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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, 2008

Commission File No. 002-31909

 

 

OXYGEN BIOTHERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-2593535
(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

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 filers 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 the this Form 10-K.     x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

Large Accelerated Filer   ¨     Accelerated Filer   ¨     Non-Accelerated Filer   ¨     Smaller Reporting Company   x

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $16,889,303.

The number of shares outstanding of the registrant’s class of $0.0001 par value common stock as of August 7, 2008 was 156,093,356.

DOCUMENTS INCORPORATED BY REFERENCE: None


Table of Contents

TABLE OF CONTENTS

 

ITEM NUMBER AND CAPTION

   Page

Part I

  

1.

  

Business

   3

1A.

  

Risk Factors

   6

1B.

  

Unresolved Staff Comments

   10

2.

  

Properties

   10

3.

  

Legal Proceedings

   10

4.

  

Submission of Matters to a Vote of Security Holders

   11

Part II

  

5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   11

6.

  

Selected Financial Data

   12

7.

  

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

   12

7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   16

8.

  

Financial Statements and Supplementary Data

   16

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   16

9A.

  

Controls and Procedures

   16

9B.

  

Other Information

   18

Part III

  

10.

  

Directors, Executive Officers, and Corporate Governance

   19

11.

  

Executive Compensation

   21

12.

  

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

   25

13.

  

Certain Relationships and Related Transactions and Director Independence

   26

14.

  

Principal Accountant Fees and Expenses

   27

Part IV

  

15.

  

Exhibits and Financial Statement Schedules

   28

FORWARD-LOOKING STATEMENTS

All statements contained in this report, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including plans for clinical tests and other such matters pertaining to testing and development products, are forward-looking statements. 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, but not limited to, the risks discussed elsewhere in this report 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 filing of this report or to conform such statements to actual results.

 

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PART I

ITEM 1—BUSINESS

General

Oxygen Biotherapeutics, Inc. is engaged in the business of developing biotechnology products with a focus on oxygen delivery to tissue. We are currently 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 subcutaneous fluid. As a fourth product opportunity we intend to develop perfluorocarbon based oxygen carriers for topical wound healing.

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. We submitted a report on the results, which were in line with our expectations, to the FDA along with a Phase II protocol in 2004. Phase II-A clinical studies began in the fourth quarter 2004, and were completed in 2006. A further Phase II study protocol was filed with the FDA in the spring of 2008. Management is hopeful the protocol will be approved and the new study begun in 2008, and if this comes to pass the study would continue into 2009. 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 the point it has regulatory approval for use in one or more medical applications.

Fluorovent and our biosensor implant are still at 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 in the near future.

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

Oxygen Biotherapeutics was originally formed as a New Jersey corporation in 1967 under the name Rudmer, David & Associates, Inc., and subsequently changed its name to Synthetic Blood International, Inc. On June 17, 2008, the stockholders of Synthetic Blood International approved the Agreement and Plan of Merger dated April 28, 2008, between Synthetic Blood International and Oxygen Biotherapeutics, Inc., a Delaware corporation. Oxygen Biotherapeutics was formed on April 17, 2008, by Synthetic Blood International to participate in the merger for the purpose of changing the state of domicile of Synthetic Blood International, Inc. from New Jersey to Delaware. Certificates of Merger were filed with the states of New Jersey and Delaware, and the merger was effective June 30, 2008. Under the Plan of Merger, Oxygen Biotherapeutics, Inc. is the surviving corporation and each share of Synthetic Blood International, Inc. common stock outstanding on June 30, 2008, was converted to one share of Oxygen Biotherapeutics, Inc. common stock.

Oxygen to Tissue Delivery 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 AABB 2005 Nationwide Blood Collection and Utilization Report, over 14 million units of whole blood and red blood cells were transfused in the United States in 2004. 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 an oxygen carrier and substitute for blood transfusion that ordinarily would be applied in cases of trauma, surgery (emergency and elective), unexpected blood loss 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, because we believe Oxycyte is capable of transporting higher levels of oxygen than red blood cells are able to transport.

 

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We believe 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 fluid 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 oxygen carrier, and we believe Oxycyte is a viable candidate for exploiting that market.

Our primary product—Oxycyte

Our Oxycyte oxygen carrier 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 is sterile and free of potential contamination from a donor. Further, since Oxycyte is based on readily available inert compounds, we believe it can be manufactured on a cost effective basis in amounts sufficient to meet demand.

After receiving clearance from the FDA, we conducted a Phase I clinical study on Oxycyte, which was completed in December 2003. We submitted a report on the results, which were in line with our expectations, to the FDA along with a Phase II protocol in 2004. Phase II-A clinical studies began in the fourth quarter 2004, and were completed in 2006. A further Phase II study protocol was filed with the FDA in the spring of 2008. Management is hopeful the protocol will be approved and the new study begun in 2008, and if this comes to pass the study would continue into 2009.

We use a proprietary process of perfluorocarbon production and emulsification to produce Oxycyte. We use a contract manufacturer to produce Oxycyte for our clinical testing. Our contract manufacturer for trial batches 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. Based on the composition and manufacturing process for Oxycyte, management believes there are a number of other manufacturers capable of producing Oxycyte in accordance with FDA regulations and in sufficient quantities for current needs. For larger batches we intend to employ the contract manufacturing services of a major pharmaceutical company in North Carolina.

Should Oxycyte successfully progress through Phase II and III testing and it appears regulatory approval for one or more medical uses is likely, we will evaluate our options for exploiting the product. These options include licensing Oxycyte to a third party for manufacture and distribution, manufacturing Oxycyte ourselves for distribution through third party distributors, manufacturing and selling the product ourselves, or establishing some other form of strategic relationship for making and distributing Oxycyte with a participant in the pharmaceutical industry. We are currently investigating and evaluating all options.

If approved for one or more medical uses, 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. We are aware of five other products at various stages of development that are intended to achieve the same result as Oxycyte. Three of these products are based on hemoglobin derivates, two from outdated human blood and the third from bovine blood. One product is also based on perfluorocarbon and the other on nanobubble oxygen technology. None of these products is approved for use in the United States. The 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, and it was not approved and no clinical trials in the United States are currently underway. All hemoglobin based products were targets of a very critical meta-analysis in the JAMA, the Journal of the American Medical Association, (May 21, 2008, p. 2304ff, www.jama.com ) which concluded that “based on the available data, use of HBBSs (Hemoglobin-based blood substitutes) is associated with a significantly increased risk of death or MI (myocardial infarction)”. Phase III clinical trials on the other perfluorocarbon product in the U.S. were halted in 2001 and have not resumed. That product has now been licensed for development with a drug manufacturer in China.

We believe that important competitive factors in the market for oxygen carrier 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 oxygen carrier products and the scope of the intended uses for which they are approved, the scope and enforceability

 

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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 maintain and enforce our proprietary rights covering Oxycyte and its manufacturing process, and our ability to develop capabilities for manufacturing and distributing the product ourselves or with others, should we obtain regulatory approval.

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 have found a partner to bring this products to market.

Implanted glucose biosensor

We have 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

We hold 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, the process of manufacturing the perfluocarbon contained in our products is extremely complicated and protected by numerous perfluorocarbon manufacturing process patents of our supplier.

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 Biologics License Application, or 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

 

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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 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 five individuals, one is our President and Chief Operative Officer, two are Scientific Personnel, one is our Corporate Secretary, and one is our office manager/bookkeeper. Our employees are not represented by a union or any other form of collective bargaining unit. Our Chief Executive Officer devotes part of his time to our business under a consulting agreement. We also use the services of two directors on a part-time basis through consulting arrangements.

ITEM 1A—RISK FACTORS

The following is a discussion of risks we believe to be significant with respect to our business, operations, financial condition, and other matters pertaining to an investment in our common stock. It is not possible to anticipate or predict every risk that may, in the future, prove to have a significant affect on Oxygen Biotherapeutics. Additional risks, including those that are currently not known to us or that we currently deem immaterial, may also impair our prospects and business operations.

We will need to generate income, or 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 find acceptable.

As a result of the foregoing circumstances our independent registered public accounting firm has, and is 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 obtain debt or equity financing. Any additional funding derived from the sale of equity securities may result in significant dilution to our existing stockholders.

We are currently a one product company, so our future depends on the success of that product.

We have limited financial resources, so at present we are using these resources solely on developing our Oxycyte oxygen carrier product. We have halted development on Fluorovent, our oxygen carrying liquid, and our implantable glucose biosensor until we found license partners for their development, or additional financing is obtained. Consequently, we are focusing all our resources on advancing Oxycyte to the point it receives regulatory approval for one or more medical uses, 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

 

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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, which are expensive and time consuming, and the outcome of the trials is uncertain.

We completed Phase I clinical trials on Oxycyte in December 2003, and completed Phase II-A clinical testing in the fourth quarter of 2004 with filings completed in the second quarter of 2008. If we are successful with our Phase II-B trials (of which there is no assurance) we will need to conduct 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. Our lack of capital over the past two years has prevented us from advancing our clinical testing the way we would have preferred resulting in delays in advancing the testing of Oxycyte. 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 obtaining capital to advance our testing program and receiving FDA approval of Oxycyte. A significant delay in our planned clinical trials or a failure to achieve FDA approval would have a material adverse effect on us and could result in major setbacks, up to in the cessation of our business.

Our activities are and will continue to be subject to extensive government regulation, which is expensive and time consuming, and we won’t be able to sell our product without regulatory approval.

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 that 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.

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

 

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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, which raises doubt about our ability to continue as a going concern.

Oxygen Biotherapeutics began research and development activities in 1990 and is a development stage company. We have been engaged for the past 18 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, 2008 our accumulated deficit during the development stage is $37,741,362. 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 Oxycyte or any of our other products can be manufactured at an acceptable cost and in appropriate quantities, or that there will be a viable market for any of our products. The foregoing factors raise substantial doubt about our ability to continue as a going concern.

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 surgical and similar oxygen delivery applications. The biomedical field has undergone rapid and significant technological changes. Technological developments may result in Oxycyte 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 are currently in the process of establishing an arrangement for commercial production of Oxycyte with a manufacturer in North Carolina, but 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 oxygen delivery, and 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 oxygen delivery product of our kind 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.

These companies and others have substantially greater financial resources, larger research and development staffs, more extensive facilities and more experience than Oxygen Biotherapeutics 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.

 

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

We have no experience in the sale or marketing of medical products. We have not decided upon a marketing strategy. We do not know of any third party that is prepared to distribute Oxycyte should it be approved. If we decide to establish our own marketing capability, we will need to recruit, train and retain a marketing staff and sales force with sufficient technical expertise. We do not know 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 operating results are uncertain.

During fiscal year ended April 30, 2008, we incurred a net loss of $6.7 million, and we incurred a net loss of $3.3 million in fiscal year 2007. 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 Oxygen Biotherapeutics 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 total amount of $3 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 scientists and support personnel. 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.

 

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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.

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 oxygen carrier 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 oxygen carrier, or blood substitute products being developed by our competitors;

 

   

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 company specific results.

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.

The authorized capital stock of the Company consists of an aggregate of 400 million shares of common stock, of which 156,093,356 shares are issued and outstanding as of August 7, 2008 and approximately 216 million shares are reserved for issuance upon conversion or exercise of issued and outstanding notes, options, and warrants. The substantial number of shares available now and that may become available in the future for sale in the public market could cause the market price of our common stock to decline or have a depressive effect on the market price.

ITEM 1B—UNRESOLVED STAFF COMMENTS

We have not received any comments from the Securities and Exchange Commission that remain unresolved.

ITEM 2—PROPERTIES

Oxygen Biotherapeutics owns no real property and currently leases its principal administrative and laboratory facilities at 3189 Airway Avenue, Building C, Costa Mesa, California 92626. The current rent is approximately $15,400 per month. The Company also leases a laboratory facility at 800 East Leigh Street, Richmond, VA 23219 for rent of approximately $500 per month.

ITEM 3—LEGAL PROCEEDINGS

Oxygen Biotherapeutics is not presently involved in any legal proceedings and was not involved in any such proceedings during fiscal year 2008.

 

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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, 2008.

A special meeting of stockholders was held June 17, 2008. At the special meeting, the stockholders voted on (1) the Agreement and Plan of Merger dated April 28, 2008, pursuant to which the company would change its state of incorporation from New Jersey to Delaware and the name of the company to Oxygen Biotherapeutics, Inc., and (2) the proposal to amend our 1999 Stock Plan to increase the number of shares of common stock available for awards under the plan from 4,000,000 to 12,000,000, increase the maximum number of shares covered by awards granted under the plan to an eligible participant from 4,000,000 shares to 5,000,000 shares, add provisions intended to facilitate compliance with changes in tax law, and make additional technical changes to update the plan. The stockholders approved the Agreement and Plan of Merger by a vote of 71,672,849 for, 1,956,027 against and 346,329 abstain. The stockholders approved the amendments to our 1999 Stock Plan by a vote of 64,378,513 for, 142,500 against and 30,600 abstain.

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 Oxygen Biotherapeutics are reported on the OTC Electronic Bulletin Board under the symbol “OXBO.” 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 high and low bid prices in each fiscal quarter were:

 

     2008    2007

Quarter

   Low    High    Low    High

1st

   $ 0.10    $ 0.15    $ 0.10    $ 0.18

2nd

   $ 0.07    $ 0.20    $ 0.04    $ 0.15

3rd

   $ 0.16    $ 0.34    $ 0.12    $ 0.22

4th

   $ 0.26    $ 1.01    $ 0.11    $ 0.18

At July 17, 2008 we had approximately 1,340 shareholders of record.

Since inception of Oxygen Biotherapeutics, no dividends have been paid on the common stock. Oxygen Biotherapeutics 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.

Equity Compensation Plan Information

 

Plan category

   (a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants, and rights
    (b)
Weighted-average
exercise price of
outstanding
options,
warrants and rights
   (c)
Number of securities remaining
available for future issuances
under equity compensation
plans (excluding securities
reflected in column (a))
 

Equity compensation plans approved by security holders

   3,330,000     $ .0234    670,000 (2)

Equity compensation plans not approved by security holders

   4,490,000 (1)   $ .0208    0  

Total

   7,820,000     $ .0219    670,000  

 

(1) This figure includes options issued to officers and employees under individual compensation arrangements. The figure also includes options issued to directors for board and committee service that were approved by the board of directors.

 

(2) In June 2008, the stockholders approved a proposal to amend our 1999 Stock Plan to increase the number of shares of common stock available for awards under the plan from 4,000,000 to 12,000,000. As a result, the number of shares remaining available for future issuances, assuming no options or rights were issued subsequent to April 30, 2008, increased to 8,670,000 shares.

 

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Repurchases of Common Stock

There were no repurchases of equity securities by Oxygen Biotherapeutics in the fourth fiscal quarter that ended April 30, 2008.

ITEM 6—SELECTED FINANCIAL DATA

Not Applicable.

ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of financial condition and results of operations of Oxygen Biotherapeutics for the fiscal years ended April 30, 2008 and 2007. This discussion and analysis should be read in conjunction with the financial statements and notes thereto included elsewhere herein.

Overview

Since 1990, Oxygen Biotherapeutics has pursued the development of medical products based on perfluorocarbon technology. These products include Oxycyte™, a synthetic oxygen carrier substance, and Fluorovent™, an oxygen exchange fluid for facilitating the treatment of lung conditions. Since 1993 Oxygen Biotherapeutics 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. We started Phase II testing in 2004.

Five clinical sites have received local Institutional Review Board (IRB) approval to participate in the first Phase II trial with Oxycyte in hip surgery patients. In this first Phase II trial we were evaluating both efficacy and safety in the prevention of tissue hypoxia (the effects of reduced oxygen levels) in hip surgery patients who experience mild to moderate blood loss during surgery. While blood transfusions are typically not given during such procedures, blood loss may result in postoperative complications caused by tissue hypoxia. We closed this study in 2006 due to a lack of enrollment and completed this study and reported our findings in April 2008.

A Phase II-A trial in severe brain injury patients was started in 2006 and has been completed with good results. The Phase II-B trial protocol was filed in April 2008 and is currently under review of the FDA. A revised Phase II protocol for a study in patients with sickle cell pain crisis is ready to be filed with the FDA, as soon as the severe brain injury Phase II-B trial has been approved. Our future plans include testing Oxycyte in stroke, myocardial infarction, malignant tumors, trauma, coronary bypass surgery and decompression sickness. We expect Phase II studies will continue over at least the next two years, after which Phase III studies may be able to commence depending on results of Phase II trials, the development of acceptable protocols for Phase III trials, and the availability of financial and other resources to purse the Phase II trials.

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.

Results of operations

Fiscal year 2008 compared to fiscal year 2007

For the fiscal year ended April 30, 2008, other income decreased to $105,629 from $120,027 in the fiscal year ended April 30, 2007. Other income consists principally of rental income. The decrease during 2008 is attributed to a one-time gain from the settlement of a vendor payable in fiscal 2007.

Research and development expenses increased from $752,614 for the fiscal year ended April 30, 2007, to $939,998 for the fiscal year ended April 30, 2008. 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 decreased expenditures relating to Oxycyte™ Phase II clinical trials during fiscal 2007 and into fiscal 2008 due to the Company’s shortage of working capital. Due to the $6.3 million financing we obtained during the third and fourth quarters of fiscal 2008, we were able to resume funding of our Phase II clinical trials and increase our lab personnel and related expenses.

 

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General and administrative expenses of $1,992,687 for fiscal year 2008 increased 95 percent or $972,892 over fiscal year 2007 expenses of $1,019,795. This change is primarily due to a $716,000 increase in our noncash compensation relating to the issue of compensatory stock options and warrants, an increase in our payroll expenses of $144,000, and an increase in our accounting expenses of $71,000 over the amounts incurred in fiscal 2007.

Interest charges associated with the convertible notes and short-term notes, including amortization of the original issue discount, debt issue costs, common stock purchase warrant value and beneficial conversion features, aggregated to $3,611,902 for fiscal 2008 as compared to $1,678,488 for fiscal 2007. This increase is a result the significant additional financing costs related to our $6.3 million financing and the exchange of our short-term notes for five-year convertible notes during the third and fourth quarters of fiscal 2008. During the year ended April 30, 2008, we also incurred a debt extinguishment loss of $250,097 related to the exchange of our short-term notes for five-year convertible notes. The debt extinguishment was recognized in accordance with EITF 96-19 and results principally from the write off of unamortized debt discounts and debt issue costs. We also incurred a $32,113 impairment loss on our lab equipment during fiscal 2008.

For the year ended April 30, 2008, we incurred a loss of $6,721,168 compared to a loss of $3,330,870 for the previous fiscal year.

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, 2008, we had $4,952,717 in total current assets and working capital of $4,687,726, compared to $1,483,348 in total current assets and negative working capital of $362,286 as of April 30, 2007.

During the first and second quarters of fiscal year 2008, the Company financed operations by issuing two-year notes payable in the principal amount of approximately $282,055, on which the Company recorded an original issue discount of $16,417, and additional discounts of $67,969 related to the relative fair value of 2,815,763 warrants issued in the transaction. The Company recorded debt issue costs of $154,070 of which $120,223 was non-cash through the issuance of 1,431,000 warrants for capital raising services.

During the third quarter of fiscal year 2008, the Company received $1,000,000 from the issuance of short term bridge loans to fund operations and other working capital needs. The notes were unsecured and accrued interest at 10% per year. In addition, the Company issued five-year warrants to purchase 2,500,000 shares of common stock at $0.245 per share to investors. An additional discount of $288,750 was recorded for the relative fair value of the warrants. The Company also recorded debt issue costs of $288,750 for the value of 2,500,000 additional warrants issued for capital raising service fees. In December 2007, the Company exchanged its $1,000,000 bridge loans for five-year convertible notes with a face amount of $2,222,222. The notes are unsecured, convertible into shares of common stock at $0.247 per share, and were issued with a 55% original issue discount totaling $1,222,222. In addition, the Company issued five-year warrants to purchase 4,498,426 shares of common stock at $0.247 per share to investors. Additional discounts of $703,554 and $296,446 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

During the third quarter of fiscal year 2008, the Company exchanged its remaining outstanding short term loans for five-year convertible notes with a face amount of $3,982,545. The notes are unsecured, convertible into shares of common stock at $0.247 per share, and were issued with a 55% original issue discount totaling $2,190,400. In addition, the Company issued five-year warrants to purchase 8,061,831 shares of common stock at $0.247 per share to investors. Additional discounts of $1,035,945 and $756,200 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively. Pursuant to this exchange transaction, the Company recorded a debt extinguishment loss of $250,097.

During the third and fourth quarters of fiscal year 2008, the Company received a total of $6,335,000 proceeds from the sale of convertible notes, with a total face amount of $14,077,778. The notes are convertible at any time prior to maturity into a total of 56,995,053 shares of common stock, or $0.247 per share. In connection with the issuance of these obligations, the Company recorded a 55% original issue discount of $7,742,778, and additional discounts of $4,864,998 related to the relative fair value of the 28,497,501 five-year warrants to purchase common stock at $0.247 per share that were issued in the transaction, and $1,470,002 for the relative fair value of the embedded beneficial conversion feature. The Company also incurred total costs of $5,510,562 for capital raising services on these transactions. The costs of the capital raising services include a $369,215 cash fee, plus $768,337 for the fair value of 2,088,272 restricted shares of common stock, plus $4,373,010 for the fair value of warrants to purchase 21,853,086 common shares at prices ranging from $0.20 to $0.28.

Warrants totaling approximately 49.4 million and convertible notes issued during the year ended April 30, 2008 are subject to a requirement that the Company file a registration statement with the SEC to register the underlying shares, and that it be declared effective on or before January 9, 2009. If for any reason Oxygen Biotherapeutics is unable to make payment of the notes through issuance of its common stock, it would be required to make such payment with cash, which would place a severe burden on Oxygen Biotherapeutics’ limited cash and could result in a default on the note obligations.

 

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During fiscal year 2007, the Company financed its operations by issuing short-term notes payable totaling $1,294,390 and recorded original issue discount of $72,190 and additional discount of $665,956 related to the value of warrants issued to the holders.

During the year ended April 30, 2008, net cash provided by financing activities was $7,242,709, primarily from the issuance of convertible notes and short-term notes payable, as noted above. Net cash of $2,276,209 was used to fund operating activities and $102,101 was used for investing activities, primarily for lab equipment expenditures. Consequently, our cash and cash equivalents increased from $16,234 at April 30, 2007 to $4,880,633 at April 30, 2008. We do not have any lines of credit or other borrowing arrangements with lenders.

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 submitted a report to the FDA along with a Phase II protocol, received FDA approval, and started Phase II testing in the fourth quarter of 2004, which is expected to continue through 2009 for Phase II-b studies in severe traumatic brain injury. 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 2009 depends on achieving license income, or obtaining outside financial resources. There is no assurance that needed license agreement, or financing will occur or that we will succeed in obtaining the necessary resources.

We are 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 highlight that the company must achieve license agreements, or additional financing by end of 2009.

We do have the working capital necessary to fund our operations in fiscal year 2008-2009. By end of 2009, we will need additional financing to cover administrative expenses and on-going expenses of testing Oxycyte. Management is actively seeking additional sources of equity and/or debt financing; however there is no assurance that any additional funding will be available in time. Should we be unable to obtain additional financing to meet mid-term needs, we may be forced to cease operations. Our ability to continue as a going concern depends on success of these activities.

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 compensation as prescribed by of SFAS No. 123R, which requires stock options and warrants issued to employees and nonemployees to be valued using the fair value method. 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 and warrant 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 and expected term. Because our stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input

 

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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 stock options.

Convertible Notes –

If the conversion feature of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to EITF Issue No. 98-5 (“EITF 98-05”), Accounting for Convertible Securities with Beneficial Conversion Features or Contingency Adjustable Conversion Ratio, and EITF Issue No. 00-27, Application of EITF Issue No. 98-5 to Certain Convertible Instruments. In those circumstances, the convertible debt will be recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the effective interest method.

Registration Payment Arrangements –

In connection with prior private placements of our common stock and warrants to purchase shares of our common stock, we entered into agreements that committed us to timely register the shares of common stock purchased as well as the shares underlying the issued warrants. Those registration agreements specified potential cash penalties if we did not timely register the related shares with the SEC.

In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,” when the potential cash penalties were included in registration payment arrangements, the estimated fair value of the warrants would be recorded as a liability, with an offsetting reduction to additional paid-in capital received from the private placement. The fair value of the warrants would be estimated using the Black-Scholes option pricing model.

Under EITF 00-19, the estimated fair value of the warrants would be re-measured at each reporting date and on the date of effectiveness of the related registration statement, with the increase in fair value recorded as other expense in our Statement of Operations. As of the date of effectiveness of the registration statement, the warrant liability would be reclassified to additional paid-in capital, evidencing the non-impact of these adjustments on our financial position and business operations.

In December 2006, the FASB issued FASB Staff Position, or FSP, EITF No. 00-19-2, “Accounting for Registration Payment Arrangements.” This FSP specifies that companies that enter into agreements to register securities will be required to recognize a liability if a payment to investors for failing to fulfill the agreement is probable and can be reasonably estimated. This accounting differs from the guidance in EITF 00-19, which required a liability to be recognized and measured at fair value, regardless of probability.

EITF 00-19-2 is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that we enter into or modify after the date of issuance of this FSP. For our registration payment arrangements and financial instruments subject to those arrangements that were entered prior to the issuance of this FSP, the guidance was effective beginning January 1, 2007.

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 impairment in accordance with SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).

Recent Accounting Pronouncements –

SFAS 157 —In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS 157 was originally effective for fiscal years beginning after November 15, 2007, but was partially delayed by one year for non-financial assets and liabilities as detailed within FASB Staff Position 157-2. The Company is currently evaluating SFAS 157 and FASB Staff Position 157-2, and does not believe these pronouncements will materially affect its financial position or results of operations.

SFAS 159 —In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS 159”), which permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of fiscal years after November 15, 2007. The Company adopted SFAS 159 on May 1, 2008, and does not believe it will materially affect its financial position or results of operations.

 

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SFAS No. 141(R) —In December 2007, the FASB issued Statement No. 141(R), Business Combinations . This Statement replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this Statement. This Statement’s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting – the acquisition method – to all transactions and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating SFAS 141(R), and has not yet determined its potential impact on its future results of operations or financial position.

SFAS No. 160 —In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 . This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R). This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating SFAS 160 and has not yet determined its potential impact on its future results of operations or financial position.

SFAS No. 161 —In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 .” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the impact, if any SFAS No. 161 will have on its financial statements.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable, as management believes that the Company does not have instruments that are sensitive to market risk. Our debt instruments bear interest at fixed interest rates.

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

None.

ITEM 9A—CONTROLS AND PROCEDURES

This Report includes the certifications of our Chief Executive Officer and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications.

Disclosure controls and procedures

Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission (“SEC”), and that

 

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such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this report, Oxygen Biotherapeutics’ management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of the design and operation of our disclosure controls and procedures as of April 30, 2008. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as a result of the identification of certain material weaknesses in the internal controls over financial reporting described below, which we view as an integral part of our disclosure controls and procedures, our disclosure controls and procedures were not effective as of April 30, 2008.

Nevertheless, based on the completion of management’s internal review of our processes and procedures and the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the financial statements included in this report on Form 10-K fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented.

Changes in Internal Controls

There were no changes in Oxygen Biotherapeutics’ internal control over financial reporting during the three-month period ended April 30, 2008, that materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

Management Plan to Remediate Material Weaknesses

In the first six-months of fiscal year 2009, our management is pursuing the implementation of corrective measures to address the material weaknesses described below. These measures, outlined below, are intended both to address the identified material weaknesses and to enhance our overall financial control environment.

 

   

We are actively recruiting an experienced Chief Financial Officer to engage. Bringing on a new Chief Financial Officer will help us to achieve a better segregation of duties in our cash disbursement process and add a person to executive management with knowledge of US Generally Accepted Accounting Principles.

 

   

We obtained additional financing at the end of fiscal year 2008, which has enabled us to add administrative staff at the beginning of fiscal year 2009. The addition of administrative staff and the hiring of a Chief Financial Officer will facilitate the design and implementation of document collection and retention procedures with respect to the agreements and documents generated in our financing and business activities.

 

   

In fiscal year 2009 the Board of Directors intends to review existing committee charters, implement evaluation programs called for by the charters, and evaluate what changes, if any, are necessary or appropriate to make the functioning of Board committees more effective and meaningful.

 

   

We will examine options for an anonymous whistle blower process or system that is practical and meaningful in light of the fact that we have only four full-time employees who do have regular access to, and communication with, our executive officers and directors.

We believe the remediation measures described above will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently and vigorously review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in rules promulgated under the Exchange Act, is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:

 

   

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our Board of Directors; and

 

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provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Our management assessed the effectiveness of our internal control over financial reporting as of April 30, 2008. In making its assessment, management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, management has concluded that we had certain control deficiencies described below that constituted material weaknesses in our internal controls over financial reporting. As a result, our internal control over financial reporting was not effective as of April 30, 2008.

A “material weakness” is defined under SEC rules as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis by the company’s internal controls. As a result of management’s review of the investigation issues and results, and other internal reviews and evaluations that were completed after the end of fiscal year 2008 related to the preparation of management’s report on internal controls over financial reporting required for this annual report on Form 10-K, management concluded that we had material weaknesses in our control environment and financial reporting process consisting of the following:

 

   

We have incompatible duties in our cash disbursement process. Due to our small staff and historically limited financing, our President has had to maintain responsibility for check signing and authorizing invoices and purchase orders.

 

   

We have not always consistently maintained final, complete and executed copies of significant contracts, including financing agreements, warrant and option agreements, and note agreements. We rely on a very small staff, and have been a party to numerous complex financing transactions that required significant changes to terms, which were not clearly and effectively processed and recorded as they occurred.

 

   

Given our cash position for most of the fiscal year and the limited number of accounting resources available to us, we did not maintain a sufficient amount of knowledge of US Generally Accepted Accounting Principles, did not measure board committee performance against established charters, have not implemented an anonymous whistle-blower process, and did not utilize a formal financial reporting close process that ensured sufficient levels of review of all key financial statement account reconciliations, significant judgments/estimates and period end financial statements.

We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the fiscal year ended April 30, 2008. We note, however, that the material weaknesses are in our control environment and financial reporting process and could negatively impact our operating controls and procedures in future periods if they remain unaddressed by management.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

ITEM 9B—OTHER INFORMATION

There is no information to report under this item for the quarter ended April 30, 2008.

 

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PART III

ITEM 10—DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

Directors and executive officers

Our officers and directors manage our business. The following persons are the officers and directors of Oxygen Biotherapeutics:

 

Name

   Age   

Position

Chris J. Stern, DBA

   50    Chairman of the Board, Chief Executive Officer, Chief Financial Officer and Director

Richard M. Kiral, PhD

   67    President, Chief Operating Officer, and Director

Bruce Spiess, MD, FAHA

   53    Director

Gerald L. Klein, MD

   61    Director

Robert J. Larsen served as Chief Executive Officer and Chief Financial Officer from November 2007 until his unexpected death on March 24, 2008. Chris J. Stern was appointed Chief Executive Officer at the end of March 2008, and effective July 24, 2008, was appointed Chief Financial Officer, which we expect will be an interim position until we are able to hire a Chief Financial Officer on a more permanent basis.

Our directors serve for a term beginning with election and ending with resignation, removal by the stockholders, or election of a successor by the stockholders. 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.

In November 2007 Dr. Chris J. Stern joined Oxygen Biotherapeutics as Chairman of the Board. He became Chief Executive Officer in March 2008, and Chief Financial Officer ad interim in July 2008. For the past twelve years Dr. Stern has been the principal of the Institute for Efficient Management, which he founded in 1996 to provide consulting services to business on strategic planning and global marketing. Since May 2001 Dr. Stern has served as a non-executive director on the Board of Directors of Klocke of America (contract packaging) in Ft. Myers, FL. From April 2000 to March 2007 he also served as a Director of Boehme Filatex, Inc. in Reidsville, NC (specialty chemicals). In January 1996 Mr. Stern became a faculty member and associate partner of the St. Gallen Business School, and St. Gallen Management Institute, two Swiss institutions for which he still selectively teaches executive seminars. From 1997 to 1999 he simultaneously took over the position of CEO of a billion dollar urban and private development company in Germany for restructuring. Mr. Stern developed his strategic management and planning skills during tenure at the consulting practice of Diebold from January 1990 until December 1995. Dr. Stern’s first engagements were in the textile industry where he was President and CEO of Textile Dynamics Corporation from 1985 to 1990, and had various positions in a small conglomerate from 1977 until 1984. Dr. Stern is a United States citizen born in Switzerland and therefore American and Swiss dual national. He holds an MBA from the Graduate School of Business Administration in Zurich, which is affiliated with the State University of New York at Albany, and a doctorate in business administration from Trinity University.

Dr. Richard Kiral became President and Chief Operating Offcier of Oxygen Biotherapeutics in March 2008. For over five years prior to March 2008, he served as our vice president of research and development and has been responsible for developing products from Oxygen Biotherapeutics’s perfluorocarbon technology platforms. Throughout his career, Dr. Kiral has held senior management, research, and product development positions at leading pharmaceutical and medical device companies for more than 35 years. He began his career at Miles Laboratories (now Bayer) as a quality control chemist and advanced to the position of Manager of Analytical Systems Development for the company’s consumer healthcare and medical diagnostics divisions. As Director of Pharmaceutical Product Development at the McGaw division of American Hospital Supply Corporation, Dr. Kiral was responsible for the development of intravenous pharmaceuticals, infusion systems and clinically-based oral nutrition products. After leaving McGaw, Dr. Kiral joined Allergan Pharmaceuticals, a leading developer and manufacturer of vision care and dermatology products, where he held several senior management positions, including Vice President of R&D for the company’s Optical Division. While at Allergan, Dr. Kiral led a 100-person interdisciplinary R&D team in four US and European locations in the development of contact lenses and lens care products, many of which became market leaders. Prior to joining Synthetic Blood International, Dr. Kiral served as Vice President of R&D for Ioptex Research, a division of Smith & Nephew, which manufactured and marketed intraocular lenses and associated ophthalmic surgical products. In his position he was responsible for product development, R&D engineering, pilot manufacturing, and technical liaison with ophthalmologists. Dr. Kiral holds a Ph.D. in Analytical Chemistry from the University of Notre Dame in South Bend, Indiana and a B.S. degree in Chemistry from St. Vincent College in Latrobe, Pennsylvania. He is a cofounder of a pharmaceutical contract manufacturer in San Diego and currently serves on its Board of Directors.

Dr. Bruce D. Spiess, MD, FAHA, joined Oxygen Biotherapeutics Inc as a consultant, member of the Board of Directors and Chair of the Medical Advisory Board. in March 2008. His undergraduate degree in biology was from Denison University in

 

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Granville, Ohio and his medical school training was received at Rush Medical College in Chicago. From there three years were spent at the Mayo Graduate School of medicine in Rochester, Minnesota. The last year of that training as chief resident was specialized in cardiovascular anesthesia. That training led to an instructor/assistant professorship back at Rush in Chicago where Dr. Spiess ran cardiac anesthesia and opened the new sub-specialty of liver transplant anesthesia at that university. In 1990 he was recruited to the University of Washington to be Chief of Cardiothoracic Anesthesia. In 1999 he left that position to take his present post at Virginia Commonwealth University Health Systems where he has served as Vice Chair of the Department of Anesthesiology, Chief of Cardiothoracic Anesthesia and Director of Research. Dr Spiess as director is particularly proud of the establishment of VCURES shock research center, a consortium of over 60 MD and PhD researchers. To date, VCURES has secured over 40 million dollars in extramural funding for shock research and patented/out licensed numerous medical technologies. His research has focused upon cardiac surgical care, coagulation dysfunction, blood transfusion, and the development of blood substitutes/oxygen therapeutics. Most recently he has been funded (for 7 years) by the United States Navy Office of Naval Research to investigate perfluorocarbon blood substitutes (PFC) as a treatment for decompression sickness and an adjunct to the US Navy disabled submarine initiative (DISSUB). Multiple usages for PFC’s including the treatment of traumatic brain injury, blast injury, cardiac arrest, sickle cell crisis, wound healing and other medical applications of enhanced oxygen delivery are underway. He has published over 200 peer reviewed academic articles, 25 book chapters and has edited 5 textbooks.

Dr. Gerald Klein became a director of the Oxygen Biotherapeutics in March 2008. He has served as Vice President of Global Medical and Clinical Affairs and Chief Medical Officer for Talecris Biotherapeutics, headquartered in Research Triangle Park, North Carolina, since September 2005. His responsibilities there include global clinical development and medical affairs. For two years prior to September 2005, he was the Vice President of Medical Affairs and Clinical Research at Dey LP in Napa, California. Dr. Klein earned his medical degree from the University of Brussels Medical School in Belgium, and holds board certifications issued by the American Board of Pediatrics and the American Board of Allergy and Clinical Immunology. Dr. Klein completed his undergraduate work at the University of Florida and medical degree at the Free University of Brussels. He completed a pediatric residence at New Jersey College of Medicine and fellowship in Allergy and Immunology at the University of California, Irvine. Dr. Klein practiced Allergy in San Diego Country while being on the faculty of the University CA, Irvine. He became a professor of Clinical Medicine and Pediatrics, at that institution. While being on the clinical faculty, Dr. Klein published numerous peer reviewed papers, in allergy and asthma. He was also very active in national medical organizations as served on the Board of Regents of the American College of Allergy, Asthma, and Clinical Immunology. While in practice, Dr. Klein founded San Diego Clinical Research Associates, a site management organization that he sold to Research Across America, as well as founding SDCRA, a contract research organization which was sold to Quintiles. He then joined Quintiles, as a Sr. Vice President, of clinical development. Dr. Klein spent four years there working on domestic as well as international clinical trials. After leaving Quintiles, Dr. Klein became an EVP at Clingenics, a combination of a CRO and pharmacogenomics company. During this time Dr. Klein founded Externa Pharmceutical Company, where he served as CEO. Dr. Klein was recruited to Specialty Laboratory, a large commercial and central laboratory, where he served as VP of Clinical Trials. Dr. Klein, together with some former employees from Specialty Labs, and Bay City Capital, founded Pathway Diagnostic and served as its executive vice president. He than moved to Napa, CA to join Dey LP as VP of Medical and Clinical Affairs in October 2003 and served there until September 2005 as described above.

Board meetings and committees; Code of Ethics

In the fiscal year ended April 30, 2008, the board of directors of Oxygen Biotherapeutics met five 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.

The Audit Committee (the “Committee”) is the only standing committee of the Board of Directors. Mr. Stern and Dr. Klein are its current members. From November 20, 2007 to March 24, 2008, its members included Mr. Stern and Mr. Larsen. From October 8, 2007 to November 20, 2007, Robert W. Nicora was the Committee’s sole member. From May 1, 2007 to October 8, 2007, Jonathon Spees (a former independent director) was the Committee’s sole member. The Committee is responsible for financial reporting matters, internal controls, and compliance with Oxygen Biotherapeutics’ financial policies, and meets with its independent registered public accounting firm when appropriate. The Committee met four times in fiscal year 2008. The Board has determined that during their periods of service in fiscal year 2008, Mr. Larsen and Mr. Spees were “audit committee financial experts” within the meaning of Item 407(d)(5)(ii) of Regulation S-K, and that Mr. Spees was “independent” under the criteria set forth in Rule 4200(15) of the Nasdaq Marketplace Rules. The Board has also determined that Mr. Stern is an “audit committee financial expert” within the meaning of Item 407(d)(5)(ii) of Regulation S-K, but that Mr. Stern is not “independent” under the criteria set forth in Rule 4200(15) of the Nasdaq Marketplace Rules.

Our board of directors now has four members. Chris J. Stern is our Chairman, Chief Executive Officer and Chief Financial Officer, Richard M. Kiral is our President and Chief Operating Offcier, and Bruce Spiess and Gerald Klein are directors. Mr. Stern, Dr. Spiess, and Dr. Klein are non-employee directors and compensated by consulting agreements. The Board has determined that none of its directors is “independent” under the criteria set forth in Rule 4200(15) of the Nasdaq Marketplace Rules. The board does not have a separately designated Nominating Committee or Compensation Committee, so the function of evaluating and nominating persons for election as directors and the function of evaluating and determining compensation arrangements for our officers, employees and consultants is performed by the entire Board.

 

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Oxygen Biotherapeutics has adopted a Code of Ethics applicable to its chief executive officer and chief financial officer, a copy of which will be provided to any person, free of charge, upon request. A request for a copy of the Code of Ethics should be in writing and sent to Oxygen Biotherapeutics, Inc., Attn: Corporate Secretary, 3189 Airway Avenue, Building C, Costa Mesa, California 92626.

Changes in procedures for nominating directors

As a result of changing our corporate domicile to Delaware, we are now governed by new Bylaws. The new Bylaws provide, in part, that for business to be properly brought before an stockholder annual meeting by a stockholder of record, including the nomination of a director, the stockholder must have given timely notice thereof in writing to the corporate secretary. To be timely, a stockholder’s notice must be delivered to, or mailed and received at, our principal executive offices (i) not less than 120 days in advance of the date in the current year that corresponds to the date on which notice of the annual meeting was first mailed to stockholders in the prior year (unless a later date is selected by the Board of directors and communicated to the stockholders), or (ii) if no annual meeting was held in the prior year or the corresponding date on which notice of the annual meeting is sent to stockholders of record changes by more than 30 days from the date in the previous year, not less than 30 days in advance of the date that we begin printing our notice of the annual meeting to be disseminated to stockholders. A stockholder’s notice must include information as to each matter the stockholder proposes to bring before the annual meeting, the name and record address of the stockholder proposing such business, the class and numbers of shares that are beneficially owned by the stockholder, and any material interest of the stockholder in such business. If required notice has not been given on a timely basis with respect to the nomination of a person for election as a director at an annual meeting, the chairman of the annual meeting shall, if the facts warrant, declare to the meeting that the nomination was not properly brought before the meeting in accordance with the Bylaws, in which case no vote would be taken on the nomination.

Section 16(a) filings

Section 16(a) of the Securities Exchange Act of 1934 requires officers and directors and persons who own more than ten percent of a class of its equity securities registered under Section 12 to file reports of ownership and changes in their ownership on Forms 3, 4, and 5 with the Securities and Exchange Commission. Oxygen Biotherapeutics does not have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, so its officers, directors, and ten percent stockholders are not required to, and do not, file such reports.

ITEM 11—EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Oxygen Biotherapeutics did not have a separate compensation committee during the fiscal year ending April 30, 2008. Until November 20, 2007 all compensation decisions were made by the Board of Directors. The Board of Directors believed extending existing employment agreements on pre-existing terms were necessary to retain the continuing services of its executive officers under the circumstances the Company was in. Accordingly, the Board of Directors had not developed any broad based compensation objectives or policies with respect to the amount of compensation, the elements of compensation, or performance measures affecting compensation. After November 20, 2007, and for the remainder of the fiscal year, the Board of Directors made compensation decisions with unanimous approval at Board meetings. The Company has entered in performance based compensation agreements for all its Board members, and key contractors.

At its Board meeting of May 1, 2008 the Company established a compensation committee with Dr. Gerald Klein and Chris Stern as its members. All existing employment agreements will be reviewed in 2009 to include a substantial performance based component.

Summary of Compensation

The following table provides certain summary information concerning compensation earned for services rendered in all capacities to Oxygen Biotherapeutics for the fiscal years ended April 30, 2008, 2007 and 2006, by the Company’s Chief Executive Officer and the other most highly compensated executive officers of Oxygen Biotherapeutics (“Named Executive Officers”) and Directors. This information includes the dollar amount of base salaries, bonus awards, stock options and all other compensation, if any, whether paid or deferred.

 

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Name and Position

   Year    Salary
($)
   Bonus
($)
   Stock
Awards
($)(1)
   Options
Awards
($)(2)
   All Other
Compensation
($)(3)
   Total

Robert Nicora (including severance pay)

   2008    15,750    —      —      13,947    347,310    377,007

President until November 19, 2007

   2007

2006

   173,250

189,000

   —  

—  

   —  

—  

   32,500

—  

   30,492

35,719

   236,242

224,719

Richard Kiral

   2008    192,840    —      —      23,756    21,337    237,933

President & COO

   2007    152,847    —      —      8,000    16,379    177,226

Product Development

   2006    167,742    —      —      —      23,066    190,808

Chris J. Stern

   2008    75,000    —      12,460    89,644    12,460    102,104

Chairman & CEO

   2007    —      —      —      —      —      —  

March 25, 2008 to present

   2006    —      —      —      —      —      —  

Robert Larsen (4)

   2008    50,000    —      —      218,429    2,750    221,179

CEO and President from November 20, 2007

   2007    —      —      —      —      —      —  

to March 24, 2008

   2006    —      —      —      —      —      —  

 

(1) Mr. Stern received a grant of 14,000 common shares valued at $12,460 on April 1, 2008, and will continue to receive 14,000 shares per month as long as he serves on the Company’s Board.

 

(2) The dollar values shown reflect the compensation cost of the awards, before reflecting forfeitures, over the requisite service period, as described in FAS 123(R), which we implemented May 1, 2006. Prior to adoption FAS 123(R), we did not record stock-based compensation expense directly in the financial statements. The assumptions we used in valuing these awards are described in Note G, to our Financial Statements included in this Form 10-K.

 

(3) Mr. Nicora received a severance package valued at $239,508, plus medical premiums and retirement contributions paid for by Oxygen Biotherapeutics totaling $14,578. Mr. Kiral received a $6,600 car allowance plus medical premiums and retirement contributions paid for by Oxygen Biotherapeutics totaling $14,737. Mr. Larsen received a $2,750 car allowance and a $17,279 housing allowance paid for by Oxygen Biotherapeutics.

 

(4) Mr. Larsen passed away March 24, 2008.

David H. Johnson held the position of Chief Financial Officer until his resignation August 17, 2007, which was immediately following the filing of Oxygen Biotherapeutics’ annual report on Form 10-K for the year ended April 30, 2007. Accordingly, Mr. Johnson did not perform services or functions normally associated with the office of chief financial officer for the financial reporting periods in fiscal year 2008 and Oxygen Biotherapeutics did not accrue or pay to Mr. Johnson any compensation in relation to fiscal year 2008. For his services as Chief Financial Officer in fiscal years 2007 and 2006, his compensation was $40,000 in each year.

Option grants

Oxygen Biotherapeutics 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 Oxygen Biotherapeutics’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, 2008 were 3,345,000 with a weighted average exercise price of $0.23.

In addition, Oxygen Biotherapeutics has issued options outside the Plan. At April 30, 2008 the total non-qualified options outstanding were 4,490,000 with a weighted average exercise price of $0.21.

The following table summarizes certain information as of April 30, 2008 concerning the stock options granted to the Named Executive Officers during the fiscal year ended April 30, 2008. 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.

 

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     Grant Date    Number of Securities
Underlying Options (1)
    Exercise Price of
Option Awards
($/Sh)
    Grant Date
Fair Value of
Option Awards
($)(2)
 

Robert Nicora

   8/1/07    150,000      0.13       18,000   

President until November 19, 2007

   11/15/07    750,000  (3)   0.33   (3)   7,947  (3)

Richard Kiral

   11/19/07    100,000  (3)   0.13   (3)   3,121  (3)

President & COO

   1/9/08    150,000      0.28       37,665   

Product Development

   4/1/08    20,000      0.85       16,426   

Chris J. Stern

   11/20/07    1,000,000      0.245     89,644   

Chairman & CEO

         

March 25, 2008 to present

         

Robert Larsen

   11/19/07    300,000  (3)   0.13   (3)   15,291  (3)

CEO and President from November 20,

   11/30/07    30,000      0.18       3,064   

2007 to March 24, 2008

   12/31/07    30,000      0.31       5,430   
   1/31/08    30,000      0.30       5,322   
   2/29/08    30,000      0.33       8,820   
   3/25/08    300,000      0.30       180,502   

 

(1) Each option listed in the table vests over a three-year period and is exercisable over a ten-year period, except for the 20,000 options granted to Mr. Kiral on 4/1/08 which vest immediately and are exercisable over a three-year period.

 

(2) The dollar values shown reflect the full compensation cost of the awards as described in FAS 123R using the assumptions outlined in Note G to our Consolidated Financial Statements included in this Form 10-K.

 

(3) Reflects the extension of the exercise terms of certain options and the incremental fair value of such awards. The exercise price represents the weighted average of the exercise price of the extended awards.

Outstanding Equity Awards

The following table sets forth certain information with respect to outstanding equity awards at April 30, 2008 with respect to the Named Executive Officers.

 

     Option Awards    Stock Awards

Name

   Number of
securities
underlying
unexercised
options

(#)
exercisable
   Number of
securities
underlying
unexercised
options

(#)
unexercisable
   Option
exercise
price

($)
   Option
expiration
date
   Number
of shares
or units
of stock
that have
not vested
(#)
   Market value
of shares

of units
of stock

that have
not vested
($)

Robert W. Nicora

   300,000    —      $ 0.15      10/13/09    —      —  

President until November 19, 2007

   150,000    —      $ 0.12      02/01/10    —      —  
   300,000    —      $ 0.62      05/15/10    —      —  
   150,000    —      $ 0.21      04/20/11    —      —  
   150,000    —      $ 0.17      08/01/12    —      —  
   150,000    —      $ 0.22      08/01/13    —      —  
   150,000    —      $ 0.28      08/17/14    —      —  
   100,000    50,000    $ 0.22      08/04/15    —      —  
   50,000    100,000    $ 0.13      08/10/16    —      —  
   —      150,000    $ 0.13      08/01/17    —      —  

Richard Kiral

   100,000    —      $ 0.15      10/13/09    —      —  

President & COO

   75,000    —      $ 0.12      02/01/10    —      —  

Product Development

   250,000    —      $ 0.21      04/20/11    —      —  

 

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   75,000    —      $ 0.30      02/01/12    —        —  
   75,000    —      $ 0.15      02/01/13    —        —  
   75,000    —      $ 0.15      03/01/14    —        —  
   75,000    —      $ 0.24      02/01/15    —        —  
   50,000    25,000    $ 0.09      03/28/16    —        —  
   25,000    50,000    $ 0.12      03/09/17    —        —  
   20,000    —      $ 0.85      04/01/11    —        —  
   —      150,000    $ 0.28      01/09/18    —        —  

Chris J. Stern

Chairman & CEO

   1,000,000    —      $ 0.245    11/19/10    14,000    $ 12,460

Robert Larsen

   215,000    —      $ 0.12      02/01/10    —        —  

CEO and President

   10,000    —      $ 0.80      05/01/10    —        —  

from November 20, 2007

   300,000    —      $ 0.30      03/25/11    —        —  

to March 24, 2008

   30,000    —      $ 0.33      02/29/11    —        —  
   10,000    —      $ 0.255    05/01/11    —        —  
   10,000    —      $ 0.155    01/04/12    —        —  
   30,000    —      $ 0.18      11/30/17    —        —  
   30,000    —      $ 0.31      12/31/17    —        —  
   30,000    —      $ 0.28      01/31/18    —        —  
   300,000    —      $ 0.13      11/10/19    —        —  

David H. Johnson held the position of Chief Financial Officer until his resignation August 17, 2007. On October 13, 1999 he was granted an option to purchase 100,000 shares at an exercise price of $0.15 per share that expires October 13, 2009, and on December 16, 2002, he was granted an option to purchase 100,000 shares at an exercise price of $0.17 per share that expires December 16, 2012.

Employment Contracts

Effective March 25, 2008, Dr. Chris J. Stern, the Company’s Chairman of the Board, has been appointed to the office of Chief Executive Officer and will retain his position as Chairman. At the time Mr. Stern was elected to the Board in November 2007 and appointed Chairman, the Company agreed to pay to Mr. Stern’s consulting firm a monthly fee of $15,000 for consulting services Mr. Stern provides to the Company. Furthermore, the Company agreed (i) to issue to Mr. Stern, as of the date of his election to the Board, options to purchase 1,000,000 common shares at an exercise price of $0.245 per share that expire three years from the date of grant, and (ii) if, in the two years following the date of the agreement, the Company enters into a license agreement or is sold, to issue to Mr. Stern at the closing of the transaction options to purchase an additional 4,000,000 common shares at an exercise price of $0.245 per share that expire three years from the date of grant. As a result of Mr. Stern’s appointment as Chief Executive Officer, the Board has agreed to pay Mr. Stern’s consulting company an additional $5,000 per month by way of consulting fees and also to pay the consulting company $2,500 per month for additional secretarial and administration expenses. Furthermore, the Board has also agreed (i) to issue to Mr. Stern an aggregate of 14,000 shares of the Company’s common stock on the 1st of every month, commencing with April 1, 2008, for so long as Mr. Stern serves on the Board, and (ii) to issue and pay to Mr. Stern, upon his termination as a board member by the Company for whatever reason, with or without cause, an aggregate of 100,000 shares of the Company’s common stock and the sum of $200,000, payable upon such termination.

Richard Kiral served as Vice President of Product Development through much of fiscal year 2008 for which he was compensated at the rate of $167,000 per year and was paid additional compensation in the form of an automobile allowance, medical and dental coverage, participation in the Executive Bonus Plan, $200,000 life insurance paid for by the corporation and payable to a beneficiary named by the insured, and the grant of an option for 75,000 shares annually. Effective March 25, 2008, the Board appointed Dr. Kiral to serve as President and Chief Operating Officer of the Company. Pursuant to an agreement executed on March 26, 2008, Dr. Kiral’s employment agreement with the Company was amended to provide for an increase in annual salary to $239,000, payment of a sum equal to annual base salary and performance bonus upon termination without Cause (as defined in the agreement), issuance on the first day of each month commencing April 1, 2008, of options to purchase 20,000 common shares with an exercise price based on market value, for so long as Dr. Kiral serves on the Board, and payment of 100,000 common shares and the sum of $200,000 upon Dr. Kiral’s termination by the Company as a board member, with or without cause.

On November 19, 2008, Robert Nicora, the former President and Chief Executive Officer resigned his positions. We entered into a severance agreement that provides for a one year severance payroll and benefits package consisting of $198,450 in gross salary, a medical plan benefit of $21,244, a car benefit of $3,850, a life insurance benefit of $4,765, and a retirement benefit of $5,198. We also paid Mr. Robert Nicora unpaid salaries of $99,225 and repaid a $39,500 loan plus $6,001 for income taxes. The payment schedule was $125,000 December 31, 2007, and three equal payments of $84,411 on February 15, 2008, May 15, 2008, and August 15, 2008.

 

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The Company also extended the term of any employee stock options that expire within three years of the effective date of the resignation. A total of $289,994 was paid on this obligation during the period from November 20, 2007 to April 30, 2008.

Robert J. Larsen became interim President and Chief Executive Officer on November 20, 2007, and died unexpectedly on March 24, 2008. At the time he became an officer we agreed to pay to Mr. Larsen for his services at the rate of $120,000 per year and a car allowance of $550 per month, and issue to him for each month of service options to purchase 30,000 shares of our common stock exercisable for a term of three years following issuance with an exercise price equal to the market price on the date of each monthly issuance. In addition, we agreed to pay for Mr. Larsen’s housing cost in California during his service as an officer. Further, an option that Mr. Larsen held to purchase 300,000 shares of our common stock at an exercise price of $0.13 per that was scheduled to expire in February 2008 was extended to November 19, 2010. On March 25, 2008, the Board of Directors approved the issuance of options to the Estate of Robert J. Larsen to purchase 300,000 shares of common stock at an exercise price of $0.30 per share.

Director Compensation

The following table summarizes the compensation paid to directors who are not executive officers for the year ended April 30, 2008.

 

Name

   Fees Earned or
Paid in Cash
   Option
Awards (1)
   Total

Jonathan J. Spees—Former Director

   $ 8,000    $ —      $ 8,000

Bruce Spiess—Director

   $ 9,000    $ 220,164    $ 229,164

Gerald Klein—Director

   $ 9,000    $ 220,164    $ 229,164

 

(1) The dollar values shown reflect the compensation cost of the awards, before reflecting forfeitures, over the requisite service period, as described in FAS 123(R), which we implemented May 1, 2006. Prior to adoption FAS 123(R), we did not record stock-based compensation expense directly in the financial statements. The assumptions we used in valuing these awards are described in Note G to our Consolidated Financial Statements included in this Form 10-K.

Until November 19, 2007 each outside board member received compensation of $12,000 per year and options to purchase 10,000 shares of common stock exercisable over a term of ten years at an exercise price based on the closing market price of the Company’s common stock on the date of issuance. The Company also reimburses Directors for customary expenses related to attending board, committee and stockholder meetings.

Oxygen Biotherapeutics has agreed to pay to each of Drs. Klein and Spiess a consulting fee of $200/hour, resulting in a monthly fee of approximately $9,000. Furthermore, the Company agreed to issue to each of Dr. Spiess and Dr. Klein, as of the date of their respective elections, options to purchase 300,000 common shares at an exercise price of $0.30 per share that expire three years from the date of grant. If in the next two years the Company enters into a license agreement for its technology or is sold, it will also issue to each of Dr. Klein and Dr. Spiess at the closing of the transaction options to purchase an additional 300,000 common shares at an exercise price of $0.30 per share that expire three years from the date of grant.

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

The following table sets forth, as of April 30, 2008, the number and percentage of the outstanding shares of common stock and warrants and options that, according to the information supplied to Oxygen Biotherapeutics, 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 Oxygen Biotherapeutics, 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.

 

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Table of Contents

Name and Address

   Common
Shares
   Percent
of Class (1)
 

Principal stockholders

     

Aventis Invest (2)

Zurich, Switzerland

   19,397,556    11.7 %

Till Gontersweiler (3)

Zurich, Switzerland

   22,318,939    13.3 %

Officers and directors

     

Chris J. Stern (4)

9431 Oglebay Court

Raleigh, N.C. 27617

   1,014,000    0.7 %

Gerald L. Klein (4)

3044 Wyntre Ridge Way

Raleigh, NC 27606

   300,000    0.2 %

Bruce Spiess (4)

620 Dover Bluff Court

Manakin-Sabat, VA 23103

   300,000    0.2 %

Richard Kiral (4)

25505 Nottingham Ct.

Laguna Hills, CA 92653

   1,045,000    0.7 %

All officers and directors as a group (4 persons)

   2,659,000    1.8 %

 

(1) 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.
(2) The figure for Aventis Invest includes warrants to purchase 3,000,000 common shares at a price of $0.247 per share that expire February 2010, warrants to purchase 1,648,352 common shares at a price of $0.245 per share that expire March 2011, warrants to purchase 3,296,704 common shares at a price of $0.245 per share that expire May, 2011, warrants to purchase 2,250,714 shares at a price of $0.245 per share that expire August 2011, warrants to purchase 3,750,000 shares at a price of $0.245 per share that expire January 2012, and warrants to purchase 5,202,500 shares at a price of $0.245 per share that expire April 2012. Roland Schaub is the manager of Aventis Invest who exercises investment and voting control over the securities held by Aventis Invest.
(3) The figure for Till Gontersweiler includes warrants to purchase 2,700,000 common shares at a price of $0.245 per share which expire March 2011, warrants to purchase 600,000 shares at a price of $0.245 per share that expire June 2011, warrants to purchase 7,932,876 shares at a price of $0.245 per share that expire August 2011, warrants to purchase 3,750,000 shares at a price of $0.245 per share that expire January 2012, warrants to purchase 5,202,500 shares at a price of $0.245 per share that expire April 2012, and warrants to purchase 1,566,439 shares at a price of $0.245 per share that expire January 2013.
(4) These figures include vested options: for Mr. Stern options to purchase 1,000,000 shares of common stock; for Mr. Klein options to purchase 300,000 shares of common stock; for Mr. Kiral options to purchase 1,045,000 shares of common stock, and, for Mr. Spiess options to purchase 300,000 shares of common stock.

ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related Party Transactions

Aventis

Aventis Invest, a beneficial holder of five percent of Oxygen Biotherapeutics common stock, purchased bridge notes from us in 2006 and 2007 with face amounts totaling $164,835 and $58,500, respectively. In connection with the 2006 bridge notes, we issued Aventis Invest warrants to purchase 1,648,352 common shares at $0.245 per share that expire March 22, 2011. In connection with the 2007 bridge notes, we issued Aventis Invest warrants to purchase 3,296,704 common shares at $0.245 per share that expire May 23, 2011, and warrants to purchase 585,000 common shares at $0.245 per share that expire April 27, 2012. Aventis Invest also provided advisory services Oxygen Biotherapeutics during the fiscal year ended April 30, 2008, in connection with the placement of bridge

 

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notes and warrants in 2007 and convertible notes and warrants in 2008. Aventis Invest is located in Zurich, Switzerland and is managed by Roland Schaub. In consideration for the advisory services provided, we paid to Aventis Invest $250,579 in cash and issued to Aventis Invest:

 

   

Warrants to purchase 249,286 common shares at $0.245 per share that expired April 30, 2008

   

Warrants to purchase 2,250,714 common shares at $0.245 per share that expire August 30, 2011

   

Warrants to purchase 3,750,000 common shares at $0.245 per share that expire January 31, 2012

   

Warrants to purchase 75,000 common shares at $0.245 per share that expire April 5, 2012

   

Warrants to purchase 4,835,000 common shares at $0.245 per share that expire April 30, 2012

   

Warrants to purchase 3,000,000 common shares at $0.247 per share that expire February 1, 2010

In March 2008, Aventis Invest became the beneficial owner of 249,286 additional common shares pursuant to a cash exercise of 249,286 common stock purchase warrants at $0.245 per share, totaling $61,075.

Gontersweiler

Till Gontersweiler, a beneficial holder of five percent of Oxygen Biotherapeutics common stock, purchased bridge notes in 2006 and April 2007. In January 2008, Mr. Gontersweiler agreed to exchange the bridge notes and all accrued interest in the amount of $348,220 for our convertible notes in the aggregate principal amount of $773,822, which represents an original issue discount of 55 percent, and warrants to purchase 1,566,439 common shares at an exercise price of $0.245 per share that expire January 31, 2013. In April 2008, Till Gontersweiler became the beneficial owner of 567,124 additional common shares pursuant to a cash exercise of 567,124 common stock purchase warrants at $0.245 per share, totaling $138,945.

Nicora

Robert Nicora, an officer and director, purchased a bridge note from us in July 2007 in the principal amount of $5,300 and warrants to purchase 53,000 common shares at an exercise price of $0.245 per share that expire July 26, 2012. Mr. Nicora’s service as an officer and director ended in November 2007. In January 2008, Mr. Nicora agreed to exchange the bridge note and all accrued interest in the amount of $5,565 for our convertible notes in the aggregate principal amount of $12,367, which represents an original issue discount of 55 percent, and warrants to purchase 25,034 common shares at an exercise price of $0.245 per share that expire January 31, 2013.

Director Independence

Our board of directors has four members. Chris J. Stern is our Chairman, Chief Executive Officer and Chief Financial Officer, Richard M. Kiral is our President and Chief Operating Officer, and Bruce Spiess and Gerald Klein are directors. Mr. Stern, Dr. Spiess, and Dr. Klein are non-employee directors and compensated by consulting agreements. The Board has determined that none of its directors is “independent” under the criteria set forth in Rule 4200(15) of the Nasdaq Marketplace Rules.

ITEM 14—PRINCIPAL ACCOUNTING FEES AND EXPENSES

The aggregate fees billed for professional services by Haskell & White LLP in 2007 and 2006 were as follows:

 

     2008    2007

Audit Fees

   $ 93,640    $ 61,720

Tax Fees(1)

   $ 9,913    $ 8,775
             

Total

   $ 103,553    $ 70,495
             

 

(1) Tax return and related service

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 registered public accounting firm. We believe that all audit engagement fees and terms and permitted non-audit services provided by our independent registered public accounting firm as described in the above table were approved in advance by our Board of Directors.

 

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Table of Contents

PART IV

ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

FINANCIAL STATEMENTS

 

  (a) Report of Independent Registered Public Accounting Firm.

 

  (b) Balance Sheets as of April 30, 2008 and 2007.

 

  (c) Statements of Operations for each of the two years in the period ended April 30, 2008 and for the period May 26, 1967 (Date of Inception) to April 30, 2008.

 

  (d) Statements of Stockholders’ Equity (Deficit) for each of the two years in the period ended April 30, 2008 and for the period May 26, 1967 (Date of Inception) to April 30, 2008.

 

  (e) Statements of Cash Flows for each of the two years in the period ended April 30, 2008 and for the period May 26, 1967 (Date of Inception) to April 30, 2008.

 

  (f) Notes to the Financial Statements.

INDEX TO EXHIBITS

 

Exhibit No.

  

Exhibits Required by Item 601 of Regulation S-K

2.1    Agreement and Plan of Merger dated April 28, 2008 (1)
3.1    Certificate of Incorporation (1)
3.2    Bylaws (1)
10.1    Agreement with Leland C. Clark, Jr., Ph.D. dated November 20, 1992 with amendments, Assignment of Intellectual Property/ Employment (2)
10.2    Agreement between the Registrant and Keith R. Watson, Ph.D. Assignment of Invention (2)
10.3    Children’s Hospital Research Foundation License Agreement dated February 28, 2001 (2)
10.4    Form of Option issued to Executive Officers and Directors (2)
10.5    Form of Option issued to Employees (2)
10.6    Form of Unsecured Promissory Note Issued 2006-2007 (3)
10.7    Form of Warrant issued to Unsecured Note Holders 2006-2007 (3)
10.8    Form of Convertible Note – 2008 (4)
10.9    Form of Warrant issued to Convertible Note Holders (4)
10.10    Form of Purchase Agreement – US Purchase (without exhibits, which are included as exhibits 10.8 and 10.9, above) (4)
10.11    Form of Purchase Agreement – Non-US Purchase (without exhibits, which are included as exhibits 10.8 and 10.9, above) (4)
10.12    Form of Purchase Agreement – US Note Exchange (without exhibits, which are included as exhibits 10.8 and 10.9, above) (4)
10.13    Form of Purchase Agreement – Non-US Note Exchange (without exhibits, which are included as exhibits 10.8 and 10.9, above) (4)
10.14    Form of Warrant issued to Financing Consultants (5)
10.15    1999 Amended Stock Plan (amended 2008)
10.16    Engagement Letter with Chris J. Stern dated November 19, 2007, as amended March 26, 2008
10.17    Business Consultant Agreement with Institute for Efficient Management, Inc., as amended March 26, 2008
10.18    Employment Agreement with Richard Kiral, as amended March 26, 2008
10.19    Engagement and Consulting Agreement with Bruce Spiess
10.20    Engagement and Consulting Agreement with Gerald L. Klein
31.1    Certification of Chief Executive Officer and 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
99.1    Proxy Statement dated April 29, 2008 (6)

 

(1) These documents were filed as exhibits to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on June 30, 2008, and are incorporated herein by this reference.

 

(2) These documents were filed as exhibits to the annual report on Form 10-K filed by Oxygen Biotherapeutics with the SEC on August 13, 2004, and are incorporated herein by this reference.

 

(3) These documents were filed as exhibits to the current report on Form 8-K filed by Oxygen Biotherapeutics with the SEC on September 6, 2006, and are incorporated herein by this reference. During the period from March 2006 and through December 2007, we issued unsecured notes and common stock purchase warrants for cash to the following persons on the terms indicated:

 

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Table of Contents

Name

   Date    Note
Principal ($)
   Interest
Rate (%)
   No. of
Warrants
   Warrant
Price ($)
   Warrant
Expiration

Aventis Invest

   03/22/06    54,945    9    1,648,352    0.245    03/22/11

Till Gontersweiler

   03/22/06    90,000    9    2,700,000    0.245    03/22/11

Hanspeter Jaberg

   04/19/06    35,000    9    1,050,000    0.245    04/19/11

Aventis Invest

   05/23/06    109,890    9    3,296,704    0.245    05/23/11

Till Gontersweiler

   06/14/06    20,000    9    600,000    0.245    06/14/11

Till Gontersweiler

   08/30/06    200,000    9    6,000,000    0.245    08/30/11

Peter Tschirky

   12/22/06    100,000    6    1,000,000    0.245    12/22/11

Arnold Pfister

   12/30/06    50,000    6    500,000    0.245    12/30/11

Oskar Kaelin

   01/12/07    50,000    6    500,000    0.245    01/12/12

Andre Meuter

   01/29/07    50,000    6    500,000    0.245    01/29/12

Andreas Geiger

   02/14/07    50,000    6    500,000    0.245    02/14/12

Andre Meuter

   02/16/07    50,000    6    500,000    0.245    02/16/12

Peter Tschirky

   02/16/07    130,000    6    1,300,000    0.245    02/16/12

Aventis Invest

   04/05/07    15,000    6    150,000    0.245    04/05/12

Charles Hegglin

   04/12/07    55,000    6    550,000    0.245    04/12/12

Aventis Invest

   04/27/07    58,500    6    585,000    0.245    04/27/07

John Johnstone

   07/24/07    31,800    12    318,000    0.245    07/24/12

Ivan Bergamin

   07/25/07    15,900    12    159,000    0.245    07/25/12

Mark Nelson

   07/25/07    10,600    12    106,000    0.245    07/25/12

Steve Abbadessa

   07/26/07    31,800    12    318,000    0.245    07/26/12

Charles Yacoobian

   07/26/07    21,200    12    212,000    0.245    07/26/12

Ron Saltman

   07/26/07    10,600    12    106,000    0.245    07/26/12

Robert Nicora

   07/26/07    5,300    12    53,000    0.245    07/26/12

Bruce Anthony

   07/27/07    5,300    12    53,000    0.245    07/27/12

Dave Rock

   08/09/07    11,276    12    112,763    0.245    08/09/12

Lane Martin

   08/14/07    10,600    12    106,000    0.245    08/14/12

Christian Walliker

   10/11/07    127,200    12    1,272,000    0.245    10/11/12

Dirk Albrecht

   11/20/07    100,000    10    250,000    0.245    01/31/13

Oskar Kaelin

   11/20/07    50,000    10    125,000    0.245    01/31/13

Roger Kutner

   11/20/07    100,000    10    250,000    0.245    01/31/13

FIONA International SA

   12/13/07    750,000    10    1,875,000    0.245    01/31/13

 

(4) These documents were filed as exhibits to the quarterly report on Form 10-QSB for the period ended January 31, 2008, filed by Oxygen Biotherapeutics with the SEC on March 21, 2008, and is incorporated herein by this reference. During the period from January 31, 2008 through March 15, 2008, we issued convertible notes and common stock purchase warrants in exchange for unsecured notes issued in 2006 and 2007, and for cash. All of the convertible notes were issued with an original issue discount of 55%. The convertible notes and warrants were issued to the following persons on the terms indicated:

 

Name

   Date    Note
Principal ($)
   No. of
Warrants
   Warrant
Price ($)
   Warrant
Expiration

FIONA International SA

   01/31/08    2,117,900    3,373,821    0.245    01/31/13

Abbadessa, Steven

   01/31/08    270,756    548,089    0.245    01/31/13

Albrecht, Dirk

   01/31/08    222,222    449,842    0.245    01/31/13

Anthony, Bruce

   01/31/08    12,367    25,034    0.245    01/31/13

Bergamin, Ivan

   01/31/08    37,100    75,101    0.245    01/31/13

Geiger, Andreas

   01/31/08    116,667    236,168    0.245    01/31/13

Gontersweiler, Till

   01/31/08    773,821    1,566,439    0.245    01/31/13

Hegglin, Charles

   01/31/08    127,111    257,310    0.245    01/31/13

Jaberg, Hanspeter

   01/31/08    77,778    157,445    0.245    01/31/13

Johnstone, John

   01/31/08    339,756    687,765    0.245    01/31/13

Kaelin, Oskar

   01/31/08    228,333    462,213    0.245    01/31/13

Kulick, Shell

   01/31/08    52,444    106,162    0.245    01/31/13

Kutner, Roger

   01/31/08    222,222    449,842    0.245    01/31/13

Martin, Lane

   01/31/08    24,498    49,591    0.245    01/31/13

Meuter, Andre

   01/31/08    233,889    473,460    0.245    01/31/13

Nelson, Mark

   01/31/08    24,733    50,067    0.245    01/31/13

Nicora, Robert

   01/31/08    12,367    25,034    0.245    01/31/13

Patkin, Todd

   01/31/08    265,556    537,563    0.245    01/31/13

Pfister, Arnold

   01/31/08    117,778    238,417    0.245    01/31/13

Rock, David

   01/31/08    26,060    52,753    0.245    01/31/13

Saltman, Ron

   01/31/08    24,733    50,067    0.245    01/31/13

Tschirky, Peter

   01/31/08    538,889    1,090,868    0.245    01/31/13

Walliker, Christian

   01/31/08    288,320    583,644    0.245    01/31/13

Yacoobian, Charles

   01/31/08    49,467    100,136    0.245    01/31/13

Alternative Capital AG

   02/29/08    3,165,552    —      —      —  

FIONA International SA

   02/29/08    2,777,775    —      —      —  

Horizon Finance Group, Ltd.

   02/29/08    4,444,440    —      —      —  

Guggenheim Partner

   02/29/08    —      600,000    0.247    02/28/13

Solari Bozzi, Anne-Marie

   02/29/08    —      220,087    0.247    02/28/13

Schuetz, Heinz

   02/29/08    —      45,088    0.247    02/28/13

Kaelin, Oskar

   02/29/08    —      330,000    0.247    02/28/13

Jaberg, Hanspeter

   02/29/08    —      1,250,000    0.247    02/28/13

 

29


Table of Contents

Holdener, Edgar

   02/29/08    —      166,666    0.247    02/28/13

Erwin Schaeli

   02/29/08    —      200,000    0.247    02/28/13

Money Worth

   02/29/08    —      333,333    0.247    02/28/13

Reiff, Dieter

   02/29/08    —      195,000    0.247    02/28/13

Reiff, Nadine

   02/29/08    —      300,000    0.247    02/28/13

Kleb, Peter

   02/29/08    —      100,000    0.247    02/28/13

Meuter, Andre

   02/29/08    —      781,730    0.247    02/28/13

OPM Invest Ltd.

   02/29/08    —      1,403,374    0.247    02/28/13

Dario, Victor

   02/29/08    —      1,500,000    0.247    02/28/13

Kiilerich, Kristian

   02/29/08    —      1,221,973    0.247    02/28/13

Albrecht, Dirk

   02/29/08    —      250,000    0.247    02/28/13

Ott, Marc

   02/29/08    —      250,000    0.247    02/28/13

Walliker, Christian

   02/29/08    —      6,453,744    0.247    02/28/13

Landolt, Aurelio

   02/29/08    —      5,256,874    0.247    02/28/13

Schein, Martin

   02/29/08    —      170,000    0.247    02/28/13

Margreff, Harold

   02/29/08    222,222    449,843    0.247    02/28/13

SINITUS Nominees Ltd.

   02/29/08    666,666    1,349,526    0.247    02/28/13

Apteker, James

   02/29/08    222,222    449,842    0.247    02/28/13

Craparotta, Sal and Anette

   02/29/08    222,222    449,842    0.247    02/28/13

Fox, Lowell

   02/29/08    222,222    449,842    0.247    02/28/13

JWR Realty LLC

   02/29/08    250,000    506,072    0.247    02/28/13

Nelson, Mark

   02/29/08    22,222    44,984    0.247    02/28/13

Patkin, Todd

   02/29/08    444,444    899,685    0.247    02/28/13

Rendon, Richard

   02/29/08    228,888    463,337    0.247    02/28/13

Walsh, Kevin

   02/29/08    111,111    224,921    0.247    02/28/13

Wots-Red

   02/29/08    500,000    1,012,146    0.247    02/28/13

Fisher, Ryan

   03/15/08    55,556    112,461    0.247    03/15/13

Mahan, Joan

   03/15/08    22,222    44,984    0.247    03/15/13

Mahan, Robert

   03/15/08    55,556    112,461    0.247    03/15/13

OPM Invest Ltd.

   03/15/08    444,444    899,684    0.247    03/15/13

Cerri, Maria Anna

   03/17/08    80,000    —      —      —  

Reiff, Dieter

   03/17/08    70,000    —      —      —  

 

(5) In connection with the financing obtained through unsecured notes in 2006 and 2007 and the convertible notes issued in 2008, we issued to persons providing finance consulting services warrants to purchase common stock. We issued warrants to the following persons on the terms indicated:

 

Name

   Date    No. of
Warrants
   Warrant
Price ($)
   Warrant
Expiration

Aventis Invest

   04/30/06    249,286    0.245    04/30/08

Aventis Invest

   08/30/06    2,250,714    0.245    08/30/11

Aventis Invest

   01/31/07    7,500,000    0.245    01/31/12

Aventis Invest

   04/05/07    75,000    0.245    04/05/12

Aventis Invest

   04/30/07    9,670,000    0.245    04/30/12

Aventis Invest

   02/01/08    3,000,000    0.247    02/01/10

Suzanne Lanoldt-Parker

   01/31/08    1,431,000    0.245    01/31/13

Horizon Financial Capital Group, Ltd.

   01/31/08    2,500,000    0.245    01/31/13

Ivan Bergamin

   2/1/2008    2,500,000    0.275    02/1/10

Maylands Investment Corp.

   2/1/2008    2,500,000    0.275    02/1/10

PS Capital

   2/1/2008    2,500,000    0.275    02/1/10

Horizon Financial Capital Group, Ltd.

   2/1/2008    3,000,000    0.247    02/1/10

Horizon Financial Capital Group, Ltd.

   3/26/2008    6,264,814    0.247    03/26/13

OPM Invest Ltd

   3/26/2008    2,088,272    0.247    03/26/13

 

(6) The Proxy Statement is furnished, not filed, as supplemental information pursuant to the requirements of Form 10-K.

 

30


Table of Contents

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.

 

  OXYGEN BIOTHERAPEUTICS INTERNATIONAL, INC.
August 11, 2008  
 

/s/ Chris J. Stern

  Chris J. Stern, Chief Executive Officer
  (Principal Executive Officer)
August 11, 2008  

/s/ Chris J. Stern

  Chris J. Stern, Chief Financial Officer (interim)
  (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/ Chris J. Stern

   Date: August 11, 2008
Chris J. Stern, Director   

/s/ Richard M. Kiral

   Date: August 11, 2008
Richard M. Kiral, Director   

/s/ Gerald L. Klein

   Date: August 11, 2008
Gerald L. Klein, Director   

/s/ Bruce Spiess

   Date: August 12, 2008
Bruce Spiess, 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

The Proxy Statement dated April 29, 2008, is furnished as Exhibit 99.1 to this report.

 

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Table of Contents

INDEX TO FINANCIAL STATEMENTS

CONTENTS

 

       Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   F-2

CONSOLIDATED FINANCIAL STATEMENTS

  

CONSOLIDATED BALANCE SHEETS

   F-3

CONSOLIDATED STATEMENTS OF OPERATIONS

   F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

   F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS

   F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   F-12

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Oxygen Biotherapeutics, Inc.

We have audited the accompanying balance sheets of Oxygen Biotherapeutics, Inc., formerly Synthetic Blood International, Inc. (a development-stage enterprise) (the “Company”) as of April 30, 2008 and 2007, and the related statements of operations, stockholders’ equity and cash flows for each of the years ended April 30, 2008 and 2007, and for the period from inception, May 26, 1967, through April 30, 2008. 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. The Company’s statements of operations, stockholders’ equity and cash flows 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 previously 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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, and the report of the other auditors, provide a reasonable basis for our opinion.

In our opinion, based on our audits, and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Oxygen Biotherapeutics, Inc., formerly Synthetic Blood International, Inc. as of April 30, 2008 and 2007, and the results of its operations and its cash flows for each of the years ended April 30, 2008 and 2007, and for the period from inception, May 26, 1967, through April 30, 2008, 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, has a significant deficit accumulated during the development stage, and requires substantial additional funds to complete clinical trials and pursue regulatory approvals. In view of these matters, recoverability of a major portion of the recorded asset amounts shown in the accompanying April 30, 2008 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 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

August 12, 2008

 

F-2


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED BALANCE SHEETS

 

     April 30,
2008
    April 30,
2007
 
ASSETS     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 4,880,633     $ 16,234  

Debt issuance costs, net of accumulated amortization of $0 and $921,678, respectively

     —         1,403,806  

Prepaid expenses

     72,084       63,308  
                

Total current assets

     4,952,717       1,483,348  

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $599,448 and $531,003

     177,605       194,216  

DEBT ISSUANCE COSTS, net of accumulated amortization of $213,234 and $0, respectively

     5,297,289       —    

PATENTS, net

     129,102       144,958  
                
   $ 10,556,713     $ 1,822,522  
                
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)     

CURRENT LIABILITIES

    

Accounts payable

   $ 63,907     $ 391,627  

Related party payables

     103,000       84,000  

Accrued liabilities

     54,453       99,866  

Notes payable, net of unamortized discount of $0 and $370,423, respectively

     43,631       1,145,025  

Convertible debentures, net of unamortized discount of $0 and $4,884, respectively

     —         125,116  
                

Total current liabilities

     264,991       1,845,634  

LONG TERM PORTION of convertible debentures, net of unamortized discount of $19,716,686 and $0, respectively

     539,786       —    
                

Total liabilities

     804,777       1,845,634  
                

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY (DEFICIT)

    

Preferred stock, undesignated, authorized 10,000,000 shares; none issued or outstanding

     —         —    

Common stock, par value $.01 per share; authorized 200,000,000 shares; issued and outstanding 146,405,576 and 139,854,859, respectively

     1,464,056       1,398,549  

Additional paid-in capital

     46,029,242       29,598,533  

Deficit accumulated during the development stage

     (37,741,362 )     (31,020,194 )
                

Total stockholders’ equity (deficit)

     9,751,936       (23,112 )
                
   $ 10,556,713     $ 1,822,522  
                

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-3


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Period from
May 26, 1967
(inception) to
April 30, 2008
             
                
       Year ended April 30,  
       2008     2007  

OPERATING EXPENSES AND LOSSES

      

Research and development expense

   $ 12,357,445     $ 939,998     $ 752,614  

General and administrative expense

     18,897,516       1,992,687       1,019,795  

Loss on impairment of long-lived assets

     32,113       32,113       —    
                        

Total operating expenses and losses

     31,287,074       2,964,798       1,772,409  

INTEREST EXPENSE

     7,128,907       3,611,902       1,678,488  

LOSS ON EXTINGUISHMENT
OF DEBT

     250,097       250,097       —    

OTHER INCOME

     (924,716 )     (105,629 )     (120,027 )
                        

NET LOSS

   $ (37,741,362 )   $ (6,721,168 )   $ (3,330,870 )
                        

NET LOSS PER SHARE, basic

     $ (0.05 )   $ (0.02 )
                  

NET LOSS PER SHARE, diluted

     $ (0.08 )   $ (0.02 )
                  

WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING, basic

       141,482,244       138,232,970  
                  

WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING, diluted

       250,012,892       138,232,970  
                  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-4


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the two years ended April 30, 2008 and for the period

May 26, 1967 (date of inception) to April 30, 2008

 

     Common stock    Additional
paid-in capital
   Deferred
compensation
    Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity (deficit)
 
     Number of
Shares
   Amount          

BALANCES, May 26, 1967

   $ —      $ —      $ —      $ –       $ —       $ —    

Common stock sold, net of offering costs

     105,603,252      1,056,032      16,683,920      —         —         17,739,952  

Common stock issued for convertible debt

     14,579,953      145,799      2,756,509      —         —         2,902,308  

Issuance of common stock to employees and compensatory options

     218,800      2,188      1,706,095      —         —         1,708,283  

Compensation on options and warrants issued

     —        —        647,750      (237,834 )     —         409,916  

Amortization of deferred compensation

     —        —        —        128,085       —         128,085  

Issuance of common stock for services rendered

     1,268,994      12,690      284,795      —         —         297,485  

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  

Issuance of warrants and options

     —        —        265,950      —         —         265,950  

Exercise of warrants and options

     5,497,305      54,974      629,427      —         —         684,401  

Contributions of capital for cash and services rendered

     —        —        65,700      —         —         65,700  

Contributions of capital for by shareholders

     —        —        581,818      —         —         581,818  

Beneficial conversion on convertible debt

     —        —        770,000      —         —         770,000  

Warrants issued with debt instruments

     —        —        702,800      —         —         702,800  

Issuance of common stock for promissory notes

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

Amortization of deferred compensation

     —        —        —        93,918         93,918  

Net loss

     —        —        —        —         (27,689,324 )     (27,689,324 )
                                             

BALANCES, April 30, 2006

     136,589,119    $ 1,365,891    $ 26,525,480    $ (15,831 )   $ (27,689,324 )   $ 186,216  

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-5


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED

For the two years ended April 30, 2008 and for the period

May 26, 1967 (date of inception) to April 30, 2008

 

     Common stock    Additional
paid-in

capital
   Deferred
compensation
    Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity (deficit)
 
     Number of
Shares
   Amount          

BALANCES, April 30, 2006

   136,589,119    $ 1,365,891    $ 26,525,480    $ (15,831 )   $ (27,689,324 )   $ 186,216  

Warrants issued for services rendered

   —        —        2,019,125          2,019,125  

Common stock issued for convertible debt

   3,265,740      32,658      302,555      —         —         335,213  

Warrants issued for settlement of debt

   —        —        72,000      —         —         72,000  

Value of employee stock options

   —        —        53,000      —         —         53,000  

Warrants issued with debt instruments

   —        —        626,373      —         —         626,373  

Amortization of deferred compensation

   —        —        —        15,831       —         15,831  

Net loss

   —        —        —        —         (3,330,870 )     (3,330,870 )
                                           

BALANCES, April 30, 2007

   139,854,859    $ 1,398,549    $ 29,598,533    $ —       $ (31,020,194 )   $ (23,112 )

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-6


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) - CONTINUED

For the two years ended April 30, 2008 and for the period

May 26, 1967 (date of inception) to April 30, 2008

 

     Common stock    Additional
paid-in

capital
   Deferred
compensation
   Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity (deficit)
 
     Number of
Shares
   Amount           

BALANCES, April 30, 2007

   139,854,859    $ 1,398,549    $ 29,598,533    $ —      $ (31,020,194 )   $ (23,112 )

Warrants issued for services rendered

   —        —        4,781,983      —        —         4,781,983  

Common stock issued for services rendered

   2,088,272      20,883      747,455      —        —         768,338  

Common stock issued as compensation

   14,000      140      12,320      —        —         12,460  

Common stock issued for convertible debt

   1,333,887      13,339      116,661      —        —         130,000  

Compensation on options and warrants issued

   —        —        769,331      —        —         769,331  

Warrants issued with debt instruments

   —        —        7,290,352      —        —         7,290,352  

Beneficial conversion on convertible debt

   —        —        2,522,648      —        —         2,522,648  

Exercise of warrants and options

   3,114,558      31,145      189,959      —        —         221,104  

Net loss

   —        —        —        —        (6,721,168 )     (6,721,168 )
                                          

BALANCES, April 30, 2008

   146,405,576    $ 1,464,056    $ 46,029,242    $ —      $ (37,741,362 )   $ 9,751,936  
                                          

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-7


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Period from
May 26, 1967
(inception) to
    Year ended April 30,  
     April 30, 2008     2008     2007  

CASH FLOWS FROM OPERATING ACTIVITIES

      

Net loss

   $ (37,741,362 )   $ (6,721,168 )   $ (3,330,870 )

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

      

Depreciation and amortization

     1,421,999       102,455       136,291  

Amortization of deferred compensation

     336,750       —         15,831  

Interest on debt instruments

     6,738,816       3,521,767       1,561,175  

Loss (gain) on debt settlement and extinguishment

     163,097       250,097       (48,000 )

Loss on impairment of long-lived assets

     32,113       32,113       —    

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

     219,305       —         —    

Issuance and vesting of compensatory stock options and warrants

     3,060,794       769,331       53,000  

Issuance of common stock below market value

     695,248       —         —    

Issuance of common stock as compensation

     12,460       12,460       —    

Issuance of common stock for services rendered

     1,265,279       —      

Issuance of note payable for services rendered

     120,000       —         120,000  

Contributions of capital through services rendered by stockholders

     216,851       —         —    

Changes in operating assets and liabilities

      

Prepaid expenses and other assets

     47,560       110,868       12,905  

Accounts payable and accrued liabilities

     436,954       (354,132 )     342,010  
                        

Net cash used in operating activities

     (22,974,136 )     (2,276,209 )     (1,137,658 )
                        

CASH FLOWS FROM INVESTING ACTIVITIES

      

Purchase of property and equipment

     (1,167,849 )     (83,947 )     —    

Capitalization of patent costs

     (717,593 )     (18,154 )     (19,283 )
                        

Net cash used in investing activities

   $ (1,885,442 )   $ (102,101 )   $ (19,283 )
                        

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

 

     Period from
May 26, 1967
(inception) to
    Year ended April 30,  
     April 30, 2008     2008     2007  

CASH FLOWS FROM FINANCING ACTIVITIES

      

Proceeds from sale of common stock and exercise of stock options and warrants, net of related expenses

   $ 18,836,623     $ 221,104       —    

Repayments of amounts due stockholders

     (121,517 )     —         —    

Proceeds from stockholder notes payable

     977,692       —         —    

Proceeds from former officer loans

     39,500       39,500       —    

Repayments of former officer loans

     (39,500 )     (39,500 )     —    

Proceeds from issuance of notes payable, net of issuance costs

     2,104,420       231,833       1,243,772  

Proceeds from convertible debentures, net of issuance costs

     8,807,285       6,865,785       —    

Payments on notes - short-term

     (572,983 )     (76,013 )     (70,979 )

Payments on notes - long term

     (291,309 )     —         —    
                        

Net cash provided by financing activities

     29,740,211       7,242,709       1,172,793  
                        

Net change in cash and cash equivalents

     4,880,633       4,864,399       15,852  

Cash and cash equivalents, beginning of period

     —         16,234       382  
                        

Cash and cash equivalents, end of period

   $ 4,880,633     $ 4,880,633     $ 16,234  
                        

Cash paid for:

      

Interest

   $ 241,855     $ 90,135     $ 8,591  
                        

Income taxes

   $ 20,739     $ 766     $ 1,148  
                        

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Non-cash financing activities during the year ended April 30, 2008:

 

  (1) In connection with the issuance of $282,055 of 2-year notes payable, the Company recorded discounts on notes payable related to the original issue discount of $16,417, and additional discounts of $67,969 related to the relative fair value of 2,815,763 warrants issued in the transaction. The Company recorded debt issue costs of $170,686, of which $120,223 was non-cash through the issuance of 1,431,000 warrants for capital raising services.

 

  (2) The Company made principal payments on its convertible debentures with a gross carrying value of $156,060 through the issuance of 1,333,887 shares of common stock. These debentures included discounts totaling $26,060, and thus had a net carrying value of $130,000.

 

  (3) The Company issued 2,193,148 shares of common stock in cashless exercises of 300,000 options and 8,455,333 warrants.

 

  (4) In connection with the issuance of a $1,000,000 short term bridge loan, the Company issued 5-year warrants to purchase 2,500,000 shares of common stock at $0.245 per share to investors. An additional discount of $288,750 was recorded for the relative fair value of the warrants. The Company also recorded debt issue costs of $288,750 for the value of 2,500,000 additional warrants issued for capital raising services.

 

  (5) In connection with the exchange of its $1,000,000 bridge loans for 5-year convertible debentures with a face amount of $2,222,222, the Company recorded an original issue discount of $1,222,222. In addition, the Company issued 5-year warrants to purchase 4,498,426 shares of common stock at $0.247 per share to investors. Additional discounts of $703,554 and $296,446 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

 

  (6) In connection with the exchange of its remaining outstanding short term loans for 5-year convertible debentures with a face amount of $3,982,545, the Company recorded an original issue discount of $2,190,400. In addition, the Company issued 5-year warrants to purchase 8,061,831 shares of common stock at $0.247 per share to investors. Additional discounts of $1,035,945 and $756,200 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively. Pursuant to this refinancing transaction, the Company recorded a debt extinguishment loss of $250,097.

 

  (7) The Company financed the prepayment of certain insurance premiums with a short-term note totaling $119,644. The Company repaid a total of $76,013 on this note during the year ended April 30, 2008.

 

  (8) In connection with the issuance of $6,335,000 of convertible debentures with a total face amount of $14,077,778, the Company recorded an original issue discount of $7,742,778, and additional discounts of $4,864,998 related to the relative fair value of the 28,497,501 5-year warrants to purchase common stock at $0.247 per share that were issued in the transaction and $1,470,002 for the relative fair value of the embedded beneficial conversion feature. The Company also recorded debt issue costs of $5,510,562 for capital raising services, of which $768,337 was non-cash through the issuance of 2,088,272 restricted shares of common stock, and $4,373,010 was non-cash through the issuance of 21,853,086 warrants for capital raising services.

 

  (9) In March 2008, the Company issued 760,000 warrants to a noteholder as compensation for the Company's failure to issue the proper amount of warrants and provide an adequate exercise term in connection with previously issued 12% notes payable. These warrants have a 3-year term and are exercisable at $0.245 per share. Interest expense of $329,137 was recorded for the fair value of these warrants.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Company)

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Non-cash financing activities during the year ended April 30, 2007:

 

  (1) The Company issued short-term notes payable totaling $1,294,390 and recorded original issue discount of $72,190 and additional discount of $665,956 related to the value of warrants issued to the holders.

 

  (2) The Company made principal payments on its convertible debentures of $335,213 through the issuance of 3,265,740 shares of common stock.

 

  (3) The Company recorded debt issue costs of $2,019,125 through the issuance of 21,353,595 warrants for capital raising services.

 

  (4) The Company issued 1,500,000 warrants with an estimated fair value of $72,000 to settle a vendor note payable of $120,000.

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

NOTE A—DESCRIPTION OF BUSINESS AND GOING CONCERN

Description of Business —Oxygen Biotherapeutics (the Company) was originally formed as a New Jersey corporation in 1967 under the name Rudmer, David & Associates, Inc., and subsequently changed its name to Synthetic Blood International, Inc. On June 17, 2008, the stockholders of Synthetic Blood International approved the Agreement and Plan of Merger dated April 28, 2008, between Synthetic Blood International and Oxygen Biotherapeutics, Inc., a Delaware corporation. Oxygen Biotherapeutics was formed on April 17, 2008, by Synthetic Blood International to participate in the merger for the purpose of changing the state of domicile of Synthetic Blood International from New Jersey to Delaware. Certificates of Merger were filed with the states of New Jersey and Delaware, and the merger was effective June 30, 2008. Under the Plan of Merger, Oxygen Biotherapeutics is the surviving corporation and each share of Synthetic Blood International common stock outstanding on June 30, 2008, was converted to one share of Oxygen Biotherapeutics common stock.

The Company 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. 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, the Company’s alternative to transfused blood for use in surgical and similar medical situations, 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 started Phase II clinical trials of Oxycyte in surgical patients in the fourth quarter of 2004. The protocol was successfully completed in 2006 and filed in April 2008. Fluorovent, an oxygen exchange fluid for facilitating the treatment of lung conditions, and the glucose biosensor are at the preclinical development stage, and are currently inactive, awaiting additional financing. The Company has not generated significant revenues since inception.

The accompanying consolidated financial statements include the accounts and transactions of Oxygen Biotherapeutics, Inc. and Synthetic Blood International, Inc. All material intercompany transactions and balances have been eliminated in consolidation.

Going Concern —Management believes the accompanying consolidated 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 an accumulated deficit during the development stage of $37,741,362 at April 30, 2008 and used cash in operations of $2,276,209 during the year ended April 30, 2008. The Company requires substantial additional funds to complete clinical trials and pursue regulatory approvals. Although management believes that the Company has necessary working capital to fund operations in fiscal year 2008-2009, management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available.

In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying April 30, 2008 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 consolidated 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.

NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Development Stage— The Company has not commenced its planned principal operations, and has not earned significant revenues, therefore it is considered a “Development Stage Enterprise.”

Cash and Cash Equivalents— The Company considers all highly liquid instruments with a maturity date of three months or less, when acquired, to be cash equivalents.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

Cash Concentrations —The Company maintains cash balances at financial institutions, which may at times, exceed the amounts insured by the Federal Deposit Insurance Corporation (“FDIC”) of $100,000 per institution. The Company’s cash and cash equivalents included balances uninsured by the FDIC of approximately $278,000 at April 30, 2008. A total of $4,576,563 of the Company’s cash is invested in the UBS Select Prime Institutional Money Market Fund which has an average maturity of 53 days and is rated AAA by Moody’s and Standard and Poor’s. These funds included balances uninsured by the Securities Investor Protection Corporation of approximately $4,076,000.

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.

Impairment of Long-Lived Assets —The Company accounts for its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition of the asset. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and the fair value or disposable value. During the year ended April 30, 2008, the Company incurred impairment charges totaling $32,113 on a piece of laboratory equipment due to infrequency of use.

Research and Development Costs —All costs related to research and development activities are treated as expenses in the period incurred.

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 fiscal year 2007 diluted loss per share computation because their effect is antidilutive. If such shares were included in diluted EPS, they would have resulted in weighted-average common shares of approximately 204.8 million in fiscal year 2007, respectively. Such amounts include shares potentially issuable under outstanding options, warrants and convertible debentures.

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, short-term notes payable, and convertible debentures. The Company considers the carrying amount of its cash and cash equivalents and short-term notes payable to approximate fair value due to the short-term nature of these instruments It is not practicable for the Company to estimate the fair value of its convertible debentures as such estimates cannot be made without incurring excessive costs. The significant terms of the Company’s convertible debentures are described in Note D. At April 30, 2008 the debentures had a gross carrying value of $20,256,242, with an original issue discount totaling $11,155,401.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

Employee Stock Options and Stock-Based Compensation — Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share Based Payment,” using a modified prospective application. Earlier periods were not restated. SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

Prior to adopting SFAS No. 123(R), as permitted, the Company elected to follow APB 25 in accounting for its employee stock options. According to APB 25, no compensation expense was recognized since the exercise price of the Company’s stock options generally equaled the market price of the underlying stock on the date of grant. The Company transitioned to SFAS No. 123 by utilizing SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). In accordance with SFAS No. 148, the Company disclosed the effects of stock-based employee compensation on reported net income or loss and earnings or loss per share in the footnotes to its annual and interim financial statements.

Given that the Company previously followed APB 25 and SFAS No. 148 in accounting for its employee stock options, the impact of adopting the expense recognition requirements of SFAS 123(R) was significant to the Company’s results of operations, but not its financial position. The Company’s net loss for the years ended April 30, 2008 and 2007 includes approximately $769,000 and $53,000 of non-cash stock-based employee compensation costs, respectively.

The Company continues to follow EITF Issue 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with EITF Issue 96-18, these stock options and warrants issued as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided. The Company’s net loss for the years ended April 30, 2008 and 2007 includes expenses of approximately $4,782,000 and $2,019,000, respectively, for non-cash stock-based compensation for options issued to consultants and other non-employees.

Recent Accounting Pronouncements

SFAS 157 —In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS 157 was originally effective for fiscal years beginning after November 15, 2007, but was partially delayed by one year for non-financial assets and liabilities as detailed within FASB Staff Position 157-2. The Company is currently evaluating SFAS 157 and FASB Staff Position 157-2, and does not believe these pronouncements will materially affect its financial position or results of operations.

SFAS 159 —In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS 159”), which permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of fiscal years after November 15, 2007. The Company adopted SFAS 159 on May 1, 2008, and does not believe it will materially affect its financial position or results of operations.

SFAS No. 141(R) —In December 2007, the FASB issued Statement No. 141(R), Business Combinations . This Statement replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this

 

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OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

Statement. This Statement’s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting – the acquisition method – to all transactions and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating SFAS 141(R), and has not yet determined its potential impact on its future results of operations or financial position.

SFAS No. 160 —In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 . This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R). This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating SFAS 160 and has not yet determined its potential impact on its future results of operations or financial position.

SFAS No. 161 —In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 .” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities. These enhanced disclosures will discuss (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company has not determined the impact, if any SFAS No. 161 will have on its financial statements.

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 . During the year ended April 30, 2008, management believes no indications of impairment existed.

Patents consist of the following at April 30:

 

     2008     2007  

Patents

   $ 349,164     $ 331,010  

Less accumulated amortization

     (220,062 )     (186,052 )
                
   $ 129,102     $ 144,958  
                

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

The amortization expense for years ended April 30, 2008 and 2007 was $34,010 and $32,137, respectively. The unamortized balance of patents is estimated to be amortized over the next five years and thereafter as follows:

 

Fiscal Year ending April 30:

    

2009

   $ 29,099

2010

     24,380

2011

     20,678

2012

     16,183

2013

     12,431

Thereafter

     26,331
      
   $ 129,102
      

NOTE D—NOTES PAYABLE

Fiscal Year 2008:

In July and August 2007, the Company issued $282,055 of 2-year notes payable for working capital needs. The notes were unsecured and were issued with an original issue discount of $16,417, and additional discounts of $67,969 related to the relative fair value of 2,815,763 warrants issued in the transaction. Of the total discounts of $84,386, $26,230 was amortized into interest and the remaining balance of $58,156 was included in the loss on debt extinguishment. The Company recorded debt issuance costs of $170,686, of which $120,223 was through the issuance of 1,431,000 warrants and $50,463 was paid in cash for capital raising services.

In November and December 2007, the Company received $1,000,000 from the issuance of short term bridge loans to fund operations and other working capital needs. The notes were unsecured and paid interest at 10% per year. In addition, the Company issued 5-year warrants to purchase 2,500,000 shares of common stock at $0.245 per share to investors. An additional discount of $288,750 was recorded for the relative fair value of the warrants. In connection with the bridge financing, the Company issued 2,500,000 warrants for capital raising services and recorded debt issue costs of $288,750 which represents the fair value of these warrants.

In December 2007, the Company exchanged its $1,000,000 bridge loans for 5-year convertible debentures with a face amount of $2,222,222. The notes are unsecured, convertible into shares of common stock at $0.247 per share, and were issued with a 55% original issue discount totaling $1,222,222. In addition, the Company issued 5-year warrants to purchase 4,498,426 shares of common stock at $0.247 per share to investors. Additional discounts of $703,554 and $296,446 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively. The Company incurred no debt extinguishment costs in this exchange.

In January 2008, the Company exchanged its remaining outstanding short term loans for 5-year convertible debentures with a face amount of $3,982,545. The notes are unsecured, convertible into shares of common stock at $0.247 per share, and were issued with a 55% original issue discount totaling $2,190,400. In addition, the Company issued 5-year warrants to purchase 8,061,831 shares of common stock at $0.247 per share to investors. Additional discounts of $1,035,945 and $756,200 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively. Pursuant to this exchange transaction, the Company recorded a debt extinguishment loss of $191,941. The Company determined that the exchange of notes should be accounted for as complete debt extinguishment as opposed to a debt modification, pursuant to the guidance in EITF 02-04 and EITF 96-19. The key components of this determination were as follows: (a) no concessions were granted to the Company by the existing note holders; and (b) the modification of terms was deemed substantial enough to be treated as an extinguishment, since the present value of the new notes exceeded the present value of the exchanged notes by more than 10%.

 

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OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

During the third and fourth quarters of the year ended April 30, 2008, the Company received a total of $6,335,000 proceeds from the sale of 5-year convertible debentures, with a total face amount of $14,077,778. The debentures are unsecured and convertible at any time prior to maturity into a total of 56,995,053 shares of common stock, or $0.247 per share. In connection with the issuance of these obligations, the Company recorded a 55% original issue discount of $7,742,778, and additional discounts of $4,864,998 related to the relative fair value of the 28,497,501 5-year warrants to purchase common stock at $0.247 per share that were issued in the transaction, and $1,470,002 for the relative fair value of the beneficial conversion feature. The Company also incurred total costs of $5,510,562 for capital raising services on these transactions. The costs of the capital raising services include $369,215 paid in cash, $768,337 for the fair value of 2,088,272 restricted shares of common stock, and $4,373,010 for the fair value of 21,853,086 warrants.

Fiscal Year 2007:

During the fiscal year ended April 30, 2007, the Company received a net amount of $1,222,200 from the issuance of 1-year notes payable. The notes are unsecured, issued with original issue discounts ranging from 6% to 9% totaling $72,190 and pay interest ranging from 6% to 18% per year. In addition, the Company issued warrants to purchase 22,941,699 shares of common stock at $0.245 per share. Additional discount of $665,956 was recorded for the relative fair value of the warrants computed using the Black-Scholes pricing model. Total discount on the notes of $738,146 will be amortized as additional interest expense over the one-year life of the notes payable.

In connection with the placement of the notes, the Company paid fees totaling $106,000 and issued 5-year warrants to purchase 21,353,595 shares of common stock at $0.245 per share with a fair value of $2,019,000. Total debt issue costs of $2,125,000 have been capitalized and will be written-off to interest expense over the one-year life of the notes payable.

Interest charges associated with the notes payable, including amortization of the original issue discount, common stock purchase warrant value and beneficial conversion feature, aggregated $1,893,294 and $879,488 for the years ended April 30, 2008 and 2007. Interest charges associated with the amortization of debt issue costs aggregated $1,718,608 and $799,000 for the years ended April 30, 2008 and 2007.

The Company’s long-term debt at April 30, 2008 matures as follows:

 

Year ending April 30,

      

2009

   $ —    

2010

     —    

2011

     —    

2012

     —    

2013

     20,256,472  
        

Total scheduled maturities

     20,256,472  

Less unamortized discount at April 30, 2008

     (19,716,686 )
        
   $ 539,786  
        

NOTE E—COMMITMENTS AND CONTINGENCIES

Operating Leases— The Company leases its office and laboratory space under two operating leases that include fixed annual increases and expire in May 2009 and July 2015. Rent expense amounted to approximately $189,500 and $184,800 for the periods ended April 30, 2008 and 2007.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

The approximate future minimum payments for these leases are as follows:

 

2009

   $ 180,600

2010

     176,500

2011

     176,000

2012

     176,000

2013

     176,000

Thereafter

     396,100
      
   $ 1,281,200
      

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. At April 30, 2008 the Company is not a party to any litigation matters.

Employment Contracts— Effective March 25, 2008, Dr. Chris J. Stern, the Company’s Chairman of the Board, has been appointed to the office of Chief Executive Officer and will retain his position as Chairman. At the time Mr. Stern was elected to the Board in November 2007 and appointed Chairman, the Company agreed to pay to Mr. Stern’s consulting firm a monthly fee of $15,000 for consulting services that Mr. Stern provides to the Company. Furthermore, the Company agreed (i) to issue to Mr. Stern, as of the date of his election to the Board, options to purchase 1,000,000 common shares at an exercise price of $0.245 per share that expire three years from the grant date, and (ii) if, in the two years following the date of the agreement, the Company enters into a license agreement or is sold, the Company will issue to Mr. Stern at the closing of the transaction, options to purchase an additional 4,000,000 common shares at an exercise price of $0.245 per share that expire three years from the grant date. As a result of Mr. Stern’s appointment as Chief Executive Officer, the Board has agreed to pay Mr. Stern’s consulting company an additional $5,000 per month by way of consulting fees and also to pay the consulting company $2,500 per month for additional secretarial and administration expenses. Furthermore, the Board has also agreed (i) to issue to Mr. Stern an aggregate of 14,000 shares of the Company’s common stock on the 1st of every month, commencing with April 1, 2008, for so long as Mr. Stern serves on the Board, and (ii) to issue and pay to Mr. Stern, upon his termination as a board member by the Company for whatever reason, with or without cause, an aggregate of 100,000 shares of the Company’s common stock and the sum of $200,000, payable upon such termination.

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 April 2008 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 options granted 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. Effective March 25, 2008, the Board appointed Dr. Richard M. Kiral to serve as President and Chief Operating Officer of the Company. Pursuant to an agreement executed on March 26, 2008, Dr. Kiral’s employment agreement with the Company has been amended to provide for payment of a sum equal to Dr. Kiral’s annual base salary and performance bonus upon Dr. Kiral’s termination without cause, as that term is defined in the employment agreement. Furthermore, the Board has increased Dr. Kiral’s monthly compensation by $6,000 and has agreed to (i) to issue to Dr. Kiral an aggregate of 20,000 options to purchase shares of the Company’s common stock, at a price to be determined, on the 1st of every month, commencing with April 1, 2008, for so long as Dr. Kiral serves on the Board, and (ii) to issue and pay to Dr. Kiral, upon his termination as a board member by the Company for whatever reason, with or without cause, an aggregate of 100,000 shares of the Company’s common stock and the sum of $200,000, payable upon such termination.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

Effective November 20, 2007, Robert W. Nicora, the Company’s President, Chief Executive Officer and Chief Financial Officer resigned from all officer positions and from his directorship. In accordance with his employment agreement, Mr. Nicora is entitled to receive a total amount of $378,233 which includes accrued salaries, repayment of advances and severance payments. A total of $289,994 was paid on this obligation during the period from November 20, 2007 to April 30, 2008.

Robert J. Larsen, a member of the Company’s Board of Directors and its former interim President and Chief Executive Officer, died unexpectedly on March 24, 2008. On March 25, 2008, the Board of Directors approved the issuance of options to the Estate of Robert J. Larsen to purchase 300,000 shares of common stock at an exercise price of $0.30 per share.

Other Agreements —The Company has entered into agreements with its two of its Board members and a consultant whereby it will grant 3-year options for a total of 900,000 shares at an exercise of price of $0.30 per share in the event the Company enters into a license agreement, undergoes a change of control, or is sold.

Registration Requirement —Warrants totaling 49,410,844 and convertible notes issued during the year ended April 30, 2008 are subject to a requirement that the Company file a registration statement with the SEC to register the underlying shares, and that it be declared effective on or before January 9, 2009. In the event that the Company does not have an effective registration statement as of that date, or if at some future date the registration ceases to be effective, then the Company is obligated to pay liquidated damages to each holder in the amount of 1% of the aggregate market value of the stock, as measured on January 9, 2009 or at the date the registration statement ceases to be effective. As an additional remedy for non-registration of the shares, the holders would also receive the option of a cashless exercise of their warrant or conversion shares.

The agreement underlying the issue of the above warrants (“Warrant Agreement”) asserts that, prior to September 30, 2008, the Company is required to take action to submit to the shareholders of the Company a proposal to amend the Company’s articles of incorporation to increase the number of authorized shares of common stock by such amount as is necessary to reserve for issuance the maximum aggregate number of warrant shares then issued or potentially issuable in the future upon exercise of the Warrant Agreement. As a result of the June 30, 2008 merger (further described in Note K), this action was completed and the number of authorized common shares was increased from 200 million common shares, par value $0.01, to 400 million common shares, par value $0.0001.

NOTE F—STOCKHOLDERS’ EQUITY

Fiscal Year 2008:

Pursuant to the exercise of 50,000 options and 871,410 warrants for cash, the Company issued 921,410 shares of its common stock and received proceeds of $221,104. In addition, the Company issued 2,193,148 shares of common stock in cashless exercises of 300,000 options and 8,455,333 warrants.

In connection with the issuance of $282,055 of 2-year notes payable, the Company recorded a discount of $67,969 related to the relative fair value of 2,815,763 warrants issued in the transaction. The Company recorded debt issue costs of $170,686, of which $120,223 was through the issuance of 1,431,000 warrants for capital raising services.

The Company issued 5-year warrants to purchase 2,500,000 shares of common stock at $0.245 per share to investors that provided $1,000,000 in bridge financing. A discount of $288,750 was recorded for the relative fair value of the warrants. In connection with the bridge financing, the Company issued 2,500,000 warrants for capital raising services and recorded debt issue cost of $288,750 which represents the fair value of these warrants estimated using the Black-Scholes valuation model. The warrants are exercisable at a price of $0.245 per share. In addition, the Company paid $100,000 in cash for capital raising services.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

In the exchange its $1,000,000 bridge loans for 5-year convertible debentures, the Company issued 5-year warrants to purchase 4,498,426 shares of common stock at $0.247 per share to investors. Discounts of $703,554 and $296,446 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

In the exchange of its remaining outstanding short term loans for 5-year convertible debentures with a face amount of $3,982,545, the Company issued 5-year warrants to purchase 8,061,831 shares of common stock at $0.247 per share to investors. Discounts of $1,035,945 and $756,200 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

In connection with the Company’s $6,335,000 financing as described in Note D, the Company recorded discounts of $4,864,998 related to the relative fair value of the 28,497,501 5-year warrants to purchase common stock at $0.247 per share, and $1,470,002 for the relative fair value of the beneficial conversion feature. The Company also incurred total costs of $5,510,562 for capital raising services on these transactions. The costs of the capital raising services include a $369,215 paid in cash, $768,337 for the fair value of 2,088,272 restricted shares of common stock, and $4,373,010 for the fair value of 21,853,086 warrants.

In March 2008, the Company issued 760,000 warrants to a noteholder as compensation for the Company’s failure to issue the proper amount of warrants and provide an adequate exercise term in the original 2006 issuance. These warrants have a 3-year term and are exercisable at $0.245 per share. Interest expense of $329,137 was recorded for the fair value of these warrants.

The Company made principal payments on its convertible notes payable with a net carrying value of $130,000 through the issuance of 1,333,887 shares of common stock.

In April 2008, the Company issued 14,000 shares of its common stock as compensation to its Chief Executive Officer, valued at $12,460.

As further described in Note E, warrants totaling 41,057,783 and convertible notes issued during the year ended April 30, 2008 are subject to a requirement that the Company file a registration statement with the SEC to register the underlying shares, and that it be declared effective on or before January 9, 2009. EITF 00-19 provides guidance to proper recognition, measurement, and classification of certain freestanding financial instruments that are indexed to, and potentially settled in, any entity’s own stock. If an issuer does not control the form of settlement, an instrument is classified as an asset or liability. An issuer is deemed to “control the settlement” if it has both the contractual right to settle in equity shares and the ability to deliver equity shares. EITF 00-19 states that the existence of a contractual requirement for the issuer to deliver registered shares is one of the conditions that is considered outside the control of the issuer. However, the Financial Accounting Standards Board issued a FASB Staff Position on EITF 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”) in December 2006. The FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. Pursuant to the guidance in EITF 00-19 and FSP EITF 00-19-2, the Company has accounted for the warrants as equity instruments in the accompanying financial statements.

The Company determined that the conversion feature embedded in the convertible debentures satisfied the definition of a conventional convertible instrument under the guidance provided in ETIF 00-19 and ETIF 05-02, as the conversion option’s value may only be realized by the holder by exercising the option and receiving a fixed number of shares. As such, the embedded conversion option in the notes payable qualifies for equity classification under ETIF 00-19, qualifies for the scope exception of paragraph 11(a) of SFAS 133, and is not bifurcated from the host contract. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible debentures and common stock purchase warrants based on their relative estimated fair values. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible debentures contained a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible debentures to the common stock purchase warrants. The amounts recorded for the original issue discount, common stock purchase warrants and the beneficial conversion feature are amortized as interest expense over the terms of the convertible debentures.

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

Fiscal Year 2007:

The Company made principal payments on convertible debentures issued in 2006 of $335,216 through the issuance of 3,265,740 shares of common stock for the year ended April 30, 2007. At April 30, 2007, 590,914 shares were convertible by the note holders under the debenture agreements at $0.22 per share, and all of these conversions were made during fiscal year 2008.

The Company determined that the conversion feature embedded in the notes payable satisfied the definition of a conventional convertible instrument under the guidance provided in ETIF 00-19 and ETIF 05-02, as the conversion option’s value may only be realized by the holder by exercising the option and receiving a fixed number of shares. As such, the embedded conversion option in the notes payable qualifies for equity classification under ETIF 00-19, qualifies for the scope exception of paragraph 11(a) of SAFS 133, and is not bifurcated from the host contract. In accordance with the provisions of Accounting Principles Board Opinion No. 14, the Company allocated the net proceeds received in this transaction to each of the convertible debentures and common stock purchase warrants based on their relative estimated fair values. As a result, the Company allocated $770,000 to the convertible debentures and $525,000 to the common stock purchase warrants, which was recorded in additional paid-in-capital. In accordance with the consensus of EITF issues 98-5 and 00-27, management determined that the convertible debentures contained a beneficial conversion feature based on the effective conversion price after allocating proceeds of the convertible debentures to the common stock purchase warrants. Because the calculated beneficial conversion amount exceeded the remaining net carrying value of the convertible debentures, the beneficial conversion was recorded in an amount equal to the remaining net carrying value of the convertible debentures of $770,000 with a corresponding amount recorded as additional paid-in-capital. The amounts recorded for the original issue discount, common stock purchase warrants and the beneficial conversion feature are amortized as interest expense over the terms of the convertible debentures.

The shares underlying the convertible debentures and warrants are subject to a registration rights agreement that requires the Company to effect a registration statement and then maintain the effectiveness of the registration statement for a defined period of time. If the Company fails to comply with the related contractual terms, then liquidated damages penalties accrue to the Company in an amount not to exceed 20% of the investors’ investment. Management believes that such penalties reasonably represent the difference between the value of a registered share and an unregistered share of the Company’s common stock, and therefore, the Company has accounted for the warrants as equity instruments in the accompanying financial statements pursuant to the guidance in EITF 00-19 and FSP EITF 00-19-2.

NOTE G—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, 2008, the Company had 3,345,000 qualified stock options outstanding under the 1999 Plan. In addition, the Company has 4,490,000 non-qualified stock options outstanding as of April 30, 2008. All options granted in the three fiscal years ended April 30, 2008 were granted at fair market value. As of April 30, 2008, there were 655,000 options available for grant under the 1999 Plan.

Effective May 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment,” which establishes accounting for share-based instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to May 1, 2006, the Company accounted for share-based compensation to employees in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” The Company elected to employ the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented have not been restated to reflect the fair value method of expensing share-based compensation. For the year ended April 30, 2008, the Company recorded share-based compensation expense of approximately $769,000. The adoption of SFAS No. 123R did not affect cash flow.

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the paragraph below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option.

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 2.8% for 2008 and 4.7% for 2007; average volatility of 94% for 2008 and 101% for 2007; zero dividend yield for all years; and expected life of 3-10 years.

The estimated weighted average fair value of options granted during the years ended April 30, 2008 and 2007 was $0.32 and $0.12, respectively

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

 

     Year ended
April 30, 2008
   Year ended
April 30, 2007
     Options     Weighted
Average
Exercise
Price
   Options     Weighted
Average
Exercise
Price

Outstanding, beginning of year

   6,075,000     $ 0.18    5,935,000     $ 0.19

Granted

   2,745,000       0.27    280,000       0.13

Forfeited

   (635,000 )     0.17    (140,000 )     0.19

Exercised

   (350,000 )     0.13    —         —  
                         

Outstanding, end of year

   7,835,000     $ 0.22    6,075,000     $ 0.18
                         

The following table summarizes information about stock options outstanding at April 30, 2008:

 

Range of Exercise Prices

   Number
Outstanding
   Weighted
Average
Remaining

Life
   Weighted
Average

Exercise
Price
   Number
Exercisable
   Weighted
Average

Exercise
Price

$0.09 to $0.13

   2,700,000    2.6    $ 0.12    2,331,667    $ 0.12

$0.15 to $0.24

   1,925,000    3.4    $ 0.18    1,786,667    $ 0.18

$0.25 to $0.33

   2,805,000    3.5    $ 0.28    2,560,000    $ 0.28

$0.44 to $0.85

   405,000    2.2    $ 0.64    405,000    $ 0.64
                  
   7,835,000          7,083,333   
                  

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

As of April 30, 2008, the unamortized compensation expense related to outstanding unvested options was approximately $83,000. The Company expects to amortize this expense over the remaining vesting period of these stock options.

The Company issues new shares to satisfy stock option and warrant exercises. The total intrinsic value of options exercised during the years ended April 30, 2008 and 2007 was approximately $50,000 and $0, respectively.

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

 

     2008    2007
     Warrants     Weighted
Average
Exercise
Price
   Warrants     Weighted
Average
Exercise
Price

Outstanding, beginning of year

   78,254,555     $ 0.25    39,972,654     $ 0.28

Granted

   72,917,607       0.25    45,795,294       0.25

Forfeited

   (16,197,500 )     0.25    (7,513,393 )     0.36

Exercised

   (9,326,743 )     0.24    —         —  
                         

Outstanding, end of year

   125,647,919     $ 0.25    78,254,555     $ 0.25
                         

The fair value of each warrant was estimated at the grant date using the Black-Scholes option-pricing model using the following assumptions: an average risk-free interest rate of 2.0% for 2008 and 4.0% for 2007; average volatility of 92.9% for 2008 and 70.3% for 2007; zero dividend yield for all years; and expected life of 2-5 years.

Warrant activity for the years ended April 30, 2008 and 2007 was as follows:

Fiscal 2008:

In connection with the issuance of $282,055 of 2-year notes payable, the Company recorded a discount of $67,969 related to the relative fair value of 2,815,763 warrants issued in the transaction. The Company recorded debt issue costs of $170,686, of which $120,223 was non-cash through the issuance of 1,431,000 warrants for capital raising services.

The Company issued 5-year warrants to purchase 2,500,000 shares of common stock at $0.245 per share to investors that provided $1,000,000 in bridge financing. A discount of $288,750 was recorded for the relative fair value of the warrants. In connection with the bridge financing, the Company issued 2,500,000 warrants for capital raising services and recorded debt issue cost of $288,750 which represents the fair value of these warrants estimated using the Black-Scholes valuation model. The warrants are exercisable at a price of $0.245 per share. In addition, the Company paid $100,000 in cash for capital raising services.

In the exchange its $1,000,000 bridge loans for 5-year convertible debentures, the Company issued 5-year warrants to purchase 4,498,426 shares of common stock at $0.247 per share to investors. Discounts of $703,554 and $296,446 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

In the exchange of its remaining outstanding short term loans for 5-year convertible debentures with a face amount of $3,982,545, the Company issued 5-year warrants to purchase 8,061,831 shares of common stock at $0.247 per share to investors. Discounts of $1,035,945 and $756,200 were recorded for the relative fair values of the warrants and beneficial conversion feature, respectively.

In connection with the Company’s $6,335,000 financing as described in Note D, the Company recorded discounts of $4,864,998 related to the relative fair value of the 28,497,501 5-year warrants to purchase common stock at

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

$0.247 per share that were issued in the transaction, and $1,470,002 for the relative fair value of the beneficial conversion feature. The Company also incurred total costs of $5,510,562 for capital raising services on these transactions. The costs of the capital raising services include $369,215 paid in cash, $768,337 for the fair value of 2,088,272 restricted shares of common stock, and $4,373,010 for the fair value of 21,853,086 warrants.

In March 2008, the Company issued 760,000 warrants to a noteholder as compensation for the Company’s failure to issue the proper amount of warrants and provide an adequate exercise term in the original 2006 issuance. These warrants have a 3-year term and are exercisable at $0.245 per share. Interest expense of $329,137 was recorded for the fair value of these warrants.

Pursuant to the exercise of 871,410 warrants for cash, the Company issued 871,410 shares of its common stock and received proceeds of $221,104. In addition, the Company issued 2,023,148 shares of common stock in cashless exercises of 8,455,333 warrants.

Fiscal 2007:

The Company issued warrants to the debt holders for the purchase of 22,941,699 shares of common stock at $0.245 per share in connection with the issuance of short-term notes payable. In addition, the Company issued 5-year warrants to purchase 21,353,595 shares of common stock at $0.245 per share with a fair value of $2,019,000 as part of a placement fee for the notes.

The Company issued 3-year warrants to purchase 1,500,000 shares of common stock at $0.245 per share in satisfaction of a note payable with a recorded value of $120,000.

NOTE H—INCOME TAXES

No provision for federal and state income taxes has been recorded as the Company has incurred net operating losses through April 30, 2008. The Company’s federal net operating loss carryforwards as of April 30, 2008 are approximately $35,700,000. Loss carryforwards totaling approximately $900,000 expired in the fiscal year ended April 30, 2008. The remaining loss carryforwards will continue to expire at various times through April 30, 2028. Deferred tax assets of approximately $15,900,000 and $13,400,000 at April 30, 2008 and 2007, 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 will be limited based on ownership changes under Section 382 of the Internal Revenue Code.

The provision for income taxes was $0 for each of the two years ended April 30, 2008:

The deferred tax benefit differs from the amount computed by applying the federal income tax rate as follows:

 

     Years ended
April 30,
 
     2008     2007  

Statutory federal tax rate

   35 %   35 %

State income taxes, net of federal benefit

   9 %   9 %

Valuation allowance

   (44 )%   (44 )%
            
   0 %   0 %
            

Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts used for income tax purposes and the amounts used for income tax purposes. The components of deferred tax assets are as follows:

 

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Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

     As of April 30,  
     2008     2007  

Net operating loss carryforwards

   $ 15,900,000     $ 13,400,000  

Valuation allowance

     (15,900,000 )     (13,400,000 )
                

Net deferred tax asset

   $ —       $ —    
                

In June 2006, The FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.” Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006. The cumulative effect, if any, of applying the Interpretation is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The impact of the Company’s reassessment of its tax positions in accordance with Interpretation No. 48 did not have an effect on the Company’s results of operations, financial condition or liquidity. As of April 30, 2008, the Company does not have any unrecognized tax benefits related to various federal and state income tax matters. The Company will recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.

The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending April 30, 2005 through 2007. The Company’s state income tax returns are open to audit under the statute of limitations for the years ended April 30, 2005 through 2007. The Company does not anticipate any material amount of unrecognized tax benefits within the next 12 months.

NOTE I—RELATED PARTIES

During fiscal years 2008 and 2007, the Company paid $95,200 and $17,334, respectively, to a specialty contract manufacturer of pharmaceutical products to manufacture the Company’s perfluorocarbon-based blood substitute and therapeutic oxygen carrier, for upcoming clinical trials. The Company had no balances due to this entity as of April 30, 2008 and 2007. An officer of the Company is a minority shareholder and director of this specialty manufacturer.

Robert Nicora, an officer and director, purchased a bridge note from the Company in July 2007 in the principal amount of $5,300 and warrants to purchase 53,000 common shares at an exercise price of $0.245 per share that expire July 26, 2012. Mr. Nicora’s service as an officer and director ended in November 2007. In January 2008, Mr. Nicora agreed to exchange the bridge note and all accrued interest in the amount of $5,565 for the Company’s convertible notes in the aggregate principal amount of $12,367, which represents an original issue discount of 55 percent, and warrants to purchase 25,034 common shares at an exercise price of $0.245 per share that expire January 31, 2013.

As of April 30, 2008 and 2007, the Company had approximately $128,000 and $84,000, respectively, payable to directors of the Company.

NOTE J—SUBSEQUENT EVENTS

From May 1, 2008 through August 12, 2008, the Company received an additional $2,144,715 in cash and issued 7,845,000 shares for the exercise of common stock warrants.

From May 1, 2008 through August 12, 2008, the Company issued 56,000 shares of its common stock as compensation to its Chief Executive Officer, valued at $44,800. During the same period the Company also issued 411,250 shares in exchange for consulting services valued at $296,100, and 1,375,530 shares in exchange for the conversion of notes with a face amount of $339,756.

 

F-25


Table of Contents

OXYGEN BIOTHERAPEUTICS, INC.

(FORMERLY SYNTHETIC BLOOD INTERNATIONAL, INC.)

(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

April 30, 2008 and 2007

 

On June 17, 2008, the stockholders of Synthetic Blood International, Inc. approved the amendment of the Company’s 1999 Stock Plan to increase the number of shares of common stock available for awards under the plan from 4,000,000 to 12,000,000, increase the maximum number of shares covered by awards granted under the plan to an eligible participant from 4,000,000 shares to 5,000,000 shares, and make additional technical changes to update the plan. Persons eligible to receive grants under the Plan consist of all of the Company’s employees (including executive officers and employee directors), non-employee directors, and consultants and advisors who perform services for the Company.

As discussed in Note A, on June 17, 2008, the stockholders of Synthetic Blood International, Inc. approved the Agreement and Plan of Merger dated April 28, 2008 (“Plan of Merger”), between Synthetic Blood International and Oxygen Biotherapeutics, Inc., a Delaware corporation. Oxygen Biotherapeutics was formed on April 17, 2008, by Synthetic Blood International to participate in the merger for the purpose of changing the state of domicile of Synthetic Blood International from New Jersey to Delaware. Certificates of Merger were filed with the states of New Jersey and Delaware, and the merger was effective June 30, 2008. Under the Plan of Merger, Synthetic Blood International has been merged with and into Oxygen Biotherapeutics, which is the surviving corporation. As a result of the merger: (a) Each share of Synthetic Blood International common stock outstanding on June 30, 2008, has been converted to one share of Oxygen Biotherapeutics common stock; (b) The name of the corporation is changed to Oxygen Biotherapeutics, Inc.; (c) The number of authorized common shares changed from 200,000,000 common shares, par value $0.01, to 400,000,000; (d) The Certificate of Incorporation and Bylaws of Oxygen Biotherapeutics are now the charter documents for the corporation; and (e) The General Corporation Law of the State of Delaware now applies to the corporation, rather than the New Jersey Business Corporation Act.

 

F-26

Exhibit 10.14

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.

COMMON STOCK PURCHASE WARRANT

To Purchase              Shares of Common Stock of

SYNTHETIC BLOOD INTERNATIONAL, INC.

THIS COMMON STOCK PURCHASE WARRANT (the “ Warrant ”) CERTIFIES that, for value received,                  (the “ Holder ”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or prior to              , 20          (the “ Termination Date ”) but not thereafter, to subscribe for and purchase from Synthetic Blood International, Inc., a New Jersey corporation (the “ Company ”), up to              shares (the “ Warrant Shares ”) of Common Stock, par value $0.01 per share, of the Company (the “ Common Stock ”). The purchase price of one share of Common Stock (the “ Exercise Price ”) under this Warrant is $              . The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.

1. Title to Warrant . Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. Notwithstanding the foregoing, all subsequent offers and sales of this Warrant shall be made in compliance with Regulation S and/or pursuant to registration of the Warrant under the Securities Act or pursuant to an exemption from registration under the Securities Act. Unless registered for sale under the Securities Act, this Warrant can not be resold to U.S. Persons or within the United States and otherwise in compliance with Rule 904 of Regulation S.

2. Authorization of Shares . The Company covenants that all Warrant Shares that may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

3. Exercise of Warrant.

(a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, said exercise will be void and of no effect if the Holder does not surrender this Warrant to the Company and the Company does not receive payment of the aggregate Exercise Price of the shares purchased by wire transfer or cashier’s check drawn on a United States bank on or before the fifth day following the date notice of exercise is delivered to the Company. Certificates


for shares purchased hereunder shall be issued to the Holder within three business days from the delivery to the Company of the notice of exercise, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above. This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid.

(b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(c) Notwithstanding the foregoing, this Warrant can not be exercised within the United States and the Warrant Shares can not be delivered within the United States upon exercise, other than in a transaction deemed by the Company to meet the definition of an “offshore transaction” pursuant to Rule 902(h) of Regulation S adopted under the Securities Act, unless the transaction is registered under the Securities Act or an exemption from such registration requirement is available.

4. No Fractional Shares or Scrip . No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.

5. Charges, Taxes and Expenses . Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided , however , that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

6. Closing of Books . The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

7. Transfer, Division and Combination .

(a) Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

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(b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

(d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

(e) In connection with any transfer of this Warrant the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, and (ii) that the holder or transferee execute and deliver to the Company a representation letter regarding compliance with the Securities Act in form and substance acceptable to the Company.

8. No Rights as Shareholder until Exercise . This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

9. Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

10. Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the United States, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

11. Adjustments of Exercise Price and Number of Warrant Shares .

(a) Stock Splits, etc . The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company that it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company that are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other

 

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security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by a fraction, the numerator of which is the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and the denominator of which is the number of Warrant Shares or other securities of the Company that are purchasable pursuant hereto immediately after such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

(b) Minimum Adjustment of Exercise Price . No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price.

(c) Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets . In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“ Other Property ”), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable that shall be as nearly equivalent as practicable to the adjustments provided for in this Section 11. For purposes of this Section 11, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class that is not preferred as to dividends or assets over any other class of stock of such corporation and that is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 11(c) shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.

(d) Voluntary Adjustment by the Company . The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. The Company may at any time during the term of this Warrant extend the Termination Date to any date deemed appropriate by the Board of Directors of the Company.

(e) Notice of Adjustment . Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state

 

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the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

(f) Notice of Corporate Action . If at any time:

(i) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or

(ii) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,

(iii) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at least 20 days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days’ prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 13(d). The failure of the Company to give any such notice under this Section 11(f) shall not affect the effectiveness or validity of any action that would have been the subject of the notice and such failure to give notice shall not entitle the Holder to pursue any course of legal action or equitable proceeding against the Company or its successors to enjoin, prevent, or rescind any action taken without providing notice to the Holder.

12. Authorized Shares . Prior to September 30, 2007, the Company shall take all action required by law to submit to the shareholders of the Company a proposal to amend the Company’s articles of incorporation to increase the number of authorized shares of Common Stock by such amount as is necessary to reserve for issuance the maximum aggregate number of Warrant Shares then issued or potentially issuable in the future upon the exercise of any purchase rights under this Warrant. If, on any date after the articles of incorporation of the Company are amended to increase the number of authorized shares of Common Stock, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the number of Warrant Shares issued or issuable hereunder, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company’s articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the maximum number of Warrant Shares, as soon as possible and in any event not later than the 75th day after such date.

 

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The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable there for upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.

13. Miscellaneous .

(a) Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the state of California, without regard to the principles of conflicts of law thereof.

(b) Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant will have restrictions upon resale imposed by state and federal securities laws.

(c) Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

(d) Notices . Any notice, request or other document required or permitted to be given or delivered all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile and receipt is confirmed by telephone, (b) the second business day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (c) upon actual receipt by the party to whom such notice is required to be given. The Holder’s address for such notices and communications shall be the address of Holder as it appears in the books and records of the Company.

(e) Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.

(f) Amendment . This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

 

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(g) Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(h) Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

 

Dated:                      , 20         
SYNTHETIC BLOOD INTERNATIONAL, INC.
By:    
  Name:    
  Title:    

 

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NOTICE OF EXERCISE

To: Synthetic Blood International, Inc.

(1) The undersigned hereby elects to purchase                      Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

       

The Warrant Shares shall be delivered to the following:

 

       
       
       

(3) The undersigned is not a U.S. Person, was not formed for the purpose of investing in the Securities, which have not been registered under the Securities Act of 1933 in reliance upon Regulation S, and the undersigned is not acquiring the Warrant Shares by or for the benefit of a U.S. person.

(4) Attached to this Notice of Exercise is an opinion of counsel to the effect that (a) the Warrant Shares have been registered under the Securities Act of 1933, or (b) the purchase and sale of the Warrant Shares is exempt from registration under the Securities Act of 1933.

 

[PURCHASER]
By:    
Name:    
Title:    
Dated:    

 

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ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

     whose address is
 
 

 

Dated:                        ,             
Holder’s Signature:    
Holder’s Address:    
   

Signature Guaranteed:                                                      

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

9

Exhibit 10.15

OXYGEN BIOTHERAPEUTICS, INC.

(Formerly Synthetic Blood International, Inc.)

1999 AMENDED STOCK PLAN

(as Amended and Restated on June 17, 2008)

1. Purpose of the Plan. The purpose of the Oxygen Biotherapeutics, Inc. 1999 Stock Plan, as amended and restated on June 17, 2008 (the “Plan”) is to enable Oxygen Biotherapeutics, 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, and any applicable regulations promulgated thereunder.

(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 Oxygen Biotherapeutics, Inc., a Delaware corporation, or any successor corporation thereto.

(h) “Consultant” means any person who is engaged by the Company or a Parent or Subsidiary to render consulting or advisory services to such entity (other than as an Employee or a Director).

(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 bona fide leave of absence approved by the Company, provided, however that if any such leave exceeds ninety (90) days, on the one hundred and eighty-first (181 st ) day following the commencement of such leave any Incentive Stock Option by an eligible Optionee shall be treated as a Non-statutory Stock Option unless reemployment upon the expiration of such leave is guaranteed by statute or contract; or (ii) transfers between locations of the Company or between the Company, its parent, its subsidiary or its successor. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as service for purposes of determining vesting under the Option Agreement or Stock Purchase Agreement.

(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.


(1) “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 a share 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 Nasdaq Stock Market, 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 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 on the exchange;

(ii) If the Common Stock is quoted on 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 by Bloomberg; or

(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, without regard to any restriction other than a restriction which, by its terms, will never lapse, and subject to compliance with Section 409A of the Code.

(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 individual performance factors or upon such other criteria as the Administrator may deem appropriate. Notwithstanding the foregoing, a Long-Term Performance award shall not be based on a level of performance that is substantially certain to be met at the time the criteria is established.

(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.

 

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(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 “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, as amended.

(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.

 

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(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.

(11) “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. However, eligibility in accordance with this Section shall not entitle any person to be granted an Option or Right, or, having been granted an Option or Right, to be granted additional Options of Rights.

4. Shares Subject to the Plan

(a) Issuable Shares. 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 12,000,000 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.

(b) Adjustments for Changes in Capital Structure. Subject to any required action by the stockholders of the Company, in the event of any change in the Common Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Common Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Common Stock, appropriate and proportionate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding awards and in the exercise or purchase price per share of any outstanding Awards in order to prevent dilution or enlargement of rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section 4(b) shall be rounded down to the nearest whole number, and in no event may the exercise price of any Option or Right be decreased to an amount less than the par value, if any, of the stock subject to the Option or Right. Such adjustments shall be determined by the Board, and its determination shall be final, binding and conclusive.

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.

 

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(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;

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

(xi) 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;

(xii) to institute an Option Exchange Program;

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

 

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(xiv) 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.

(d) Limitations on Grants. No Employee, Director or Consultant will be granted Options or SARs under the Plan to purchase more than 5,000,000 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. Term of the Plan. The Plan shall continue in effect until the earlier of its termination by the Board or the date on which all of the shares of Stock available for issuance under the Plan have been issued and all restrictions on such shares under the terms of the Plan and the agreements evidencing Options and/or Rights granted under the Plan have lapsed. However, to the extent required by applicable law, all Options and Rights shall be granted, if at all, within ten (10) years from the earlier of the date the Plan is adopted by the Board or the date the Plan is duly approved by the stockholders of the Company.

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 Non-statutory 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 Non-statutory 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 time 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 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 grant) and may consist entirely of

(1) cash;

(2) check;

(3) promissory note;

 

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(4) other Shares with (1) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (2) a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option shall be exercised;

(5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price, or such consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan;

(6) any combination of the foregoing methods of payment; or

(7) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws.

(iv) Special Incentive Stock Option Provisions. In addition to the foregoing, Options granted under the Plan which are intended to be Incentive Stock Options under Section 422 of the Code shall be subject to the following terms and conditions:

(1) Dollar Limitation. To the extent that the aggregate Fair Market Value of (a) the Shares with respect to which Options designated as Incentive Stock Options plus (b) the shares of stock of the Company, Parent and any Subsidiary with respect to which other incentive stock options are exercisable for the first time by an Optionee during any calendar year under all plans of the Company and any Parent and subsidiary exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (a) Options shall be taken into account in the order in which they were granted, and (b) the Fair Market Value of the Shares shall be determined as of the time the Option or other incentive stock option is granted.

(2) 10% Shareholder. If any optionee to whom an Incentive Stock Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, the owner of Common Stock (as determined under Section 424 (d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, then the following special provisions shall be applicable to the Option granted to such individual: the per Share Option price of Shares subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of Common stock on the date of grant; and the Option shall not have a term in excess of five (5) years from the date of grant.

Except as modified by the preceding provisions of this subsection 7(a)(iv) and except as otherwise limited by Section 422 of the Code, all of the provisions of the Plan shall be applicable to the Incentive Stock Options granted hereunder.

(v) Non-statutory Option Price. The exercise price per share for a Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option.

(vii) Other Provisions. Each Option granted under the Plan may contain such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Administrator.

(viii) Buyout Provisions. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made.

(b) SARs.

 

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(i) In Connection with Options. At the sole discretion of the Administrator, SARs may be granted in connection with all or any part of an Option, either concurrently with the grant of the Option or at any time thereafter during the term of the Option. The following provisions apply to SARs that are granted in connection with Options:

(1) The SAR shall entitle the Optionee to exercise the SAR by surrendering to the Company unexercised a portion of the related Option. The Optionee shall receive in exchange from the Company an amount equal to the excess of (1) the Fair Market Value on the date of exercise of the SAR of the Common Stock covered by the surrendered portion of the related Option over (2) the exercise price of the Common Stock covered by the surrendered portion of the related Option; provided that a SAR that is granted subsequent to the grant date of a related Option must have a SAR exercise price that is no less than the Fair Market Value of one share of Common Stock on the date of grant of the SAR. Notwithstanding the foregoing, the Administrator may place limits on the amount that may be paid upon exercise of an SAR; provided, however, that such limit shall not restrict the exercisability of the related Option.

(2) When an SAR is exercised, the related Option, to the extent surrendered, shall cease to be exercisable.

(3) An SAR shall be exercisable only when and to the extent that the related Option is exercisable and shall expire no later than the date on which the related Option expires.

(4) A SAR may only be exercised at a time when the Fair Market Value of the Common Stock covered by the related Option exceeds the exercise price of the Common Stock covered by the related Option.

(ii) Independent of Options. At the sole discretion of the Administrator, SARs may be granted without related Options. The following provisions apply to SARs that are not granted in connection with Options:

(1) The SAR shall entitle the Optionee, by exercising the SAR, to receive from the Company an amount equal to the excess of (1) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the date of such exercise, over (2) the Fair Market Value of the Common Stock covered by the exercised portion of the SAR, as of the last market trading date prior to the date on which the SAR was granted; provided, however, that the Administrator may place limits on the aggregate amount that may be paid upon exercise of an SAR. In no event shall the exercise price of a SAR be less than 100% of the Fair Market Value per share of Common Stock on the date of grant.

(2) SARs shall be exercisable, in whole or in part, at such times as the Administrator shall specify in the Optionee’s SAR agreement.

(iii) Form of Payment. The Company’s obligations arising upon the exercise of an SAR may be paid in Common Stock or in cash, or in any combination of Common Stock and cash, as the Administrator, in its sole discretion, may determine. Shares issued upon the exercise of an SAR shall be valued at their Fair Market Value as of the date of exercise.

(c) Method of Exercise.

(i) Procedure for Exercise, Rights as a Shareholder. Any Option or SAR granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option or SAR shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option or SAR by the person entitled to exercise the Option or SAR and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator (and, in the case of an Incentive Stock Option, determined at the time of grant) and permitted by the Option Agreement consist of any consideration and method of payment allowable under subsection 7(a)(iii) of the Plan. Until the issuance (as evidenced by the

 

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appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan.

Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. Exercise of an SAR in any manner shall, to the extent the SAR is exercised, result in a decrease in the number of Shares which thereafter shall be available for purposes of the Plan, and the SAR shall cease to be exercisable to the extent it has been exercised.

(ii) Rule 16b-3. Options and SARs granted to individuals subject to Section 16 of the Exchange Act (“Insiders”) may in the discretion of the Administrator, comply with the applicable provisions of Rule 16b-3 and may contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions.

(iii) Termination of Employment or Consulting Relationship. Subject to Section 18 of the Plan relating to cancellation and rescission of Options and Rights, in the event an Optionee’s Continuous Status as an Employee or Consultant terminates (other than upon the Optionee’s death or Disability), the Optionee may exercise his or her Option or SAR, but only within such period of time as is determined by the Administrator at the time of grant, not to exceed three (3) months from the date of such termination (but in no event later than the expiration of the term of such Option or SAR as set forth in the Option or SAR at the date of such termination, and to the extent that the Optionee does not exercise such Option or SAR (to the extent otherwise so entitled) within the time specified herein, the Option or SAR shall terminate.

(iv) Disability of Optionee. In the event an Optionee’s Continuous Status as an Employee or Consultant terminates as a result of the Optionee’s Disability, the Optionee may exercise his or her Option or SAR, but only within twelve (12) months from the date of such termination, and only to the extent that the Optionee was entitled to exercise it at the date of such termination (but in no event later than the expiration of the term of such Option or SAR as set forth in the Option or SAR Agreement). To the extent that Optionee was not entitled to exercise an Option or SAR at the date of such termination, and to the extent that the Optionee does not exercise such Option or SAR (to the extent otherwise so entitled) within the time specified herein, the Option or SAR shall terminate.

(v) Death of Optionee. In the event of an Optionee’s death, the Optionee’s estate or a person who acquired the right to exercise the deceased Optionee’s Option or SAR by bequest or inheritance may exercise the Option or SAR, but only within twelve (12) months following the date of death, and only to the extent that the Optionee was entitled to exercise it at the date of death (but in no event later than the expiration of the term of such Option or SAR as set forth in the Option or SAR Agreement). To the extent that Optionee was not entitled to exercise an Option or SAR at the date of death, and to the extent that the Optionee’s estate or a person who acquired the right to exercise such Option does not exercise such Option or SAR (to the extent otherwise so entitled) within the time specified herein, the Option or SAR shall terminate.

8. Stock Purchase Rights.

(a) Rights to Purchase. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will offer Stock Purchase Rights under the Plan it shall advise the offeree in writing of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer, which shall in no event exceed thirty (30) days from the date upon which the Administrator made the determination to grant the Stock Purchase Right. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

 

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(b) Repurchase Option. Unless the Administrator determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s employment with the Company for any reason (including death or Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option shall lapse at such rate as the Administrator may determine.

(c) Other Provisions. The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. In addition, the provisions of Restricted Stock Purchase Agreements need not be the same with respect to each purchaser.

(d) Rule 16b-3. Stock Purchase Rights granted to Insiders, and Shares purchased by Insiders in connection with Stock Purchase Rights may be, in the discretion of the Administrator, subject to any restrictions applicable thereto in compliance with Rule 16b-3. An Insider may only purchase Shares pursuant to the grant of a Stock Purchase Right, and may only sell Shares purchased pursuant to the grant of a Stock Purchase Right, during such time or times as are permitted by Rule 16b-3 unless waived in the sole discretion of the Administrator.

(e) Rights as a Shareholder. Once the Stock Purchase Right is exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when he or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 11 of the Plan.

9. Long-Term Performance Awards.

(a) Administration. Long-Term Performance Awards are cash or stock bonus awards that may be granted either alone or in addition to other awards granted under the Plan. Such awards shall be granted for no cash consideration. The Administrator shall determine the nature, length and starting date of any performance period (the “Performance Period”) for each Long-Term Performance Award, and shall determine the performance or employment factors, if any, to be used in the determination of Long-Term Performance Awards and the extent to which such Long-Term Performance Awards are valued or have been earned. Long-Term Performance Awards may vary from participant to participant and between groups of participants and shall be based upon the achievement of Company, Subsidiary, Parent and/or individual performance factors or upon such other criteria as the Administrator may deem appropriate. Performance Periods may overlap and participants may participate simultaneously with respect to Long-Term Performance Awards that are subject to different Performance Periods and different performance factors and criteria. Long Term Performance Awards shall be confirmed by, and be subject to the terms of a Long-Term Performance Award agreement. The terms of such awards need not be the same with respect to each participant.

At the beginning of each Performance Period, the Administrator may determine for each Long-Term Performance Award subject to such Performance Period the range of dollar values or number of shares of Common Stock to be awarded to the participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Long Term Performance Award are met. Such dollar values or number of shares of common Stock may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Administrator.

(b) Adjustment of Awards. The Administrator may adjust the performance factors applicable to the Long-Term Performance Awards to take into account changes in legal, accounting and tax rules and to make such adjustments as the Administrator deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events or circumstances in order to avoid windfalls or hardships.

10. Non-Transferability of Awards. Options and Rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee, provided, however, Nonstatutory Stock Options and Rights may be transferred: (i) by gift to a Family Member; (ii) under a

 

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domestic relations order in settlement of marital property rights; and (iii) to any entity in which more than fifty percent of the voting interests are owned by Family Members (or the Employee or Consultant) in exchange for an interest in that entity. Any attempted non-permitted transfer shall be void and shall immediately terminate the Non-statutory Stock Option or Right.

11. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset Sale or Change of Control.

(a) Changes in Capitalization. Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Option and Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan as to which no Options or Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Right, as well as the price per share of Common Stock covered by each such outstanding Option or Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall effect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Right.

(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, to the extent that an Option or Right has not been previously exercised, it will terminate immediately prior to the consummation of such proposed action. The Board may, in the exercise of its sole discretion in such instances, declare that any Option or Right shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option or Right as to all or any part of the Optioned Stock, including Shares as to which the Option or Right would not otherwise be exercisable.

(c) Merger or Asset Sale. Subject to the provisions of paragraph (d) hereof, in the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, each outstanding Option and Right shall be assumed or an equivalent Option or Right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation does not agree to assume the Option or to substitute an equivalent option, the Administrator shall, in lieu of such assumption or substitution, provide for the Optionee to have the right to exercise the Option or Right as to all or a portion of the Optioned Stock, including Shares as to which it would not otherwise be exercisable. If the Administrator makes an Option or Right exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option or Right shall be exercisable for a period of fifteen (15) days from the date of such notice, and the Option or Right will terminate upon the expiration of such period. For the purposes of this paragraph, the Option or Right shall be considered assumed if, immediately following the merger or sale of assets, the Option or Right confers the right to purchase, for each Share of Optioned Stock subject to the Option or Right immediately prior to the merger or sale of assets, the consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or sale of assets was not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon the exercise of the Option or Right, for each Share of Optioned Stock subject to the Option or Right, to be solely common stock of the successor corporation or its Parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or sale of assets.

(d) Change in Control. In the event of a “Change in Control” of the Company, as defined in paragraph (e) below, then the following acceleration and valuation provisions shall apply:

(i) Except as otherwise determined by the Board, in its discretion, prior to the occurrence of a Change in Control, any Options and Rights outstanding on the date such Change in Control is determined to have occurred that are not yet exercisable and vested on such date shall become fully exercisable and vested;

 

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(ii) Except as otherwise determined by the Board, in its discretion, prior to the occurrence of a Change in Control, all outstanding Options and Rights, to the extent they are exercisable and vested (including Options and Rights that shall become exercisable and vested pursuant to subparagraph (i) above), shall be terminated in exchange for a cash payment equal to the Change in Control Price, (reduced by the exercise price, if any, applicable to such Options or Rights). These cash proceeds shall be paid to the Optionee or, in the event of death of an Optionee prior to payment, to the estate of the Optionee or to a person who acquired the right to exercise the Option or Right by bequest or inheritance.

(e) Definition of “Change in Control”. For purposes of this Section 11, a “Change in Control” means the happening of any of the following:

(i) When any “person,” as such term is used in Section 13(d) and 14 (d) of the Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors; or

(ii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets; or

(iii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors.

“Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date the Plan is approved by the shareholders, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

(f) Change in Control Price. For purposes of this Section 11, “Change in Control Price” shall be, as determined by the Board, (i) the highest Fair Market Value of a Share within the 60-day period immediately preceding the date of determination of the Change in Control Price by the Board (the “60-Day Period”), or (ii) the highest price paid or offered per Share, as determined by the Board, in any bona fide transaction or bona fide offer related to the Change in Control of the Company, at any time within the 60-Day Period, or (iii) such lower price as the Board, in its discretion, determines to be a reasonable estimate of the fair market value of a Share.

12. Date of Grant. The date of grant of an Option or Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Right, or such other later date as is determined by the Administrator. Notice of the determination shall be provided to each Optionee within a reasonable time after the date of such grant.

13. Amendment and Termination of the Plan.

(a) Amendment and Termination. The Board may at any time amend, alter, suspend or terminate the Plan.

 

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(b) Shareholder Approval. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Section 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation.

(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company.

14. Conditions Upon Issuance of Shares.

(a) Legal Compliance. Shares shall not be issued pursuant to the exercise of an Option or Right unless the exercise of such Option or Right and the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the securities laws of applicable states, the rules and regulations promulgated thereunder, Applicable Laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b) Investment Representations. As a condition to the exercise of an Option or Right, the Company may require the person exercising such Option or Right to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares and to provide such other representations and warranties as are necessary to comply with Federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any offering of its Common Stock, if in the opinion of counsel for the Company, such representations are required.

15. Liability of Company.

(a) Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell Shares as to which such requisite authority shall not have been obtained.

(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered by an Option or Right exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional shareholder approval, such Option or Right shall be void with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section 13 (b) of the Plan.

16. Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

17. Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under applicable federal and state law.

18. Cancellation and Rescission of Options and Rights.

(a) Conditions for Cancellation and Rescission of Options and Rights. Unless the Option Agreement, SAR Agreement, Long-Term Performance Award Agreement or Restricted Stock Purchase Agreement (collectively the “Stock Award Agreement”) specifies otherwise, the Board may cancel, rescind, suspend, withhold or otherwise limit or restrict any unexpired, unpaid, or deferred Option or Right at any time if

 

13


the participant is not in compliance with all applicable provisions of the Stock Award Agreement and the Plan, or if the participant engages in any “Detrimental Activity.” For purposes of this subsection 18(a), “Detrimental Activity” shall include: (i) the rendering of services for any organization or engaging directly or indirectly in any business which is or becomes competitive with the Company, or which organization or business, or the rendering of services to such organization or business, is or becomes otherwise prejudicial to or in conflict with the interests of the Company; (ii) the disclosure to anyone outside the Company, or the use in other than the Company’s business, without prior written authorization from the Company, of any confidential information or material, as defined in the Company’s confidential information or similar agreement, relating to the business of the Company, acquired by the participant either during or after employment with the Company; (iii) the failure or refusal to disclose promptly and to assign to the Company, pursuant to the Company’s confidential information or similar agreement, all right, title and interest in any invention or idea, patentable or not, made or conceived by the participant during employment by the Company, relating in any manner to the actual or anticipated business, research or development work of the Company or the failure or refusal to do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in other countries; (iv) activity that results in termination of the participant’s employment for cause; (v) a violation of any rules, policies, procedures or guidelines of the Company, including but not limited to the Company’s business conduct or similar guidelines; (vi) any attempt directly or indirectly to induce any employee of the Company to be employed or perform services elsewhere or any attempt directly or indirectly to solicit the trade or business of any current or prospective customer, supplier or partner of the Company; (vii) the participant being convicted of, or entering a guilty plea with respect to, a crime, whether or not connected with the Company; or (viii) any other conduct or act determined to be injurious, detrimental or prejudicial to any interest of the Company.

(b) Remedies of the Company. In connection with subsection 18(a) herein, upon exercise, payment or delivery pursuant to an Option or Right, the participant shall certify in a manner acceptable to the Company that he or she is in compliance with the terms and conditions of the Plan. In the event a participant engages in a Detrimental Activity prior to, or during the six months after, any exercise, payment or delivery pursuant to an Option or Right, such exercise, payment or delivery may be rescinded within two years thereafter. In the event of any such rescission, the participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment or delivery, in such manner and on such terms and conditions as may be required, and the Company shall be entitled to set-off against the amount of any such gain any amount owed to the participant by the Company.

Adopted by the Board of Directors on October 9, 1999, amended effective June 17, 2008.

 

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Exhibit 10.16

Synthetic Blood International, Inc.

3189 Airway Avenue, Building C

Costa Mesa, CA 92626

To:

Mr. Christian J. Stern

9431 Oglebay Court

Raleigh, N.C. 27617

Engagement Letter

Dear Chris:

Subject to our by-laws we herewith confirm your engagement as a director and chairman of the board of our company (SYBD).

We agreed that monetary compensation shall be through a consulting contract with IFEM Management Consultants, Inc.

Independent of the aforementioned consulting contract, we will pay you the following stock compensation for your services:

Stock options (3 years life), exercisable at a price of $0.245, as follows:

1,000,000 with this appointment to the board of directors;

4,000,000 at closing of a license agreement, or sale of the company within 24 months after appointment to the board of directors.

With regard to the services to be performed by you pursuant to the terms of this engagement, you shall not be liable to SYBD, or to anyone who may claim any right due to any relationship with SYBD, for any acts or omissions in the performance of services on your part. SYBD shall hold your free and harmless from any obligations, costs, claims, judgments, attorneys’ fees, and attachments arising from or growing out of the services rendered to SYBD pursuant to the terms of this agreement or in any way connected with the rendering of services, except when you are adjudged to be guilty of willful misconduct or gross negligence by a court of competent jurisdiction. SYBD shall maintain an appropriate director’s and officer’s (D&O) insurance at all times and cover you under such a policy.

 

Sincerely,

Synthetic Blood International, Inc. (SYBD)

 

/s/                                                                 11/19/07

 

By:                                                               Date:

 

Accepted:

 

/s/                                                                             11/19/07

 

Christian (a.K.a. Chris) J. Stern                             Date:


Synthetic Blood International, Inc.

3189 Airway Avenue, Building C

Costa Mesa, CA 92626

To:

Mr. Christian J. Stern

9431 Oglebay Court

Raleigh, N.C. 27617

Amendment of Engagement Letter

Dear Chris:

On March 25, 2008 the board of directors of Synthetic Blood International, Inc. decided to amend your engagement as follows:

Additional to your unchanged role as director and chairman of the board of our company (SYBD), we have elected you to be Chief Executive Officer.

We agreed that additional monetary compensation shall be through an amendment of your consulting contract with IFEM Management Consultants, Inc.

Independent of the aforementioned consulting contract, we will pay you the following additional stock compensation for your services:

14,000 restricted shares per month, issuable every 1 st of the month, beginning April 1, 2008.

Additional benefit to serve on the Executive Committee: An additional (to any other already existing) severance package of $200,000 in cash and 100,000 shares of SYBD, payable at date/the day of termination, should the company terminate you as a board member for whatever reason, cause or no cause.

All other clauses unchanged.

 

Sincerely,

Synthetic Blood International, Inc. (SYBD)

 

/s/                                                               03/26/08

 

By:    Richard M. Kiral                            Date:

 

Accepted:

 

 

/s/                                                                             03/26/08

 

Christian (a.K.a. Chris) J. Stern                            Date:

Exhibit 10.17

BUSINESS CONSULTANT AGREEMENT

This agreement dated November 19, 2007, is made By and Between Synthetic Blood, International, Inc., whose address is 3189 Airway Avenue, Building C, Costa Mesa, CA 92626, (“Company”), AND IFEM Management Consultants, Inc., whose address is 9431 Oglebay Court, Raleigh, NC 27617, (“Consultant.”)

1. Consultation Services. The company hereby employs the consultant to perform the following services in accordance with the terms and conditions set forth in this agreement: The consultant will consult with the officers and employees of the company concerning matters relating to the management and organization of the company, their financial policies, the terms and conditions of employment, and generally any matter arising out of the business affairs of the company.

2. Terms of Agreement. This agreement will begin November 19, 2007. Either party may cancel this agreement on ninety (90) days notice to the other party in writing, by certified mail or personal delivery.

3. Time Devoted by Consultant. It is anticipated the consultant will assign Dr. Chris J. Stern to this account and that he will spend approximately five days per month in fulfilling its obligations under this contract. The particular amount of time may vary from day to day or week to week. However, the consultant shall devote sufficient time to its duties in accordance with this agreement.

4. Place Where Services Will Be Rendered. The consultant will perform most services in accordance with this contract at a location of consultant’s discretion. In addition the consultant will perform services on the telephone and at such other places as necessary to perform these services in accordance with this agreement.

5. Payment to Consultant. The consultant will be paid at the rate of $15,000 per month for work performed in accordance with this agreement. Payment will be by electronic transfer on, or before the 20 th day of each month, as long as the agreement is in force. Consultant is entitled to reimbursement of reasonable expenses for travel. The company will reimburse the consultant expenses as indicated by statements submitted by the consultant within ten (10) days of receipt.

6. Independent Contractor. Both the company and the consultant agree that the consultant will act as an independent contractor in the performance of its duties under this contract. Accordingly, the consultant shall be responsible for payment of all taxes including Federal, State and local taxes arising out of the consultant’s activities in accordance with this contract, including by way of illustration but not limitation, Federal and State income tax, Social Security tax, Unemployment Insurance taxes, and any other taxes or business license fee as required.

7. Confidential Information. The consultant agrees that any information received by the consultant during any furtherance of the consultant’s obligations in accordance with this contract, which concerns the personal, financial or other affairs of the company will be treated by the consultant in full confidence and will not be revealed to any other persons, firms or organizations.

 

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8. Employment of Others. The company may from time to time request that the consultant arrange for the services of others. All costs to the consultant for those services will be paid by the company but in no event shall the consultant employ others without the prior authorization of the company.

9. Liability. With regard to the services to be performed by the Consultant pursuant to the terms of this agreement, the Consultant shall not be liable to the Company, or to anyone who may claim any right due to any relationship with the Corporation, for any acts or omissions in the performance of services on the part of the Consultant or on the part of the agents or employees of the Consultant. The Company shall hold the Consultant free and harmless from any obligations, costs, claims, judgments, attorneys’ fees, and attachments arising from or growing out of the services rendered to the Company pursuant to the terms of this agreement or in any way connected with the rendering of services, except when the Consultant is adjudged to be guilty of willful misconduct or gross negligence by a court of competent jurisdiction.

10. Arbitration. Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration in accordance of the rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) shall be entered in any court having jurisdiction thereof. For that purpose, the parties hereto consent to the jurisdiction and venue of an appropriate court located in Wake County, State of North Carolina. In the event that litigation results from or arises out of this Agreement or the performance thereof, the parties agree to reimburse the prevailing party’s reasonable attorney’s fees, court costs, and all other expenses, whether or not taxable by the court as costs, in addition to any other relief to which the prevailing party may be entitled. In such event, no action shall be entertained by said court or any court of competent jurisdiction if filed more than one year subsequent to the date the cause(s) of action actually accrued regardless of whether damages were otherwise as of said time calculable.

 

By: Company   By: Consultant
/s/   /s/
Synthetic Blood International, Inc.   Institute for Efficient Management, Inc.
By: Robert Larsen, President   By: Chris J. Stern, President

 

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AMENDMENT #1 OF BUSINESS CONSULTANT AGREEMENT

This is an amendment #1 dated March 25, 2008 to the agreement dated November 19, 2007, made By and Between Synthetic Blood, International, Inc., whose address is 3189 Airway Avenue, Building C, Costa Mesa, CA 92626, (“Company”), AND IFEM Management Consultants, Inc., whose address is 9431 Oglebay Court, Raleigh, NC 27617, (“Consultant.”)

5. Payment to Consultant. The pay to the consultant will be increased at the rate of $5,000 per month for work performed in accordance with this agreement. The consultant will also be paid $2,500 per month for additional secretarial and administration expenses.

All other clauses unchanged.

March 25, 2008

 

By: Company   By: Consultant
/s/   /s/
Synthetic Blood International, Inc.   Institute for Efficient Management, Inc.
By: Richard M. Kiral   By: Chris J. Stern

 

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Exhibit 10.18

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made effective as of February 1, 2000, between Synthetic Blood International, Inc., a New Jersey corporation, (hereinafter sometimes referred to as “SBI” or the “Corporation”) and Richard Kiral (“Employee”).

 

1. TERM OF EMPLOYMENT

SBI HEREBY EMPLOYS Employee and Employee hereby accepts employment with SBI for the period beginning on February 1, 2000 and terminating on January 31, 2001; thereafter, this Agreement and Employee’s employment hereunder shall be automatically renewed on a one-year basis unless canceled or renegotiated. As used herein, the phrase “employment term” refers to the entire period of employment of Employee by SBI hereunder, whether for the period provided above, or whether terminated earlier as hereinafter provided, or extended by mutual ,agreement of SBI and Employee.

 

2. DUTIES OF EMPLOYEE

 

  2.01 General Duties. Employee shall serve as Vice President of R&D at SBI. Notwithstanding the foregoing, the precise services of Employee may be specified or changed from time to time at the discretion of the President & CEO of SBI, to whom Employee reports.

 

  2.02 Specific Duties. Employee is responsible for researching and developing all current and future products at SBI. To accomplish this, employee directly or indirectly supervises all laboratory and lab support personnel at SBI’s Costa Mesa and Kettering facilities. Employee is also expected to use his position as head of R&D and chief scientific officer to build value into the Company and increase shareholder value.

 

  2.03 Devotion of Time to SBI’s Business. Employee shall devote whatever time, ability and attention to the business of SBI during the term of this Agreement as is reasonably required to fulfill his responsibilities, provided however, he shall be required to devote his full-time.

 

  2.04 Uniqueness of Employee’s Services. Employee hereby agrees the services to be performed by him under the terms of this Agreement are of special, unique, unusual, extraordinary, and intellectual character which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated by monetary damages in an action at law. Employee therefore expressly agrees that SBI, in addition to any other rights or remedies which SBI may possess, shall be entitled to injunctive and other equitable relief to prevent a breach of this Agreement by Employee.

 

  2.05 Loyal and Conscientious Performance of Duties. Employee agrees, to the best of his ability and experience, he will at all times loyally and conscientiously perform all of the duties and obligations either expressly or implicitly required of him by the terms of this Agreement.


3. COMPENSATION OF EMPLOYEE

 

  3.01 Base Salary. As compensation for services hereunder, SBI shall pay Employee a base annual salary of One Hundred and Thirty Thousand Dollars ($130,000.00), payable monthly during the term hereof. Annual adjustments, if any, shall be negotiated by the CEO and the Board based on individual performance.

 

  3.02 Signing Bonus. Employee will be granted a stock option at the signing of this agreement.

 

  3.03 Performance Bonus. In addition to the base compensation set forth above, Employee may be entitled to participate in an Executive Bonus Program to be negotiated in a separate agreement.

 

  3.04 Vacation Pay. Employee shall be entitled to vacation time and pay of four weeks per year for each year during the term of this agreement. Time or times for such vacation shall be proposed by Employee and approved in advance by SBI.

 

  3.05 Paid Sick Leave. Employee shall be entitled to such sick leave time and pay in accordance with the then prevailing policies of Employer.

 

  3.06 Additional Bonuses. Nothing herein shall imply any limitation on the ability of the Company to authorize any additional bonus(es) which in their discretion they deem reasonable.

 

4. EMPLOYEE BENEFITS

 

  4.01 Use of Automobile. SBI shall pay all expenses of one automobile to be used in part by Employee in the course of his employment, up to the cost of Five Hundred Dollars ($500.00) per month during the term hereof, and shall procure and maintain an automobile liability insurance policy on the automobile, with coverage of Employee and SBI, in amounts determined by the Board of Directors.

 

  4.02 Employee shall be given medical insurance through the Company’s group medical plan, and $50 per month for dental coverage until a Company dental plan is available.

 

  4.03 Life Insurance. SBI will acquire and pay for term life insurance coverage on the life of Employee, with death benefits in the amount of Two Hundred Thousand Dollars ($200,000.00) payable to beneficiary(s) designated by Employee. Coverage shall be continued without lapse through the employment term.

 

  4.04 401 (k) Plan. SBI shall continue to implement and Employee shall be entitled to participate, to the maximum extent allowed by law, in a retirement plan under Internal Revenue Code Section 401 (k)


  4.05 Stock Options and Plans. Employee shall participate in the 1999 Stock Plan and shall be eligible to participate in other SBI stock option and related plans as determined by the CEO and Board of Directors. Employee shall be granted options for 100,000 shares of Stock at signing of this agreement, and for 75,000 shares at each renewal.

 

5. BUSINESS EXPENSES

 

  5.01 Entertainment Expenses. The services required by SBI require Employee to incur travel, entertainment, and other expenses on behalf of SBI. SBI will promptly reimburse Employee for all reasonable business expenses incurred by Employee in promoting the business of SBI, including expenditures for entertainment, gifts, and travel, provided that:

 

  (1) Each such expenditure is of a nature qualifying it as an allowable deduction from gross income in the determination of taxable income on the federal and state income tax returns of SBI; and

 

  (2) Employee furnishes to SBI adequate records and other documentary evidence required by federal and state statutes and regulations issued by the appropriate taxing authorities where the substantiation of each such expenditure as an income tax deduction is required; and

 

  (3) No gift may exceed Five Hundred Dollars ($500.00) without the written approval of the Board of Directors of SBI.

 

6. TERMINATION OF EMPLOYMENT

 

  6.01 Resignation Retirement, Death or Disability. Employee’s employment hereunder shall be terminated at any time by Employee’s resignation (other than by Resignation for Good Reason) or by Employee’s retirement at or after attainment of age 65 (“Retirement”), death or his inability to perform his duties under this Agreement because of a physical or mental illness (“Disability”).