UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED June 30, 2001
FORM 10-KSB/A
Annual REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Sangui BioTech International, Inc.
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(Exact name of registrant as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation)
0-29233 84-1330732
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(Commission File Number) (IRS Employer Identification No.)
1508 Brookhollow Drive, Suite 354, Santa Ana, CA 92705
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(Address of principal executive offices) (Zip Code)
(714) 429-7807
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Registrant's telephone number, including area code:
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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None N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [] No [x]
Check whether there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B in this Form, and will not be contained, to the best of
Registrant's incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for the fiscal year ended June 30, 2001 was $567,007.
The market value of the voting stock held by non-affiliates of the issuer as of
September 25, 2001 was approximately $11,338,249.
The number of shares of the common stock outstanding as of September 25, 2001
was 40,654,363.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
FORWARD LOOKING STATEMENT
This Annual Report contains forward-looking statements concerning, among other
things, the Company's prospects affecting our potential and our business
strategies.
These forward looking statements involve risks and uncertainties. Actual
results may differ materially from those predicted by the forward-looking
statements because of various factors and possible events, including those
discussed under "Risk Factors". Because these forward looking statements involve
risks and uncertainties, actual results may differ significantly from those
predicted in these forward looking statements. These statements may be
accompanied by words such as "believe," "estimate," "project," "expect,"
"anticipate," or "predict" that conveys the uncertainty of future events or
outcomes. These statements are based on assumptions that the Company believes
are reasonable; however, many factors could cause the Company's actual results
in the future to differ materially from the forward-looking statements made
herein and in any other documents or oral presentations made by, or on behalf
of, the Company. Important factors which could cause actual results to differ
materially from those in forward-looking statements include, among others, the
ability to obtain additional financing, which is not assured; rapid
technological developments and changes; problems in developments of the
Company's products; price and product competition by competitors; general
economic conditions; and factors discussed in the Company's SEC filings.
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
Sangui BioTech, Inc. ("SBT") was incorporated in Delaware on August 2,
1996, and began operations in October 1996. In August 1997, Citadel
acquired one hundred percent (100%) of the outstanding common shares of SBT, and
as a result, SBT became a wholly-owned subsidiary of Citadel. Thereafter,
Citadel Investment System Inc, a publicly held company, changed its name to
Sangui BioTech International, Inc. Sangui BioTech International Inc. is referred
in this report as the Company or SGBI. The Company's business operations are
conducted through four subsidiaries: SBT, SanguiBioTech AG ("Sangui AG"),
GlukoMediTech AG ("Gluko AG"), and Sangui Biotech Singapore Pte Ltd. ("Sangui
Singapore").
SBT is principally engaged in the development and manufacturing
of immunodiagnostic kits, which are sold by SBT in niche markets in the
United States and Europe. SBT is located in Santa Ana, California. The
California laboratory facility, approximately 3,360 square feet, is
devoted to immunodiagnostic research, development, manufacturing, and
marketing, as well as the Company's administrative functions.
Sangui AG was established and organized under the laws of Germany in Mainz,
Germany, on November 25, 1995. Sangui AG is in the business of developing
hemoglobin-based artificial oxygen carriers as blood volume substitutes and
blood additive and products thereof. The officers of Sangui AG are
Professor Wolfgang Barnikol, M.D., Ph.D., Sieglinde Borchert, Ph.D., Harald
Poetzschke, M.D. and Detlev Freiherr von Linsingen, attorney. The members of
Sangui AG's supervisory board are Professor Joachim Lutz, M.D., Dora Malek,
attorney, Oswald Burkhard, M.D., Ph.D., Cornelius Grau, businessman, Professor
Dietrich Gronemeyer, M.D. and Doris Barnikol, Ph.D.
Gluko AG was established and organized under the laws of Germany in
Mainz, Germany, on July 15, 1996. Gluko AG is developing a long-term
implantable glucose sensor, by-products thereof, and sensors. The officers of
Gluko AG are Professor Wolfgang Barnikol, M.D., Ph.D., Sieglinde Borchert,
Ph.D., Kai Zirk, engineer, and Detlev Freiherr von Linsingen, attorney-at-law.
The members of Gluko AG's supervisory board are Professor Dietrich Gronemeyer,
M.D., Dora Malek, attorney-at-law, Oswald Burkhard, M.D., Ph.D., Cornelius Grau,
business man, Professor Joachim Lutz, M.D. and Doris Barnikol, Ph.D.
Since April 1998, the facilities of Sangui AG and Gluko AG, about 800
square meters, are located on the premises of the Forschungs- und
Entwickungszentrum of the University of Witten/Herdecke, Witten, Germany.
Sangui Singapore was incorporated in Singapore on May 15, 1999.
Sangui Singapore is the Asia regional office for the Company and is expected
to be engaged in the business of carrying out research and development projects
as well as animal experiments in conjunction with the German
subsidiaries. The premises of the company, about 350 square meters, are
located in the Science Park II, Gemini Building, Singapore.
On March 30, 2000, the Company acquired all the outstanding common stock of
Felnam Investments, Inc. ("Felnam"). The transaction was funded through the
issuance of 100,000 shares of the Company's stock valued at $0 per share due to
the Company treating the transaction as a recapitalization of the Company. In
conjunction with the transaction, the Company incurred approximately $ 180,000
of transaction costs which were charged to operations.
To date, neither SGBI nor any of its subsidiaries has had profitable
operations. The Company has never been profitable and, through June 30, 2001,
the Company's accumulated deficit exceeded $11.6 million. The Company expects
to continue to incur substantial and increasing losses over at least the
next several years as it expands its research and development efforts,
testing activities and
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manufacturing operations. All of the Company's potential products are in
development except for the immunodiagnostic test kits. The Company will
need to obtain substantial additional capital to fulfill its business
plan.
BUSINESS OF THE COMPANY
The Company's mission is the development of novel proprietary products.
The special focus of Sangui AG is on developing oxygen carriers
capable of human organ support in cases of acute and chronic lack of oxygen or
blood loss due to surgery, accident, arterial occlusion, anemia or other causes.
The Company seeks to develop and commercialize such artificial oxygen carriers
with blood volume substitute/blood additive technologies by reproducibly
synthesizing polymers of defined molecular sizes. The Company also develops
oxygen carriers for external application in the medical and cosmetic fields in
the form of jellies and emulsions for the regeneration of the skin.
The second important project pertains to Gluko AG's long term implantable
glucose sensor for day and night monitoring of a patient's glucose level.
The project is designed to obviate the need for persistent blood sampling
and to provide required information on a continuous basis, which could
minimize the harmful effects of peaks and troughs in the patient's blood sugar
level.
SBT has completed the development of nine in vitro diagnostics kits. Five
products have been cleared for marketing by the United States Food and
Drug Administration ("FDA"). The other four kits were sold overseas with
Certificate of Exportability from the FDA. In December, 2000, the Company's
only competitor in the CDT business, Axis/Shields, a Norwegian Company purchased
by Shields Diagnostics of United Kingdoms, filed a lawsuit against the Company
for alleged infringement on a U.S. patent held by Axis Biochemical ASA. The
Company has reached a settlement with Axis/Shields and agreed to discontinue the
sales of the Company's CDT product, trade-marked ChronAlco ID CDT test kit.
Sales related to this test kit totalled $312,000 and $279,000 for the years
ended June 30, 2001 and 2000, respectively. The Company has since re-designed
its CDT product, called ChronAlco ID II CDT test kit, to resolve the patent
conflict. The Company has since sold the new version of CDT kit, i.e. ChronAlco
ID II CDT test kit, to its distributors and customers. There is no significant
loss or gain of the Company's CDT business.
ARTIFICIAL OXYGEN CARRIER
There are several products in development that are polymers of
natural hemoglobins with oxygen carrying abilities similar to native hemoglobin:
The Company seeks to develop and commercialize proprietary artificial blood
volume substitute/artificial oxygen carrier technologies by synthesizing
reproducible polymers of defined molecular sizes. The experiments completed
in the Company's laboratories demonstrated that it is possible to polymerize
hemoglobins isolated from pigs resulting in huge soluble molecules, the
so-called hyperpolymers. In August 2000 the Company finalized its work on the
pharmaceutical formulation of the oxygen carrier for laboratory scale. In
February 2001 a pilot production in a laboratory scale has been carried out in
the Company's clean room. At present the Company is working on the upscale
process.
Blood Volume Substitute
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The need for blood volume substitutes is growing because of: (i) reduced
willingness of the population to give blood; and (ii) contamination of donors
with HIV and hepatitis viruses. The worldwide market for stored blood is
estimated to total about US $ 5 billion per year.
Invasive surgery, resulting from such causes as transplantation or
accidents, can result in substantial loss of blood. In such circumstances, blood
volume has to be substituted to avoid shock. Blood substitution must be done
with an isoncotic solution that has the same colloid-osmotic pressure as blood
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plasma. Such blood volume substitutes are called "plasma expanders". These
expanders use macromolecules like polysaccharides or gelatin to generate the
oncotic pressure.
Blood additive
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In cases where the native blood oxygen carrier system does not deliver
enough oxygen to tissues of the heart, brain, extremities, kidneys and other
organs or to cancer tumors, a critical clinical situation arises requiring
another oxygen carrier strategy. In these cases, the patients do not have a
blood volume deficiency, but suffer from an oxygen deficiency. To compensate
for this oxygen deficiency, an artificial oxygen carrier must be introduced
into the circulatory system and this additive must have no influence on the
oncotic pressure, i.e., it must have a negligible oncotic pressure as compared
to normal, which is about 30hPa. Sangui AG has polymerized various
hyperpolymers in small quantities, as described above with characteristics
such as sufficiently low viscosity and a negligible oncotic pressure at the
desired concentration and desired hematocrit concentration.
Small animal exchange experiments with artificial oxygen carriers carried out
by the Company have demonstrated that these carriers are very effective in
oxygen transport already in small concentrations within the blood plasma and
that they show a synergistic effect with native transport systems. Also it
was possible to synthesize hyperpolymeric oxygen carriers which exhibit
almost no immunogenicity in mice sensitized to hemoglobin. Experiments
conducted in alert rats with a magnetometric method appear to demonstrate
that the hyperpolymer hemoglobins irritate the reticulo-endothelial system of
the liver far less than emulsions of fluorocarbon or encapsulated hemoglobins
solutions.
The management of Sangui AG believes that the additive feature of the oxygen
carrier under development, could potentially address a market possibly equal
to or larger than that of blood volume substitutes. It has been reported that
the oxygenation of solid tumors makes them more sensitive to radio and
chemo therapy. Management believes that its blood additive technologies, for
which there are no known competitive products, could be very attractive in the
medical field. Therefore, the development of an artificial oxygen carrier
has become the primary focus of the management of SGBI. However, such a
market projection for plasma expanders and additives, as therapeutics for
oxygen deficiency disorders, cannot be ascertained, since such products are not
available in the marketplace.
If oxygen carriers can be used successfully in the cancer field, this could
be expected to speed the approval process for the use of blood volume
substitutes based on similar technologies. However, there can be no assurances
that these applications will be approved by the various government regulatory
agencies, including but not limited to the FDA in the United States and the
similar agencies in Germany and other Western European countries.
It should be noted that this specialized or niche application, if
successfully developed, would have a market potential substantially smaller than
the overall market of artificial blood volume substitute or the therapeutic
market (with oxygen carrier as an additive or therapeutic agent) for more
widespread oxygen deficiency disorders such as myocardial infarction and stroke.
Sangui AG has received a grant from the government of the German state of
Northrhine-Westphalia in an amount of more than US $2,000,000 which covers 40%
of the estimated costs of the research and pre-clinical development of the
Company's polymer hemoglobin based artificial oxygen carrier. Sangui AG has
received installments of approximately 1,880,000 German Marks (approximately
US$818,000) from the grant to reimburse 40% of its research and development
expenses and related capital expenditures in the period from April 1998
through June 2001.
Oxygen carriers for regeneration of the skin
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The healthy skin is supplied with oxygen, both through the supply from inside
and also through diffusion from outside, in which connection with the proportion
of the supply of the exterior cell layers of the upper skin, the so-called
Stratum germinativum, located directly beneath the Stratum corneum, is normally
around 50 percent. Lack of oxygen of the skin will cause degenerative
alterations of various extent, ranging from surface damage to open wounds. The
cause for the lack of oxygen may be the normal aging process, but also burns or
radiation. Impairment of the blood flow, for example caused by diabetes
mellitus, can also lead to insufficient oxygen supply and resulting skin damage.
The new preparations under development by Sangui AG have been designed to
contribute to supporting the regeneration of the skin in the case of lack of
oxygen. In addition to the therapy, these preparations are also intended for
purposes of prevention, among others for the improved oxygen supply of the skin
in the course of a radiation therapy, or in the case of an acne treatment.
The basic idea of the mode of effectiveness consists of the mechanism of the
facilitated oxygen diffusion. The oxygen carriers are intended to increase the
diffuse flow of oxygen from outside, when having been worked into the exterior
cell layers.
GLUCOSE SENSOR AND TECHNICAL BETA-CELL
Over 5% of the inhabitants of the industrialized countries suffer from
diabetes. About one tenth of these patients are afflicted with diabetes
mellitus Type 1, which means they are dependent for life on the parenteral
application of insulin. In addition, about 10 % of the Type II diabetics also
get insulin dependent during the course of their illness.
Diabetes Type I patients suffer from the irreversible destruction of the so
called beta cells of the pancreas (absolute insulin deficiency); the beta cells
normally produce the hormone, insulin.
Diabetes Type II patients suffer from a relative insulin deficiency; the
insulin receptors are insensitive to the hormone.
The central problem of the diabetic is to properly and constantly measure
the blood glucose level, ideally 24 hours a day, and thereby to know how to
adjust, quantitatively, the glucose level in the tissues by administering
insulin, for example, in order to stabilize the blood sugar level at its normal
value of 1 g/L. Only a rough adjustment may be achieved during waking hours
when the patient is able to sample a drop of blood from the fingertips
periodically, and to determine the level of glucose with the aid of dipsticks.
Nevertheless, the permanent sampling of blood and the need to inject
insulin deteriorate the quality of life. An enormous danger for the diabetic
patient arises when he is asleep, i.e. one third of his life time, when he is
neither able to sample the glucose level in his blood system, nor to adjust it,
if necessary.
Furthermore, as shown by measurements using a short time (only 3 days)
glucose monitoring system based on the enzymatic detection of glucose, (even in
patients who seem to be well adjusted) dramatic changes of the blood sugar occur
during night and day.
Infectious diseases and vegetative disorders are also reasons for
uncontrollable disturbances and variations of the glucose level, even during
waking hours. Those are very dangerous for the patient as it is explained
below:
A glucose level which remains too low over long periods of time results in
damage to organs with high metabolism, such as the brain. Brain cells which die
cannot be replaced. If a glucose level remains too high, the typical long term
sequelae of Type I diabetes occur, such as peripheral circulatory deficiencies
resulting in the need for amputation of extremities and detachment of the retina
resulting in blindness.
Page6
Accordingly, it should be of substantial advantage to be able to
constantly and automatically monitor the blood sugar level of the patient. To
do so, the glucose monitor must stay at or in the patient for a long period of
time making the procedure cost effective and efficacious. Problems
ofinfection, comfort, and the risk of detachment should all favor a
permanently implantable sensor.
The device being developed by the Company communicates via radio signals
with a control panel/modem outside the body and supplies the patient with
the necessary information. In combination with a dosage pump for insulin
(internal or external) an artificial beta-cell for insulin dependent
diabetics could be realized. Until now, an implantable glucose sensor has
been the missing link in the development of a beta cell for the automatic
dispensation of insulin.
German insurance companies have estimated the possible savings for a
patient with Type I diabetes to range from between approximately $6,000 to
$8,000 per annum. Based on a unit price of about $7,000, the market potential
for the developed countries could amount to several billion dollars per year.
The following experimental results were obtained in furtherance of the
Company's objective of developing an implantable glucose sensor on the basis of
physical measurement systems:
* polarimetric, infrared and refraktometric measurements of glucose
concentrations in the physiological range resulted in electronic signals,
sufficiently high for further processing
* glucose is responsible for at least 95% of the optical rotation of
ultrafiltered blood plasma
* the concentration of glucose in ultrafiltrated tissue fluid equals that of
blood
* the level of glucose in an implanted ultrafiltrating hollow fiber did not
drift, in the sense of decreasing, over a period of three weeks
* the adjusting time of the glucose level in the hollow fiber is about ten
minutes and is also stable over a period of three weeks
Gluko AG presented a first model of a long-term implantable glucose sensor
at the Duesseldorf MEDICA Show in November 1998. The Company demonstrated an
improved model comprised of a miniaturized optical system (which
includes a light source, diodes, light detectors and an integrated sensor
electronics which has not been finally miniaturized yet) at the Duesseldorf
MEDICA Show in November 1999. In August 2000, the Company stated a further
development of its concept for the long term implantable glucose sensor
which offers the Company an additional possibility to also develop an
"insertable" sensor for the initial clinical adjustment of diabetics. In
contrast to an implanted sensor this is completely under the skin and has
no connection at all through the skin to the outside, an inserted sensor is
"pierced" through the skin. In contrast to the implantable sensor, the
functional capacity does not depend on a complete miniaturizing of the
electronic system. Gluko's engineers have advanced the construction of the
sensor in such a way that in future all moveable mechanic parts can be
completely dispensed. Since the final mechanically moveable sensor component -
a micro pump with a relatively high energy demand - has been omitted, the
sensor might become safer in operation. The change might have a positive
effect on the sensor's energy supply.
In September 1999, Gluko AG received a grant from the German state of
Northrhine-Westphalia in the amount of approximately $2,000,000 for the long
term implantable glucose sensor. The grant will cover 40% of the budget project
cost from December 1998 to November 2001. Gluko AG has already
received installments of approximately 800,000 German Marks (approximately
$365,000) from the grant to reimburse 40% of its relevant expenses in the
period from December 1998 through June 2001. The grant requires the Company's
economic ability to cover 60% of the project costs on its own. An additional
condition of the grant is that if the product is developed before 2003, it
must be produced in the German state of Northrhine-Westphalia.
BY PRODUCTS
The knowledge gained during developing the glucose sensor, has resulted in
the development of two by-products based on the measuring systems of the glucose
sensor:
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* a high precision analytical micro system for monitoring and controlling of
(bio)chemical processes in biotechnology, chemistry and Pharma industry and
* a polarimeter/spectrometer designed for laboratory work
During his work at the University in Mainz, Germany, one area of
Professor Barnikol's research focused on respiration processes. From this
research work Gluko AG's projects in the field of anesthesia, intensive
care and sleep diagnostics are derived. The product line comprises
monitoring devices as:
* a sensor tube
* a sensor connector for new borns
* a nose sensor
* a main stream respiratory oxygen sensor
Further by products of the Gluko AG are:
* an oxygen sensor device for the skin (skin-oxy-meter)
* an equipment for small animal (rats and also mice) experiments
* a respiratory microvalve
* a micro respiratory flow sensor
IMMUNODIAGNOSTIC TEST KITS
The Company has developed a number of immunodiagnostic products
including the niche Carbohydrate-Deficient Transferrin (CDT) test kit. The
Company plans to attempt to increase the sales of its products by (1)
introducing its products to additional distributors covering geographic markets,
which the Company currently has no coverage, and (2) offering the products to
established distributors and larger companies who have established
distribution and worldwide marketing network at significant discounts.
SBT has completed the research and development of certain health care
products which are intended to be produced, promoted, marketed, and used
world-wide. SBT's products consist of: (i) a CDT- test kit, which is
used to detect chronic alcohol abuse; (ii) a urinary micro-albumin test, which
is a diagnostic test to detect small amounts of proteinuria in diabetes
mellitus; (iii) two different kits for the measurement of Parathyroid Hormone,
which is a diagnostics adjunct to the differential diagnosis of hyper- and
hypo-parathyroidism. ; (iv) ACTH (Adrenocorticotropic Hormone), a niche
endocrine test for adrenal cortex function; (v) Calcitonin, another
endocrine test for a rare disease; (vi)Erythropoietin (EPO), a test for certain
types of anemia; and (vii) TSH (Thyroid Stimulating Hormone or Thyrotropin), a
common and popular thyroid function test, but faced with over forty (40)
competitors' products on the same test.
All the products are based on the microplate format, except for the
Parathyroid Hormone (PTH) IRMA and TSH IRMA. This microplate or microtiter
platform was chosen, because microplate readers are quite common in the clinical
and hospital medical laboratory setting. All the test kits, except TSH, are
targeted at the niche laboratory market. Nonetheless, due to the aging or
maturation of the in vitro diagnostics industry, unprecedented fierce
competition coupled with healthcare cost containment has resulted in the
appearance of the previous niche tests on the menu of proprietary
instrumentation made by billion dollar well-capitalized companies owned by
the world-class pharmaceutical companies. At present, the only product, which
truly can be considered "niche" is the CDT.
* CDT (Carbohydrate Deficient Transferrin). Has been reported as the most
reliable test for identification of chronic alcohol abuse. The worldwide market
potential is estimated at between US $1.5 million to US $ 2 million per
annum. The market potential has been reduced, due to the discontinuation of
reimbursement in Germany. This test uses microplate format Turbidimetric
Immunoassay with
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prepackaged chromatography columns. The SBT CDT test kit, trademarked as
ChronAlco I.D. in Germany, has been found to be superior to the product made by
the only other manufacturer (competitor) by two leading German scientists.
However, the Company's only CDT competitor, Axis/Shields has changed its product
such that the Axis/Shields new product is quite similar to the Company's. The
Company has no patent or patent application for its CDT assay. About 55% of the
product sales realized by the Company were derived from this product for the
fiscal year ended June 30, 2001.
* Intact-PTH on the ELISA Microplate format (2nd Generation). This product
has been cleared under the 510(k) regulations by the FDA in late December 1997.
It has one distinct advantage over the two other ELISA microplate PTH kits on
the market. It is faster and easier, with performance characteristics similar or
superior to the competitors. Nonetheless, the sales increase has been gradual.
The management believes that the lack of significant sales is mostly likely
due to the current market trend of complete turn-key (hands off or
complete) automation in the laboratory business, dominated by divisions of large
pharmaceutical companies.
* Intact-PTH IRMA (ImmunoRadioMetricAssay). The radioactive version will
compete mainly based on price. The worldwide market potential for all the PTH
kits, with over 12 competitors, is estimated at US $ 50 million per annum,
dominated by large companies with proprietary fully automated instrumentation.
* Microalbumin quantitative test via TIA. Highly sensitive determination of
small quantities of albumin in urine. Early detection of microalbuminuria can
prevent subsequent irreversible renal impairment in patients with Diabetics
Mellitus. The worldwide market potential is estimated at US$5 million per
annum. However, the Company has derived negligible sales for the last three
years (since the completion of product development on this product) due to
market dominance of large companies, such as Roche/ Boehringer Mannheim and
Beckman Instruments,Inc.
* ACTH (Adrenocorticotropic Hormone) ELISA. This product is the only 2nd
Generation ELISA Kit in the market. This test is intended for the assessment of
adrenal cortex function such as Addison Disease and the differential diagnosis
of Cushing Syndrome. The estimated market potential size is US $ 5 million per
annum.
* Calcitonin ELISA. This product is the only ELISA in the market. This is
another calcium metabolism test. The test volume has been increasing in Europe
and the US. The estimated market potential size is US $ 1 million per annum.
* Erythropoietin (EPO) ELISA. Quantitation of serum erythropoietin
concentration serves as a diagnostic adjunct in determining the cause of anemia
or erythrocytosis (an increase of red blood cell mass). Also, Amgen, Inc.
manufacturers the drug Erythropoietin, trade-name Epogen. Hence, it is believed
that there is a small market for drug monitoring as well. However, there are
several competitors including at least one competitor with fully automated
system.
* TSH IRMA. TSH (Thyrotropin) is a very useful, if not the most important,
screening test for thyroid function assessment. However, there are at least
forty kits in the market-place, so this product is not a niche product. The
Company's kit is based on the ImmunoRadioMetricAssay and was originally
developed specifically for sale to a small German distributor, who had
overestimated its ability to sell significant quantities in Germany.
The majority of the sales and repeat orders are from Germany and the United
States.
To date, the Company's efforts to sell its products to emerging markets such as
the mainland China, Hong Kong and Taiwan have been unsuccessful and the
sales to date have been very limited. At present, the Company intends to
comply with the regulations published by the Notified Bodies of the CE (European
Community) for in vitro diagnostic kits. The Company plans to implement the
requirements in compliance with the CE Mark regulations before the deadline in
2003.
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DEVELOPMENT PROCESS
ARTIFICIAL OXYGEN CARRIER
In December 1997 the Company decided that porcine hemoglobin should be used
as basic material for its artificial oxygen carriers. In March 1999 the Company
came to the fundamental decision as to which hemoglobin hyperpolymer will go
into preclinical investigation and that glutaraldehyde will be taken as cross
linker and pyridoxalphosphate as effector. The fine adjustment of the formula
of the artificial oxygen carriers - optimized for laboratory scale - was
finalized in Summer 2000. This fine adjustment comprises different conditions
like concentrations of glutaraldehyde and pyridoxalphoshate, incubation times,
and temperature.
In laboratory scale the manufacturing is set out as follows: First, pure
porcine blood must be obtained from slaughterhouses. The blood must not be
contaminated with endotoxins released by bacteria or other contaminating
material. Therefore, it must be guaranteed that the pigs, of which the blood is
taken, were neither ill nor had received medicine. The state of health of the
pigs has to be contractually fixed with the pig breeders. In order to determine
and prove the purity of the source material as well as that of intermediate and
final products, an analytic department has been set up.
After release of the hemoglobin molecules from erythrocytes, about fifteen
molecules are cross-linked to a hyperpolymer molecule by a chemical reaction
using glutaraldehyde as a cross-linker. This hemoglobin hyperpolymer is the
artificial oxygen carrier. An advantage of the hyperpolymer structure is that
it prevents the oxygen carrier from secreting via the kidneys which would have
harmful effects on the patients.
Pyridoxalphosphate is used as an effector by which the oxygen binding
properties of the hemoglobin hyperpolymer molecules, for instance the functional
oxygen transport capacity, are adjusted properly. During all preparation steps
defined conditions have to be chosen and maintained carefully (e.g. temperature,
pH of the solutions). After preparation of the oxygen carrying hyperpolymers,
they are separated into a high molecular fraction and a low molecular fraction
to obtain the blood additive and the blood volume substitute, respectively.
At this point in time, the Company is developing the upscaling process for
preparation of a large amount of oxygen carrier for preclinical and clinical
trials. According to regulatory requirements, all drugs have to pass through
preclinical and clinical trials before approval (e.g. FDA approval: Federal drug
administration) and launching to the market. In preclinical trials,
experiments using animal models and tissue culture models have to be carried out
to evaluate the efficacy and safety of the developed drug. Phase I of the
clinical trials, so called "human pharmacology" comprises the application of
the drug in healthy volunteers. Phase II is called "therapeutic explanatory"
and comprises trials with a small number of ill patients. Phase III is
called "therapeutic confirmation" and comprises trials with a larger
number of ill patients.
Management of the Company believes that the European and FDA approval
process will take at least several years.
IMPLANTABLE GLUCOSE-SENSOR AND TECHNICAL BETA-CELL
The glucose sensor under development by Gluko AG is based on physical
methods for the determination of the diabetic's glucose level. Three
physical measurement systems have been developed for the glucose detection
system: a polarimetric, an infrared system, and a refractometric system.
These systems have to be proved to be specific for in vitro determination of
glucose levels in the physiological range of 50 to 500 milligram glucose
per decilitre. At present, it is not settled which one of the systems will
be used in the first generation of the sensor. Gluko AG endeavors to install
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two independent measuring systems in its sensor to increase the specificity
and accuracy of the glucose determination.
The sensor will be implanted into the subcutaneous fat tissue in the
stomach area near the belly button. The Company endeavors to develop a glucose
sensor that might be implanted for a period of three to five years. To protect
the detection system inside the measuring chamber from large compounds of the
interstitial fluid, especially from proteins, and to increase the specificity of
the system, an exchange membrane will be part of the sensor.
During the day, it is planned to send the measuring signal telemetrically
to a glucose watch which the diabetic patient will carry at his wrist.
During the night, the telemetric signal will be sent to a receiver which will
monitor the glucose level and warn the patient of hypoglycemia and
hyperglycemia acoustically.
The latest further development in the sensor construction provides the
additional possibility of developing also an "insertable" sensor for the
initial clinical adjustment of diabetics. In contrast to an implanted
sensor that is completely under the skin and has no connection at all through
the skin to the outside, an inserted sensor is so to speak "pierced" through the
skin and it has a connection to the outside. The insertable sensor of the
Company is being designed to allow a continuous glucose determination over
several days and to exhibit the same measuring principles and almost the
identical design as the implantable sensor. In contrast to the implantable
sensor, the functional capacity does not depend on a complete miniaturizing of
the electronic system. The analyzing unit will be outside of the human
body and connected by cable with the insertable sensor.
The construction of the glucose sensor has been changed so that all
moveable mechanical parts can be completely dispensed in an effort to increase
the safety of the sensor and to have a positive effect on the sensors' energy
supply.
According to regulatory requirements, all medical devices have to pass
through clinical trials before approval (e.g. FDA approval; Federal drug
administration) and launching to the market. Unlike the Company's oxygen
carriers that are classified under pharmaceutical products, glucose sensors
are classified as medical devices and have a different approval process. The
clinical trials for the glucose sensor do not have different phases and
entails doing studies immediately with diabetic patients.
Management of the Company believes that European and FDA approval process
will take at least several years for the implantable glucose sensor.
PATENTS AND PROPRIETARY RIGHTS
The Company has the policy of seeking patents covering its research
and development and all modifications and improvements thereto. The German
subsidiaries Sangui AG and Gluko AG have been granted 15 patents belonging to 14
patent families. Furthermore, the subsidiaries have applied for 37 patents
belonging to 23 patent families.
MARKETING AND DISTRIBUTION
Other than the immunodiagnostic products, the Company has not yet
manufactured its products in commercial quantities.
SBT markets its immunodiagnostic products through a distributor in a
particular country. The products are targeted at the smaller laboratories in
Western Europe and the United States, who may have insufficient test volume to
justify the installation of "turn-key" fully automated proprietary
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instrumentation by the large competitors. It also includes end users like
independent clinical, hospital or physician operated laboratories.
The Company sells its CDT kits mainly through one German distributor,
selling directly to one customer in the US, and one distributor
covering Switzerland and Austria. In December, 2000, the Company's only
competitor in the CDT business, Axis/Shields, a Norwegian Company purchased by
Shields Diagnostics of United Kingdoms, filed a lawsuit against the Company for
alleged infringement on a U.S. patent held by Axis Biochemical ASA. The Company
has reached a settlement with Axis/Shields and agreed to discontinue the sales
of the Company's CDT product, trade-marked ChronAlco ID CDT test kit. The
Company has since re-designed its CDT product, called ChronAlco ID II CDT test
kit, to resolve the patent conflict. The Company has since sold the new version
of CDT kit, i.e. ChronAlco ID II CDT test kit, to its distributors and
customers. There is no significant loss or gain of the Company's CDT business.
The Company has limited experience in sales and marketing of products.
In general, the distributor is required to commit to a minimum sales volume in
order to maintain an exclusive position in a given territory. It is not
uncommon to provide a 30 to 50 % discount or even more from the product transfer
price. The distributor typically uses the margin to pay for the shipping
costs, its overhead, sales staff and keep the balance as profit. To date, the
Company's has made exclusive distribution agreements in the certain sales
territories, i.e. Austria, Italy and Turkey.
Two customers accounted for approximately 54% of sales for the year
ended June 30, 2001. Four customers accounted to approximately 70% of sales for
the year ended June 30, 2000.
To raise its profile, the Company regularly participates in various
medical and health related product exhibitions and trade fairs, for instance the
latest Medica 2000 held in Duesseldorf.
GOVERNMENT REGULATION
SGBI and its subsidiaries are, and will continue to be, subject to
governmental regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, and other
similar laws of general application, as to all of which SGBI believes it and its
subsidiaries are in material compliance.
Because of the nature of the operations of SGBI and its subsidiaries and
the use of hazardous substances and their ongoing research and development and
manufacturing activities, SGBI and its subsidiaries are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacturing, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although it is believed
that SGBI and its subsidiaries are in material compliance with all applicable
governmental and environmental laws, rules, regulations and policies, there can
be no assurance that the business, financial conditions, and results of
operations of SGBI and its subsidiaries will not be materially adversely
affected by current or future environmental laws, rules, regulations and
policies, or by liability occurring because of any past or future releases or
discharges of materials that could be hazardous.
Additionally, the clinical testing, manufacture, promotion and sale of a
significant majority of the products and technologies of the subsidiaries, and
to a much less extent to SGBI, if those products and technologies are to be
offered and sold in the United States, are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA, and
corresponding state regulatory agencies. Additionally, to the extent those
products and technologies are to be offered and sold in markets other than the
United States, the clinical testing, manufacture, promotion and sale of those
products and technologies will be subject to similar regulation by corresponding
foreign regulatory agencies. In general, the regulatory framework for
biological health care products is more rigorous than for non-biological health
care products. Generally, biological health care products must be shown to be
safe, pure, potent and effective. There are numerous state and federal statutes
and regulations that govern or influence the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
distribution and promotion of biological health care products. Non-compliance
with applicable requirements can result in, among other things, fines,
injunctions, seizures of products, total or partial suspension of product
Page12
marketing, failure of the government to grant pre-market approval, withdrawal of
marketing approvals, product recall and criminal prosecution.
COMPETITION
IMMUNODIAGNOSTIC KITS
TYPE OF IMMUNODIAGNOSTIC KIT MAJOR COMPETITORS
Intact-PTH on the ELISA Microplate format Abbott Laboratories
Bayer
Hoffman La-Roche
DPC
Nichols Institute Diagnostics
DSL (Diagnostic Systems
Laboratories)
Bio Rad
DiaSorin
Intact-PTH IRMA Nichols
IncStar
DSL
ACTH ELISA Bayers
DPC
Nichols Institute
DSL
CIS
DiaSorin
Euro Diagnostics
Calcitonin ELISA Nichols Institute Diagnostics
DPC
Mitsubishi
DiaSorin
DSL
CDT Axis Biochemical,
ASA (Axis/Shields)
Hoffman-La-Roche (Distributor of
one older Version of Axis kit)
Erythropoietin ELISA R&D Laboratories
Nichols Institute
DLS
DPC
Microalbumin quantitative test via TIA BMC/ Hitachi
Beckman
DPC
The market for the products and technologies of the Company is highly
competitive, and SBT expects competition to increase. SBT will compete with
many other health care research product suppliers, most of which will be larger
than SBT.
Page13
Some of the competitors of SBT offer a broad range of equipment, supplies,
products and technology, including many of the products and technologies
contemplated to be offered by SBT. To the extent that customers exhibit
loyalty to the supplier that first supplies them with a particular product or
technology, the competitors of SBT may have an advantage over SBT with respect
to products and technologies first developed by such competitors. Additionally,
many of the competitors of SBT have, and will continue to have, greater
research and development, marketing, financial and other resources than SBT
and, therefore, represent and will continue to represent significant competition
in the anticipated markets of SBT. As a result of their size and the breadth
of their product offerings, certain of these companies have been and will be
able to establish managed accounts by which, through a combination of direct
computer links and volume discounts, they seek to gain a disproportionate share
of orders for health care products and technologies from prospective customers.
Such managed accounts present significant competitive barriers for SBT. It is
anticipated that SBT will benefit from their participation in selected markets
which, as they expand, may attract the attention of the competitors of SBT.
There can be no assurance that the Company will be able to compete successfully
in these markets.
The competition in the US $20 billion diagnostic business is fierce,
mainly dominated by the large pharmaceutical and larger established
biotechnology companies such as Abbott Laboratories, Hoffman La Roche etc.
For its CDT kits, the Company's only competitor is Axis Biochemicals, ASA,
in Oslo, Norway which has entered into European and distributorship arrangements
with Bio Rad Laboratories, Inc. and Roche Diagnostics, a division of
Hoffman-La-Roche. Large competitors with complete automation with proprietary
instrumentation have offered packaged reagent rental programs to potential
customers, for which the use of instrument is not paid by the customers except
for some small commitment to purchase the products. These large
companies dominate essentially over 80% of the endocrine assay markets in the
developed countries such as the United States, Western Europe and Japan with
their proprietary fully automated instruments. SBT can only attempt to increase
the sales for its endocrine products to small laboratories through its
distributors and seek to enter emerging markets in Latin America, Asia and
Eastern Europe, where the need for endocrine has been traditionally minimal, due
to the prevalent poverty and in some cases over-population.
BLOOD VOLUME SUBSTITUTE
In the business of blood volume substitute, there are at least six
large companies that have obtained substantial capitalization either through
equity funding or through acquisition by large corporations, such as Baxter
International acquiring Somatogen. Other future competitors are Hemosol Inc. in
Canada, Northfield, Alliance Pharmaceutical and Biopure Corporation.
Nearly all these companies have already made strategic marketing alliances
with large companies with established marketing and distribution channels,
such as Johnson and Johnson, Eli Lilly and Company, and Pharmacia/Upjohn.
Most of these companies have already proceeded Clinical Trial Phase III with the
FDA. Biopure Corporation has received approval in South Africa to treat acute
anemia in surgery patients. To be competitive, the Company is attempting to
develop well-characterized and differentiated products in unique formulations
which could capture some of the market as a new generation of oxygen
carrier/additives to address the markets of artificial blood volume
substitutes as well as the potential new market of therapeutics for oxygen
deficiencies.
BLOOD ADDITIVE
In the business of blood additive, Sangui AG is not aware of any
existing or potential competitors.
GLUCOSE SENSOR
The Company is not aware of any glucose sensing implants currently
available . In the last few years different approaches have been chosen by
companies to reduce the pain caused by the finger pricks necessary for
the determination of the blood glucose. Cygnus Inc., Redwood City,
California, USA, for example, has been developing a device which collects
interstitial fluid at the diabetic's wrist by use of electrical energy.
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Cygnus applied for FDA approval. and is currently engaged in further testing
of the device. On devices close to an implantable glucose sensor,
MiniMed Inc. of Sylmar, CA has submitted to FDA a Notification on a
Continuous Glucose Sensor For Diabetes in December, 1997. MiniMed Inc.
announced its intention to produce and market this product. It expects to
utilize the sensor for a series of products, the first two of which will be a
physician diagnostic device and an alarm product to warn people with diabetes
of dangerously low glucose levels. However, the reagents for the MiniMed's
sensor are stable for only three days. By contrast to the objective of an
implantable long term glucose sensor by Gluko AG, the MiniMed's sensor does not
solve the problem in the long term.
Gluko AG is aware of three other companies also developing implantable
glucose sensors. Medical Research Group, LLC, MRG, a privately-held company
has been developing a glucose sensor and is planning to connect this
sensor with an insulin pump developed by MiniMed. The sensor under
development by Synthetic Blood International, Kettering, Ohio, USA is
based on an enzymatic glucose
determination. Animas, Corp., Frazer, Pennsylvania, USA has been developing an
implantable glucose sensor based on infrared spectroscopy.
RISK FACTORS
An investment in SGBI involves significant risks associated with economic,
business, market and financial factors and developments which may have adverse
impacts on the Company's future performance, including significant risks not
normally associated with investing in equity securities of United States
companies including the following:
LIMITED OPERATING HISTORY OF THE COMPANY; LOSSES ARE EXPECTED TO CONTINUE
The Company is a relatively new entity with a limited operating
history upon which a significant evaluation of the Company's prospects can be
made. The prospects of SGBI must be considered keeping in mind the risks,
expenses, and difficulties frequently encountered in the establishment of a new
business in an ever changing industry and the research, development,
manufacture, distribution, and commercialization of esoteric medical
technology, procedures, and products and related technologies. There can be no
assurance that unanticipated technical or other problems will not occur which
would result in material delays in product commercialization or that the
efforts of SGBI will result in successful product commercialization. SGBI has
been operating at a loss and expects its costs to increase as its development
efforts and testing activities accelerate. It is currently unknown when
profitable operations might be achieved.
DEPENDENCE ON KEY PERSONNEL
The future success of the Company will depend on the service of
its key scientific personnel in its pharmaceutical, chemistry and biochemistry
departments and, when appropriate, computer hardware and software engineering,
electrical and mechanical engineering and management personnel and,
additionally, its ability to identify, hire and retain additional qualified
personnel. There is intense competition for qualified personnel in the areas of
the activities of SGBI and there can be no assurance that SGBI will be able to
attract and retain personnel necessary for the development of the business of
SGBI. Because of the intense competition, there can be no assurance that SGBI
will be successful in adding technical personnel if needed to satisfy its
staffing requirements. Failure to attract and retain key personnel could have a
material adverse effect on SGBI.
SGBI and its subsidiaries are dependent on the efforts and abilities of
their senior management. The loss of various members from management could have
a material adverse effect on the business and prospects of SGBI. In particular,
SGBI will depend on the service of Professor Wolfgang Barnikol because he is
instrumental in his expertise in the development of the oxygen carrier and
glucose sensor products. There can be no assurance that upon the departure of
key personnel from the service of SGBI or its subsidiaries that suitable
replacement personnel will be available.
Page15
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
Although the Company's cash position is strong, substantial funds will be
required to effect the Company's development plans. The Company will require
additional cash for: (i) payment of increased operating expenses; (ii)
payment of development expenses; and (iii) further implementation of
those business strategies. Such additional capital may be raised by
additional public or private financing, as well as borrowings and other
resources. To the extent that additional capital is received by SGBI by
the sale of equity or equity-related securities, the issuance of such securities
will result in dilution to the Company's shareholders. There can be no
assurance that additional funding will be available on favorable terms, if at
all. SGBI may also seek arrangements with collaborative partners in order to
gain additional funding, marketing assistance or other contributions. However,
such arrangements may require SGBI to relinquish rights or reduce its interests
in certain of its the technologies or product candidates. The inability
of the Company to access the capital markets or obtain acceptable financing
could have a material adverse effect on the results of operations and
financial condition of the Company. Moreover, if funds are not available
from any sources, the Company may not be able to continue to operate.
LICENSES AND CONSENTS
The utilization or other exploitation of the products and services
developed by SGBI or its subsidiaries may require SGBI or its subsidiaries to
obtain licenses or consents from the producers or other holders of copyrights or
other similar rights relating to the products and technologies of SGBI or its
subsidiaries. In the event SGBI or its subsidiaries are unable, if so required,
to obtain any necessary license or consent on terms which the management of SGBI
or its subsidiaries consider to be reasonable, SGBI or its subsidiaries may be
required to cease developing, utilizing, or exploiting products or technologies
affected by those copyrights or similar rights. In the event SGBI or its
subsidiaries is challenged by the holders of such copyrights or other similar
rights, there can be no assurance that SGBI or its subsidiaries will have the
financial or other resources to defend any resulting legal action, which could
be significant.
TECHNOLOGICAL FACTORS
The market for the products and technology developed by SGBI is
characterized by rapidly changing technology which could result in product
obsolescence or short product life cycles. Similarly, the industry is
characterized by continuous development and introduction of new products and
technology to replace outdated products and technology. Accordingly, the
ability of SGBI to compete will be dependent upon the ability of SGBI to provide
new and innovative products and technology. There can be no assurance that
competitors will not develop technologies or products that render the proposed
products and technology of SGBI obsolete or less marketable. SGBI will be
required to adapt to technological changes in the industry and develop products
and technology to satisfy evolving industry or customer requirements, any of
which could require the expenditure of significant funds and resources, and SGBI
does not have a source or commitment for any such funds and resources.
Development efforts relating to the technological aspects of the various
products and technologies to be developed by SGBI are not substantially
completed. Accordingly, SGBI will continue to refine and improve those products
and technologies. Continued refinement and improvement efforts remain subject
to the risks inherent in new product development, including unanticipated
technical or other problems which could result in material delays in product
commercialization or significantly increased costs. In addition, there can be
no assurance that those products and technologies will prove to be sufficiently
reliable or durable in wide spread commercial application. The products or
technologies sought to be developed by SGBI will be the result of significant
efforts which may result in errors that become apparent subsequent to
widespread commercial utilization. In such event, SGBI would be required to
modify such products or technologies and continue with additional research and
development, which could delay the plans of SGBI and cause SGBI to incur
additional cost.
Page16
EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO ASSURANCE OF
SUCCESSFUL PRODUCT DEVELOPMENT
Although the Company is currently marketing immunodiagnotic kits, its primary
efforts are devoted on the development of proprietary products involving
artificial oxygen carriers and glucose sensors.
The potential products of SGBI will require additional pre-clinical and
clinical development, regulatory approval and additional investment prior to
commercialization, either by SGBI independently or by others through
collaborative arrangements. Potential products that appear to be promising at
early stages of development may be ineffective or be shown to cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of others. There can be no assurance
that any potential products will be successfully developed, prove to be safe and
efficacious in clinical trials, satisfy applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs or
achieve commercial acceptance.
All products and technologies under development by SGBI will require
significant commitment of personnel and financial resources. Several products
will require extensive evaluation and pre-marketing clearance by the FDA and
comparable agencies in other countries prior to commercial sale. SGBI regularly
re-evaluates its product development efforts. On the basis of these
re-evaluations, SGBI may abandon development efforts for particular products.
No assurance can be given that any product or technology under development
will result in the successful introduction of any new product. The
failure to introduce new products into the market on a timely basis could have
a material adverse effect on the business, financial conditions or results of
operation of SGBI.
The technologies of SGBI have not yet been tested in humans and there can
be no assurance that human testing of potential products based on such
technologies will be permitted by regulatory authorities or, even if human
testing is permitted, that products based on such technologies will be shown to
be safe or efficacious. Potential products based on the technologies of SGBI
are at an early stage of testing and there can be no assurance that such
products will be shown to be safe or effective.
MARKET ACCEPTANCE
There can be no assurance that the products and technologies of SGBI will
achieve a significant degree of market acceptance, and that acceptance, if
achieved, will be sustained for any significant period or that product life
cycles will be sufficient ( or substitute products developed) to permit SGBI to
achieve or sustain market acceptance which could have a material adverse effect
on the business, financial condition, and results of operations of SGBI.
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL
The clinical testing, manufacture, promotion, and sale of biotechnology and
pharmaceutical products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies prior to the introduction of
those products. Management of SGBI believes that many of the potential products
of SGBI will be regulated by the FDA under current regulations of the FDA.
Other federal and state statutes and regulations may govern or influence the
testing, manufacture, safety, effectiveness, labeling, storage, record-keeping,
approval, advertising, distribution and promotion of certain products developed
by SGBI. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, seizure of products, suspensions of regulatory
approvals, product recalls, operating restrictions, re-labeling costs, delays in
sales, cessation of manufacture of products, the imposition of civil or criminal
sanctions, total or partial suspension of product marketing, failure of the
government to grant pre-market approval, withdrawal of marketing approvals and
criminal prosecution.
Page17
The FDA's requirements include lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-consuming
procedures. In particular, human therapeutic products are subject to rigorous
pre-clinical and clinical testing and other approval requirements by the FDA and
agencies in Germany, Singapore and other countries. Although the time required
for completing such testing and obtaining such approvals is uncertain,
satisfaction of these requirements typically takes a number of years and varies
substantially based on the type, complexity and novelty of each product.
Neither SGBI nor its subsidiaries can accurately predict when product
applications or submissions for FDA or other regulatory review may be submitted.
Management of the Company has no experience in obtaining regulatory clearance on
these types of products. The lengthy process of obtaining regulatory approval
and ensuring compliance with applicable law requires the expenditure of
substantial resources. Any delays or failure by SGBI or its subsidiaries to
obtain regulatory approval and ensure compliance with appropriate standards
could adversely affect the commercialization of such products, the ability
of SGBI to earn product or royalty revenue, and its results of operations,
liquidity and capital resources.
Pre-clinical testing is generally conducted in laboratory animals to
evaluate the potential safety and effectiveness of a drug. The results of these
studies are submitted to the FDA, which must be approved before clinical trials
can begin. Typically, clinical evaluation involves a time consuming and costly
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile, the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical trials and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
Clinical trials and the marketing and manufacturing of products are subject
to the rigorous testing and approval processes of the FDA and foreign regulatory
authorities. The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive. There can be no assurance that SGBI will be
able to obtain the necessary approvals to conduct clinical trials for the
manufacturing and marketing of products, that all necessary clearances will be
granted to SGBI or their licensors for future products on a timely basis, or at
all, or that FDA review or other actions will not involve delays adversely
affecting the marketing and sale of the products or SGBI. In addition, the
testing and approval process with respect to certain new products which SGBI may
seek to introduce is likely to take a substantial number of years and involve
the expenditure of substantial resources. There can be no assurance that
pharmaceutical products currently in development will be cleared for marketing
by the FDA. Failure to obtain any necessary approvals or failure to comply with
applicable regulatory requirements could have a material adverse effect on the
business, financial condition or results of operations of SGBI. Further, future
government regulation could prevent or delay regulatory approval of the products
of SGBI.
There can be no assurance as to the length of the clinical trial period or
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and effectiveness of the products of
SGBI. SGBI may encounter significant delays or excessive costs in their efforts
to secure necessary approvals, and regulatory requirements are evolving and
uncertain. Future United States or foreign legislative or administrative acts
could also prevent or delay regulatory approval of the products of SGBI. If
commercial regulatory approvals are obtained, they may include significant
limitations on the indicated uses for which a product may be marketed. In
addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or the failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product, or even the removal of the product from the market, as well as
possible civil or criminal sanctions. Failure of SGBI to obtain marketing
approval for any of their products under development on a timely basis, or FDA
withdrawal of marketing approval once obtained, could have a material adverse
effect on the business, financial condition and results of operations of SGBI.
Page18
Any party that manufactures therapeutic or pharmaceutical products is
required to adhere to applicable standards for manufacturing practices and to
engage in extensive record keeping and reporting. Any manufacturing facilities
of SGBI are subject to periodic inspection by state and federal agencies,
including the FDA and comparable agencies in foreign countries.
The effect of governmental regulation may be to delay the marketing of new
products for a considerable period of time, to impose costly requirements on the
activities of SGBI or to provide a competitive advantage to other companies that
compete with SGBI. There can be no assurance that FDA or other regulatory
approval for any products developed by SGBI will be granted on a timely basis,
if at all or, if granted, that compliance with regulatory standards will be
maintained. Adverse clinical results by SGBI could have a negative impact on
the regulatory process and timing. A delay in obtaining, or failure to obtain,
regulatory approvals could preclude or adversely affect the marketing of
products and the liquidity and capital resources of SGBI. The extent of
potentially adverse governmental regulation that might result from future
legislation or administrative action cannot be predicted.
SGBI will be subject to regulatory authorities in Germany, Singapore, and
other countries governing clinical trials and product sales. Even if FDA
approval is obtained, approval of a product by the comparable regulatory
authorities of other countries must be obtained prior to the commencement of
marketing the product in those countries. The approval process varies from
country to country and the time required may be longer or shorter than that
required for FDA approval. The foreign regulatory approval process includes
all of the risks associated with obtaining FDA approval set forth above, and
approval by the FDA does not ensure approval by the health authorities of any
other country. There can be no assurance that any foreign regulatory agency
will approve any product submitted for review by SGBI.
SGBI is subject to various federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with its research
work. The extent and character of governmental regulation that might result
from future legislation or administrative action cannot be accurately predicted.
INTENSE COMPETITION
Competition in the biotechnology and pharmaceutical industries is intense
and is expected to increase. SGBI and its subsidiaries compete directly with the
research departments of biotechnology and pharmaceutical companies, chemical
companies and, possibly, joint collaborations between chemical companies and
research and academic institutions. Management of SGBI is aware that other
companies and businesses have developed and are in the process of developing
technologies and products which may be competitive with the products and
technologies developed and offered by SGBI. The biotechnology and
pharmaceutical industries continue to undergo rapid change. There can be no
assurance that competitors have not or will not succeed in developing
technologies and products that are more effective than any which have been or
are being developed by SGBI or which would render the technology and products of
SGBI obsolete. Many of the competitors of SGBI have substantially greater
experience, financial and technical resources and production, marketing and
development capabilities than SGBI. Accordingly, certain of those competitors
may succeed in obtaining regulatory approval for products more rapidly or
effectively than SGBI.
UNCERTAINTIES ASSOCIATED WITH PATENTS AND PROPRIETARY RIGHTS
The success of SGBI and its subsidiaries may depend in part on their
ability to obtain patents for their technologies and products, if any, resulting
from the application of such technologies, to defend patents once obtained and
to maintain trade secrets, both in the United States and in foreign countries.
Page19
The success of SGBI will also depend upon avoiding the infringement of patents
issued to competitors. There can be no assurance that SGBI will be able to
obtain patent protection for products based upon the technology of SGBI.
Moreover, there can be no assurance that any patents issued to SGBI or its
subsidiaries will not be challenged, invalidated or circumvented or that the
rights granted there under will provide competitive advantages to SGBI.
Litigation, which could result in substantial cost to SGBI, may be necessary
to enforce the patent and license rights of SGBI or to determine the scope
and validity of its and others' proprietary rights.
Due to the length of time and expense associated with bringing new products
through development and the length of time required for the governmental
approval process, the biotechnology and pharmaceutical industries have
traditionally placed considerable importance on obtaining and maintaining patent
and trade secret protection for significant new technologies, products and
processes. The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain. Federal court decisions
establishing legal standards for determining the validity and scope of patents
in the field are in transition. In addition, there can be no assurance that
patents will be issued or, if issued, any such patents will afford SGBI
protection from infringing patents granted to others.
A number of biotechnology and pharmaceutical companies, and research and
academic institutions, have developed technologies, filed patent applications or
received patents on various technologies that may be related to the business of
Sangui and its Subsidiaries. Some of these technologies, applications or
patents may conflict with the technologies of SGBI. Such conflicts could also
limit the scope of the patents, if any, that SGBI or its subsidiaries may be
able to obtain or result in the denial of the patent applications of SGBI.
In December, 2000, the Company's only competitor in the CDT business,
Axis/Shields, a Norwegian Company purchased by Shields Diagnostics of United
Kingdoms, filed a lawsuit against the Company for alleged patent infringement.
The Company reached a settlement with Axis/Shields and agreed to discontinue the
sales of the Company's CDT product, trade-marked ChronAlco ID CDT test kit. The
Company has since re-designed its CDT product, called ChronAlco ID II CDT test
kit, to resolve the patent conflict. The Company has since sold the new version
of CDT kit, i.e. ChronAlco ID II CDT test kit to its distributors and customers.
There has been no significant loss or gain of the Company's CDT business. The
Company believes its new ChronAlco ID II CDT test does not infringe the patent
and patent application held by Axis/Shields. Nonetheless, there can be no
assurance that the Company will prevail if a lawsuit is brought by
Axis/Shields.
Many of the competitors of SGBI have, or are affiliated with companies
having, substantially greater resources than SGBI, and such competitors may be
able to sustain the costs of complex patent litigation to a greater degree and
for longer periods of time than SGBI. Uncertainties resulting from the
initiation and continuation of any patent or related litigation could have a
material adverse effect on the ability of SGBI to compete in the marketplace
pending resolution of the disputed matters. Moreover, an adverse outcome could
subject SGBI to significant liabilities to third parties and require SGBI to
license disputed rights from third parties or cease using the technology. In
the event that third parties have or obtain rights to intellectual property or
technology used or needed by SGBI, there can be no assurance that any licenses
would be available to SGBI or would be available on terms reasonably acceptable
to SGBI.
SGBI may rely on certain proprietary technologies, trade secrets, and
know-how that are not patentable. Although SGBI has taken steps to protect
their unpatented trade secrets and technology, in part through the use of
confidentiality agreements with their employees, consultants and certain of its
contractors, there can be no assurance that: (i) these agreements will not be
breached; (ii) SGBI would have adequate remedies for any breach; or (iii) the
proprietary trade secrets and know-how of SGBI will not otherwise become known
or be independently developed or discovered by competitors.
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
Page20
The business of SGBI will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of human
pharmaceutical and therapeutic products. SGBI does not currently have product
liability insurance, and there can be no assurance that SGBI will be able to
obtain or maintain such insurance on acceptable terms or, if obtained, that such
insurance will be adequate to cover potential product liability claims or that a
loss of insurance coverage or the assertion of a product liability claim or
claims would not materially adversely affect the business, financial condition
and results of operations of SGBI. SGBI faces an inherent business risk
of exposure to product liability and other claims in the event that the
development or use of its technology or products is alleged to have
resulted in adverse effects. Such risk exists even with respect to those
products that are manufactured in licensed and regulated facilities or
that otherwise possess regulatory approval for commercial sale. There can be
no assurance that SGBI will avoids significant product liability exposure.
While SGBI has taken, and will continue to take, what it believes are
appropriate precautions, there can be no assurance that it will avoid
significant liability exposure. An inability to obtain product liability
insurance at acceptable cost or to otherwise protect against potential
product liability claims could prevent or inhibit the commercialization of
products developed by SGBI. A product liability claim could have a
material adverse effect on the business, financial condition and results of
operations of SGBI.
UNCERTAINTIES RELATING TO PRICING AND THIRD-PARTY REIMBURSEMENT
The operating results of SGBI may depend in part on the availability of
adequate reimbursement for the products of SGBI from third-party payers, such as
government entities, private health insurers and managed care organizations.
Third-party payers are increasingly seeking to negotiate the pricing of medical
services and products. In some cases, third-party payers will pay or reimburse
a user or supplier of a product for only a portion of the purchase price of the
product. In the case of the products of SGBI, payment or reimbursement by
third-party payers of only a portion of the cost of such products could make
such products less attractive, from a cost perspective, to users, suppliers and
physicians. There can be no assurance that reimbursement, if available, will be
adequate. Moreover, certain of the products of SGBI may not be of the type
generally eligible for third-party reimbursement. If adequate reimbursement
levels are not provided by government entities or other third-party payers for
the products of SGBI, the business, financial condition and results of
operations of SGBI would be materially adversely affected. A number of
legislative and regulatory proposals aimed at changing the nation's health care
system have been proposed in recent years. While SGBI cannot predict whether
any such proposals will be adopted, or the effect that any such proposal may
have on its business, such proposals, if enacted, could have a material adverse
effect on the business, financial condition or results of operations of
SGBI.
RISK OF PRODUCT RECALL; PRODUCT RETURNS
Product recalls may be issued at the discretion of SGBI, the FDA or other
government agencies having regulatory authority for product sales and may occur
due to disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that product recalls will not occur in the
future. Any product recall could materially adversely affect the business,
financial condition or results of operations of SGBI. There can be no assurance
that future recalls or returns would not have a material adverse effect upon the
business, financial condition and results of operations of SGBI.
RISKS OF INTERNATIONAL SALES AND OPERATIONS
SGBI's results of operations are subject to fluctuations in the value of
the German Deutschmark against the U.S. Dollar due to SGBI's German
subsidiaries. Although management of SGBI will monitor exposure to currency
fluctuations, there can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the results of operations or financial
condition of SGBI. In the future, SGBI could be required to sell its products
in other currencies, which would make the management of currency fluctuations
more difficult and expose SGBI to greater risks in this regard.
The products of SGBI will be subject to numerous foreign government
standards and regulations that are continually being amended. Although SGBI
will endeavor to satisfy foreign technical and regulatory standards, there can
Page21
be no assurance that the products of SGBI will comply with foreign government
standards and regulations, or changes thereto, or that it will be cost effective
for SGBI to redesign its products to comply with such standards or regulations.
The inability of SGBI to design or redesign products to comply with foreign
standards could have a material adverse effect on SGBI's business, financial
condition and results of operations.
LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE
SGBI has not yet manufactured its products, other than its nine in vitro
immunodiagnostic products, in commercial quantities. Its subsidiaries will be
engaged in manufacturing pharmaceutical products which will be subject to much
more stringent regulatory requirements, as compared to the in vitro diagnostic
products. No assurance can be given that its subsidiaries, on a timely basis,
will be able to make the transition from manufacturing clinical trial quantities
to commercial production quantities successfully or be able to arrange for
contract manufacturing. SGBI and its subsidiaries have no experience in the
sales, marketing and distribution of products. There can be no assurance that
SGBI will be able to establish sales, marketing and distribution capabilities or
make arrangements with collaborators, licensees or others to perform such
activities or that such efforts will be successful.
The manufacture of the products of SGBI involves a number of steps and requires
compliance with stringent quality control specifications imposed by SGBI and by
the FDA. Moreover, SGBI's products can only be manufactured in a facility that
has undergone a satisfactory inspection by the FDA. For these reasons, SGBI
would not be able to quickly replace its manufacturing capacity if it were
unable to use its manufacturing facilities as a result of a fire, natural
disaster (including an earthquake), equipment failure or other difficulty, or if
such facilities are deemed not in compliance with the FDA's GMP requirements and
the non-compliance could not be rapidly rectified. The inability or reduced
capacity of SGBI to manufacture their products would have a material adverse
effect on SGBI's business and results of operations.
SGBI may enter into arrangements with contract manufacturing companies to
expand its production capacities in order to satisfy requirements for its
products, or to attempt to improve manufacturing efficiency. If SGBI chooses to
contract for manufacturing services and encounters delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
its finished products, clinical trials, market introduction and subsequent sales
of such products would be adversely affected. Further, contract manufacturers
must also operate in compliance with the FDA's GMP requirements; failure to do
so could result in, among other things, the disruption of product supplies.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The research and development processes of SGBI involves the controlled
storage, use and disposal of hazardous materials and radioactive compounds.
SGBI is subject to federal, state and local laws and regulations governing the
use, generation, manufacturing, storage, handling, and disposal of such
materials and certain waste products. Although SGBI does not currently
manufacture commercial quantities of its product candidates, it produces limited
quantities of such products for its clinical trials and SGBI intends to
manufacture commercial quantities of its products. Although SGBI believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, SGBI could be held liable for any damages that
result, and any such liability could exceed the resources of SGBI. There can be
no assurance that SGBI will not be required to incur significant costs to comply
with current or future environmental laws and regulations nor that the
operations, business or assets of SGBI will not be materially or adversely
affected by current or future environmental laws or regulations.
DEPENDENCE ON MAJOR CUSTOMERS
The Company has a relatively small customer base. Two customers accounted
for approximately 51% of accounts receivable as of June 30, 2001 and
Page22
approximately 54% of sales for the year ended June 30, 2001. Four customers
accounted for approximately 70% of sales for the year ended June 30, 2000,
respectively. Although the Company is currently the supplier of certain
immunodiagnostic kits to these customers, there is no assurance that the
Company will continue to be the supplier or the supplier of choice. In the
event that the Company loses the business from any of its major customers, this
would have a significant negative impact on the Company's sales.
HUMAN RESOURCES
The Company considers its relations with its employees to be favorable. As
of June 30, 2001 the Company and its subsidiaries have 31 fulltime employees of
which 24 were involved in research and development and 7 were responsible for
administrative matters. The Company had consulting arrangements with 5
individuals as of that date.
ITEM 2.
Properties
The Company's US laboratory facility consists of approximately 3,360 square feet
located in Santa Ana, California. Rent expense for the fiscal year ended June
30, 2001 was approximately $53,000.
The German subsidiaries, approximately 800 square meters, are based in the
Forschungs- und Entwicklungszentrum of the University Witten/Herdecke, Germany.
Rent expense for the fiscal year was approximately $65,000.
The Singaporean subsidiary, approximately 350 square meters, is based in the
Science Park II, Gemini Building. Rent expense for the fiscal year was
approximately $74,000.
ITEM 3.
Legal Proceedings
On July 26, 2001, the Company commenced a lawsuit in the United States District
Court for the District of Colorado against Helmut Kappes, a director of the
Company. In the lawsuit, the Company alleges that Mr. Kappes is engaged in
conduct related to the Company's affairs that is fraudulent, dishonest and a
gross abuse of his authority or discretion as a director and that his removal
from the Company's Board of Directors would be in the best interest of the
Company. Among other things, the Company alleges that Mr. Kappes caused the
Company to enter into a contract with Axel Kleinkorres without adequate
disclosure of Mr. Kappes's conflicts of interest and that the remuneration paid
to Mr. Kleinkorres was excessive. The Company also alleges that Mr. Kappes is
engaged in an improper exchange offer campaign involving the Company's shares.
The Court issued a Temporary Restraining Order suspending Mr. Kappes from the
Board of Directors of the Company and restraining Mr. Kappes from pursuing the
exchange offer. The Temporary Restraining Order has expired. The Company has
filed a Motion for Preliminary Injunction which is pending.
The Company seeks the removal of Mr. Kappes from the Company's Board of
Directors, an injunction against Mr. Kappes and his affiliates from exchanging
the Company's shares for shares of an entity in which Mr. Kappes has a financial
interest, compensatory damages in an amount to be determined and costs of the
action. Mr. Kappes has not yet filed an Answer to the Complaint by the Company
in the lawsuit.
ITEM 4.
Submission of matters to a vote of security holders
Page23
Not applicable
PART II
ITEM 5. MARKET FOR SGBI'S SECURITIES
SGBI's common stock is presently traded on the OTC Bulletin Board operated by
Nasdaq under the symbol SGBI.
The following table sets forth the high and low closing prices for shares of
SGBI common stock for the calendar periods noted, as reported by the
National Daily Quotation Service and the Over-The-Counter Bulletin Board.
Quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
CLOSING PRICES
YEAR PERIOD HIGH LOW
2001 First quarter $1.45 $0.94
Second quarter $0.93 $0.48
2000 First quarter $5.00 $2.00
Second quarter $3.31 $2.06
Third quarter $2.72 $1.75
Fourth quarter $2.38 $1.11
1999 Third quarter $4.19 $2.00
Fourth quarter $3.63 $1.50
In addition to freely tradeable shares, SGBI has numerous shares of common
stock outstanding which could be sold pursuant to Rule 144. In general, under
Rule 144, subject to the satisfaction of certain other conditions, a person,
including one of our affiliates, who has beneficially owned restricted shares of
common stock for at least one year is entitled to sell, in certain brokerage
transactions, within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or the average weekly trading volume during the four calendar weeks
immediately preceding the sale. A person who presently is not and who has not
been an affiliate for at least three months immediately preceding the sale and
who has beneficially owned the shares of common stock for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above.
At August 21, 2001, the number of record holders of the Company's common stock
was 2,090. The Company did not pay any cash dividends during the past two
fiscal years and does not contemplate paying dividends in the foreseeable
future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2001, the Company did not sell
unregistered shares of its Common Stock.
ITEM 6.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Page24
The following discussion contains forward-looking statements that are
subject to business and economic risks and uncertainties, and the Company's
actual results could differ materially from these forward looking statement.
The following discussion regarding the financial statements of the Company
should be read in conjunction with the financial statements and notes thereto.
FISCAL 2001 COMPARED TO FISCAL 2000
RESULTS OF OPERATIONS
SBT
---
SALES. Sales increased 32% to approximately $567,000 in 2001 from approximately
$429,000 in 2000. This increase of $138,000 is attributed to an increase in
sales of the Company's immunodiagnostic kits.
COST OF SALES. Cost of sales increased 40% to approximately $395,000 in 2001
from approximately $283,000 in 2000. This increase of $112,000 is related to
costs associated with the increase in sales of the Company's immunodiagnostic
kits. The Company's gross margin decreased to 30% in 2001 from 34% in 2000
primarily due to additional costs incurred in 2001 for quality control purposes.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, exclusive of
amortization of prepaid consulting fees of approximately $444,000, decreased 48%
to approximately $670,000 in 2001 from approximately $1,283,000 in 2000. In
2000, general and administrative expenses included one time professional and
consulting fees of approximately $180,000 related to the acquisition of Felnam
Investments, Inc. and $470,000 of other non-recurring professional and
consulting fees. This decrease in non-recurring charges of approximately
$650,000, combined with an increase of approximately $37,000 in other general
and administrative expenses, results in a net decrease of $613,000 in 2001.
COMPENSATION EXPENSE RELATED TO STOCK OPTIONS. Compensation expense related to
stock options was $1,000,000 in 2001, which represents the amortization of the
fair value of stock options previously issued to the chairman of the Company.
There was no compensation expense related to stock options in 2000.
AMORTIZATION OF PREPAID CONSULTING FEES. Amortization of prepaid consulting
fees decreased 72% to $444,000 in 2001 from $1,572,500 in 2000. The decrease of
$1,128,500 results from an extension of the corresponding consulting agreement
for an additional 24 months effective July 2000.
Sangui AG
----------
RESEARCH AND DEVELOPMENT. Research and development expenses increased 449% to
approximately $785,000 in 2001 from approximately $143,000 in 2000, due to
increased research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 78%
to approximately $562,000 in 2001 from approximately $315,000 in 2000. This
increase of $247,000 is attributed to increases in staffing and operating
expenses.
Gluko AG
---------
RESEARCH AND DEVELOPMENT. Research and development expenses increased 295% to
approximately $162,000 in 2001 from approximately $41,000 in 2000, due to
increased research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 65%
to approximately $162,000 in 2001 from approximately $98,000 in 2000. This
increase of $64,000 is attributed to increases in staffing and operating
expenses.
Page25
Sangui Singapore
-----------------
GENERAL AND ADIMISTRATIVE. General and administrative expenses were
approximately $183,000 in 2001. There were insignificant amounts of general and
administrative expenses in 2000. This increase is attributed to full time
operations beginning during the most recent fiscal year.
SGBI
----
NET LOSS. The Company's net loss was approximately $3,628,000, or approximately
nine cents per common share, in 2001, compared to approximately $3,120,000, or
nine cents per common share, in 2000. This increase in net loss is a result
primarily of increased research and development expenses and an increase in
compensation expense related to stock options, offset by a decrease in
amortization of prepaid consulting fees.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001 the Company had cash and liquid marketable securities of
approximately $5.8 million. The Company believes that its available cash will
be sufficient to satisfy its requirements for at least the fiscal year ending
June 30, 2002. Moreover, the Company is able to collect about $2.3 million of
its funds granted by the German state of Northrhine-Westfalia. However, the
Company will need substantial additional funding to fulfill its business plan
and the Company intends to explore financing sources for its future development
activities during the current year. No assurance can be given that these
efforts will be successful.
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Page26
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2001
WITH
INDEPENDENT AUDITORS' REPORT THEREON
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Sangui Biotech International, Inc.
We have audited the accompanying consolidated balance sheet of Sangui
Biotech International, Inc. (the "Company") as of June 30, 2001, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for each of the years in the two-year
period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Sangui BioTech International, Inc. at June 30, 2001, and the
results of their operations and their cash flows for each of the years in the
two-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
CORBIN & WERTZ
Irvine, California, U.S.A.
August 16, 2001
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
JUNE 30,
--------
2001
-------------
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . $ 2,354,584
Available for sale securities. . . . . . . . . . . . 3,463,509
Accounts receivable. . . . . . . . . . . . . . . . . 128,928
Inventories. . . . . . . . . . . . . . . . . . . . . 70,021
Prepaid expenses and other assets. . . . . . . . . . 362,736
-------------
Total current assets. . . . . . . . . . . . . . 6,379,778
Property and equipment-net . . . . . . . . . . . . . . 514,188
Patents-net. . . . . . . . . . . . . . . . . . . . . . 36,867
-------------
Total assets . . . . . . . . . . . . . . . . . . . . . $ 6,930,833
=============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities
Accounts payable and accrued expenses. . . . . . . . $ 288,617
Commitments and contingencies. . . . . . . . . . . . . -
Stockholders' equity
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding . . . . -
Common stock: no par value; 50,000,000 shares
authorized, 40,514,363 shares issued and outstanding 18,305,881
Additional paid-in capital . . . . . . . . . . . . . 1,000,000
Prepaid consulting fees. . . . . . . . . . . . . . . (661,169)
Accumulated other comprehensive loss . . . . . . . . (356,370)
Accumulated deficit. . . . . . . . . . . . . . . . . (11,646,126)
-------------
Total stockholders' equity . . . . . . . . . . . . . 6,642,216
-------------
Total liabilities and stockholders' equity . . . . . . $ 6,930,833
=============
See independent auditors' report and accompanying notes to consolidated
financial statements
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED JUNE 30,
---------------------
2001 2000
--------------------- ------------
Sales . . . . . . . . . . . . . . . . . . . . . $ 567,007 $ 429,400
Cost of sales . . . . . . . . . . . . . . . . . 395,282 282,611
--------------------- ------------
Gross profit. . . . . . . . . . . . . . . . . . 171,725 146,789
--------------------- ------------
Operating expenses
Research and development. . . . . . . . . . . . 946,959 183,878
General and administrative. . . . . . . . . . . 1,577,315 1,696,458
Compensation expense related to stock options . 1,000,000 -
Depreciation and amortization . . . . . . . . . 147,191 151,317
Amortization of prepaid consulting fees . . . . 443,831 1,572,500
--------------------- ------------
Total operating expenses. . . . . . . . . . . . 4,115,296 3,604,153
--------------------- ------------
Loss from operations. . . . . . . . . . . . . . (3,943,571) (3,457,364)
--------------------- ------------
Other income
Interest income, net of interest expense of
approximately $7,000 and $16,000, respectively. 276,824 138,861
Other income. . . . . . . . . . . . . . . . . . 38,886 118,067
Gain on marketable securities . . . . . . . . . - 80,557
--------------------- ------------
Total Other Income. . . . . . . . . . . . . . . 315,710 337,485
--------------------- ------------
Net loss. . . . . . . . . . . . . . . . . . . . (3,627,861) (3,119,879)
Other comprehensive (loss)
Foreign currency translation adjustments. . . . (310,272) (47,746)
Unrealized gain on marketable securities
and cash equivalents . . . . . . . . . . . . . 64,716 -
--------------------- ------------
Comprehensive loss. . . . . . . . . . . . . . . $ (3,873,417) $(3,167,625)
===================== ============
Net loss available to common
shareholder per common share
Net loss. . . . . . . . . . . . . . . . . . . . ($0.09) ($0.09)
===================== ============
Basic and diluted weighted average
number of common shares outstanding . . . . . . 40,514,363 32,879,796
===================== ============
See independent auditors' report and accompanying notes to consolidated
financial statements
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
Preferred Stock Common Stock Additional
--------------- -------------- Paid-in
Shares Amount Shares Amount Capital
---------------- -------------- ---------- ------------ ----------
Balance at July 1, 1999. . . . . . . . . . . . . 505,000 $ 5,050 31,867,878 $10,277,373 $ -
Issuance of common stock
for cash at $1.15 per share. . . . . . . . . . . - - 466,485 536,458 -
Issuance of common stock for cash at $0.964
(including 80,000 shares issued for finders fees) - - 8,080,000 7,712,000 -
Issuance of common stock for the
recapitalization of Felnam Investments . . . . . - - 100,000 - -
Receipt of stock subscriptions . . . . . . . . . - - - - -
Amortization of prepaid consulting fees. . . . . - - - - -
Currency translation adjustments . . . . . . . . - - - - -
Net loss . . . . . . . . . . . . . . . . . . . . - - - - -
---------------- -------------- ---------- ------------ ----------
Balance at June 30, 2000 . . . . . . . . . . . . 505,000 5,050 40,514,363 18,525,831 -
Receipt of stock subscriptions . . . . . . . . . - - - - -
Write-off of stock subscriptions . . . . . . . . - - - (225,000) -
Cancellation of preferred stock. . . . . . . . . (505,000) (5,050) - 5,050 -
Compensation expense related to stock options. . - - - - 1,000,000
Amortization of prepaid consulting fees. . . . . - - - - -
Currency translation adjustments . . . . . . . . - - - - -
Unrealized gain on marketable securities
and cash equivalents . . . . . . . . . . . . . . - - - - -
Net loss . . . . . . . . . . . . . . . . . . . . - - - - -
---------------- -------------- ---------- ------------ ----------
Balance at June 30, 2001 . . . . . . . . . . . . - $ - 40,514,363 $18,305,881 $1,000,000
================ ============== ========== ============ ==========
Accumulated
Other Total
Stock Prepaid Comprehensive Accumulated Stockholders
Subscriptions Consulting Fees Income (Loss) Deficit Equity
--------------- ----------------- --------------- ------------- ------------
Balance at July 1, 1999. . . . . . . . . . . . . $ (341,072) $ (2,677,500) $ (63,068) $ (4,898,386) $ 2,302,397
Issuance of common stock
for cash at $1.15 per share. . . . . . . . . . . - - - - 536,458
Issuance of common stock for cash at $0.964
(including 80,000 shares issued for finders fees) (429,708) - - - 7,282,292
Issuance of common stock for the
recapitalization of Felnam Investments . . . . . - - - - -
Receipt of stock subscriptions . . . . . . . . . 224,413 - - - 224,413
Amortization of prepaid consulting fees. . . . . - 1,572,500 - - 1,572,500
Currency translation adjustments . . . . . . . . - - (47,746) - (47,746)
Net loss . . . . . . . . . . . . . . . . . . . . - - - (3,119,879) (3,119,879)
--------------- ----------------- --------------- ------------- ------------
Balance at June 30, 2000 . . . . . . . . . . . . (546,367) (1,105,000) (110,814) (8,018,265) 8,750,435
Receipt of stock subscriptions . . . . . . . . . 321,367 - - - 321,367
Write-off of stock subscriptions . . . . . . . . 225,000 - - - -
Cancellation of preferred stock. . . . . . . . . - - - - -
Compensation expense related to stock options. . - - - - 1,000,000
Amortization of prepaid consulting fees. . . . . - 443,831 - - 443,831
Currency translation adjustments . . . . . . . . - - (310,272) - (310,272)
Unrealized gain on marketable securities
and cash equivalents . . . . . . . . . . . . . . - - 64,716 - 64,716
Net loss . . . . . . . . . . . . . . . . . . . . - - - (3,627,861) (3,627,861)
--------------- ----------------- --------------- ------------- ------------
Balance at June 30, 2001 . . . . . . . . . . . . $ - $ (661,169) $ (356,370) $(11,646,126) $ 6,642,216
=============== ================= =============== ============= ============
See independent auditors' report and accompanying notes to consolidated
financial statements
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------
2001 2000
--------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,627,861) $(3,119,879)
Adjustments to reconcile net loss to cash used by operating activities
Compensation expense related to stock options. . . . . . . . . . . . 1,000,000 -
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 147,191 151,317
Amortization of prepaid consulting fees. . . . . . . . . . . . . . . 443,831 1,572,500
Gain on marketable securities. . . . . . . . . . . . . . . . . . . . - (80,557)
Changes in operating asset and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . (73,210) 43,856
Grant receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 176,844 (79,844)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,669 32,346
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . (147,226) (112,210)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . 58,412 102,785
--------------------- ------------
Net cash used in operating activities. . . . . . . . . . . . . . . . . (2,012,350) (1,489,686)
--------------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities. . . . . . . . . . . . . . . . . . (4,394,972) -
Purchase of property and equipment . . . . . . . . . . . . . . . . . (234,626) (222,641)
Proceeds from sale of marketable securities. . . . . . . . . . . . . 996,179 1,369,177
Cash grants received for property and equipment. . . . . . . . . . . - 81,490
--------------------- ------------
Net cash (used in) provided by investing activities. . . . . . . . . . (3,633,419) 1,228,026
--------------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . - 7,768,750
Collection of stock subscription receivable. . . . . . . . . . . . . 321,367 224,413
--------------------- ------------
Net cash provided by financing activities. . . . . . . . . . . . . . . 321,367 7,993,163
--------------------- ------------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . (310,272) (47,746)
--------------------- ------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . (5,634,674) 7,683,757
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 7,989,258 305,501
--------------------- ------------
Cash and cash equivalents, ending of period. . . . . . . . . . . . . . $ 2,354,584 $ 7,989,258
===================== ============
Supplemental disclosures:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,309 $ 15,537
===================== ============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800 -
===================== ============
See accompanying notes to accompanying consolidated financial statements
for more information on non-cash investing and financing activities
during the years ended June 30, 2001 and 2000.
See independent auditors' report and accompanying notes to consolidated
financial statements
SANGUI BIO TECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2001
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------------------
Nature of Business
--------------------
Sangui BioTech International, Inc., incorporated in Colorado in 1995, and its
subsidiaries (collectively, the "Company") are engaged in the research,
development, manufacture, and sales of medical products.
The Company's wholly owned subsidiary Sangui Bio Tech, Inc. ("SBT") incorporated
in Delaware in 1996, is located in Santa Ana, California. SBT manufactures in
vitro immunodiagnostic blood test kits that are primary sold in the United
States and Europe. , The Company has three subsidiaries located outside the
United States , SanguiBioTech AG ("Sangui AG"), GlukoMediTech, AG ("Gluko AG"),
and Sangui BioTech PTE Ltd. ("Sangui Singapore").
Sangui AG, incorporated in Mainz, Germany in 1995, is engaged in the development
of artificial oxygen carriers (blood substitute and additives). Gluko AG,
incorporated in Mainz, Germany in 1996, is engaged in the development of glucose
implant sensors.
Sangui Singapore, incorporated in Singapore in 1999, is a regional office for
the Company and its subsidiaries and is carrying out research and development
projects in conjunction with Sangui AG and Gluko AG.
Risks and Uncertainties
-------------------------
The Company's line of in vitro immunodiagnostic products, as well as the future
pharmaceutical (artificial oxygen carriers or blood substitute and additives)
and in vivo biosensors (glucose implant sensor) being developed by its German
subsidiaries, are deemed as medical devices or biologics, and as such are
governed by the Federal Food and Drug and Cosmetics Act and by the
regulations of state agencies and various foreign government agencies.
Currently, most of the Company's immunodiagnostic tests for use with humans have
been cleared by the above regulatory agencies. There can be no assurance that
the Company will maintain the regulatory approvals required to market its
products elsewhere. The pharmaceutical and biosensor products, under
development in Germany, will be subject to more stringent regulatory
requirements, because they are in vivo products for humans. The Company and
its subsidiaries have no experience in obtaining regulatory clearance on
these types of products. Therefore, the Company will be subject to the risks of
delays in obtaining or failing to obtain regulatory clearance.
The Company's revenues from product sales derived from its immunodiagnostic
blood test kits are small. However, management believes its current cash and
liquid marketable securities totaling approximately $5.8 million at June 30,
2001, are sufficient to fund the Company's operations and working capital
requirements at least through June 30, 2002.
Consolidation
-------------
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of the Company and its wholly owned domestic and foreign
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Certain amounts in 2000 and have been reclassified to conform to the
current year's presentation.
Use of Estimates
------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United Sates of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made by management are, among
others, provisions for losses on accounts receivable, realizability of
long-lived assets, and estimates for deferred income tax valuation allowance.
Actual results could differ from those estimates.
Financial Instruments
----------------------
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
107 "Disclosures About Fair Value of Financial Instruments." SFAS No. 107
requires disclosure of fair value information about financial instruments when
it is practicable to estimate that value. The carrying amount of the
Company's cash, accounts receivable, accounts payable and accrued expenses
approximate their estimated fair values due to the short-term nature of these
financial statements. Marketable securities are stated at fair value based
upon quoted market prices and are classified as available-for-sale securities.
Derivative and hedging activities
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes standards for accounting of derivative instruments including
certain derivative instruments embedded in other contracts, and hedging
activities. Management has completed its evaluation of the various issues
related to SFAS No. 133 for the year ended June 30, 2001, and the Company has no
derivative instruments or hedging activities, as defined by SFAS No. 133.
Therefore, the adoption of SFAS No. 133 had no impact on the Company's
consolidated financial position or operations.
Concentration of Risk
-----------------------
Two customers accounted for 51% of accounts receivable as of June 30, 2001 and
approximately 54% of sales for the year ended June 30, 2001. Four customers
accounted for 70% of sales for the year ended June 30, 2000. The loss of any of
these customers in the future would significantly affect the Company's operating
results (see Note 10).
Foreign Currency Translation
------------------------------
Assets and liabilities of the Company's German and Singapore operations are
translated into U.S. dollars at period-end exchange rates. Net exchange
gains or losses resulting from such translation are excluded from net earnings
but are included in comprehensive income and accumulated in a separate component
of stockholders' equity. Income and expense are translated at weighted average
exchange rates for the period. During fiscal 2001 and 2000, the Company had
foreign exchange transaction gains included in other income of approximately
$33,600 and $100,000, respectively.
Cash and Cash Equivalents
----------------------------
The Company maintains its cash in uninsured accounts and not in bank
depository accounts insured by the Federal Deposit Insurance Corporation
(FDIC). The Company has not experienced any losses in these uninsured
accounts. Cash and cash equivalents include time deposits for which the
Company has no requirements for compensating balances and mutual funds of
money markets. As of June 30, 2001, the Company's mutual funds had a fair
market value of $629,319 with a cost of $595,077 resulting in an unrealized gain
of $34,242, and the Company's time deposits had a currency translation gain of
$38,865. The Company recorded the entire amount of $73,107 as unrealized gain
under other comprehensive income in the statement of stockholders' equity. The
Company also maintains bank accounts in Germany.
Marketable Securities
----------------------
Marketable securities are classified as available-for-sale, as defined by SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized gains and losses are excluded from earnings and are
reported as a separate component of other comprehensive loss in shareholders'
equity. Realized gains and losses are included in income and are determined
based on the specific identification of the securities bought and sold (see Note
3).
Inventories
-----------
Inventories, which consist primarily of finished immunodiagnostic products and
related materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out (FIFO) basis. The Company regularly
monitors inventory for excess or obsolete items and makes any valuation
corrections when such adjustments are needed.
Property and Equipment
------------------------
Property and equipment are recorded at cost and are depreciated or amortized
using the straight-line method over the expected useful lives, which range from
three to five years. Depreciation expense for the years ended June 30, 2001
and 2000 was $137,750 and $131,440, respectively. Expenditures for normal
maintenance and repairs are charged to income, and significant improvements
are capitalized. The cost and related accumulated depreciation of assets
are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations.
Patents
-------
Patents are recorded at cost and are depreciated using the straight-line method
over their estimated useful lives, which range from three to eleven years.
Amortization expense for the years ended June 30, 2001 and 2000 was $9,441 and
$19,877, respectively.
Impairment of Long-Lived Assets
----------------------------------
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of" which requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The Company reviews
its intangible and other long-lived assets for events or changes in
circumstances which indicate that their carrying value may not be recoverable.
As of June 30, 2001, management of the Company believes that no impairment has
been indicated. There can be no assurances, however, that market conditions
will not change or demand for the Company's products will continue which could
result in impairment on long-lived assets in the future.
Revenue Recognition
--------------------
Revenues from product sales are recognized at the time of shipment.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, "Revenue Recognition in the Financial Statements"
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements and which
was effective October 1, 2000. The adoption of SAB No. 101 did not have a
material impact on the Company's financial statements.
Research and Development
--------------------------
Research and development are charged to operations as they are incurred. Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred.
Grants
------
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment (see note
10). Revenue from grants for the reimbursement of research and
development expenses are offset against research and development expenses when
the related expenses are incurred. Grants related to the acquisition of
tangible property are recorded as a reduction of the properties'
historical cost.
Income Taxes
-------------
The Company accounts for deferred income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
Accounting for Stock-Based Compensation
------------------------------------------
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under
the intrinsic value based method, compensation is the excess, if any, of the
fair value of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Compensation, if any, is
recognized over the applicable service period, which is usually the vesting
period. The FASB has issued SFAS No. 123 "Accounting for Stock-Based
Compensation." This standard, if fully adopted, changes the method of
accounting for all stock-based compensation to the fair value based method.
For stock options and warrants, fair value is determined using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option or warrant and the annual rate
of quarterly dividends. Compensation expense, if any, is recognized over
the applicable service period, which is usually the vesting period.
The adoption of the accounting methodology of SFAS No. 123 for employees is
optional and the Company has elected to continue accounting for stock-based
compensation issued to employees using APB 25; however, pro forma disclosures,
as if the Company adopted the cost recognition requirements under SFAS No. 123,
are required to be presented (see Note 6).
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB 25."
FIN 44 clarifies the application of APB 25 for (a) the definition of employee
for purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of the provisions of FIN 44 did not have a material
effect on the financial statements.
Basic and Diluted Earnings (Loss) Per Common Share
---------------------------------------------------------
The Company computes net loss per common share using SFAS No. 128 "Earnings
Per Share." Basic earnings (loss) per common share is computed based on the
weighted average number of shares outstanding for the period. Diluted earnings
(loss) per share is computed by dividing net income (loss) by the
weighted average shares outstanding assuming all dilutive potential common
shares were issued. Basic and diluted loss per share are the same as the
effect of stock options on loss per share are anti-dilutive and thus not
included in the diluted loss per share calculation (see Note 8).
Comprehensive Income
---------------------
The Company adopted SFAS No. 130 "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. Total
comprehensive income represents the net change in stockholders' equity during a
period from sources other than transactions with stockholders and as such,
includes net earnings. For the Company, the components of other comprehensive
income are the changes in the cumulative foreign currency translation
adjustments and unrealized gains (losses) on marketable securities and cash
equivalents and are recorded as components of stockholders' equity.
Segments of an Enterprise and Related Information
-------------------------------------------------------
The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues
and its major customers (see Note 11).
New Accounting Pronouncements
-------------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", which is
effective for business combinations initiated after June 30, 2001. SFAS No. 141
eliminates the pooling of interest method of accounting for business
combinations and requires that all business combinations occurring on or after
July 1, 2001 are accounted for under the purchase method. The Company does not
expect SFAS No. 141 to have a material impact on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 15, 2001.
Early adoption is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not been
previously issued. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets should be accounted for in
the financial statements upon their acquisition and after they have been
initially recognized in the financial statements. SFAS No. 142 requires that
goodwill and intangible assets that have indefinite useful lives not be
amortized but rather be tested at least annually for impairment, and intangible
assets that have finite useful lives be amortized over their useful lives. SFAS
No. 142 provides specific guidance for testing goodwill and intangible assets
that will not be amortized for impairment. In addition, SFAS No. 142 expands the
disclosure requirements about goodwill and other intangible assets in the years
subsequent to their acquisition. Impairment losses for goodwill and
indefinite-life intangible assets that arise due to the initial application of
SFAS No. 142 are to be reported as resulting from a change in accounting
principle. However, goodwill and intangible assets acquired after June 30, 2001
will be subject immediately to the provisions of SFAS No. 142. The Company
does not expect SFAS No. 142 to have a material effect on its financial
statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" . SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective for fiscal years beginning
after June 15, 2002. The Company does not expect SFAS No. 143 to have a material
impact on its financial statements.
NOTE 2 - BUSINESS ACQUISITIONS
----------------------------------
On March 30, 2000, the Company acquired all the outstanding common stock of
Felnam Investments, Inc. ("Felnam"). The transaction was funded through the
issuance of 100,000 shares of the Company's stock valued at $0 due to the
Company treating the transaction as a recapitalization of the Company. In
conjunction with the transaction, the Company incurred approximately $180,000 of
transaction costs, which are charged to operations. The net assets and results
of operations of Felnam were not material to the Company's consolidated
financial statements. Accordingly, pro forma financial information was not
disclosed.
NOTE 3 - AVAILABLE FOR SALE SECURITIES
--------------------------------------------
Available for sale securities consist of the following at June 30, 2001:
Cost Fair Market Unrealized
----- Value Loss
------------------ ------------------
Corporate bonds due within one year $3,471,900 $ 3,463,509 $ (8,391)
---------- ------------------ ------------------
During fiscal 2000, the Company sold remaining shares from a previous investment
with a book value of zero for $80,557 which is included in gain on sale of
securities in the accompanying statement of operations.
NOTE 4 - PROPERTY AND EQUIPMENT
------------------------------------
Property and equipment consists of the following at June 30, 2001:
Leasehold improvements $ 139,268
Technical and laboratory equipment 990,061
Office equipment 31,170
------
1,160,499
Less accumulated depreciation and amortization (646,311)
---------
$ 514,188
=======
NOTE 5 - PATENTS
-------------------
Patents consist of the following at June 30, 2001:
Patents $ 79,934
Less accumulated amortization (43,067)
--------
$ 36,867
========
NOTE 6 - STOCKHOLDERS' EQUITY
---------------------------------
Common Stock
-------------
The Company is authorized to issue 50,000,000 shares of no par value common
stock. The holders of the Company's common stock are entitled to one vote for
each share held of record on all matters to be voted on by those stockholders.
On September 15, 1998, the Company entered into an exchange agreement with
Euro-American GmbH to sell 1,062,394 shares of its common stock at $0.50 per
share, or $531,197. Payment was in the form of a promissory note bearing
interest at 9% with monthly payments of $24,267, maturing September 1, 2000.
Principal payments of $116,655 and $224,413 were received on the note during the
years ended June 30, 2001 and 2000, respectively. At June 30, 2001, the note is
paid in full.
During the fiscal year ended June 30, 2000, the Company issued 466,485 shares of
common stock to Euro-American GmbH for $536,458 of which $50,000 was received
during the fiscal year ended June 30, 1999.
In 1999, the Company issued 2,600,000 shares of its common stock to a
consultant in exchange for a public relations/promotions contract covering the
period January 1999 to December 2002, as amended in August 2000. The fair value
of the services, $3,145,000, is being amortized ratably over the contract
period. For the years ended June 30, 2001 and 2000, the Company recognized
$444,000 and $1,572,500 of amortization expense, respectively. The unamortized
balance of the prepaid asset at June 30, 2001 was $661,169 which the Company has
offset against stockholders' equity in the accompanying financial statements.
During 2000, the Company entered into a subscription with Euro-America GmbH
valued at $7,712,000, of which the Company received $7,487,000. The balance,
$225,000, was recorded as stock subscription receivable as of June 30, 2000. On
June 30, 2001, the Company's Board of Directors authorized - because of the
deficiency in collection - the writing off of the $225,000 of stock
subscription receivable which the Company has recorded as a reduction of common
stock in the accompanying statement of stockholders' equity.
Preferred Stock
----------------
The Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors has not designated any liquidation
value or dividend rates. During the year ended June 30, 2001, the Company
cancelled all 505,000 shares of its preferred stock that had been issued.
Stock Options
--------------
From time to time, the Company may issue stock options pursuant to various
agreements and other contemporary agreements.
In November 1999, pursuant to an agreement with its chairman, the Company issued
the chairman options to purchase 3,000,000 shares of common stock at an exercise
price of $0.01 valued at $10,845,000 (under APB 25). The options can be
exercised at the time the Company completes the development of the artificial
oxygen carrier or the implantable sensor and receives regulatory approval from
either Germany, the United States or Singapore, which the Company is
amortizing to compensation expense over the remaining estimated vesting period
of the options since the Company is in the process of developing the artificial
oxygen carrier and implantable sensor. The options are exercisable through June
30, 2009. As a result, the Company recognized compensation expense of
$1,000,000 in fiscal 2001 related to the vesting of the options.
Option activity for the years indicated below is as follows:
Options Weighted
Average Price
Outstanding, June 30, 1999 - -
Granted 3,000,000 $0.01
Exercised - -
Cancelled/Forfeited - -
--------- ------------
Outstanding, June 30, 2000 and 2001 3,000,000 $0.01
========= ============
Exercisable, June 30,2001 - -
========= ============
Weighted average fair value of options
granted in 1999 $3.62
==============
3,000,000 of the options outstanding at June 30, 2001 have an exercise price of
$0.01 per share and a weighted average remaining contractual life of 8 years;
none of these options are exercisable at June 30, 2001.
SFAS 123 Pro Forma Information
----------------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123. Pro
forma information regarding net income (loss) is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee's stock
options under the fair value method of SFAS No. 123. The fair value for
these options was estimated at the date of grant using the Black Scholes
option pricing model with the following assumptions for the year ended June
30, 2000: risk free interest rate of 6.0%; expected dividend yield of 0%
(for all years); volatility factor of 62.5%; and an expected term of three
years.
For purpose of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the option vesting period. Adjustments are made for
options forfeited prior to vesting. The effect on compensation expense and net
loss had compensation cost for the Company's stock option issuances been
determined based on fair value on the date of grant consistent with the
provisions of SFAS No. 123 is as follows for the years ended June 30:
2001 2000
------------ ------------
Net loss
As reported. . $(3,627,861) $(3,119,879)
Pro forma. . . $(3,627,861) $(3,119,879)
Net loss per share:
As reported. . $ (0.09) $ (0.09)
Pro forma. . . $ (0.09) $ (0.09)
NOTE 7 - INCOME TAX PROVISION
----------------------------------
There is no income tax expense recorded for the years ended June 30, 2001 and
2000, due to the Company's net losses.
Income tax expense for the years ended June 30, 2001 and 2000 differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent for
the following reasons:
2001 2000
------------ ------------
Income tax expense (benefit) at U.S. federal statutory rates . $(1,233,000) $(1,010,000)
Net operating losses not benefited . . . . . . . . . . . . . . 1,233,800 1,011,600
State and local income taxes, net of federal income tax effect (800) (1,600)
$ - $ -
------------ ------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 2001 are presented below:
Deferred tax assets:
Net operating loss carryforwards $ 1,638,000
Less valuation allowance. . . . . (1,638,000)
Net deferred tax assets. . . . . $ -
------------
As of June 30, 2000, the Company had net operating loss carryforwards of
approximately $3,858,000 $3,506,000, and $3,795,000 available to offset future
taxable Federal, state, and foreign income, respectively. The federal and state
carryforward amounts expire in varying amounts between 2001 and 2011. The
foreign net operating loss carryforwards do not have an expiration period.
NOTE 8 - BASIC AND DILUTED LOSS PER COMMON SHARE
---------------------------------------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations:
2001 2000
Numerator for basic and diluted loss earnings per common share net loss $(3,627,861) $(3,119,879)
=========== ============
Denominator for basic and diluted earnings per
common stock - weighted average shares . . . . . . . . . . . . . . . . 40,514,363 34,476,465
=========== ============
Basic and diluted loss per common stock. . . . . . . . . . . . . . . . . $ (0.09) $ (0.09)
=========== ============
NOTE 9 - RELATED PARTY TRANSACTIONS
As described in Note 6, the Company wrote-off $225,000 of stock subscription
receivable due from Euro-American GmbH.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
--------------------------------------------
Operating Leases
-----------------
The Company leases its office and laboratory facilities in the United States,
Germany, and Singapore under three operating leases which expire through
December 2003, respectively.
Future minimum lease payments under these leases at June 30, 2001 are:
Years Ending
June 30,
---------
2002 $271,000
2003 251,000
2004 45,000
--------
567,000
========
Rent expense for the years ended June 30, 2001 and 2000 was approximately
$210,000 and $120,000, respectively.
Grants
------
In November 1998, the German state of Northrhine-Westphalia granted Sangui
AG German Marks (DM) 3,574,575 for the research and development of the
Company's artificial oxygen carrier. The grant originally covered the period
from April 1998 to March 2001 but was extended to June 2002. In September
1999, Northrhine-Westphalia granted the Company's subsidiary, Gluko AG, DM
4,340,764 for the research and development of the Company's long-term
implantable glucose sensor. The grant originally covered the period from
December 1998 to November 2001, including retroactive months, but was extended
to June 2002.
The grants covers 40% of eligible research and development costs and capital
expenditures and are subject to the Company's ability to cover the
remaining 60% of the costs. An additional condition of the grant is that the
product was originally to be developed and subsequently produced in the German
state of Northrhine-Westphalia if developed by 2003.
Based on research and development expenditures and capital expenditures through
June 30, 2000, the Company had qualified for $817,560, of the grants. There
were no research and development expenditures and capital expenditures in fiscal
2001which qualified for grants. Approximately $736,000 related to research and
development expenditures has been recorded as a reduction of research and
development expenses and $81,490 related to capital expenditures was
recorded as a reduction to the historical costs of property and equipment, as of
June 30, 2000. As of June 30, 2001, all of the grants the Company had
qualified for so far have been received.
Legal proceedings
------------------
On December 20, 2000, Axis/Shields ASA, a Norway Corporation (Axis), filed a
lawsuit in the United States District Court in the Southern California District,
alleging that the manufacture or sale by Sangui USA of its
Carbohydrate-Deficient Transferring ("CDT") test kit, which is used to detect
chronic alcohol abuse, constituted an infringement of patent rights owned by
Axis. On March 26, 2001, the Company settled the lawsuit with Axis in which the
Company agreed to pay Axis $50,000 in damages which is recorded in general and
administrative expenses in the accompanying consolidated statement of
operations. In addition, the Company agreed to cease the manufacture and sale
of the ChronAlco CDT test kit by June 26, 2001. Sales related to this test kit
totalled $312,000 and $279,000 for the years ended June 30, 2001 and 2000,
respectively. Sangui USA redesigned and introduced a new kit in May 2001.
On July 26, 2001, the Company commenced a lawsuit in the United States District
Court for the District of Colorado against a director of the Company. In the
lawsuit, the Company alleges that the director is engaged in conduct related to
the Company's affairs that is fraudulent, dishonest and a gross abuse of his
authority or discretion as a director and that his removal from the Company's
Board of Directors would be in the best interest of the Company. Among other
things, the Company alleges that the director caused the Company to enter into a
contract without adequate disclosure of the director's conflicts of interest and
that the remuneration paid in conjunction with this contract was excessive. The
Company also alleges that the director is engaged in an improper exchange offer
campaign involving the Company's shares. The Court issued a Temporary
Restraining Order suspending the director from the Board of Directors of the
Company and restraining the director from pursuing the exchange offer. The
Temporary Restraining Order has expired. The Company has filed a Motion for
Preliminary Injunction which is pending.
The Company seeks the removal of the director from the Company's Board of
Directors, an injunction against the director and his affiliates from exchanging
the Company's shares for shares of an entity in which the director has a
financial interest, compensatory damages in an amount to be determined and costs
of the action. The director has not yet filed an Answer to the Complaint by the
Company in the lawsuit.
NOTE 11 - BUSINESS SEGMENTS
---------------------------------
The Company Reports it business segments based on geographic regions, which are
As follows for the years ended June 30:
2001 2000
---------- ----------
Net sales:
----------
Sangui USA. . . . . . . . . . . . $ 567,007 $ 429,400
Sangui BioTech AG . . . . . . . . - -
GlukoMediTech,AG. . . . . . . . . - -
Sangui BioTech PTE Ltd, Singapore - -
---------- ----------
$ 567,007 $ 429,400
========== ==========
Net loss:
---------
Sangui USA. . . . . . . . . . . . $1,895,170 $2,397,120
Sangui BioTech AG . . . . . . . . 1,102,167 548,587
GlukoMediTech,AG. . . . . . . . . 447,456 156,460
Sangui BioTech PTE Ltd, Singapore 183,068 17,712
---------- ----------
$3,627,861 $3,119,879
========== ==========
Depreciation and amortization
-----------------------------
Sangui USA. . . . . . . . . . . . $ 14,570 $ 42,264
Sangui BioTech AG . . . . . . . . 98,031 91,242
GlukoMediTech,AG. . . . . . . . . 34,590 17,811
Sangui BioTech PTE Ltd, Singapore - -
---------- ----------
$ 147,191 $ 151,317
========== ==========
Identifiable assets
-------------------
Sangui USA. . . . . . . . . . . . $1,288,538
Sangui BioTech AG . . . . . . . . 2,491,604
GlukoMediTech,AG. . . . . . . . . 2,828,593
Sangui BioTech PTE Ltd, Singapore 322,098
----------
$6,930,833
==========
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AN ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors and
executive officers of Sangui BioTech International, Inc. (SGBI), their principal
offices and positions and the date each such person became a director or
executive officer. Our executive officers are elected annually by the Board of
Directors. Our directors serve one year terms until their successors are
elected. The executive officers serve terms of one year or until their death,
resignation or removal by the Board of Directors. There are no family
relationships between any of the directors and executive officers. In addition,
there was no arrangement or understanding between any executive officer and any
other person pursuant to which any person was selected as an executive officer.
The directors are as follows:
NAME AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol, 67 Arndtstrasse 8, D-58453 Germany Chairman, President, Chief Executive
M.D., Ph. D. Witten, Germany Officer, Executive Director
Oswald Burkhard, 51 Martinsgasse 1, D-67547 Germany Non-Executive Director
M.D., Ph. D. Worms, Germany
Dora Malek 44 Saturnstr. 19, D-85609 Germany Non-Executive Director
Aschheim, Germany
Professor Joachim Lutz, 69 Thueringerstr. 24 D-97078 Germany Non-Executive Director
M.D., Ph.D. Wuerzberg, Germany
None of the Directors are related to one another. None of the independent
Directors has a business or professional relationship with SGBI and/or the other
Directors and substantial shareholders of the Company.
The day-to-day operations of SGBI are entrusted to the Executive Directors of
the Company who are assisted by a management team of key executive officers
("Executive Officers"). The particulars of the Executive Officers are set out
below:
NAME AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol, 67 Arndtstrasse 8, D-58453 Germany President and Chief
M.D., Ph. D. Witten, Germany Executive Officer
Oswald Burkhard, 51 Martinsgasse 1, D-67547 Germany Vice President
M.D., Ph. D. Worms, Germany
Sieglinde Borchert, 42 Bahnhofstr 12, D-58452 Germany Chief Operating Officer
Ph. D. Witten, Germany
Detlev Freiherr von 58 Herzog-Adolf-Strasse 17 Germany Chief Financial Officer, Treasurer
Linsingen D-61440 Oberursel, Germany
Harald Poetzschke, 41 Weidenstr. 4, D-65207 Germany Chief Scientific Officer
M.D. Wiesbaden, Germany
Patrick Onishi 48 2 Cambridge US Secretary
Irvine CA 92620
The business and working experience of the Directors and key Executive
Officers of the Company are set out below:
PROFESSOR WOLFGANG K. R. BARNIKOL, M.D., Ph.D., Chairman, President and
Chief Executive Officer, and Executive Director of the Company, has studied
chemistry, physics and medicine at the Universities of Munster, Aachen and
Mainz, Germany. In 1961, he received a Diploma in chemistry from University of
Mainz, Mainz, Germany. In 1964, he obtained the doctorate in physical chemistry
(Dr. rer. nat.) and in 1973 the doctorate in medicine (Dr. med.) both from the
University of Mainz, Mainz, Germany. In that same year, he also was appointed
professor in medical physiology at University of Mainz, Mainz Germany. In 1996,
Dr. Barnikol was awarded a specialist in medical physiology by the medical
association of Rheinland-Pfalz Germany. His research interest in physical
chemistry focused on the polymerization of styrene and the determination of
molecular weights of polymers with the electron microscope. Dr. Barnikol's
research areas in medicine are: (i) respiration; and (ii) blood and circulation.
In the field of respiration, he works on the functional analysis of the
bronchial system and gas exchange. Moreover, he is engaged in the development of
respiratory and skin oxygen sensors. In the field of blood and circulation, he
works on the development of artificial oxygen carriers for medical use, which
are based on polymerised soluble hemoglobins. As a third sphere of work, Dr.
Barnikol is engaged in the development of an implantable glucose sensor. Dr.
Barnikol has published more than 100 scientific articles, a textbook in
physiology and a review on the situation of German universities.
OSWALD BURKHARD, M.D., PH.D., Vice President and Non-Executive Director of
the Company, has more than 16 years of clinical experience in the diagnosis and
treatment of hematological and oncological diseases. Since 1989, Dr. Burkhard
has operated his own facilities in Worms, Germany, which specialize in
hematology and oncology. His practice offers patients all diagnostic and
therapeutic possibilities, necessary for internal oncology. From 1982 to 1989,
Mr. Burkhard was trained in hematology and oncology at the University School of
Medicine at Mainz, Mainz, Germany. During this time, he cared almost daily for
patients with hematological or oncological problems. Additionally, he was
trained in transfusion medicine. He became a specialist in internal medicine and
hematology. He has significant experience in clinical trials. From 1975 to 1989,
he worked at the Institute for Physiology at the University of Mainz, Mainz,
Germany where he was involved in the physical chemistry of hemoglobin solutions
and the measurement of oxygen by fluorescence quenching. In 1988, he obtained
the Doctorate in Medicine from University of Mainz, Mainz, Germany. Dr. Burkhard
received several patents for his scientific work. In 1989, he obtained the
Tancre award of the University of Mainz, Mainz, Germany. Dr. Burkhard has
studied chemistry, physics and medicine at the University of Mainz, Mainz,
Germany. He received a diploma in Chemistry in 1973 from University of Mainz,
Mainz, Germany. In 1976, he obtained the Doctorate in Physical Chemistry from
University of Mainz, Mainz, Germany. During his thesis, Dr. Burkhard synthesized
approximately 20 new compounds.
DORA MALEK, Attorney-at-Law, Non-Executive Director, date of birth
7/26/1957 in Wuppertal, employed since 1990 in the finance department of an
international insurance company in the area of group investments, and since 1994
as an independent attorney specializing in banking and stock exchange law,
capital investment law and the law of partnerships and corporations. She will
aid the company not only in all legal matters, but also in the development of
financial and investment concepts.
PROFESSOR JOACHIM LUTZ, M.D., Non-Executive Director, date of birth
5/15/1932 in Ludwigshafen, professor and lecturer in medical physiology in the
subject area of the vascular system and venous pressure at the Physiological
Institute of the Bavarian-Julius-Maximilian University in W rzburg until his
retirement in 1998. There he spent years evaluating artificial oxygen carriers
in small animal models such as the magneto metric determination of the
impairment of the body's own macrophages that are responsible for
detoxification. He is a member of the "International Advisory Committee on Blood
Substitutes (ISABI)" as well as the "International Society on Oxygen Transport
to Tissue (ISOTT)". He will accelerate development work as well as the
pre-clinical and clinical testing of blood with artificial oxygen carriers with
his technical knowledge and experience.
SIEGLINDE BORCHERT, Ph.D, Chief Operating Officer, after an apprenticeship
as a clerk and studying biology she made her Ph.D. in biochemistry. She worked
for more than 4 years as a research scientist at the University in Goettingen,
Germany. Subsequently she participated in a further vocational training in the
field of public relation and economy studies followed by working as a free
lancer for a scientific journal, Laborjournal, Freiburg, Germany, and for the
Forum fuer Wissenschaft und Technik, Goettingen, Germany. She started her work
for Sangui AG and Gluko AG in June 1998. In April 2000 she was appointed as the
Company"s Chief Operating Officer, in May 2001 she was appointed Chief Operating
Officer of the German subsidiaries Sangui AG and Gluko AG.
DETLEV FREIHERR VON LINSINGEN, ATTORNEY AT LAW, Chief Financial Officer,
Treasurer, born in 1943 in K nigsberg. Studied law in Berlin, Mainz and M nchen.
Between 1967 and 1970, first and second state examination in law in M nchen. In
1974, tax consultant exam in Hamburg and license as attorney at law. From 1970
until 1974, auditor and tax counsel with the Deutsche Treuhand-Gesellschaft
(KPMG) in Germany, Brasil and South Africa. From 1974 until 1980, assistant to
the board of management of Wacker-Chemie GmbH, M nchen, and of Allianz
Versicherung AG, M nchen Headquarters. Between 1980 and 1993, member of the
board of management of Alte Leipziger Lebensversicherungsgesellschaft a.G. and
Alte Leipziger Versicherung AG, Oberursel, and of the board of directors of
Interpolis Lebensversicherung Kalinigrad, Russia. Cooperative partner with
Mummert & Partner Management Consultants, Hamburg, from 1993 until 1995. Member
of the board of management of AOK-Bayern during the integration phase from 1995
to 1996, followed by activities as management consultant, interim financial
executive (CFO) and board director for newly founded enterprises. Joined Sangui
BioTech enterprise group as a consultant in June 2001. In September 2001, became
a member of the board of management for both SanguiBioTech AG and GlukoMediTech
AG and was appointed treasurer and chief financial officer for both Sangui
BioTech International, Inc. and Sangui BioTech, Inc.
HARALD POETZSCHKE, M.D., Chief Scientific Officer, Head of Research of
SanguiBioTech AG, born in 1959, studied medicine at the universities of
Frankfurt, Mainz and Vienna. In 1992, he received his approbation as a doctor
and in 1996 qualified as a specialist in physiology. Between 1990 and 1995, he
worked as a scientific assistant at the Johannes-Gutenberg University in Mainz.
In 1997, at the University of Vienna, he obtained his doctorate in the field of
the medical chemistry. Having worked with Professor Barnikol at the University
of Mainz for many years, he played a decisive role in the research and
development of hemoglobin hyerpolymers as artificial oxygen carriers. Dr. P
tzschke has been working for SanguiBioTech AG since 1996. Since then, his main
occupation has been topical scientific questions relating to the development of
artificial oxygen carriers. Since May 1998, he has been Vice Chairman of the
Executive Board at SanguiBioTech AG and GlukoMediTech AG. In October 2000, the
Board of Directors appointed him Chief Scientific Officer for Sangui BioTech
International Inc. and Sangui BioTech Singapore Pte. Ltd.
PATRICK ONISHI, Secretary, joined SanguiBioTech, Inc. in 1997 and is
responsible for manufacturing, purchasing, packaging and shipping. He held
various key technical management positions for 14 years at the Nichols Institute
Diagnostics (now Quest Diagnostics, Inc.) such as Director of Manufacturing, and
Manager of Technical Manufacturing. He worked as a laboratory technician after
his graduation at San Diego State University in Biology.
Section 16(a) of the U.S. Securities Exchange Act of 1934 requires the officers
and directors of the Company and those persons who beneficially own more than
10% of the outstanding stock of the Company to file reports of securities
ownership and charges in such ownership with the SEC. Based solely upon a review
of copies of the reports filed, the Company believes that during the year ended
June 30, 2001, the filing requirements were complied with by its officers and
directors, except that a former director of the Company, Mr. Helmut Kappes did
not comply with such reporting requirements.
ITEM 10. EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following SGBI summary compensation table shows certain compensation
information for services rendered in all capacities for the two fiscal years
ended June 30, 2000 and 2001. No executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- -----------------------
Awards Payouts
------ -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
------------------ ------ ------- ----- ------------- ---------- ---------- ------ ------------
Wolfgang Barnikol 2001 -0- -0- -0- -0- -0- -0- -0-
Chairman, CEO
and President (1) 2000 -0- -0- -0- -0- -0- -0- -0-
Oswald Burkhard 2001 -0- -0- -0- -0- -0- -0- -0-
Vice President(2) 2000 -0- -0- -0- -0- -0- -0- -0-
Seiglinde Borchert 2001 -0- -0- -0- -0- -0- -0- -0-
COO (3) 2000 -0- -0- -0- -0- -0- -0- -0-
Detlev Frhr. von 2001 -0- -0- -0- -0- -0- -0- -0-
Linsingen (4)
CFO, Treasurer 2000 -0- -0- -0- -0- -0- -0- -0-
Harald Poetzschke 2001 -0- -0- -0- -0- -0- -0- -0-
CSO (5) 2000 -0- -0- -0- -0- -0- -0- -0-
Patrick Onishi 2001 -0- -0- -0- -0- -0- -0- -0-
Secretary (6) 2000 -0- -0- -0- -0- -0- -0- -0-
(1) Professor Barnikol receives a yearly salary of an aggregate $140,000 as
President of the two German subsidiaries Sangui AG and Gluko AG. Professor
Barnikol was issued 3,000,000 options to purchase common stock of the Company
for $0.01 per share exercisable until June 30, 2009 in consideration for the
transfer of all his patent rights to the Company.
(2) Until May 2001, Oswald Burkhard received a year compensation of
approximately $6,000 as Officer (Vice President) of the two German subsidiaries.
(3) Sieglinde Borchert receives a monthly fee of approximately $5,800 from the
German subsidiaries Sangui AG and Gluko AG.
(4) Detlev Freiherr von Linsingen receives a monthly fee of approximately $6,850
from the German Subsidiaries Sangui AG and Gluko AG.
(5) Harald Poetzschke receives a monthly fee of approximately $3,900 from the
German Subsidiaries Sangui AG and Gluko AG.
(6) Patrick Onishi receives a monthly salary of approximately $5,800 from
SanguiBioTech
Compensation of Directors
To date, Directors of the Company have not received any compensation for
serving in such capacity.
Employment Agreements
The Company and its subsidiaries have employment agreements with each of
its officers or key employees. Professor Barnikol has an agreement with the
Company pursuant to which he is entitled to 3% royalties of gross revenues
earned with any product based on his inventions.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the common stock of SGBI as of the date of this report by:
* each person or entity known to own beneficially more than 5%
of the common stock;
* each of SGBI's directors;
* each of SGBI's named executive officers; and
* all executive officers and directors of SGBI as a group.
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership Class
------------------ ---------------------- -------------------- -----------
Common Stock Dr. Wolfgang Barnikol 1,853,600 4.56%
Arndtsr, 8, D-58453 Witten
Germany
Common Stock Dr. Oswald Burkhard 794,400 1.95%
Martinsgasse 1, D-67547 Worms
Germany
Common Stock Dora Malek 200 *
Saturnstr. 19
D-85609 Aschheim
Germany
Common Stock Professor Joachim Lutz -0- *
Thueringerstr. 24 D-97078 Wuerzburg
Germany
Common Stock Sieglinde Borchert 61,000 0.15%
Bahnhofstr. 12
D-58452 Witten
Germany
Common Stock Harald Poetzschke 81,000 0.20%
M.D. Weidenstr. 4, D-65207 Wiesbaden
Germany
Common Stock Patrick Onishi 70,000 0.17%
2 Cambridge
Irvine CA 92620, US
Common Stock All Officers and Directors as
a Group (8 persons) 2,860,200 7.03%
========= ======
*Less than 0.1%
ITEM 12. CERTAIN TRANSACTIONS
Except as otherwise disclosed below, no Director, substantial shareholder
or Executive Officer of the Company was or is interested in any transaction
undertaken by SGBI within the last three years.
EURO-AMERICAN. Euro-American GmbH ("EA") is a venture capital investment
corporation organized and established in Germany. Axel Kutscher, former
Non-Executive Director of the Company, and Helmet Kappes, former Non-Executive
Director of the Company, and substantial shareholders of the Company, are also
directors and shareholders of EA. During 2000, the Company entered into a
subscription with EA, a principal stockholder of the Company, valued at
$7,712,000, of which the Company received $7,487,000. The balance, $225,000,
was recorded as stock subscription receivable. On June 30, 2001, the Company's
Board of Directors authorized the writing off of the $225,000 of stock
subscription receivable.
STOCK OPTIONS GRANTED IN FAVOR OF PROFESSOR WOLFGANG BARNIKOL. The Company
entered into a stock option agreement which took effect on September 24, 1999,
with Professor Wolfgang Barnikol, Chairman, Chief Operating Officer, and
Executive Director and a substantial shareholder of the Company. Professor
Barnikol was granted a share option of 3 million Shares at an exercise price of
US$0.01 per share, in consideration of the assignment of his patent rights to
the Company. Professor Barnikol is entitled to exercise the option at the point
the Company completes the development of the artificial oxygen carrier or the
implantable sensor and receives regulatory approval from either Germany,
Singapore or the United States. The option shall terminate and cease to be
exercisable on June 30, 2009 unless terminated earlier in accordance with the
stock option agreement. The stock option agreement is governed under the laws of
the State of California.
ROYALTY ARRANGEMENT WITH PROFESSOR WOLFGANG BARNIKOL. On July 7, 1997, the
Company entered into an agreement with Professor Barnikol pursuant to which
Professor Barnikol assigned certain patents to the Company's German subsidiaries
in exchange for a 3% royalty on products on net revenues developed by
SanguiBioTech AG or GlukoMeditech AG. The royalty expires in 20 years or upon
expiration of the patents.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
Exhibit No.
-----------
2.1 (1) Exchange Agreement between MRC Legal Services LLC and SanguiBioTech
International, Inc., dated of March 31, 2000 (1)
3.1 (1) Articles of Incorporation of the Company (1)
3.2 (1) Bylaws of the Company(1)
3.3 Articles of Association of GlukoMeditech Aktiengesellschaft (2)
3.4 Articles of Association of SanguiBiotech Aktiengesellschaft (2)
3.5 Memorandum and Articles of Association of Sangui Biotech Singapore Pte.
Ltd. (3)
4.1 Stock Option Agreement between Professor Wolfgang Barnikol and Sangui
Biotech International, Inc. dated October 12, 2000 (2)
10.1 Office Lease between Brookhollow Office Park and Sangui Biotech
International, Inc. dated September 4, 1996 and as amended 2000 (3)
10.2 Fee Agreement between GlukoMeditech AG and Dr. Seiglinde Borchert dated
June 15, 1998 (2)
10.3 Fee Agreement between SanguiBiotech AG and Dr. Seiglinde Borchert dated
June 15, 1998 (2)
10.4 Service Contract between GlukoMeditech AG and Dr. Wolfgang Barnikol
dated June 30, 1998 (2)
10.5 Service Contract between SanguiBiotech AG and Dr. Wolfgang Barnikol
dated June 30, 1998 (2)
10.6 Service Agreement between Axel Kleinkorres Promotionsagentur and Sangui
Biotech International, Inc. dated April 26, 1999 (2)
10.7 Amendment to Service Agreement between Axel Kleinkorres
Promotionsagentur and Sangui Biotech International, Inc. dated August 18, 2000
(2)
10.8 Appropriation Notice from North-Rhine-Westphalia to GlukoMediTech AG
dated November 30, 1998 (2)
10.9 Appropriation Notice from North-Rhine-Westphalia SanguiBiotech AG dated
November 30, 1998 (2)
10.10 Lease Contract for Business Rooms between Research and Development
Centre, Witten, Germany and GlukoMeditech AG dated June 6, 2000 (2)
10.11 Additional Agreement to Lease Contract between Research and
Development Centre, Witten, Germany and GlukoMeditech AG dated June 7, 2000
(2)
10.12 Additional Agreement to Lease Contract between Research and
Development Centre, Witten, Germany and SanguiBiotech AG dated June 7, 2000
(2)
10.13 Assignment of Patents and Royalty Agreement with Dr. Wolfgang Barnikol (3)
10.14 Prolongation Letter for SanguiBiotech AG Grants (4)
21.1 Subsidiaries of the Company (2)
---------
(1) Filed as an Exhibit to the Report on Form 8-K filed on or about April 4,
2000 and incorporated herein by reference.
(2) Filed as an Exhibit to the original Report on Form 10-KSB filed on
October 13, 2000.
(3) Filed as an Exhibit to the amended Report on Form 10-KSB filed on November
20, 2000.
(4) Filed as an Exhibit to the Report on Form 10-KSB filed on September
28, 2001.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-KSB/A to be signed on its
behalf by the undersigned hereunto duly authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
/s/ Wolfgang Barnikol
----------------------------------
Wolfgang Barnikol
President and Director
Date: October, 29, 2001