UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the annual period ended JUNE 30, 2002
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________ TO ______________
For the fiscal year ended June 30, 2002
Commission file number 0-21271
SANGUI BIOTECH INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1330732
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1508 Brookhollow Drive, Suite 354 92705
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Santa Ana, CA 92705 (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code (714) 429-7807
Common Stock, no par value
--------------------------
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 [x] No [ ]
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. [x]
The issuer's revenue for the fiscal year ended June 30, 2002 was $571,742.
The market value of the voting stock held by non-affiliates of the issuer as of
September 13, 2002 was approximately $7,531,000.
The number of shares of the common stock outstanding as of September 13, 2002
was 40,655,363.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
1
Table of Contents
PART 1. .............................................................. 3
ITEM 1. DESCRIPTION OF BUSINESS....................................... 3
ITEM 2. PROPERTIES.................................................... 17
ITEM 3. LEGAL PROCEEDINGS............................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 17
PART II .............................................................. 17
ITEM 5. MARKET FOR SGBI'S SECURITIES.................................. 17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 18
ITEM 7. FINANCIAL STATEMENTS.......................................... 20
CONSOLIDATED BALANCE SHEET.................................... 22
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS............................................ 23
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY............... 24
CONSOLIDATED STATEMENTS OF CASH FLOWS......................... 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................... 27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 37
PART III .............................................................. 37
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.............................. 37
ITEM 10. EXECUTIVE COMPENSATION AND OTHER INFORMATION.................. 40
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40
ITEM 12. CERTAIN TRANSACTIONS.......................................... 41
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................. 42
2
PART 1
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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.
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 Investment System,
Inc. (Citadel), a publicly held company, acquired one hundred percent (100%) of
the outstanding common shares of SBT; as a result, SBT became a wholly owned
subsidiary of Citadel. Thereafter, Citadel changed its name to Sangui BioTech
International, Inc. (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 has been principally engaged in the development and manufacturing of
immunodiagnostic kits, which were 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, has been devoted to
immunodiagnostic research, development, manufacturing, and marketing, as well as
the Company's administrative functions. Subsequent to the June 30, 2002 fiscal
year-end SBT sold the assets, and commenced the wind-down, of the U.S. business
operation.
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
haemoglobin-based artificial oxygen carriers as blood additive and blood volume
substitutes and products thereof. Sangui AG is also developing an anti-aging
cosmetic based on the artificial oxygen carrier. The officer of Sangui AG is
Professor Wolfgang Barnikol, M.D., Ph.D. The members of Sangui AG's supervisory
board are Professor Joachim Lutz, M.D., Dora Malek, attorney-at-law, Oswald
Burkhard, M.D., Ph.D., Edgar Fritschi, Ph.D. and Doris Barnikol-Keuten, 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 officer of Gluko AG is
Professor Wolfgang Barnikol, M.D., Ph.D. The members of Gluko AG's supervisory
board are Dora Malek, attorney-at-law, Oswald Burkhard, M.D., Ph.D., Professor
Joachim Lutz, M.D., Edgar Fritschi, Ph.D. and Doris Barnikol-Keuten, 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 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 Sangui Singapore,
about 350 square meters, are located in the Science Park II, Gemini Building,
Singapore.
3
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, 2002, the Company's
accumulated deficit exceeded $ 16.1 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
manufacturing operations. All of the Company's potential products are in
development. The Company will need to obtain substantial additional capital to
fulfil its business plan.
The Company has adopted a program aimed at cost reductions and at refocusing the
Company's funds to accelerate time to market for its most promising and mature
products. No assurance can be given that the Company's program will be
successful.
4
BUSINESS OF THE COMPANY
The Company's mission is the development of novel proprietary products. The
Company aims at marketing and selling all or some of these products through
partnerships with industry partners.
The special focus of Sangui AG is on developing oxygen carriers capable of
support of oxygen transport in humans in cases of acute and chronic lack of
oxygen due to arterial occlusion, anemia or blood loss due to surgery, accident,
or other causes. The Company is engaged in the development and commercialization
of such artificial oxygen carriers by reproducibly synthesizing polymers out of
native haemoglobin 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. A short
term insertable glucose sensor is also in development.
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, Axis/Shields ASA, a Norway
corporation (Axis), filed a lawsuit against Sangui USA alleging that Sangui
USA's Carbohydrate-Deficient Transferrin ("CDT") test kit, which is used to
detect chronic alcohol abuse, constituted an infringement of patent rights owned
by Axis. In March 2001, a settlement was reached and Sangui USA agreed to cease
manufacture and sale of the CDT test kit. Sangui USA subsequently designed a new
test kit which was then manufactured and sold. In December 2001, Axis filed
another lawsuit in the U.S. District Court for the Central District of
California against Sangui USA alleging that the new test kit also infringed on
Axis' patent rights. Sangui USA filed an answer denying the claims of Axis and
counterclaimed against Axis for a declaratory judgment of invalidity of the
patent of Axis and for antitrust violations. Because of the substantial funds
required to defend itself against the lawsuit filed by Axis, despite of a high
probability of not being found infringing the patent held by Axis, the Company
decided to offer its CDT business for sale to Axis. In July, 2002, an agreement
was entered with Axis and the Company, according to which the Company agreed to
cease to sell CDT kits among other intangible information for a consideration of
U.S. $100,000 paid by Axis to the Company. As a result of this settlement, Axis
caused a dismissal with prejudice of all its claims, and the Company caused a
dismissal with prejudice of the Company's counterclaim. In summary, this lawsuit
from Axis has been resolved. Further, with the loss of sales from its CDT
business, which was expected to negatively impact its immunodiagnostics
business, Sangui also decided to discontinue its small in vitro immunodiagnostic
operations in the United States by the end of September 2002, so that it can
focus its resources on the product development projects in Germany.
ARTIFICIAL OXYGEN CARRIER
Sangui develops several products based on polymers of purified natural porcine
haemoglobin with oxygen carrying abilities similar to native haemoglobin. These
are (1) oxygen carrying blood additives and (2) oxygen carrying blood volume
substitutes.
In December 1997 the Company decided that porcine haemoglobin should be used as
basic material for its artificial oxygen carriers. In March 1999 the Company
came to the fundamental decision as to which haemoglobin hyperpolymer will go
into preclinical investigation and that glutaraldehyde will be taken as cross
linker and the polymer haemoglobin is chemically masked to prevent protein
interaction in blood plasma. The fine adjustment of the formula of the
artificial oxygen carriers - optimized for laboratory scale production - was
finalized in Summer 2000.
The experiments completed in the Company's laboratories demonstrated that it is
possible to polymerize haemoglobins isolated from porcine blood resulting in
huge soluble molecules, 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 was
carried out in the Company's clean room. At present the Company is working on
the upscale process for preparation of a large amount of oxygen carrier for
preclinical and clinical trials.
5
OXYGEN CARRYING BLOOD ADDITIVE AND BLOOD VOLUME SUBSTITUTE
The need for oxygen carrying 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.
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 added to the circulatory
system. Such an additive must not have any influence on the oncotic pressure,
i.e., it must have a negligible oncotic pressure as compared to plasma, which is
about 35hPa. 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 in
blood plasma.
The management of Sangui AG believes that the additive feature of the oxygen
carrier under development, could potentially address a market possibly equal or
even 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.
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. Management of the Company believes
that the European and FDA approval process will take at least several years.
OXYGEN CARRIERS FOR REGENERATION OF THE SKIN
The healthy skin is supplied with oxygen, both through the supply from inside
and also through diffusion from outside. Lack of oxygen will cause degenerative
alterations of various extent, ranging from premature aging to surface damage
and 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 haemoglobin-based preparations under development by Sangui AG have been
designed to contribute to supporting the regeneration of the skin by improving
its oxygen supply. 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 course of an acne
treatment. The key product the Company currently focuses on is an anti-aging
application for the cosmetics market.
The Company had, in fiscal year 2002, finalized the development of an external,
cosmetic application of its oxygen carrier. The Company has established contact
with a German cosmetics vendor and is planning and preparing to jointly
introduce this application as a cosmetic anti-aging product in the German market
in fiscal year 2003.
GLUCOSE SENSOR
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. Type II diabetics are patients,
where the body either fails to produce sufficient insulin or the cells do not
respond to insulin.
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.
6
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.
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 of infection, comfort,
and the risk of detachment should all favor a permanently implantable sensor.
The glucose sensor being developed by the Company 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. Two of these
measuring systems are going to be used in the glucose sensor jointly, but
independently to increase the specificity and accuracy of the glucose
determination. The sensor 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.
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 fiscal year 2002 Gluko AG had STEAG
Microparts GmbH of Dortmund, Germany, carried out a development project aimed at
miniaturizing the sensor in silicon hybrid technology and prove the possibility
of creating and producing such devices in industrial quantities. Phase 1 of this
project was successfully accomplished in April, 2002.
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.
According to regulatory requirements, all medical devices have to pass through
clinical trials before approval (e.g. FDA approval) 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.
PUBLIC GRANTS
Sangui AG and Gluko AG have received grants from the government of the German
state of Northrhine-Westphalia supporting their respective development projects.
These grants are designed to cover 40% of ongoing development costs and require
the Company's economic ability to cover 60% of the project costs on its own. The
grant for Sangui AG originally amounted to $2.1 million and the grant for Gluko
AG originally amounted to $2.3 million.
Based on research and development expenditures and capital expenditures through
June 30, 2000, the Company had qualified for approximately $818,000 of the
grants. In fiscal 2001, the Company recorded approximately $348,000 and $76,000
of research and development expenditures and capital expenditures, respectively.
In fiscal 2002, the Company recorded approximately $379,000 and $62,000 of
research and development expenditures and capital expenditures, respectively.
The grants received are primarily recorded as a reduction of research and
development costs, with a smaller amount recorded as reduction of the historical
cost of certain property and equipment.
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.
7
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 18 patents 12 of which
cover Germany, 3 the USA and one each Germany plus the USA, Germany plus
Singapore, and several European countries, respectively. Furthermore, the
subsidiaries have applied for 24 patents most of which have been filed in
Germany, the USA and as an international patent application with the European
Patent Office, respectively. Four patent applications are related to progress
made in the final development stages of the external application of the
artificial oxygen carriers.
MARKETING AND DISTRIBUTION
Other than the immunodiagnostic products, the Company has not yet manufactured
any of its products in commercial quantities.
The Company has limited experience in sales and marketing of products. It is,
therefore, dependent on attracting industrial, marketing and distribution
partners in order to succeed in selling its products in the respective markets.
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 condition, 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 of 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
marketing, failure of the government to grant pre-market approval, withdrawal of
marketing approvals, product recall and criminal prosecution.
COMPETITION
The market for the products and technologies of the Company is highly
competitive, and SGBI expects competition to increase
OXYGEN CARRYING BLOOD ADDITIVE
In the business of blood additive, Sangui AG is not aware of any existing or
potential competitors.
8
OXYGEN CARRYING 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 include Hemosol Inc.
in Canada, Northfield, Alliance Pharmaceutical and Biopure Corporation. 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.
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 find
alternative ways to determine the blood glucose level.
The sensor under development by Synthetic Blood International, Kettering, Ohio,
USA is based on an enzymatic glucose determination. 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. They
have received FDA approval for this technology in 2001.
In 2001, Medtronic, Inc acquired MiniMed Inc. of Sylmar, Ca, and Medical
Research Group, LLC. They have been merged to form Medtronic MiniMed in 2001.
This company pursues the developments previously started by both predecessor
companies. Their implantable long term glucose sensor has undergone clinical
test for 14 months now and tests are underway as to whether it can be used
jointly with the insulin pump developed by MiniMed. MedTronic Minimed's
insertable glucose sensor is being used in clinics in the US and abroad already.
9
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.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
Although management believes that the Company's cash position should be
sufficient to cover its financing for at least another fiscal year, 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.
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.
10
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.
11
EARLY STAGE OF PRODUCT DEVELOPMENT; LACK OF COMMERCIAL PRODUCTS; NO
ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
The Company's primary efforts are devoted to 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.
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.
12
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. 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 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.
13
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.
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, 2001, the Company's only competitor in the CDT business,
Axis/Shields, a Norwegian Company purchased by Shields Diagnostics of United
Kingdom, filed a lawsuit against the Company for alleged patent infringement.
The Company reached a settlement with Axis/Shields in which the Company sold the
Company's CDT business to Axis/Shield.
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.
14
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
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 avoid 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
Euro 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 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
15
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, in commercial quantities. Its
subsidiaries will be engaged in manufacturing pharmaceutical products which will
be subject to stringent regulatory requirements. 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 Good Manufacturing
Practice ("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
Since the Company sold its CDT business to Axis/Shield in July, 2002, there is
no longer a customer base.
16
HUMAN RESOURCES
The Company considers its relations with its employees to be favorable. As of
June 30, 2002 the Company and its subsidiaries had 30 fulltime employees of
which 22 were involved in research and development and 8 were responsible for
administrative matters. The Company had consulting arrangements with 6
individuals as of that date. Contracts with three employees are due to expire
during the first quarter of fiscal 2003.
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, 2002 was approximately $51,000 with a lease to expire in December, 2002.
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 ended June 30, 2002 was approximately $100,000.
The Singaporean subsidiary, approximately 350 square meters, is based in the
Science Park II, Gemini Building. Rent expense for the fiscal year ended June
30, 2002 was approximately $59,000.
ITEM 3. LEGAL PROCEEDINGS
On July 26, 2001, the Company filed 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. The Company seeks the permanent
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
filed an answer denying the Company's claims.
In September 2002, Mr. Kappes' wife, Kerstin Kappes, and Petra Schwab-Kutscher,
the wife of Axel Kutscher, who is a former director of the Company and an
associate of Mr. Kappes, commenced an action in the United States District Court
for the District of Colorado against the Company and its attorneys for alleged
wrongful refusal to permit Mrs. Kappes and Mrs. Kutscher to transfer the
Company's stock. Mrs. Kappes and Mrs. Schwabe-Kutscher have sworn under oath as
of August 15, 2002, that they currently have a buyer in Switzerland, who is
ready, willing and able to purchase all of their Company's stock. Mrs. Kappes
and Mrs. Kutscher also complained that the actions involving the stock transfer
entitle them to a judgment that the stock may be freely transferable without
restriction as well as money damages estimated by them to be not less than
$583,600, and punitive damages, costs and attorney's fees in unspecified
amounts. The Company believes that the action is without merit and intends to
vigorously defend against this action. The Company has been granted an extension
of time to respond to the complaint.
On August 10, 2002, Sieglinde Borchert, a former director of Sangui AG and Gluko
AG, filed a lawsuit against the two German Corporations alleging that she is
still member of the Board of Management of these Companies. The Motion is
pending. However, the Company believes that the lawsuit has and will have no
material affect to the results and/or activities of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
fourth quarter covered by this Report.
PART II
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ITEM 5. MARKET FOR SGBI'S SECURITIES
17
SGBI's common stock is presently traded on the OTC Bulletin Board operated by
Nasdaq under the symbol SGBI as well as on the OTC markets of the Berlin,
Frankfurt and Hamburg stock exchanges in Germany.
The following table sets forth the high and low closing prices for shares of
SGBI common stock for the fiscal 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 commissions
and may not represent actual transactions.
CLOSING PRICES
YEAR PERIOD HIGH LOW
2002 First quarter $0.59 $0.28
Second quarter $0.43 $0.28
Third quarter $0.38 $0.25
Fourth quarter $0.65 $0.31
2001 First quarter $2.72 $1.75
Second quarter $2.38 $1.11
Third quarter $1.45 $0.94
Fourth quarter $0.93 $0.48
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 June 30, 2002, the number of record holders of the Company's common stock was
1,515. The Company did not pay any cash dividends during the past three fiscal
years and does not contemplate paying dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended June 30, 2002, the Company issued 141,000 shares of
common stock for consulting services, valued at $39,610, based on the closing
price of the Company's common stock on the date of issuance. The issuance was an
isolated transaction not involving a public offering pursuant to Section (4) 2
of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses, and related disclosure of contingent assets and
liabilities. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Actual results may differ from these
estimates under different assumptions or conditions.
Grants
------
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Revenue
18
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 property's historical cost.
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 statements. The following
discussion regarding the financial statements of the Company should be read in
conjunction with the financial statements and notes thereto.
FISCAL 2002 COMPARED TO FISCAL 2001
RESULTS OF OPERATIONS
SBT
---
SALES. Sales remained essentially flat, increasing 1% to approximately $572,000
in 2002 from approximately $567,000 in 2001.
COST OF SALES. Cost of sales decreased 8% to approximately $364,000 in 2002 from
approximately $395,000 in 2001. This decrease of $31,000 is primarily related to
additional costs incurred in 2001 for quality control purposes that were not
incurred in 2002. As a result of the decreased cost of sales, the Company's
gross margin increased to 36% in 2002 from 30% in 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 20% to
approximately $806,000 in 2002 from approximately $670,000 in 2001. This
increase of $136,000 relates mainly to increased legal expenses from lawsuits as
described in Item 3 (legal proceedings).
COMPENSATION EXPENSE RELATED TO STOCK OPTIONS. Compensation expense related to
stock options was $1,000,000 in both 2002 and 2001, which represents the
amortization of the fair value of stock options previously issued to the
chairman of the Company. Effective June 30, 2002, these stock options were
cancelled and such expense will not be recognized in the future.
AMORTIZATION OF PREPAID CONSULTING FEES. Amortization of prepaid consulting fees
increased 49% to approximately $661,000 from approximately $444,000 in 2001, or
an increase of $217,000. At June 30, 2002, management determined that no more
benefit will be received in relation to the prepaid consulting fee and
accordingly wrote off the unamortized balance of approximately $221,000.
Sangui AG
---------
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 18% to
approximately $647,000 in 2002 from approximately $785,000 in 2001. This
decrease of $138,000 is due to decreased research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 21% to
approximately $682,000 in 2002 from approximately $562,000 in 2001. This
increase of $120,000 is attributed to increases in operating expenses.
Gluko AG
--------
RESEARCH AND DEVELOPMENT. Research and development expenses increased 295% to
approximately $640,000 in 2002 from approximately $162,000 in 2001. This
increase of $478,000 is due to increased research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased 115%
to approximately $348,000 in 2002 from approximately $162,000 in 2001. This
increase of $186,000 is attributed to increases in staffing and operating
expenses.
Sangui Singapore
----------------
GENERAL AND ADIMISTRATIVE. General and administrative expenses increased 5% to
approximately $192,000 in 2002 from approximately $183,000 in 2001. This
increase of $9,000 relates to an increase in operating expenses.
SGBI
----
NET LOSS. The Company's net loss was approximately $4,798,000 or approximately
twelve cents per common share, in 2002, compared to approximately $3,628,000, or
19
nine cents per common share, in 2001. This increase in net loss is a result
primarily of increased research and development expenses, general and
administrative expenses, and a decrease in investment income.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002 the Company had cash and liquid marketable securities of
approximately $3.4 million. The Company believes that its available cash will be
sufficient to satisfy its requirements for at least the fiscal year ending June
30, 2003. 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. No assurance can be given that these
efforts will be successful. Subsequent to June 30, 2002, the Company sold the
assets of its U.S. based operations conducted by SBT in two separate
transactions. In the first transaction, the Company has received $100,000 in
July, 2002 from the sales of its CDT business as described in last paragraph
under the heading Patent-Related Litigation, under NOTE 9 - COMMITMENTS AND
CONTINGENCIES. The second transaction pertains to the sales of the Company's
remaining diagnostic business to another diagnostic company, for $60,000, to be
received in three equal annual payments beginning December 1, 2002.
ITEM 7. FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
20
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2002 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. and its subsidiaries (collectively, the "Company") as of
June 30, 2002, 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 consolidated 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sangui BioTech
International, Inc. and its subsidiaries as of June 30, 2002, 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 30, 2002
21
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
------
June 30,
-------
2002
------------
Current assets
Cash and cash equivalents................................. $ 832,130
Available for sale securities............................. 2,559,197
Accounts receivable....................................... 84,919
Inventories............................................... 51,712
Grant receivable.......................................... 214,321
Prepaid expenses and other assets......................... 334,372
------------
Total current assets................................. 4,076,651
Property and equipment-net....................................... 510,064
Patents and licenses-net......................................... 45,315
------------
Total assets..................................................... $ 4,632,030
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses..................... $ 567,231
------------
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, 40,655,363 shares issued and outstanding...... 18,345,491
Additional paid-in capital................................ 2,000,000
Accumulated other comprehensive income.................... 162,942
Accumulated deficit....................................... (16,443,634)
------------
Total stockholders' equity................................ 4,064,799
Total liabilities and stockholders' equity....................... $ 4,632,030
===========
See independent auditors' report and accompanying notes to consolidated
financial statements
22
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended June 30,
------------- -------------
2002 2001
------------- -------------
Sales.......................................... $ 571,742 $ 567,007
Cost of sales.................................. 364,182 395,282
------------- -------------
Gross profit................................... 207,560 171,725
------------- -------------
Operating expenses
Research and development....................... 1,287,193 946,959
General and administrative..................... 2,028,355 1,577,315
Compensation expense related to stock options.. 1,000,000 1,000,000
Depreciation and amortization.................. 194,581 147,191
Amortization of prepaid consulting fees........ 661,169 443,831
------------- -------------
Total operating expenses....................... 5,171,298 4,115,296
------------- -------------
Loss from operations........................... (4,963,738) (3,943,571)
------------- -------------
Other income
Interest income, net of interest expense of
approximately $1,100 and $7,000, respectively.. 70,940 276,824
Other income................................... 95,290 38,886
------------- -------------
Total other income............................. 166,230 315,710
------------- -------------
Net loss....................................... (4,797,508) (3,627,861)
Other comprehensive income (loss)
Foreign currency translation adjustments....... 468,218 (276,272)
Unrealized gain on marketable securities....... 51,094 30,716
------------- -------------
Comprehensive loss............................. $ (4,278,196) $ (3,873,417)
============= =============
Net loss available to common
shareholders per common share.................. ($0.12) ($0.09)
============= =============
Basic and diluted weighted average
number of common shares outstanding............ 40,622,703 40,514,363
============= =============
See independent auditors' report and accompanying notes to consolidated
financial statements
23
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2002 AND 2001
Preferred Stock Common Stock Additional
-------------------------- -------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance at July 1, 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....... - - - - -
Net loss....................................... - - - - -
--------------------------------------------------------------------
Balance at June 30, 2001....................... - - 40,514,363 18,305,881 1,000,000
Compensation expense related to stock options.. - - - - 1,000,000
Amortization of prepaid consulting fees........ - - - - -
Issuance of common stock for consulting........ - - 141,000 39,610 -
Currency translation adjustments............... - - - - -
Unrealized gain on marketable securities....... - - - - -
Net loss....................................... - - - - -
--------------------------------------------------------------------
Balance at June 30, 2002....................... - $ - 40,655,363 $18,345,491 $ 2,000,000
====================================================================
See independent auditors' report and accompanying notes to consolidated
financial statements
24
Accumulated
Other Total
Stock Prepaid Comprehensive Accumulated Stockholders'
Subscriptions Consulting Fees Income (Loss) Deficit Equity
------------- --------------- ------------- -------------- -------------
Balance at July 1, 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............... - - (276,272) - (276,272)
Unrealized gain on marketable securities....... - - 30,716 - 30,716
Net loss....................................... - - - (3,627,861) (3,627,861)
----------------------------------------------------------------------------
Balance at June 30, 2001....................... - (661,169) (356,370) (11,646,126) 6,642,216
Compensation expense related to stock options.. - - - - 1,000,000
Amortization of prepaid consulting fees........ - 661,169 - - 661,169
Issuance of common stock for consulting........ - - - - 39,610
Currency translation adjustments............... - - 468,218 - 468,218
Unrealized gain on marketable securities....... - - 51,094 - 51,094
Net loss....................................... - - - (4,797,508) (4,797,508)
----------------------------------------------------------------------------
Balance at June 30, 2002....................... $ - $ - $ 162,942 ($16,443,634) $ 4,064,799
============================================================================
See independent auditors' report and accompanying notes to consolidated
financial statements
25
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
------------ ------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $(4,797,508) $(3,627,861)
Adjustments to reconcile net loss to net cash used in operating activities:
Compensation expense related to stock options ............................... 1,000,000 1,000,000
Depreciation and amortization ............................................... 194,581 147,191
Amortization of prepaid consulting fees ..................................... 661,169 443,831
Realized gains on marketable securities ..................................... (61,000) -
Foreign exchange transaction gains .......................................... (15,000) (34,000)
Estimated fair market value of common stock issued for services rendered .... 39,610 -
Changes in operating assets and liabilities:
Accounts receivable ......................................................... 44,009 (73,210)
Grant receivable ............................................................ (208,138) 176,844
Inventories ................................................................. 18,309 9,669
Prepaid expenses and other assets ........................................... 22,181 (147,226)
Accounts payable and accrued expenses ....................................... 278,614 58,412
------------ ------------
Net cash used in operating activities ............................................. (2,823,173) (2,046,350)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in marketable securities ................................................. (4,846,151) (4,394,972)
Purchase of property and equipment, patents and licenses .......................... (198,905) (234,626)
Maturities of marketable securities ............................................... 5,877,557 996,179
------------ ------------
Net cash provided by (used in) investing activities ............................... 832,501 (3,633,419)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Collection of stock subscription receivable ....................................... - 321,367
------------ ------------
Effect of exchange rate changes ................................................... 468,218 (276,272)
------------ ------------
Net decrease in cash and cash equivalents ......................................... (1,522,454) (5,634,674)
Cash and cash equivalents, beginning of period .................................... 2,354,584 7,989,258
------------ ------------
Cash and cash equivalents, ending of period ....................................... $ 832,130 $ 2,354,584
============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest..................................................................... $ 1,127 $ 7,309
============ ============
Income taxes................................................................. $ 800 $ 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, 2002 and 2001.
See independent auditors' report and accompanying notes to consolidated
financial statements
26
SANGUI BIO TECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2002
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 BioTech, Inc. ("Sangui USA"),
incorporated in Delaware in 1996, is located in Santa Ana, California. Sangui
USA manufactures in vitro immunodiagnostic blood test kits that are primarily
sold in the United States and Europe. Subsequent to June 30, 2002, the Company
agreed to sell its entire Sangui USA operation (see Note 11). The Company has
three subsidiaries located outside the United States: Sangui-BioTech 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 carries out research and development
projects in conjunction with Sangui AG and Gluko AG.
Consolidation
-------------
The consolidated financial statements include the accounts of Sangui BioTech
International, Inc. and its wholly owned domestic and foreign subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in fiscal 2001 have been reclassified to conform
to the fiscal 2002 presentation.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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
receivable, inventories, and long-lived assets, and valuation allowance on
deferred tax assets.
Risks 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 AG and Gluko AG, 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 Company's management believes, based on its current operating plan, its
current cash and highly liquid marketable securities totaling approximately $3.4
million at June 30, 2002, are sufficient to fund the Company's operations and
working capital requirements at least through June 30, 2003. The Company is also
considering various debt or equity funding opportunities.
Concentration of Risk
---------------------
Two customers accounted for 38% of accounts receivable as of June 30, 2002 and
approximately 40% of sales for the year ended June 30, 2002. The two customers
accounted for 51% of sales for the year ended June 30, 2001.
27
Financial Instruments
---------------------
The Company has financial instruments whereby the fair market value of the
financial instruments could be different than that recorded on a historical
basis. The Company's financial instruments consist of its cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
and accrued expenses. The carrying amount of the Company's cash and cash
equivalents, 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.
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 loss but are
included in comprehensive income (loss) and accumulated in a separate component
of stockholders' equity. Income and expense are translated at weighted average
exchange rates for the period. During fiscal 2002 and 2001, the Company had
foreign exchange transaction gains included in other income of approximately
$15,000 and $34,000, 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. The Company also maintains bank accounts in Germany
and Singapore.
Marketable Securities
---------------------
Marketable securities are classified as available-for-sale, as defined by
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Unrealized gains and losses
are excluded from net loss and are reported as a separate component of other
comprehensive income in shareholders' equity. Realized gains and losses are
included in other income and are determined based on the specific identification
of the securities bought and sold (see Note 2).
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, 2002 and
2001, was approximately $177,000 and $138,000, 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 and Licenses
--------------------
Patents and licenses are recorded at cost and are amortized using the
straight-line method over their estimated useful lives, which range from four to
eight years. Amortization expense for the years ended June 30, 2002 and 2001,
was approximately $17,000 and $9,000, respectively.
Impairment of Long-Lived Assets
-------------------------------
Long-lived assets and certain identifiable intangibles to be held and used by an
entity are reviewed by the management of the Company for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. As of June 30, 2002, management of the Company believes
28
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.
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
9). 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 property's 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"), as
amended. 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 Financial Accounting Standards Board ("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 5).
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 (at June
30, 2002, there were no potential common shares).
Comprehensive Income (Loss)
---------------------------
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income (loss)
and its components in a full set of general-purpose financial statements. 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. 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 cash equivalents and are recorded as components of stockholders' equity.
29
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 10).
New Accounting Pronouncements
-----------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within these fiscal years, with early adoption encouraged. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," to update,
clarify and simplify existing accounting pronouncements. SFAS No. 4, which
required all gains and losses from debt extinguishment to be aggregated and, if
material, classified as an extraordinary item, net of related tax effect, was
rescinded. Consequently, SFAS No. 64, which amended SFAS No.4, was rescinded
because it was no longer necessary. The Company does not expect SFAS No. 145 to
have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 addresses accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS No. 146 did not
have a material effect on its financial statements.
NOTE 2 - AVAILABLE FOR SALE SECURITIES
---------------------------------------
Available for sale securities consist of the following at June 30, 2002:
Cost Fair Market Value Unrealized
Gain
Mutual Funds......................... $1,525,414 $1,568,117 $42,703
Corporate bonds due within one year.. 991,080 991,080 -
----------- ------------ -------------
$2,516,494 $2,559,197 $42,703
=========== ============ =============
NOTE 3 - PROPERTY AND EQUIPMENT
------------------------------------
Property and equipment consists of the following at June 30, 2002:
Technical and laboratory equipment............... $845,767
Leasehold improvements........................... 216,416
Office equipment................................. 41,334
-----------
1,103,517
Less accumulated depreciation and amortization (593,453)
-----------
$510,064
===========
30
NOTE 4 - PATENTS AND LICENSES
--------------------------------
At June 30, 2002, patents and licenses totaled $107,334 less accumulated
amortization of $62,019.
NOTE 5 - 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.
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, was being amortized ratably over the contract period. For
the year ended June 30, 2001, the Company recognized approximately $444,000 of
amortization expense. For the year ended June 30, 2002, the Company initially
recognized $440,000 of amortization expense, leaving an unamortized balance of
the prepaid asset of $221,169. At June 30, 2002, management determined that no
more benefit will be received in relation to the prepaid consulting fee and
accordingly wrote off the remaining balance of $221,169 to amortization of
prepaid consulting fees expenses.
During fiscal 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 recorded as a reduction of common
stock in the accompanying statements of stockholders' equity.
During fiscal 2002, the Company issued 141,000 shares of restricted common stock
valued at $39,610 as payment for consulting services.
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. The Company is amortizing the
option value 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 were exercisable through June
30, 2009. As a result, the Company recognized compensation expense of $1,000,000
in fiscal 2002 and 2001, respectively, related to the vesting of the options.
Effective June 30, 2002, these options were cancelled by mutual agreement of
both parties. No further compensation expense will be recorded as a result of
the cancellation.
31
Option activity for the years indicated below is as follows:
Options Weighted
Average Price
Outstanding, June 30, 2001 and 2000......... 3,000,000 $0.01
Granted................................ - -
Exercised.............................. - -
Cancelled/Forfeited.................... (3,000,000) (0.01)
------------- --------------
Outstanding, June 30, 2002 - -
============= ==============
Exercisable, June 30,2002 - -
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:
2002 2001
Net loss
As reported.................. $(4,797,508) $(3,627,861)
Pro forma.................... $(4,797,508) $(3,627,861)
Net loss per share:
As reported.................. $ (0.12) $ (0.09)
Pro forma.................... $ (0.12) $ (0.09)
NOTE 6 - INCOME TAX PROVISION
---------------------------------
No current provision for income taxes for the years ended June 30, 2002 and 2001
is required, since the Company incurred net operating losses through June 30,
2002.
Income tax expense for the years ended June 30, 2002 and 2001 differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent for
the following reasons:
2002 2001
-------------- --------------
Income tax benefit at U.S. federal
statutory rates............... $ (1,631,000) $ (1,233,000)
Net operating losses not benefited.... 1,631,800 1,233,800
State and local income taxes, net
of federal income tax effect.. (800) (800)
-------------- --------------
$ - $ -
============== ==============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 2002 are presented below:
Deferred tax assets:
Net operating losses..................... $ 4,375,000
Less valuation allowance................. $ (4,375,000)
--------------
Net deferred tax assets................. $ -
==============
32
As of June 30, 2002, the Company had net operating loss carryforwards of
approximately $4,560,000, $4,208,000 and $6,116,000 available to offset future
taxable federal, state, and foreign income, respectively. The federal and state
carryforward amounts expire in varying amounts between 2002 and 2012. The
foreign net operating loss carryforwards do not have an expiration period.
NOTE 7 - 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 for the years ended June
30, 2002 and 2001:
2002 2001
-------------- --------------
Numerator for basic and diluted loss
per common share - net loss $ (4,797,508) $ (3,627,861)
============== ==============
Denominator for basic and diluted loss
per common share - weighted average
shares 40,622,703 40,514,363
============== ==============
Basic and diluted loss per common share $ (0.12) $ (0.09)
============== ==============
NOTE 8 - RELATED PARTY TRANSACTIONS
-----------------------------------
As described in Note 5, the Company wrote-off $225,000 of stock subscription
receivable due from Euro-American GmbH.
The Company has an agreement with Professor Barnikol, the Company's President
and CEO, pursuant to which he is entitled to 3% royalties of gross revenues
earned with any product based on his inventions. No royalties were paid or
earned in fiscal 2002 and 2001.
Effective June 30, 2002, options to purchase 3,000,000 shares of common stock
which were issued to the chairman of the Company in fiscal 2000 were cancelled
(see Note 5).
NOTE 9 - 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, 2002 are:
Years Ending
June 30,
--------
2003.......................... $178,000
2004.......................... 45,000
-----------
$223,000
===========
Rent expense was approximately $210,000 for each of the years ended June 30,
2002 and 2001.
Grants
------
In 1998 and 1999, Sangui AG and Gluko AG, respectively, received grants from the
government of the German state of Northrhine-Westphalia supporting their
respective development projects. These grants are designed to cover 40% of
eligible research and development costs and capital expenditures subject to the
Company's ability to cover the remaining 60% of the costs. The grants originally
totalled approximately $1.8 million and $2.2 million for Sangui AG and Gluko AG,
respectively. 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.
33
Based on research and development expenditures and capital expenditures through
June 30, 2000, the Company had recorded for approximately $818,000 of the
grants. In fiscal 2001, the Company recorded approximately $348,000 and $76,000
of research and development expenditures and capital expenditures, respectively.
In fiscal 2002, the Company recorded approximately $379,000 and $62,000 of
research and development expenditures and capital expenditures, respectively.
The grants are recorded as a reduction of research and development costs and as
a reduction of the historical cost of certain property and equipment.
Patent-Related Litigation
-------------------------
In December 2000, Axis/Shields ASA, a Norway corporation ("Axis"), filed a
lawsuit against Sangui USA alleging that Sangui USA's Carbohydrate-Deficient
Transferrin ("CDT") test kit, which is used to detect chronic alcohol abuse,
constituted an infringement of patent rights owned by Axis. In March 2001, a
settlement was reached and Sangui USA agreed to cease manufacture and sale of
the CDT test kit. Sangui USA subsequently designed a new test kit which it is
currently manufacturing and selling. Sangui USA designed its current product
specifically to avoid infringement of the Axis patent. In December 2001, Axis
filed another lawsuit in the U.S. District Court for the Central District of
California against Sangui USA alleging that the new test kit also infringed on
Axis' patent rights. Sangui USA filed an answer denying the claims of Axis and
has counterclaimed against Axis for a declaratory judgment of invalidity of the
patent of Axis and for antitrust violations. On July 24, 2002, an agreement was
entered into between Axis and the Company, where the Company agreed to cease to
sell CDT kits and provided other intangible information in consideration of
$100,000 paid by Axis to the Company. As a result of this settlement, Axis
caused a dismissal with prejudice of all its claims to be filed in the legal
action. Concurrently, the Company caused a dismissal with prejudice of the
Company's counterclaim to be filed in the legal action.
Other Litigation
----------------
The Company is, from time to time, involved in various litigation resulting in
the ordinary course of operating its business. Management is currently not able
to predict the outcome of these cases. However, management believes that the
amount of ultimate liability, if any, with respect to these actions will not
have a material effect on the Company's financial position and results of
operations.
NOTE 10 - BUSINESS SEGMENTS
---------------------------
The Company reports it business segments based on geographic regions, which are
as follows as of June 30, 2002 and for the years ended June 30, 2002 and 2001:
2002 2001
------------ ------------
Net sales:
Sangui USA......................... $ 571,742 $ 567,007
Sangui BioTech AG.................. - -
GlukoMediTech AG................... - -
Sangui BioTech PTE Ltd............. - -
------------ ------------
$ 571,742 $ 567,007
============ ============
Net loss:
Sangui USA......................... $ 2,256,071 $ 1,895,170
Sangui BioTech AG.................. 1,365,525 1,102,167
GlukoMediTech AG................... 955,756 447,456
Sangui BioTech PTE Ltd............. 220,156 183,068
------------ ------------
$ 4,797,508 $ 3,627,861
============ ============
34
Depreciation and amortization
Sangui USA......................... $ 13,981 $ 14,570
Sangui BioTech AG.................. 107,070 98,031
GlukoMediTech AG................... 41,192 34,590
Sangui BioTech PTE Ltd............. 32,338 -
------------ ------------
$ 194,581 $ 147,191
============ ============
Identifiable assets
Sangui USA......................... $ 705,414
Sangui BioTech AG.................. 1,517,076
GlukoMediTech AG................... 2,261,128
Sangui BioTech PTE Ltd............. 148,412
------------
$ 4,632,030
============
NOTE 11 - SUBSEQUENT EVENT
----------------------------
On September 15, 2002, the Company sold essentially all the remaining assets of
Sangui USA to Biomerica, Inc., a Delaware company operating in the Orange
County, California, for $60,000, to be received in three equal annual payments
beginning December 1, 2002.
NOTE 12 - PRO FORMA CONDENSED FINANCIAL INFORMATION (UNAUDITED)
---------------------------------------------------------------
The pro forma information contained in this schedule is based on the historical
financial statements of the Company and should be read in conjunction with these
statements and related notes thereto. The purpose of presenting this unaudited
pro forma financial data is to show the effects on the historical financial
information had the Company agreed to cease to sell CDT kits and sell the assets
of Sangui USA (collectively, the "Sangui USA Operations") at June 30, 2002 for
the proforma balance sheet and at July 1, 2001 for the proforma statement of
operations. However, the pro froma condensed balance sheet and the pro forma
condensed statement of operations are not necessarily indicative of the effects
on the financial position and results of operations what would have been
attained had the cessation of the Sangui USA Operations actually occurred
earlier.
PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2002
(IN THOUSANDS OF DOLLARS)
(See Note a)
ASSETS
Pro Forma
excluding the
Pro Forma See Sangui USA
Historical Adjustments Notes Operations
------------- -------------- ----- --------------
Cash and cash equivalents..................... $832 $60 b $827
(65) c
Available for sale securities................. 2,559 - 2,559
Accounts receivable and inventories.......... 137 (137) d -
Grant receivable, prepaid expenses and
other assets............................... 549 - 549
------------- -------------- --------------
Total current assets.......................... 4,077 (142) 3,935
Property and equipment-net.................... 510 (6) d 504
Patents-net................................... 45 - 45
------------- -------------- --------------
Total assets.................................. $4,632 $(148) $4,484
============= ============== ==============
35
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses......... $567 (65) c $502
Common stock.................................. 18,509 - 18,509
Additional paid-in capital.................... 2,000 - 2,000
Accumulated deficit........................... (16,444) 60 (16,527)
(143)
------------- -------------- --------------
$4,632 $(148) $4,484
============= ============== ==============
Notes to pro forma adjustments:
a) These pro forma adjustments have been computed assuming the cessation
of sales of CDT kits and the sale of Sangui USA's assets was
consummated at June 30, 2002. These amounts will differ from the actual
results primarily due to the timing of the actual transaction.
To record the following:
b) Sales price of assets............................... $60
c) Payment of liabilities of from sales proceeds....... 65
d) Cost of assets sold................................. 143
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2002
(IN THOUSANDS OF DOLLARS)
(See Note a)
Pro Forma
excluding the
Pro Forma See Sangui USA
Historical Adjustments Notes Operations
---------- ----------- ----- -------------
Sales $ 572 (572) b $ -
Cost of sales 364 (364) b -
---------- ----------- ----- -------------
Gross profit 208 (208) -
Operating expenses:
Research and development 1,287 - 1,287
General and administrative 2,028 (274) b 1,754
Compensation expense related to stock
options 1,000 - 1,000
Depreciation and amortization 195 - 195
Amortization of prepaid consulting fee 661 - 661
---------- ----------- ----- -------------
5,171 (274) 4,897
Loss from operations (4,963) (66) (4,897)
Other income 166 - 166
---------- ----------- ----- -------------
Net loss $ (4,797) $ (66) $ (4,731)
========== =========== ===== =============
36
Notes to pro forma adjustments:
a) These pro forma adjustments have been computed assuming the cessation
of sales of CDT-kits and the sale of Sangui USA's assets was
consummated at June 30, 2001. These amounts will differ from the actual
results primarily due to the timing of the actual transaction. However,
the pro forma statement only discloses income or losses from recurring
operations and does not reflect any gain or loss from the sale of
Sangui USA's assets. The pro forma adjustments give effect to events
that are directly attributable to the sale and expected to have a
continuing impact on the Company.
To record the following:
b) Eliminate income and loss items directly identified with Sangui USA's
Operations.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 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, 68 Arndtstrasse 8, D-58453 Germany Chairman, President,
M.D., Ph. D. Witten, Germany Chief Executive Officer,
Executive Director
Oswald Burkhard, 51 Martinsgasse 1, D-67547 Germany Non-Executive Director
M.D., Ph. D. Worms, Germany
Dr. Edgar Fritschi, Ph.D. 60 Rispenweg 9, D-50933 Germany Non-Executive Director
Koeln
Dora Malek 45 Saturnstr. 19, D-85609 Germany Non-Executive Director
Aschheim, Germany
Professor Joachim Lutz, 70 Thueringerstr. 24 D-97078 Germany Non-Executive Director
M.D., Ph.D. Wuerzberg, Germany
37
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 as per June 30,
2002 are set out below:
NAME AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol, 68 Arndtstrasse 8, D-58453 Germany President and Chief
M.D., Ph. D. Witten, Germany Executive Officer
Oswald Burkhard, 52 Martinsgasse 1, D-67547 Germany Vice President
M.D., Ph. D. Worms, 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 haemoglobins. 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 haemoglobin 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.
38
EDGAR FRITSCHI, M.D., studied Veterinary Medicine at the Universities of
Gie(beta)en and Zurich gaining his Doctorate in Hannover. He had specialised in
the fields of toxicology, pharmacology, and in the development of new human
therapeutics in particular. Since 1969, Dr Fritschi has held leading positions
in the research and development departments of renowned German pharmaceutical
companies, including Godecke AG in Freiburg, L. Heumann & Co. in Nuremberg, and
Schwarz Pharma AG in Monheim. Dr Fritschi is a Board Member of the North
Rhine-Westphalia Venture Capital Forum and since 1999 has been Managing Director
of TecTo Market GmbH, Cologne, specializing in offering consulting services to
biotechnology companies.
DORA MALEK, Attorney-at-Law, Non-Executive Director, 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, 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.
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, 2002, 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.
39
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, 2002 and 2001. No executive officer's salary and bonus exceeded
$100,000 in any of the applicable years. The following information includes the
dollar value of base salaries, bonus awards, the number of stock options granted
and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- -----------------------
Awards Payouts
------ -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($)(2) ($) ($) ($) SARs (#) ($) ($)
------------------ ------ ------- ----- ------------- ---------- ---------- ------ ------------
Wolfgang Barnikol 2002 115,884 -0- -0- -0- -0- -0- -0-
Chairman, CEO
and President (1) 2001 105,922 -0- -0- -0- -0- -0- -0-
2000 111,681 -0- -0- -0- 3,000,000 -0- -0-
Oswald Burkhard 2002 -0- -0- -0- -0- -0- -0- -0-
Vice President 2001 4,775 -0- -0- -0- -0- -0- -0-
2000 5,836 -0- -0- -0- -0- -0- -0-
Seiglinde Borchert 2002 40,853 -0- -0- -0- -0- -0- -0-
COO 2001 54,697 -0- -0- -0- -0- -0- -0-
2000 57,274 -0- -0- -0- -0- -0- -0-
Detlev Frhr. von 2002 76,017 -0- -0- -0- -0- -0- -0-
Linsingen 2001 6,512 -0- -0- -0- -0- -0- -0-
CFO, Treasurer 2000 82,200 -0- -0- -0- -0- -0- -0-
Harald Poetzschke 2002 46,972 -0- -0- -0- -0- -0- -0-
CSO 2001 36,465 -0- -0- -0- -0- -0- -0-
2000 40,858 -0- -0- -0- -0- -0- -0-
Patrick Onishi 2002 70,000 -0- -0- -0- -0- -0- -0-
Secretary 2001 70,000 -0- -0- -0- -0- -0- -0-
2000 70,000 -0- -0- -0- -0- -0- -0-
(1) These options were cancelled as of June 30, 2002. (2) All figures are
expressed in United States Dollars ("USD") For the German management personnel,
the EURO or DM was converted to USD as of the fiscal year end of each year.
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;
40
* 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(1)4.56%
Arndtsr, 8, D-58453 Witten
Germany
Common Stock Dr. Oswald Burkhard 794,400 1.95%
Martinsgasse 1, D-67547 Worms
Germany
Common Sock Dr. Edgar Fritschi -0- *
Rispenweg 9
D-50544 Koeln
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 Patrick Onishi 70,000 0.17%
2 Cambridge
Irvine CA 92620, US
Common Stock All Officers and Directors as
a Group (8 persons) 2,718,200 6.69%
========= ======
(1) Excludes 3,000,000 options to purchase common stock of the Company that were
cancelled as of June 30, 2002.
*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) was a financial services corporation
organized and established in Germany. Axel Kutscher, former Non-Executive
Director of the Company, and Helmut 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. As of June 30, 2002 Prof. Barnikol waived his rights
concerning the option and the option was cancelled.
ROYALTY ARRANGEMENT WITH PROFESSOR WOLFGANG BARNIKOL. On July 7, 1997, the
Company entered into an agreement with Professor Barnikol pursuant to which
41
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)(cancelled as of
June 30, 2002).
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. Sieglinde Borchert
dated June 15, 1998 (2)
10.3 Fee Agreement between SanguiBiotech AG and Dr. Sieglinde 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.
42
(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 to be signed on its behalf
by the undersigned hereunto duly authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
/s/ Wolfgang Barnikol
----------------------------------
Wolfgang Barnikol
President and Director
In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signatures Title Date
---------- ----- ----
September 27, 2002
/s/ Wolfgang Barnikol President, Chief Executive
---------------------- Officer and Director
Wolfgang Barnikol, M.D.,
Ph.D
September 27, 2002
/s/ Patrick Onishi Secretary
----------------------
Patrick Onishi
September 27, 2002
/s/ Oswald Berkhard Director
----------------------
Oswald Berkhard, M.D., Ph.D
September 27, 2002
/s/ Dora Malek Director
----------------------
Dora Malek
September 27, 2002
/s/ Joachim Ludz Director
----------------------
Joachim Ludz, M.D.
September 27, 2002
/s/ Edgar Fritschi Director
----------------------
Edgar Fritschi, Ph.D
43
CERTIFICATION PURSUANT TO
18 U.S.C.SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Sangui BioTech International, Inc. (the
"Company") on Form 10-KSB for the period ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"),the
undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 27, 2002 /s/ Wolfgang Barnikol
---------------------
Wolfgang Barnikol
President and Director
CERTIFICATION
The undersigned, Prof. Dr. W. Barnikol, Chief Executive Officer and Chief
Financial Officer, certifies that:
1. I have reviewed this annual report on Form 10-KSB of Sangui
BioTech International, Inc.
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for the periods presented in this annual report.
Date: September 27, 2002 By: /s/ W. Barnikol
--------------------------------------
Prof. Dr. W. Barnikol, Chief Executive
Officer and Chief Financial Officer
44