Chris Stern Blog

Dear supporters of our company:

This Blog summarizes last fiscal year’s developments in our company. It also serves as our letter to the shareholders.

We have just filed with the SEC our annual report on Form 10-K filled with extensive detail. Our finance and accounting people and auditors worked very hard in getting this document created and did a fabulous job.

A 10-K is an annual report. While our fiscal year 2009 ended in April, we had to report many subsequent events between then and now.  Let me briefly recap our year – and what a year it was.

In April 2008 the company was still very hopeful of getting a TBI trial done in the U.S.  Financing by the U.S. Army was in place and our protocols were going back and forth with the FDA.

It turned out that route was not a good one. The FDA had many questions about our regulatory position and some of these questions were justified. The company had been working on shoe-string budgets for so long in the past that FDA filings and reports had not been done as they should have been. While our work on current filings was certainly up to industry standards, all past reports were not. That put us, it seemed, in constant catch-up mode with the FDA.

So, we made a major decision and switched our planned trials to Switzerland and Israel. Both of those countries have excellent health care systems with 100% of the population insured (in the U.S. more than 35% are not insured or underinsured). Furthermore, in contrast to the U.S., almost all patients there have documented health care histories. Those factors make a trial so much safer and faster to conduct in those countries.

In April 2009 we hired a clinical director and changed our regulatory approach completely. We needed to re-write all past clinical reports and subsequently were able to file with a clean slate in Switzerland and Israel. This humongous undertaking was completed in just a couple of weeks.

All Ethic Committees where the protocol for our Phase II dose escalation study has been submitted have approved it and I am very confident that very shortly we will get the go-ahead to begin enrollment. We certainly expect that we will be able to start patient enrollment this month.  The structure of this trial should allow us to complete Phase II within 12-18 months. The results and data will be submitted in international standard and, if the results are what we expect, we intend to come back to the U.S. as part of a global Phase III trial with a license partner.

The U.S. Army has confirmed to us that we could use their $2.3 million grant until 2012. We have also filed for an Army grant for our trials abroad, but we are not dependent on such funding. In fact, we have to give serious thought whether and how to incorporate government funding into our business model. If our government funds medical trials or research, it very often gets in exchange a free license under the Bayh Dole Act and other provisions. If that were the case, we are not so sure we really would want to trade a billion dollar potential for a couple of million dollars in government grants.

Meanwhile, the Decompression Sickness (DCS) studies being conducted by the U.S. Navy are already showing very promising results. In one test of animals with severe DCS in the control arm, seven out of eleven died at one hour. But with Oxycyte, only two out of eleven died. In addition, the spinal cords in the test animals seem to be much better preserved with Oxycyte. The researchers are now conducting further studies that they hope will eventually allow them to move forward into humans.

A second major breakthrough in the 2009 fiscal year was the development of our topical product line. We started packing Oxycyte in blister packs and showed those prototypes to our shareholders at our June 2008 annual meeting. We have since developed several versions of a gel with Oxycyte and now have a full department with a clinical director working on a variety of topical indications where we think it can be effective and make a market impact. This is a real development pipeline.

In July 2009 we were finally in the position to hire a marketing and sales manager for our topical line and of course that means we are moving forward towards generating sales, both through licensing and our own distribution channels.

So, for the first time in our company’s history, you will soon be able to buy a product from us. Check our preliminary website http://www.buydermacyte.com to register for product information. And for the first time ever we are projecting revenues, which I expect to see this fiscal year. I think that is pretty cool.

We moved our headquarters from California to North Carolina for the simple reason that business with the East Coast is easier to conduct from the East Coast and that time differences to Switzerland and Israel are more favorable.  Also, the current economic crisis lets us find excellent people right here in the Research Triangle Park area.

A pivotal event happened in July 2009, after the end of the fiscal year. The $20 million milestone financing agreement with Vatea Fund is the biggest investment the company has ever had. It is also the least expensive one we have ever closed and we are glad to have them as an institutional investor. A lot has been written about our first-ever institutional financing and I refer to the news releases, prior blogs and the full financing details in the 10-K.

The effects of our previous non-institutional financings are still noticeable. Our previous financings for the last five years all have been extremely expensive, to say the least. But we were a big risk at that time, so I am not complaining or blaming –you have to pay for financiers to take risk. Here is a most recent effect: You may have seen the enormous non-cash interest charge we reported with the 10k – more than $24.8 million. Most of that charge comes from financings earlier than 2008 that had drastic warrant clauses. Because we bought back a substantial portion of these warrants, we still had to account for the interest and finance charge portions that had already been earned. Plus all the warrants that were issued with the notes, plus all the commissions that had to be paid – the true finance charges of our past financings were in fact enormous. I am glad that we are now in the favorable position to clean up our balance sheet and have a clear break with the past.

Meanwhile, our endeavors with Purple Heart Injury Laboratories (PHIL) are finally showing good progress. Several circumstances let us rethink the academic partnerships and financing concepts. While we are still pursuing our appropriation and line item funding, we decided that financing a research pool with one source and cooperating with only one academic institution carries too much of institutional risk and dependency.

In June 2009 we went ahead and established PHIL as a 501(c)(3) not for profit corporation and funded its administration. PHIL is now going to seek up to $100 million in bond financing, federal budget line items, appropriations, stimulus funds and private donations to unfold its full potential. I can imagine this being the most unusual and effective Defense Medicine™ research concept ever established. It should give us access to research capabilities normally available only to big Pharma.

Throughout the year we have worked hard on fixing historical Sarbanes-Oxley compliance issues and restructured our finance and administration to meet current and future demands. Governance of publicly listed companies is the same, small or big. For a small company like ours, this constitutes a very big burden. We have to adhere to the same rules a Fortune 500 company is bound to, and we have to maintain the same handbooks, manuals, controls and audits. That naturally leads to a disproportional workload in administration. However, these efforts are crucial in preparing ourselves for a potential change of our listing market.

Our affiliation with Glucometrics, Inc. is progressing nicely. We supported Glucometrics in taking a more pragmatic development approach than originally planned. Glucometrics has decided to pursue a build-to-license business plan that foresees a marketable prototype ready less than a year from now.

With the TBI trial in a forward motion, we were able to reinitiate development on other Oxycyte clinical indications, namely Sickle Cell Crisis. Our business development agent for India has found potential partners and we are in early exploratory stages of a cooperation agreement.

Very soon you will receive a proxy statement and see the announcement for our General Annual Meeting. It will take place October 19, 2009 at 1:30PM at the Meridian Parkway DoubleTree Hotel in Durham, North Carolina. This will be just the second GAM in twenty years of the company’s existence. The first was last year. Stay tuned for our Blogs and other communication explaining the proxy coming up.

Oh, and before I close, let me mention that we are doing all this with just twelve full-time employees. We will need to staff up later this year to cover the workload and gradually grow into what I believe will be the major player in the field of oxygen delivery. Things really have changed here and I’m excited about the company’s direction and future.

Thank you for your trust and support.