Chris Stern Blog

Dear Shareholders and Investors,

We have been receiving a lot of questions regarding the 1 for 15 reverse split proposed in the latest proxy. Rather than trying to answer them individually or address them in a long essay, we’ve compiled the most frequent questions below along with our response to each.

I truly believe that we need to move our stock listing to a major exchange, that a reverse split is necessary to do so, that the time is now, and that it is very much in the best interest of our shareholders. I hope that after reading the Q & A below, you will agree.

Why do we need a reverse split?
One of the company’s goals is to move its shares from the OTC Bulletin Board to a major stock exchange. This reverse split is a key step in making such a move. Listing requirements for the major exchanges include a minimum share price depending on the exchange. For NYSE AMEX for example, the minimum price is $3. So based on the present and historical trading prices for our common stock, effecting the reverse split is a prerequisite to meet the listing criteria of an exchange. Without a reverse split, we would have to wait until the stock price increased on its own to a high enough level to qualify for a move. But there is no way to know when or even if that would happen. In the meantime, our shares would continue to be subject to all of the disadvantages and negatives associated with being traded over the counter.

In addition, our current trading status significantly limits the number and type of potential investors in our shares. Most institutions will not buy penny stocks or shares that are not traded on a major exchange and priced below $5 per share. Likewise, many retail brokerage firms cannot recommend such stocks to their clients. By reducing the number of shares of common stock outstanding, the resulting share price could increase to a level where there may be greater interest in the common stock by the financial community and the investing public.

You’ve been able to raise the capital you need in the past. How does a Reverse Split benefit our ability to raise capital?

A reverse split is very important to our future ability to raise capital we might need to fund the company’s growth. In the past, our ability to raise capital has been meaningfully constrained as a result of the low market price of our common stock, the thin trading of the shares, and the absence of a listing on a major exchange. This limited the types of offerings that the company could make. The result was that when the company needed to raise money, it had to accept high borrowing costs and significant dilution. After a reverse split, the number of shares we would have to sell (additional dilution) to raise a given amount of money would be dramatically less.

Isn’t it true that a reverse split is a signal of a company in trouble?
Often when you see a company announce a reverse split, they are using it as a means of avoiding delisting from a major stock exchange due to a drop in share price below the level required for continued listing. However, that is not the case here. We are proposing the reverse split in hopes of raising the stock price to a level that will allow us to “graduate” from the penny stock stigma of the OTCBB to a listing on a major exchange.

Why a ratio of 1:15?
It’s impossible to know what our share price will be when the reverse split is effective. So, considering the recent trading range of our shares, we picked a ratio that we believe will result in a post-split price high enough to meet listing requirements of a major exchange even if the shares are trading at the low end of that range. Our calculations and decisions are based on a set of market valuations and scenarios. We worked with our advisors and came up with split numbers between 1:12 and 1:15 as ideal ratios. We decided to go the safer route and opt for the higher number.  It is our goal to relist the company at stock price comfortably north of the penny stock threshold.

Why push for a reverse split now?
The longer we wait to do the reverse split, the longer we will have to wait until our shares can trade on a major exchange. Many stocks traded over the counter are subject to manipulation that harms the average investor. We want to get away from the disadvantages of OTC trading and have access to the advantages of trading on a major exchange. We believe the time to act is now, since the capital markets appear to be very quiet which should allow our story to get the attention it deserves from analysts and institutional investors.

What is the advantage of moving our stock listing to a major exchange?
Having our shares listed on a major exchange will give our stock visibility to a broad range of potential investors who cannot or will not consider investing in a penny stock. Most of the big institutional investors (mutual funds, pension funds, etc.) will not buy penny stocks. Nor will they buy shares that are not traded on a major exchange if they are priced below $5 per share. Likewise, many retail brokerage firms cannot recommend such stocks to their clients. The higher price resulting from the reverse split and a subsequent listing on a major exchange could lead to greater interest in the common stock by the broader financial community and the investing public.

This relisting is an important opportunity to position our company where we believe it belongs. It will give us the potential financial strength needed to become a company with multiple products in various development stages.

What’s wrong with staying on the Over The Counter market until the share price is high enough to move to a major exchange?

The vast majority of OTCBB stocks trade below 50 cents and the average price for domestic stocks on the OTCBB is just six cents (source: OTCBB.com 9/16/09). You will find very few OTCBB stocks with a share price high enough to allow a move to a major exchange.

For our share price to rise to $3.00 on the OTCBB would mean a market cap of more than a billion dollars. It is unlikely that you will find any such domestic company on the OTCBB. As long as our stock is traded over the counter, it would be very unlikely for the share price to rise to the level required for listing on a major exchange without a reverse split.

We believe it is in the shareholders’ interest to move the company’s shares to a more liquid market sooner rather than later.

How confident are you that you can meet the listing requirements of a major exchange if the reverse split is approved?
Management is working to put in place the components needed to apply for listing on a major exchange once the reverse split is approved. Without a reverse split, such a move would not be possible.

Does this split reduce my holdings in the company?
No. The percentage of the issued shares that you own will not change as a result of a reverse split. If, for example, your holdings now equal one per cent of the outstanding shares, following the reverse split, your holdings will still equal one per cent of the outstanding shares.

Are the shares given to management as options, incentives, or other compensation affected by the reverse split?
The number of shares of common stock issued subject to stock options, warrants, or convertible securities will automatically be proportionately decreased by a factor of 15 and the exercise price or conversion ratio will automatically be proportionately increased by a factor of 15. For example, an option to purchase 300,000 shares at an exercise price of $0.40 per share outstanding before the reverse stock split will become, after the reverse split, an option to purchase 20,000 shares at an exercise price of $6.00.

Why won’t the number of authorized shares be reduced after the reverse split?
Having additional authorized shares gives the company a valuable tool to raise money when needed to finance the company’s growth. We are pursuing and funding TBI trials and several topical indications. However, we have many more opportunities to develop additional uses for Oxycyte. For example, funding additional Phase II clinical trials for other indications and a number of topical trials. Those are things we may want to pursue in the future to benefit the company and its shareholders.  To do so, we would need to raise additional financing and we would need the authorized shares.

How can I be sure there won’t be further dilution after the reverse split is approved?
The current management has said it is dedicated to pursuing a value growth strategy. To execute that strategy, management may, from time to time, need to sell shares to additional investors in order to raise capital needed to fund the company’s development and growth. Issuance of any additional shares is dilutive to some degree. However, if the company grows as a result, then shareholders benefit.

Who/what is Vatea Fund and why did they take such a large position in the company?
Vatea Fund is a private investment fund that manages investments for wealthy private individuals and institutions, with an investment philosophy based on long-term fundamentals. We believe that they evaluated the company and its prospects and determined that purchasing our shares would be a good investment based on the company’s products, business plan, and management.

Is this a take-over attempt by Vatea Fund?
Vatea Fund is currently the company’s largest shareholder. However they do not own a majority of the company’s shares.

Why does Gregory Pepin of Vatea Fund want to be on the board of directors?
Mr. Pepin represents the company’s largest shareholder. It is not at all unusual for very large shareholders, whether institutions or individuals, to have a representative on a company’s Board. We believe that’s a good thing as their interests tend to be aligned with those of other shareholders because their primary objective is to see the stock price improve.

What now?
If you feel confident that you understand the issues, we ask that you vote your proxy. Management suggests a “For” vote for all directors and our stock split.

You can vote online, by mail, and by telephone. You need your proxy form with the control number to vote (that is the number in the shaded box on the form).

We may use a service to make reminder calls as the proxy vote date is getting closer. Please remember, every vote counts.

If you hold your shares in a bank or brokerage account, your bank or broker will likely be the one receiving your proxy forms. So, in that case, you’ll need to instruct them how to vote (management recommends “For” for both proposals).  Also, your bank or broker may not send such forms to you right away. If you have not received your proxy form by September 28, please contact them directly or send us an email at investors@oxybiomed.com and we will try to help.

I would like to use this blog entry to talk about the reasons for proposing a reverse stock split of the company’s shares. I hope that after reading this you will vote your shares to approve the proposal.

At our last general shareholders meeting, I said that one of my goals was to move our shares from the OTC Bulletin Board to a major stock exchange. This reverse split is a key step in making such a move. It also has significant potential for our future ability to raise any capital we might need.

Let’s look at capital first. In the past the Company’s ability to raise capital has been meaningfully constrained as a result of the low market price of our common stock, the thin trading of the shares, and the absence of a listing on a major exchange. The result was that when the company needed to raise money, the terms were very expensive. This has increased the cost of raising capital and limited the types of offerings that can be made.

I believe these circumstances have also significantly reduced the number of potential investors in our shares, since most institutions will not buy penny stocks or shares that are not traded on a major exchange and priced below $5 per share. Likewise, many retail brokerage firms cannot recommend such stocks to their clients.

By reducing the number of shares of common stock outstanding, the resulting share price could increase to a level where there may be greater interest in the common stock by the financial community and the investing public.

Investor interest would be further enhanced by listing the Company’s common stock on a major exchange, which we intend to purse as soon as we meet all applicable listing criteria.

Listing requirements for the major exchanges include a minimum market price depending on the exchange. For NYSE AMEX for example, the minimum price is $3. So based on the present and historical trading prices for our common stock, effecting the reverse split is really a prerequisite to meet the listing criteria of an exchange.

Without a reverse split, we would have to wait until the stock price increased on its own to a high enough level to qualify for a move. But there is no way to know when or even if that would happen. In the meantime, our shares would continue to be subject to all of the disadvantages and negatives associated with being traded over the counter.

Some people seem to fear a reverse stock split because they don’t understand what it means. Here is the way a reverse split works:

If approved by the stockholders, the principal effect will be to decrease the number of outstanding shares of common stock from 293,767,389 to approximately 19,584,492 based on share information as of September 4, 2009. Also, the number of shares of common stock issued subject to stock options, warrants, or convertible securities will automatically be proportionately decreased by a factor of 15 and the exercise price or conversion ratio will automatically be proportionately increased by a factor of 15.

For example, an option to purchase 300,000 shares at an exercise price of $0.40 per share outstanding before the reverse stock split will become, after the reverse split, an option to purchase 20,000 shares at an exercise price of $6.00.

The reverse stock split will not change the number of authorized shares of our common stock under the Certificate of Incorporation. Therefore, because the number of issued and outstanding shares of the Company’s common stock would decrease, the number of shares remaining available for issuance would increase. These additional shares of common stock would be available for issuance from time to time for corporate purposes such as acquisitions of companies or assets or sales of stock or securities convertible into common stock to raise additional capital.

The availability of the additional shares will provide us with the flexibility to meet business needs as they arise, to take advantage of favorable opportunities, and to respond to a changing corporate environment.

I cannot predict the future. But I do know this: Without the split and the option to move to a major market, our ability to attract large institutional investors will be seriously impaired. And that could limit the company’s future.

This reverse split is an important and positive step in our company’s development, and I personally believe it is a necessity for the development of our firm. So I urge you to vote  your shares in favor of this proposal.