UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period Ended: September 30, 2004; or
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period __________ to __________
Commission File Number: 0-21271
___________________________
SANGUI BIOTECH INTERNATIONAL, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1330732
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Alfred-Herrhausen-Str. 44, 58455 Witten, Germany
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
011-49-2302-915-204
-------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
The number of shares outstanding of the registrant's common stock, $0.001
par value, as of January 31, 2005, was 43,655,363.
Transitional Small Business Disclosure Format. Yes ___ No _X_
SANGUI BIOTECH INTERNATIONAL, INC.
Report on Form 10-QSB
For the Quarter Ended September 30, 2004
INDEX
-----
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited)........................... 2
Consolidated Balance Sheet ............................... 3
Consolidated Statements of Operations and Comprehensive Loss 4
Consolidated Statements of Cash Flows..................... 5
Notes to the Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis or Plan of Operation . 11
Item 3. Controls and Procedures ................................... 14
Part II. Other Information
Item 1. Legal Proceedings ......................................... 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities ........................... 15
Item 4. Submission of Matters to a Vote of Security Holders ....... 15
Item 5. Other Information ......................................... 15
Item 6. Exhibits .................................................. 15
1
PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
-----------------------------
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB pursuant to the rules and
regulations of the Securities and Exchange Commission and, therefore, do not
include all information and footnotes necessary for a complete presentation of
our financial position, results of operations, cash flows, and stockholders'
deficit in conformity with generally accepted accounting principles in the
United States of America. In the opinion of management, all adjustments
considered necessary for a fair presentation of the results of operations and
financial position have been included and all such adjustments are of a normal
recurring nature.
Our unaudited balance sheet as of September 30, 2004 and our unaudited
statements of operations for the three month periods ended September 30, 2004
and 2003, and the unaudited statement of cash flows for the three month periods
ended September 30, 2004 and 2003, are attached hereto and incorporated herein
by this reference.
2
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
------
September 30,
2004
-------------------------
Current assets
Cash and cash equivalents $ 15,748
Accounts receivable 6,517
Taxes receivable 106,597
Inventory 15,759
Prepaid expenses and other assets 22,965
-------------------------
Total current assets 167,586
Property and equipment-net 87,265
Patents and licenses-net 9,531
Deposits 31,917
-------------------------
Total assets $ 296,299
=========================
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current liabilities
Accounts payable and accrued expenses $ 65,617
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, 40,872,863 shares issued and outstanding 18,345,491
Additional paid-in capital 2,043,500
Treasury stock (28,098)
Accumulated other comprehensive income 535,517
Accumulated deficit (20,665,728)
-------------------------
Total stockholders' equity 230,682
-------------------------
Total liabilities and stockholders' equity $ 296,299
=========================
See accompanying notes to these consolidated financial statements
3
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the three months ended
September 30,
(Unaudited)
----------------------- -----------------------
2004 2003
----------------------- -----------------------
Revenues $ 5,572 $ -
Cost of goods sold 3,902 -
----------------------- -----------------------
Gross profit 1,670 -
Operating expenses
Research and development 185,408 184,107
General and administrative 135,789 211,218
Depreciation and amortization 17,072 30,970
----------------------- -----------------------
Total operating expenses 338,269 426,295
Loss before other income (expense) (336,599) (426,295)
Other income (expense)
Interest income 1,752 7,916
Other income (expense) (2,107) 4,324
----------------------- -----------------------
Total other income (expense) (355) 12,240
Net Loss (336,954) (414,055)
Other comprehensive income
Foreign currency translation adjustments 6,848 (661)
Unrealized gain on marketable securities - 12,109
----------------------- -----------------------
Comprehensive loss $ (330,106) $ (402,607)
======================= =======================
Net loss available to common
shareholder per common share: $ (0.01) $ (0.01)
======================= =======================
Basic and diluted weighted average
number of common shares outstanding 40,836,613 40,655,363
======================= =======================
See accompanying notes to these consolidated financial statements
4
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
September 30,
(Unaudited)
----------------------------- ----------------------------
2004 2003
----------------------------- ----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (336,954) $ (414,055)
Adjustments to reconcile net loss
to cash used in operating activities
Depreciation and amortization 17,072 30,970
Stock compensation 43,500 -
Changes in operating asset and liabilities:
Accounts receivable 20,829 -
Inventories (15,759) -
Taxes receivable (1,357) 3,295
Prepaid expenses and other assets 19,972 11,930
Deposits (16,917) -
Accounts payable and accrued expenses (20,106) (3,264)
----------------------------- ----------------------------
Net cash used in operating activities (289,720) (371,124)
----------------------------- ----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (1,830)
----------------------------- ----------------------------
Net cash used in investing activities - (1,830)
----------------------------- ----------------------------
Effect of exchange rate changes (5,491) (1,843)
----------------------------- ----------------------------
Net decrease in cash and cash equivalents (295,211) (374,797)
Cash and cash equivalents, beginning of period 310,959 956,531
----------------------------- ----------------------------
Cash and cash equivalents, ending of period $ 15,748 $ 581,734
============================= ============================
Supplemental disclosures:
Cash paid during the period for:
Interest $ - $ -
============================= ============================
Income taxes $ - $ -
============================= ============================
See accompanying notes to these consolidated financial statements
5
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying consolidated financial statements have been prepared without
audit in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to
Form 10-QSB and Item 301 of Regulation S-B. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
unaudited consolidated financial statements and notes should, therefore, be read
in conjunction with the consolidated financial statements and notes thereto in
the Company's Form 10-KSB for the year ended June 30, 2004. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation, have been included. The results of
operations for the three-month period ended September 30, 2004 are not
indicative of the results that may be expected for the full fiscal year ending
June 30, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Nature of Business
------------------
Sangui BioTech International, Inc., incorporated in Colorado in 1995, and its
subsidiary (collectively, the "Company") have been engaged in the research,
development, manufacture, and sales of medical products.
Prior to June 30, 2003, the company had two German subsidiaries, SanguiBioTech
AG and GlukoMediTech AG. On June 30,2003, GlukoMediTech AG was merged into
Sangui BioTech AG. Effective November 4, 2003, Sangui AG was converted into
SanguiBioTech GmbH (Sangui GmbH). After completion of the restructuring, Sangui
GmbH, which is headquartered in Witten, Germany, is engaged in the development
of artificial oxygen carriers (external applications of haemoglobin, blood
substitutes and blood additives), the development of wound care products as well
as in the development of glucose implant sensors. Sangui GmbH is a wholly-owned
subsidiary of Sangui BioTech International, Inc..
The operations of Sangui BioTech, Inc. and Sangui BioTech PTE Ltd Singapore, two
former wholly-owned subsidiaries, were discontinued and dissolved during 2002.
Consolidation
-------------
The consolidated financial statements include the accounts of Sangui BioTech
International, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in the three months ended September 30, 2003 have been
reclassified to conform to the three months ended September 30, 2004
presentation. These reclassifications have no effect on previously reported net
loss.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the respective reporting period. Actual results could differ from those
estimates. Significant estimates made by management are, among others, the
realization of taxes receivable, long-lived assets, and valuation allowance on
deferred tax assets.
6
Risk and Uncertainties
----------------------
The Company's line of future pharmaceutical products (artificial oxygen carriers
or blood substitute and additives) and in vivo biosensors (glucose implant
sensor) being developed by Sangui GmbH, 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. 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 accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business. The Company has accumulated deficit of $20,665,728 as of
September 30, 2004 and has been significantly reducing its working capital since
June 30, 2004. The Company incurred a net loss applicable to common stockholders
of $336,954 and used cash in operating activities of $290,000 for the three
months ended September 30, 2004. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The Company expects to
continue to incur significant capital expenses in pursuing its business plan to
market its products and expand its product line, while obtaining additional
financing through stock offerings or other feasible financing alternatives. In
order for the Company to continue its operations at its existing levels, the
Company will require significant additional funds over the next twelve months.
Therefore, the Company is dependent on funds raised through equity or debt
offerings. Additional financing may not be available on terms favorable to the
Company, or at all. If these funds are not available the Company may not be able
to execute its business plan or take advantage of business opportunities. The
ability of the Company to obtain such additional financing and to achieve its
operating goals is uncertain. In the event that the Company does not obtain
additional capital or is not able to increase cash flow through the increase of
sales, there is a substantial doubt of its being able to continue as a going
concern. The accompanying condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Foreign Currency Translation
----------------------------
Assets and liabilities of the Company's foreign 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 loss but are included in
comprehensive income (loss) and accumulated in a separate component of
stockholders' equity. Income and expenses are translated at weighted average
exchange rates for the period.
Cash and Cash Equivalents
-------------------------
The Company maintains its cash in bank accounts in Germany. Cash and cash
equivalents include time deposits for which the Company has no requirements for
compensating balances. The Company has not experienced any losses in its
uninsured bank accounts.
Revenue Recognition
-------------------
Revenues from product sales are recognized at the time of shipment.
7
Research and Development
------------------------
Research and development costs are charged to operations as they are incurred.
Legal fees and other direct costs incurred in obtaining and protecting patents
are expensed as incurred.
Basic and Diluted Earnings (Loss) Per Common Share
--------------------------------------------------
Basic earnings (loss) per common share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period of computation. Diluted earnings (loss) per share
gives effect to all potential dilutive common shares outstanding during the
period of compensation. The computation of diluted earnings (loss) per share
does not assume conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings. As of September 30, 2004 and
2003, the Company had no potentially dilutive securities that would effect the
loss per share if they were to be dilutive.
Comprehensive Income (Loss)
--------------------------
Total comprehensive income (loss) represents the net change in stockholders'
equity during a period from sources other than transactions with stockholders
and as such, includes net earnings (loss). For the Company, the components of
other comprehensive income (loss) are the changes in the cumulative foreign
currency translation adjustments and unrealized gains (losses) on marketable
securities and are recorded as components of stockholders' equity.
Segments of an Enterprise and Related Information
-------------------------------------------------
The Company applies Statement of Financial Accounting Standards ("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 7).
New Accounting Pronouncements
-----------------------------
On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based Payment, which
is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This
new standard eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and generally requires such
transactions to be accounted for using a fair-value-based method and the
resulting cost recognized in our financial statements. This new standard is
effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the fourth fiscal quarter of 2005, and
have not yet determined what impact this standard will have on our financial
position or results of operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the Company.
8
In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate
Time-sharing Transactions, which amends FASB statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing
Transactions. This statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
Statement will have no impact on the financial statements of the Company.
In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets.
This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetrary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. Earlier application is permitted for nonmonetary asset exchanges incurred
during fiscal years beginning after the date of this statement is issued.
Management believes the adoption of this Statement will have no impact on the
financial statements of the Company.
The implementation of the provisions of these pronouncements are not expected to
have a significant effect on the Company's consolidated financial statement
presentation.
NOTE 3 - STOCKHOLDERS' EQUITY
-----------------------------
As of September 30, 2004, the Company held 100,000 shares of its common stock
valued at historical cost of $28,098, which is reflected in the stockholders'
equity as treasury stock in the accompanying consolidated balance sheet. The
Company's management intends to sell these shares in the near future.
In July 2004, the Company issued 217,500 shares of common stock under the 2004
Employee Stock Incentive Plan (the Plan) to Sangui GmbH employees. In connection
with this transaction, the Company recorded $43,500 as compensation expense and
additional paid-in capital in the stockholders' equity (deficiency) section of
accompanying financial statements
NOTE 4 - COMMITMENTS AND CONTINGENCIES
--------------------------------------
Litigation
----------
The Company may, from time to time, be involved in various litigation resulting
from the ordinary course of operating its business. Management is currently not
able to predict the outcome of any such cases. However, management believes that
the amount of ultimate liability, if any, with respect to such actions will not
have a material effect on the Company's financial position or results of
operations.
9
Indemnities and Guarantees
--------------------------
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liabilities have been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheet.
NOTE 5 - BUSINESS SEGMENTS
--------------------------
The Company reports it business segments based on geographic regions, which are
as follows:
For the three months ended
September 30,
(Unaudited)
2004 2003
--------------------- ---------------------
Net sales:
---------
Sangui AG $ 5,572 $ -
Sangui Biotech International, Inc. - -
--------------------- ---------------------
$ 5,572 -
===================== =====================
Net income (loss):
-----------------
Sangui AG $ (293,454) $ (364,173)
Sangui Biotech International, Inc. (43,500) (49,882)
--------------------- ---------------------
$ (336,954) $ (414,055)
===================== =====================
Depreciation and amortization
-----------------------------
Sangui AG $ 17,072 $ 30,970
Sangui Biotech International, Inc. - -
--------------------- ---------------------
$ 17,072 $ 30,970
===================== =====================
Identifiable assets
-------------------
Sangui AG $ 276,299
Sangui Biotech International, Inc. 20,000
---------------------
$ 296,299
=====================
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
Forward-looking Statements
--------------------------
The following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this quarterly
report. Some of the information in this quarterly report contains
forward-looking statements, including statements related to anticipated
operating results, margins, growth, financial resources, capital requirements,
adequacy of the Company's financial resources, trends in spending on research
and development, the development of new markets, the development, regulatory
approval, manufacture, distribution, and commercial acceptance of new products,
and future product development efforts. Investors are cautioned that
forward-looking statements involve risks and uncertainties, which may affect our
business and prospects, including but not limited to, the Company's expected
need for additional funding and the uncertainty of receiving the additional
funding, changes in economic and market conditions, acceptance of our products
by the health care and reimbursement communities, new development of competitive
products and treatments, administrative and regulatory approval and related
considerations, health care legislation and regulation, and other factors
discussed in our filings with the Securities and Exchange Commission.
GENERAL
-------
The Company is primarily involved in the development of artificial oxygen
carriers and glucose sensors.
The Company's clinical development projects are primarily in the
preliminary stages. The Company is diligently developing several applications
for its clinical development projects, but does not anticipate beginning any
government protocols or clinical trials in the near term. In the course of the
ongoing cost containment efforts, these projects were halted during the last
fiscal year, after having achieved the planned milestones. The Company decided
to reduce further expenditures in the blood substitute, blood additive and
glucose sensor projects to the amount necessary to find financing, industrial or
distribution partners for further development and marketing of the resulting
products. The Company has adopted a program aimed at cost reductions and at
refocusing the Company's funds to accelerate time to market its most promising
and mature products.
By the end of the 2004 fiscal year, the company had agreed to enter into an
Agreement with a medium sized German pharmaceuticals company, regarding the
authorization and subsequent distribution of its Hemospray product. The contract
included a significant upfront payment. A letter of intent to this effect had
been signed by both parties, the contracts had been negotiated. As of August 24,
2004, said pharmaceuticals company cancelled the letter of intent and any
further cooperation without giving any valid reasons for this act.
Contacts to new potential marketing and distribution partners regarding the
Hemospray product have been established in Germany and abroad. Talks have been
facilitated by the results of an official meeting with the German Drug
Registration Authority (BfArM) on November 16, 2004. BfArM declared that it will
regard Hemospray as a medical product and not as a pharmaceutical. This means
that the authorization process will be easier and less time consuming. Among the
companies interested in marketing the product is Karl Beese GmbH.
In July, 2004, Sangui GmbH signed a marketing and distribution contract
with cosmetics vendor Mercatura Biocosmetics AG, Achim, Germany ("Mercatura").
Under the terms of the contract, Mercatura has obtained from Sangui the
exclusive right to manufacture, market und distribute the Sangui formulation for
skin regeneration and anti-aging. The company has sold to Mercatura a quantity
of 60 kg of the preparation to be used in test sales, which started in September
2004. Mercatura will pay Sangui per unit licensing fees for each product package
sold. The licensing fees refer to the ex-works price for the product and will be
between 5.5 % and 8 %, depending on the total revenue amount.
11
Initially, the contract covers the German speaking areas only. Mercatura is
obliged to submit on completion of its quarterly accounting its sales reports
for the preceding quarter confirmed by an independent auditor. These reports
will be the basis for the calculation of the royalties due to Sangui. The
parties have agreed to extend the reach of this agreement to target markets
world wide, if Sangui's formulation will be included in the proposed cooperation
between Mercatura and Wolfgang Joop GmbH. Mercatura is contractually obliged to
confirm by February 28, 2005, whether or not Wolfgang Joop GmbH is willing to
include the Anti-Aging formulation in their "Wunderkind" marketing program.
Global distribution rights outside the German speaking countries will be
returned to Sangui if Wolfgang Joop GmbH refrains from using the product.
The company is currently in the final phase of the CE certification of
"Chitoskin" wound pads authorizing the distribution of these medical products in
the European markets. It is expected that the CE certification will be granted
in the course of the third quarter of Sangui's fiscal year 2004/2005. The
"CHITOSKIN" trademark has been granted to the company for the European countries
effective November 1, 2004. In the German market the wound pads will be
distributed by Beese GmbH, Norderstedt, Germany, a leading medical products
distributor. A contract to this effect is currently being negotiated and will be
entered into after the CE certification. Joint pre-marketing activities have
started. Negotiations with distributors in other regions including Spain,
Turkey, the Arab countries and China are under way.
Cost Savings
------------
As of August 31, 2004, contracts with most employees were cancelled. As of
December 1, 2004, the company employs 2 fulltime employees and has consulting
arrangements with 5 persons.
In total, management has been able to reduce the Company's operating
expenses by 21% to approximately $338,000 in the first three months of fiscal
2005, compared to approximately $426,000 in the respective period of last fiscal
year. General and administrative expenses have been reduced by 36% in the first
three months of fiscal 2005 as compared to the respective period of last fiscal
year. This effort is also reflected in the net cash used in operating activities
which decreased 21% to approximately $290,000 compared to approximately $371,000
net cash used in operating activities in the respective period of last fiscal
year.
FINANCIAL POSITION
------------------
The company resolved to use the existing authorized capital to offer shares
to certain investors. Subsequent to September 30, 2004, in November and December
2004, the company sold 2,000,000 shares of common stock to two German investors
yielding a cash contribution of $100,000. Three other investors have indicated
to be willing to invest similar sums into the company. The Directors and
Management believe that this will be viable as a bridge financing until the
company will be in the position to generate sufficient sales to maintain a basic
level of activities.
The Company's current assets decreased approximately $319,000, or 66%, from
June 30, 2004 to approximately $168,000 at September 30, 2004. The decrease is
primarily attributable to a decrease in cash and cash equivalents of
approximately $295,000. The decrease in cash and cash equivalents results
primarily from funding the current year's operations of the Company with $5,000
of revenues in the three-month period ended September 30, 2004.
The Company's net property and equipment decreased approximately $14,000,
or 14% from June 30, 2004 to approximately $87,000 at September 30, 2004. The
decrease is primarily attributable to current period depreciation of
approximately $17,000.
The Company funded its operations primarily through its existing cash
reserves. The Company's stockholders' equity decreased approximately $286,000.
The primary decrease is caused by the Company's current period net loss of
approximately $337,000, and an increase in additional paid in capital of
approximately $44,000 as a result of stock compensation.
12
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2004 and 2003:
Sangui GmbH
-----------
RESEARCH AND DEVELOPMENT. Research and development expenses increased
marginally to approximately $185,000 in 2004 from approximately $184,000 in
2003. The marginal increase is mainly attributed to the Company diligently
developing several applications for its clinical development projects.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
43% to approximately $92,000 in 2004 from approximately $161,000 in 2003. This
decrease is mainly attributed to the ongoing refocusing program, a reduction in
staff, and closing of the Company's former office.
DEPRECIATION. Depreciation decreased 45% to approximately $17,000 in 2004
from approximately $31,000 in 2003. This decrease is mainly attributed to the
ongoing restructuring of Sangui GmbH.
Sangui BioTech International, Inc.
---------------------------------
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
14% to approximately $44,000 in 2004 from approximately $50,000 in 2003. The
increase is due to a decrease in consulting and legal fees offset by an increase
in stock compensation expense.
Consolidated
------------
NET LOSS. As a result of the above factors, the Company's consolidated net
loss was approximately $337,000, or $0.01 per common share, in 2004, compared to
approximately $414,000, or $0.01 per common share, in 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
For the three months ended September 30, 2004, net cash used in operating
activities decreased to approximately $290,000 from approximately $371,000 in
the corresponding period in 2003, primarily related to a decrease in the
Company's consolidated net loss as a result of the ongoing refocusing program.
13
Working capital was approximately $102,000 at September 30, 2004, a
decrease of approximately $298,000 from June 30, 2004 due primarily to the
Company's net loss for the three-month period. A substantial portion of the
Company's total assets consists of cash. The highly liquid nature of these
assets provides the Company with flexibility in financing and managing its
business. At September 30, 2004, the Company had cash of approximately $16,000.
The Company will need substantial additional funding to fulfil its business plan
and the Company intends to explore financing sources for its future development
activities. No assurance can be given that these efforts will be successful.
ITEM 3 - CONTROLS AND PROCEDURES
--------------------------------
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Exchange Act), as of a date within 90 days of
the filing date of this Quarterly Report on Form 10-QSB. Based on such
evaluation, they have concluded that as of such date, our disclosure controls
and procedures are effective and designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable SEC rules and forms.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of evaluation by our principal executive officer
and principal financial officer.
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - LEGAL PROCEEDINGS
--------------------------
On November 27, 2003, the company was served with a lawsuit (Landgericht
Bochum Court, Case No. 6 O 435/03). The lawsuit named among others SanguiBioTech
AG as defendant. The plaintiff alleged that SanguiBioTech AG which was converted
into SanguiBioTech GmbH in the meantime had neglected its duty in dealing with
some of the plaintiff's Sangui BioTech International, Inc., shares. With
judgement handed down on July 28th, 2004, the plaintiff's action has been
dismissed. No appeal was lodged.
On August 4, 2003, SanguiBioTech AG filed a lawsuit against a former
director of SGBI, claiming that some payments incurred by the defendant were
unjustified under German law (Landgericht Munich I Court, Case No. 34 O
14027/03). The defendant denies that the claim is justified and has brought
forward the opinion that he can claim additional fees. The plaintiff has
rejected the defendant's opinion. The litigation was still pending as of
December 31, 2004. Subsequent to the period covered by this report, by order of
the Court, on February 10, 2005, the lawsuit was settled. All claims and
counterclaims between the parties were irrevocably dismissed.
The Company is not aware of pending claims or assessments, other than as
described above, which may have a material adverse impact on the Company's
financial position or results of operations.
14
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
--------------------------------------------------------------------
On April 28, 2004, the Company adopted the 2004 Employee Stock Incentive
Plan (the Plan). Under the terms of the plan the Board was authorized to issue
up to 1,000,000 shares of common stock to certain eligible employees of the
company or its subsidiaries. In July, 2004, the Company issued 1,000,000 shares
to Sangui GmbH employees. Sangui GmbH is a subsidiary of the Company. No
underwriters were used. The securities were registered under Securities Act of
1933 on Form S-8, which became effective on May 24, 2004
Subsequent to the period covered by this report, in November and December
2004, the company sold 2,000,000 shares of its common stock to two German
investors at a price of $.0.05 per share, for a total cash contribution of US
$100,000. No underwriters were used. The offer and sale of the shares occurred
outside the United States and the shares were sold to two individuals who reside
outside the United States, pursuant to an exemption from registration under Rule
901, Regulation S of the Securities Act of 1933, as amended.
Subsequent to the period covered by this report, in February 2005, the
company sold 4,500,000 shares of common stock to six German and Suisse investors
yielding a cash contribution of US $275,000. No underwriters were used. The
offer and sale of the shares occurred outside the United States and the shares
were sold to six individuals who reside outside the United States, pursuant to
an exemption from registration under Section 4(2)of the Securities Act of 1933.
Subsequent to the period covered by this report, in February 2005, the
Company issued 200,000 restricted shares in consideration of consulting services
valued at $17,500 to Joachim Fleing, a Director of the Company. No underwriters
were used. The shares were issued to this individual, who resides outside the
United States, pursuant to an exemption from registration under Section 4(2)of
the Securities Act of 1933.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
--------------------------------------------------------------
None.
ITEM 5 - OTHER INFORMATION
--------------------------
None.
ITEM 6 - EXHIBITS
-----------------
31.1 Certification Pursuant to Rule 13a-14(a) and 15d-14(a), filed
herewith.
32. Certification Pursuant to Section 1350 of Title 18 of the United
States Code, filed herewith.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
Date: March __ , 2005 /s/ Wolfgang Barnikol
--------------------------------------
Wolfgang Barnikol
President, Chief Executive Officer and
Chief Financial Officer
Date: March __ , 2005 /s/ Joachim Fleing
--------------------------------------
Joachim Fleing
Chief Accounting Officer
16