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, 2003
| | 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, 2003
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)
Alfred Herrhausen Street 44 Germany 58455
-------------
58455 Witten, Germany (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code + 49 (2302) 915-200
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, 2003 was $138,542.
The market value of the voting stock held by non-affiliates of the issuer as of
September 19, 2003 was approximately $ 3,659,000.
The number of shares of the common stock outstanding as of September 13, 2003
was 40,655,363.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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TABLE OF CONTENTS
PART I.................................................................... 3
ITEM 1 Description of Business..................................... 3
ITEM 2 Description of Properties.................................. 13
ITEM 3 Legal Proceedings........................................... 14
ITEM 4 Submission of Matters to a Vote of Security Holders......... 14
PART II................................................................... 14
ITEM 5 Market for SGBI Securities.................................. 14
ITEM 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Grants...................................................... 16
Sangui BioTech AG........................................... 16
Sangui BioTech International Inc............................ 16
ITEM 7 Financial Statements........................................ F-1
Independent Auditors' Report................................ F-1
Consolidated Balance Sheet.................................. F-2
Consolidated Statements of Operations and
Comprehensive Loss........................................ F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
ITEM 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 19
ITEM 8 A Controls and Procedures see SEC Release 33-8238, 34-47986... 19
PART III.................................................................. 20
ITEM 9 Directors and Executive Officers............................ 20
ITEM 10 Executive Compensation and Other Information................ 22
ITEM 11 Security Ownership of Certain Beneficial
Owners and Management..................................... 22
ITEM 12 Certain Relationships and Related Transactions.............. 23
ITEM 13 Exhibits and Reports on Form 8-K............................ 24
ITEM 14 Principal Accountant Fees and Services...................... 25
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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 its potential and its 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., a Colorado corporation (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). Until the end
of fiscal year 2001/2002, the Company's business operations were conducted
through four wholly owned subsidiaries: SBT, SanguiBioTech AG (Sangui AG),
GlukoMediTech AG (Gluko AG), and Sangui Biotech Singapore Pte Ltd. (Sangui
Singapore).
SBT was principally engaged in the development and manufacturing of
immunodiagnostic kits, which were sold by SBT in niche markets in the United
States and Europe. During the first quarter of the June 30, 2003 fiscal year SBT
sold its assets, and commenced the wind-down, of the U.S. business operation.
SBT was merged with and into the SGBI effective December 31, 2002.
Sangui AG was established and organized under the laws of Germany in Mainz,
Germany, on November 25, 1995. Sangui AG is in the business of developing
hemoglobin-based artificial oxygen carriers as blood additive and blood volume
substitutes and products thereof. Sangui AG is also developing an anti-aging
cosmetic based on such artificial oxygen carriers. Professor Wolfgang Barnikol,
M.D., Ph.D serves as Chief Executive Officer of Sangui AG. The members of Sangui
AG's supervisory board as of June 30, 2003 were Professor Joachim Lutz, M.D.,
Dora Malek, attorney-at-law, Oswald Burkhard, M.D., Ph.D., and Doris
Barnikol-Keuten, Ph.D. Dora Malek resigned from her position as member of the
supervisory board effective September 15, 2003. The facilities of Sangui AG are
located on the premises of the Forschungs- und Entwickungszentrum of the
University of Witten/Herdecke, Witten, Germany.
Gluko AG was established and organized under the laws of Germany in Mainz,
Germany, on July 15, 1996. Gluko AG was developing long-term implantable glucose
sensors, including by-products thereof, and diverse other sensors. Since
additional financing for the next planned step of product development could not
be secured Gluko AG was merged with Sangui AG effective June 30, 2003. While
further development work in this area was halted, Sangui AG is working to secure
the key patents relating to the Glucose Sensors and will continue to address
potential strategic financial or industry partners.
-3-
Sangui Singapore was incorporated as a wholly owned subsidiary of SGBI in
Singapore on May 15, 1999. Sangui Singapore was the Asia regional office for the
Company and was engaged in animal experiments in conjunction with the German
subsidiaries. Effective January 31, 2003 the business was wound down and Sangui
Singapore closed. The strike-off from the Singapore register of businesses has
been applied for.
On March 30, 2000, the Company acquired all the outstanding common stock of
Felnam Investments, Inc., a Nevada corporation (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, 2003, the Company's
accumulated deficit exceeded $18.7 million. The Company expects to continue to
incur substantial 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.
BUSINESS OF THE COMPANY
The Company's mission is the development of novel proprietary products. The
Company is developing its products through its wholly owned German subsidiary
Sangui AG. The Company and Sangui AG are seeking to market and sell all or some
of their 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, anaemia or blood loss due to surgery,
accident, or other causes. Sangui AG is engaged in the development and
commercialization of such artificial oxygen carriers by reproducibly
synthesizing polymers out of native hemoglobin of defined molecular sizes.
Sangui AG 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.
ARTIFICIAL OXYGEN CARRIER
Sangui AG develops several products based on polymers of purified natural
porcine hemoglobin with oxygen carrying abilities similar to native hemoglobin.
These are (1) oxygen carrying blood additives and (2) oxygen carrying blood
volume substitutes.
In December 1997 Sangui AG decided that porcine hemoglobin should be used as
basic material for its artificial oxygen carriers. In March 1999 Sangui AG came
to the fundamental decision as to which hemoglobin hyperpolymer will go into
preclinical investigation and that glutaraldehyde will be taken as cross linker
and the polymer hemoglobin 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 Sangui AG's laboratories demonstrated that it is
possible to polymerize hemoglobins isolated from porcine blood resulting in huge
soluble molecules, so-called hyperpolymers. In August 2000, Sangui AG 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. The product was applied in single volunteers in
pilot self experiments.
The project of developing blood additives and blood substitutes was halted due
to the lack of financing for the pre-clinical test phase of the blood additives.
Sangui AG is continuing to address potential strategic financing and industry
partners in order to enter pre-clinical testing.
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. The Company's management believes
that the European and FDA approval process will take at least several years.
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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 it may also be caused by burns or radiation. Impairment of the
blood flow, for example caused by diabetes mellitus or by chronic venous
insufficiency, can also lead to insufficient oxygen supply and resulting skin
damage.
The new hemoglobin-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 Sangui AG is currently focussing on is an anti-aging
formulation and treatment for the cosmetics market.
Sangui AG had, in fiscal year 2002, finalized the development of an external,
cosmetic application of its oxygen carrier. Sangui AG 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 2004.
PUBLIC GRANTS
With the notification of subsidy dated November 30, 1998, Sangui AG was granted
a subsidy amounting to EUR 1,827,651.18 for the period from April 8, 1998 to
March 31, 2001 to promote the project "Development of a procedure for the
production of synthetic oxygen carriers on the basis of hyperpolymer hemoglobins
as a blood additive and a so-called blood substitute". In March 2001, an
application to have the subsidy period extended to June 30, 2002 was approved.
In March 2002, the Company submitted a second application to the project
authority Julich (PtJ) to have the subsidy period extended; this was approved
for the period up to December 31, 2002 with the notification of alteration dated
July 2, 2002. Through December 31, 2002, funds were received amounting to (euro)
1,388,278.87.
With notification of subsidy dated September 1, 1999, Gluko AG had funds
amounting to (euro) 2,219,397.39 approved for a period of three years. In
October 2001, an application was submitted to the project authority Juelich
(PtJ) to have the subsidy period extended until December 31, 2002; this was
approved with the notification of alteration dated November 28, 2001. Up to
December 31, 2002, the Company had received funds amounting to (euro) 671,129.32
to promote the project "Development of a permanently implantable glucose sensor
and a controllable insulin pump for diabetics into a technical beta cell".
The remaining promotion funds from both subsidized projects were returned as of
December 31, 2002.
The accomplishment of further milestones scheduled for 2003 would have required
the allocation of funds for the 60% counter-financing of the subsidies at the
beginning of the working phase. This was not possible due to the lack of
resources. The Company was therefore asked to either return the remaining funds
or furnish immediate proof of the necessary counter-financing.
To complete the project, a site inspection was held on March 10, 2003, by the
project manager from the subsidizing authority (PtJ), the goal of the
discussions being to conclude the project by a mutual consent.
The parties agreed on the following:
1. Efforts will be made to sell all of the equipment that was no longer
needed. The first priority would be to offer subsidized equipment to
employees on favorable terms. In this case, no proceeds (usually 40% of the
proceeds in accordance with the 40% subsidy ratio) would have to be
returned to the federal state (Land).
2. If equipment is sold to third parties, the proportion of the proceeds that
corresponds to the level of subsidy as a proportion of the development
funds must be returned to the Land of North Rhine-Westphalia. (NB: until
now, it has not been possible to sell any of the equipment subsidized by
the Land.)
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3. Efforts will be made to find a successor tenant for the clean room in order
to avert the deconstruction costs that would be incurred if Sangui AG had
to return the premises to their original condition when they were first
occupied. In connection with this, Sangui AG submitted an offer to the
landlord, the research and development centre (FEZ), according to which it
would transfer the fixtures to FEZ for the symbolic price of one euro.
Since the Land will not be imposing any restrictions on the use, the FEZ
can choose its tenant(s) freely.
(NB: so far no tenant has been found.)
It was agreed that the subsidizing authority will put together a written
document of the results of the site inspection and send it to Sangui AG. No
correspondence of this kind has been received so far.
Sangui AG is still looking for industrial partners for the oxygen carrier and
glucose sensor projects. Should this succeed, the projects, for which
experiments have now been halted, would be reactivated and the clean room put
back into operation.
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 eighteen (18) patents.
Furthermore, the subsidiaries have applied for twenty-four (24) patents, most of
which have been filed in Germany, the USA, and as an international patent
application with the European Patent Office. Four (4) patent applications are
related to progress made in the final development stages of the external
application of the artificial oxygen carriers.
MARKETING AND DISTRIBUTION
Sangui AG has not yet manufactured any of its products in commercial quantities.
Sangui AG 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 US subsidiary were 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.
Although it is believed that SGBI and its subsidiary were in material compliance
with all applicable governmental and environmental laws, rules, regulations and
policies, and although no government concerns were put forward during or after
the closing of the Santa Ana operations, 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 future government
claims with regard to unlikely but not impossible infringements on these or
other laws resulting from SGBI's former US operations.
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 the Company 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.
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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.
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 commercialisation 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 commercialisation or that the efforts of SGBI will result in successful
product commercialisation. SGBI has been operating at a loss and expects its
costs to increase as soon 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
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 this industry
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 suitable replacements
will be available.
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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 are
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 commercialisation 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.
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
commercialisation, 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
commercialisation 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.
-8-
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 and 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,
agencies in Germany, Singapore and other countries. Although the time required
for completing such testing and obtaining such approvals is uncertain,
satisfaction of these requirements typically takes a number of years and varies
substantially based on the type, complexity and novelty of each product. Neither
SGBI nor its subsidiaries can accurately predict when product applications or
submissions for FDA or other regulatory review may be submitted. Management of
the Company has no experience in obtaining regulatory clearance on these types
of products. The lengthy process of obtaining regulatory approval and ensuring
compliance with applicable law requires the expenditure of substantial
resources. Any delays or failure by SGBI or its subsidiaries to obtain
regulatory approval and ensure compliance with appropriate standards could
adversely affect the commercialization of such products, the ability of SGBI to
earn product or royalty revenue, and its results of operations, liquidity and
capital resources.
Pre-clinical testing is generally conducted in laboratory animals to evaluate
the potential safety and effectiveness of a drug. The results of these studies
are submitted to the FDA, which must be approved before clinical trials can
begin. Typically, clinical evaluation involves a time consuming and costly
three-phase process. In Phase I, clinical trials are conducted with a small
number of subjects to determine the early safety profile, the pattern of drug
distribution and metabolism. In Phase II, clinical trials are conducted with
groups of patients afflicted with a specific disease in order to determine
preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase
III, large-scale, multi-center, comparative trials are conducted with patients
afflicted with a target disease in order to provide enough data to demonstrate
the efficacy and safety required by the FDA. The FDA closely monitors the
progress of each of the three phases of clinical trials and may, at its
discretion, re-evaluate, alter, suspend or terminate the testing based upon the
data which have been accumulated to that point and its assessment of the
risk/benefit ratio to the patient.
Clinical trials and the marketing and manufacturing of products are subject to
the rigorous testing and approval processes of the FDA and foreign regulatory
authorities. The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive. There can be no assurance that SGBI will be
able to obtain the necessary approvals to conduct clinical trials for the
manufacturing and marketing of products, that all necessary clearances will be
granted to SGBI or their licensors for future products on a timely basis, or at
all, or that FDA review or other actions will not involve delays adversely
affecting the marketing and sale of the products or SGBI. In addition, the
testing and approval process with respect to certain new products which SGBI may
seek to introduce is likely to take a substantial number of years and involve
the expenditure of substantial resources. There can be no assurance that
-9-
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.
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.
-10-
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. U.S. 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
SGBI 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.
Many of the competitors of SGBI have, or are affiliated with companies having,
substantially greater resources than SGBI, and such competitors may be able to
sustain the costs of complex patent litigation to a greater degree and for
longer periods of time than SGBI. Uncertainties resulting from the initiation
and continuation of any patent or related litigation could have a material
adverse effect on the ability of SGBI to compete in the marketplace pending
resolution of the disputed matters. Moreover, an adverse outcome could subject
SGBI to significant liabilities to third parties and require SGBI to license
disputed rights from third parties or cease using the technology. In the event
that third parties have or obtain rights to intellectual property or technology
used or needed by SGBI, there can be no assurance that any licenses would be
available to SGBI or would be available on terms reasonably acceptable to SGBI.
SGBI may rely on certain proprietary technologies, trade secrets, and know-how
that are not patentable. Although SGBI has taken steps to protect their
unpatented trade secrets and technology, in part through the use of
confidentiality agreements with their employees, consultants and certain of its
contractors, there can be no assurance that: (i) these agreements will not be
breached; (ii) SGBI would have adequate remedies for any breach; or (iii) the
proprietary trade secrets and know-how of SGBI will not otherwise become known
or be independently developed or discovered by competitors.
RISK OF PRODUCT LIABILITY; POTENTIAL UNAVAILABILITY OF INSURANCE
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.
-11-
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
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.
-12-
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 involve the controlled storage,
use and disposal of hazardous materials. 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 major test kit business to Axis/Shield and its
remaining test kit business to Biomerica, Inc. , in July, 2002, there is no
longer a customer base.
HUMAN RESOURCES
The Company considers its relations with its employees to be favorable. As of
June 30, 2003 the Company and its subsidiaries had 7 fulltime employees of which
4 were involved in research and development and 3 were responsible for
administrative matters. The Company had consulting arrangements with 1
individual as of that date.
REPORTS TO SECURITY HOLDERS
Copies of the Company's reports, as filed with the Securities and Exchange
Commission, are available and can be accessed and downloaded via the internet at
http://www.sec.gov/cgi-bin/srch-edgar, and simply typing in "Sangui Biotech
International."
ITEM 2. PROPERTIES
The Company's US laboratory facility consisted of approximately 3,360 square
feet located in Santa Ana, California. Rent expense for the fiscal year ended
June 30, 2003 was approximately $23,000. The facility was closed in the course
of the first quarter, ended September 30, 2002.
The German subsidiary is based in the Forschungs- und Entwicklungszentrum of the
University Witten/Herdecke, Germany. Rent expense for the fiscal year ended June
30, 2003 was approximately $99,000.
-13-
The Singaporean subsidiary, approximately 350 square meters, used to be based in
the Science Park II, Gemini Building. Rent expense for the fiscal year ended
June 30, 2003 was approximately $12,000. The facility was closed in the course
of the second quarter, ended December 31, 2002.
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 October 2002, the Court granted
the motion of counsel to Mr. Kappes to withdraw from representation of Mr.
Kappes. Upon consideration by the Board of Directors of the legal costs to
prosecute the claims against Mr. Kappes and the likelihood of being able to
collect on any obtained judgment, the Company has requested its attorneys to
take the steps necessary to dismiss the liability claim.
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 In November 2002, the Company finalized a settlement agreement
with Mr. and Mrs. Kappes and Mrs. Kutscher providing for the permitted transfer
by them of their Company stock under certain conditions. No money will be paid
by the Company in connection with the settlement. The legal action has been
dismissed.
On August 10, 2002, Sieglinde Borchert, a former director of Sangui BioTechAG
and Gluko Meditech AG, filed a lawsuit against the two German Corporations
alleging that she is still member of the Board of Management of these Companies.
The parties agreed on a settlement in January 2003, which was approved by the
Court. The legal action has been dismissed.
The Company's wholly owned subsidiary, Sangui AG, was a party defendant in the
matter of Dora Malek v. Sangui AG, District Court of Landgericht Bochum,
Germany, File No. 12 O 55/03. The Plaintiff had alleged that on March 14, 2003,
at a special meeting of the shareholders of Sangui BioTech AG, Sangui Biotech AG
dismissed Ms. Malek as a member of the Supervisory Board and that the dismissal
was in violation of German law and thus void and of no force or effect. In a
written statement to the Court of May 14th, 2003, Sangui BioTech AG acknowledged
Ms. Malek's plea. On June 23, 2003, the Court issued an order confirming Ms.
Malek is a member of the Supervisory Board of Sangui Biotech AG. The Company had
to cover the costs of the action amounting to less than $2,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to our security holders for approval during the fourth
quarter covered by this Report.
PART II
ITEM 5. MARKET FOR SGBI'S SECURITIES
SGBI's common stock is presently traded on the OTC Bulletin Board operated by
NASD under the symbol SGBI as well as on the OTC markets of the Berlin,
Frankfurt and Hamburg stock exchanges in Germany.
-14-
The following table sets forth the high and low closing prices for shares of
SGBI common stock for the fiscal periods noted, as reported by the National
Daily Quotation Service and the OTC Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not represent actual transactions.
CLOSING PRICES (US$)
FISCAL YEAR PERIOD HIGH LOW
---------------------------------------------------------------------
2003 First quarter 0.35 0.15
Second quarter 0.35 0.05
Third quarter 0.09 0.05
Fourth quarter 0.30 0.04
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
In addition to freely tradable 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, 2003, the number of record holders of the Company's common stock was
1,387. 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, 2003, the Company issued no additional
shares of common stock nor any other sort of securities.
-15-
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 received grants from the German government which were used to fund
research and development activities and the acquisition of equipment. 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.
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 2003 COMPARED TO FISCAL 2002
FINANCIAL POSITION
The Company's current assets decreased approximately $2 million, or 50%, from
June 30, 2002 to approximately $2 million at June 30, 2003. The decrease is
primarily attributable to a decrease in available for sale securities of
approximately $1.8 million, a decrease in grant receivable of approximately
$214,000, a decrease in accounts receivable of approximately $85,000, and a
decrease in inventories of approximately $52,000, combined with an increase in
cash and cash equivalents of approximately $124,000. The decrease in available
for sale securities results primarily from funding the current year's operations
of the Company with little or no revenues in the year ended June 30, 2003.
The Company's net property and equipment decreased approximately $350,000, or
68%, from June 30, 2002 to approximately $160,000 at June 30, 2003. The decrease
is primarily attributable to the Company's write-off of approximately $107,000
of leasehold improvements at Sangui Singapore and current year depreciation of
approximately $309,000.
The Company funded its operations primarily through its existing cash reserves.
The Company's stockholders' equity decreased approximately $2 million. The
primary decrease is caused by the Company's current year net loss of
approximately $2.3 million, combined with an increase in accumulated other
comprehensive income of approximately $330,000 due to foreign currency
translation adjustments and unrealized gains on marketable securities.
RESULTS OF OPERATIONS
SANGUI AG
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 34% to
approximately $847,000 in 2003 from approximately $1,287,000 in 2002. This
decrease of $440,000 is due to the refocusing of research and development
activities and halting of the large-scale oxygen carrier and glucose sensor
projects in 2003.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 17% to
approximately $855,000 in 2003 from approximately $1,030,000 in 2002. This
decrease of $175,000 is attributed to decreases in operating expenses due to the
ongoing cost-cutting programs.
Sangui BioTech International, Inc.
----------------------------------
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 20% to
approximately $341,000 in 2003 from approximately $425,000 in 2002. This
decrease is primarily
-16-
related to legal costs incurred in 2002 by the Company in a lawsuit against a
former director of the Company and a decrease in professional and consulting
fees.
COMPENSATION EXPENSE RELATED TO STOCK OPTIONS. Compensation expense related to
stock options was $1,000,000 in 2002, which represented the amortization of the
fair value of stock options previously issued to the chairman of the Company.
Effective June 30, 2002, these options were cancelled and there is no
compensation expense related to stock options in 2003.
AMORTIZATION OF PREPAID CONSULTING FEES. Amortization of prepaid consulting fees
was approximately $661,000 in 2002. At June 30, 2002, management determined that
no more benefit would be received in relation to the prepaid consulting fees and
accordingly the unamortized balance was written off in fiscal 2002. Accordingly,
there was no amortization in 2003.
CONSOLIDATED
NET LOSS. As a result of the above factors and the loss from discontinued
operations, the Company's consolidated net loss was approximately $2.3 million,
or $0.06 per common share, in 2003, compared to approximately $4.8 million, or
$0.12 per common share, in 2002.
-17-
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2003, net cash used in operating activities
decreased to approximately $2.0 million from approximately $2.8 million for the
year ended June 30, 2002, primarily related to a decrease in the Company's
consolidated net loss as a result of the ongoing refocusing program.
For the year ended June 30, 2003, net cash provided by investing activities
increased to approximately $1.9 million from approximately $833,000 for the year
ended June 30, 2002. The principal increase in cash is due to the maturity of
marketable securities and decrease in purchases of marketable securities.
Working capital was approximately $1.9 million at June 30, 2003, a decrease of
approximately $1.6 million from June 30, 2002 due primarily to the Company's net
loss for the year. A substantial portion of the Company's total assets consists
of cash and marketable securities classified as available for sale securities.
The highly liquid nature of these assets provides the Company with flexibility
in financing and managing its business. For the year ended June 30, 2003,
realized gains on the Company's marketable securities were approximately
$55,000, and unrealized net gains of approximately $118,000.
At June 30, 2003 the Company had cash and liquid marketable securities of
approximately $1.8 million. The Company believes that its available cash will be
sufficient to satisfy its requirements for at least the fiscal year ending June
30, 2004.
Sangui AG has entered negotiations with distribution partners for its skin
regeneration and related products. The current state of marketing preparations
has induced management to believe that revenues from these products may be
obtainable in the course of the current fiscal year. Given the cost containment
achieved during the restructuring management believes that the Company's cash
position should be sufficient to cover its financing for at least another fiscal
year and that the planned revenues should help to build a sustainable financial
basis.
However, the Company will need substantial additional funding to fulfil its
business plan and the Company intends to explore financing sources for its
future development activities. No assurance can be given that these efforts will
be successful.
-18-
ITEM 7: FINANCIAL STATEMENTS
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, 2003, 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, 2003, 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 & COMPANY, LLP
Irvine, California, U.S.A.
September 9, 2003
F-1
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
2003
------------
Current assets
Cash and cash equivalents $ 956,531
Available for sale securities 799,068
Taxes receivable 182,820
Prepaid expenses and other assets 91,416
------------
Total current assets 2,029,835
Property and equipment-net 160,117
Patents and licenses-net 19,804
------------
Total assets $ 2,209,756
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 125,816
------------
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 492,706
Accumulated deficit (18,754,257)
------------
Total stockholders' equity 2,083,940
------------
Total liabilities and stockholders' equity $ 2,209,756
============
F-2
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Year ended June 30,
------------ ------------
2003 2002
------------ ------------
Revenues $ -- $ --
Operating expenses:
Research and development 846,657 1,287,193
General and administrative 1,196,272 1,561,252
Depreciation and amortization 309,024 148,262
Compensation expense related to stock options -- 1,000,000
Amortization of prepaid consulting fees -- 661,169
------------ ------------
Total operating expenses 2,351,953 4,657,876
Other income:
Interest income 68,913 70,940
Other income 111,414 95,290
------------ ------------
Total other income 180,327 166,230
Loss from continuing operations (2,171,626) (4,491,646)
Loss from discontinued operations (138,997) (305,862)
------------ ------------
Net loss (2,310,623) (4,797,508)
Other comprehensive income:
Foreign currency translation adjustments 254,011 468,218
Unrealized gain on marketable securities 75,753 51,094
------------ ------------
Comprehensive loss $ (1,980,859) $ (4,278,196)
============ ============
Net loss available to common shareholder per
common share:
Net loss from continuing operations $ (0.05) $ (0.11)
============ ============
Net loss from discontinued operations $ (0.01) $ (0.01)
============ ============
Net loss $ (0.06) $ (0.12)
============ ============
Basic and diluted weighted average
number of common shares outstanding 40,655,363 40,622,703
============ ============
F-3
Sangui Biotech International, Inc.
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 2003 and 2002
Accumulated
Common Stock Additional Other
------------------------- Paid-in Prepaid Comprehensive
Shares Amount Capital Consulting Fees Income (Loss)
--------------------------------------------------------------------------
Balance at July 1, 2001 40,514,363 $ 18,305,881 $ 1,000,000 $ (661,169) $ (356,370)
Compensation expense related to stock options -- -- 1,000,000 -- --
Amortization of prepaid consulting fees -- -- -- 661,169 --
Issuance of common stock for consulting 141,000 39,610 -- -- --
Currency translation adjustments -- -- -- -- 468,218
Unrealized gain on marketable securities
and cash equivalents -- -- -- -- 51,094
Net loss -- -- -- -- --
--------------------------------------------------------------------------
Balance at June 30, 2002 40,655,363 18,345,491 2,000,000 -- 162,942
Currency translation adjustments -- -- -- -- 254,011
Unrealized gain on marketable securities
and cash equivalents -- -- -- -- 75,753
Net loss -- -- -- -- --
--------------------------------------------------------------------------
Balance at June 30, 2003 40,655,363 $ 18,345,491 $ 2,000,000 $ -- $ 492,706
==========================================================================
Total
Accumulated Stockholders'
Deficit Equity
----------------------------
Balance at July 1, 2001 $(11,646,126) $ 6,642,216
Compensation expense related to stock options -- 1,000,000
Amortization of prepaid consulting fees -- 661,169
Issuance of common stock for consulting -- 39,610
Currency translation adjustments -- 468,218
Unrealized gain on marketable securities
and cash equivalents -- 51,094
Net loss (4,797,508) (4,797,508)
----------------------------
Balance at June 30, 2002 (16,443,634) 4,064,799
Currency translation adjustments -- 254,011
Unrealized gain on marketable securities
and cash equivalents -- 75,753
Net loss (2,310,623) (2,310,623)
----------------------------
Balance at June 30, 2003 $(18,754,257) $ 2,083,940
============================
F-4
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
----------- -----------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,310,623) $(4,797,508)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 309,024 194,581
Realized gain on sale of assets of discontinued operations (16,980) --
Loss on impairment of assets 106,927 --
Realized gains on marketable securities (55,072) (61,000)
Compensation expense related to stock options -- 1,000,000
Amortization of prepaid consulting fees -- 661,169
Foreign exchange transactions gains (3,000) (15,000)
Estimated fair market value of common stock issued for
services rendered -- 39,610
Changes in operating assets and liabilities:
Accounts receivable 84,919 44,009
Grant receivable 214,321 (208,138)
Inventories 16,362 18,309
Taxes receivable 56,347 (124,763)
Prepaid expenses and other assets 43,789 146,944
Accounts payable and accrued expenses (441,415) 278,614
----------- -----------
Net cash used in operating activities (1,995,401) (2,823,173)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (1,684,600) (4,846,151)
Maturities of marketable securities 3,678,031 5,877,557
Payment on note receivable 20,000 --
Purchase of property and equipment, patents and licenses (48,163) (198,905)
----------- -----------
Net cash provided by investing activities 1,965,268 832,501
----------- -----------
Effect of exchange rate changes 154,534 468,218
----------- -----------
Net decrease in cash and cash equivalents 124,401 (1,522,454)
Cash and cash equivalents, beginning of period 832,130 2,354,584
----------- -----------
Cash and cash equivalents, ending of period $ 956,531 $ 832,130
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ -- $ 1,127
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
During the year ended June 30, 2003, the Company recorded a note receivable for
$60,000 from the sale of inventory and equipment related to its discontinued
operations, which is recorded in prepaid expenses and other assets.
F-5
SANGUI BIO TECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
------------------
Sangui BioTech International, Inc., incorporated in Colorado in 1995, and its
wholly owned subsidiaries, Sangui BioTech, Inc., SanguiBioTech AG, GlukoMediTech
AG, and Sangui BioTech PTE Ltd., (collectively, the "Company") have been engaged
in the research, development, manufacture, and sales of medical products.
On June 30, 2003, GlukoMediTech AG ("Gluko AG") was merged into SanguiBioTech AG
("Sangui AG"). After completion of the merger, Sangui AG, which is headquartered
in Witten, Germany, is engaged in the development of artificial oxygen carriers
(external applications of hemoglobin, blood substitute and blood additives) as
well as in the development of glucose implant sensors.
The operations of Sangui BioTech, Inc. ("Sangui USA") were discontinued during
2002 upon the sale of its in vitro immunodiagnostics business and the subsequent
merger of Sangui USA with and into the parent company, Sangui BioTech
International, Inc., effective December 31, 2002 (see Note 8). Sangui BioTech
PTE Ltd. ("Sangui Singapore") was a regional office for the Company that carried
out research and development projects in conjunction with Sangui AG. The Company
discontinued the operations of Sangui Singapore in August 2002 (see Note 8). The
Singapore office was closed effective December 31, 2002.
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 2002 have been reclassified to conform
to the fiscal 2003 presentation. These reclassifications have no effect on
previously reported net loss.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
long-lived assets, and valuation allowance on deferred tax assets.
Risks and Uncertainties
-----------------------
The Company's line of future pharmaceutical and cosmetic products (artificial
oxygen carriers or blood substitute and additives) as well as other medical
products being developed by Sangui 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.
F-6
The Company's management believes, based on its current operating plan, its
current cash and marketable securities balances totaling approximately $1.8
million at June 30, 2003, are sufficient to fund the Company's operations and
working capital requirements at least through June 30, 2004. The Company is also
considering various debt or equity funding opportunities. However, the Company
will need substantial additional funding to fulfil its business plan and the
Company intends to explore financing sources for its future development
activities. No assurance can be given that these efforts will be successful.
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, and accounts payable and accrued expenses.
The carrying amount of the Company's cash and cash equivalents and accounts
payable and accrued expenses approximate their estimated fair values due to
their short maturities. 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 foreign operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting from such translation are excluded from net loss but are included in
comprehensive income (loss) and accumulated in a separate component of
stockholders' equity. Income and expenses are translated at weighted average
exchange rates for the period. During fiscal 2003 and 2002, the Company had
foreign exchange transaction gains included in other income of approximately
$3,000 and $15,000, respectively.
Cash and Cash Equivalents
-------------------------
The Company maintains its cash in uninsured bank accounts in Germany. Cash and
cash equivalents include time deposits for which the Company has no requirements
for compensating balances. The Company has not experienced any losses in its
uninsured bank accounts.
Marketable Securities
---------------------
Marketable securities are classified as available-for-sale. Unrealized gains and
losses are excluded from net loss and are reported as a separate component of
other comprehensive income in stockholders' 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).
Taxes Receivable
----------------
Taxes receivable balance of $182,820 as of June 30, 2003 includes foreign tax
withholdings refund claims of which approximately $27,400 has been collected by
the Company subsequent to fiscal 2003 and the remaining balance of $155,420 will
be collected when the Company files its tax return for fiscal 2003.
Property and Equipment
----------------------
Property and equipment are recorded at cost and are depreciated or amortized
using the straight-line method over the estimated useful lives of the related
assets, which range from three to five years. Leasehold improvements are
amortized using the straight-line method over the lesser of the estimated useful
lives of the assets or the related lease terms. Depreciation expense for the
years ended June 30, 2003
F-7
and 2002 was approximately $283,000 and $177,000, respectively. Expenditures for
normal maintenance and routine repairs are charged to expense, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition and
any resulting gain or loss is reflected in the statement of operations. The
Company will attempt to sell all of the equipment that it will no longer need
related to the halt of the subsidization projects and might need to return some
of the proceeds received from the sale of this equipment back to the German
government (see Note 10).
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, 2003 and 2002,
was approximately $26,000 and $17,000, respectively.
Impairment of Long-lived Assets
-------------------------------
Long-lived assets and certain identifiable intangibles to be held and used by
the Company 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, 2003, management of the Company
believes that no impairment has been indicated. There can be no assurances,
however, that market conditions will not change or demand for the Company's
products will continue, which could result in impairment on long-lived assets in
the future.
Revenue Recognition
-------------------
Revenues from product sales are recognized at the time of shipment.
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 received grants from the German government which were used to fund
research and development activities and the acquisition of equipment (see Note
10). Revenue from grants for the reimbursement of research and development
expenses were offset against research and development expenses when the related
expenses were incurred. Grants related to the acquisition of tangible property
were recorded as a reduction of the property's historical cost.
Income Taxes
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided for certain deferred
tax assets when it is more likely than not that such tax assets will not be
realized through future operations.
Accounting for Stock-based Compensation
---------------------------------------
The Company accounts for stock-based compensation issued to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as amended. The
Financial Accounting Standards Board ("FASB") has issued
F-8
SFAS No. 123, "Accounting for Stock-Based Compensation," which, if fully
adopted, changes the method of accounting for all stock-based compensation to
the fair value method.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," was issued. SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148 are effective for
financial statements for fiscal years ending after December 15, 2002.
The effect on net loss and loss per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation is immaterial for fiscal 2002. There is no stock-based employee
compensation expense under APB 25 or pro forma adjustment under SFAS No. 123 for
fiscal 2003, as the Company did not issue any stock-based compensation to
employees since June 30, 2002 (see Note 5).
Basic and Diluted Earnings (Loss) Per Common Share
--------------------------------------------------
Basic earnings (loss) per common share is computed by dividing income (loss)
available to common stockholders by the weighted average number of common shares
outstanding during the period of computation. Diluted earnings (loss) per share
gives effect to all potential dilutive common shares outstanding during the
period of compensation. The computation of diluted earnings (loss) per share
does not assume conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings. As of June 30, 2003 and 2002, the
Company had no potentially dilutive securities that would effect the loss per
share if they were to be dilutive.
Comprehensive Income (Loss)
---------------------------
Total comprehensive income (loss) represents the net change in stockholders'
equity during a period from sources other than transactions with stockholders
and as such, includes net earnings (loss). For the Company, the components of
other comprehensive income (loss) are the changes in the cumulative foreign
currency translation adjustments and unrealized gains (losses) on marketable
securities and cash equivalents and are recorded as components of stockholders'
equity.
Segments of an Enterprise and Related Information
-------------------------------------------------
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 131 establishes standards for the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. 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, if any (see Note 11).
New Accounting Pronouncements
-----------------------------
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. It is to be implemented
by reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption. Restatement is not
F-9
permitted. The Company does not expect the adoption of SFAS No. 150 to have a
material impact upon its financial position, cash flows or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure - an Amendment of FASB Statement No.
123." This statement provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements for
stock-based employee compensation, regardless of which method of accounting is
chosen. Under the new standard, companies must report certain types of
information more prominently and in a more understandable format in the
footnotes to the financial statements, and this information must be included in
interim as well as annual financial statements. SFAS No. 148 was effective for
the Company's June 30, 2003 fiscal year. The Company has applied the disclosure
provisions of SFAS No. 148 in its consolidated financial statements and the
accompanying notes.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of FIN 45
are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company adopted FIN 45 in fiscal 2003 and there was no
effect on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 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 the Company's consolidated financial
statements.
NOTE 2 - AVAILABLE FOR SALE SECURITIES
Available for sale securities consist of the following at June 30, 2003:
Unrealized
Cost Fair Market Value Gain
Corporate bonds due within one year $680,612 $799,068 $ 118,456
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the
following at June 30, 2003:
Technical and laboratory equipment $689,794
Leasehold improvements 250,724
Office equipment 30,008
------------------
970,526
Less accumulated depreciation and amortization (810,409)
------------------
$160,117
==================
F-10
NOTE 4 - PATENTS AND LICENSES
At June 30, 2003, patents and licenses totaled $124,186 less accumulated
amortization of $104,382.
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, 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 would be
received in relation to the prepaid consulting fee and accordingly wrote off the
remaining balance of the prepaid asset of $221,169 to amortization of prepaid
consulting fees expenses.
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.
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 could 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 was amortizing the
option value to compensation expense over the remaining estimated vesting period
of the options since the Company was 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 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 was recorded as a result of the cancellation. At June 30,
2003 and 2002, and during the year ended June 30, 2003, no options were issued
or outstanding.
NOTE 6 - INCOME TAX PROVISION
No current provision for income taxes for the years ended June 30, 2003 and 2002
is required, since the Company incurred net operating losses through June 30,
2003.
F-11
Income tax expense for the years ended June 30, 2003 and 2002 differed from the
amounts computed by applying the U.S. federal income tax rate of 34 percent as
follows:
2003 2002
----------- -----------
Income tax benefit at U.S. federal statutory rates $ (786,000) $(1,631,000)
Net operating losses not benefited 921,800 1,631,800
State and local income taxes, net of federal income tax effect (135,800) (800)
----------- -----------
$ -- $ --
=========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 2003 are presented below:
Deferred tax assets:
Net operating losses $ 5,300,000
Less valuation allowance (5,300,000)
-----------
Net deferred tax assets $ --
===========
As of June 30, 2003, the Company had net operating loss carryforwards of
approximately $5.3 million, $2.7 million and $8.2 available to offset future
taxable federal, state and foreign income, respectively. The federal and state
carryforward amounts expire in varying amounts between 2004 and 2013. 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, 2003 and 2002:
2003 2002
-------------- ------------
Numerator for basic and diluted loss per common share - net loss $ (2,310,623) $ (4,797,508)
============== ============
Denominator for basic and diluted loss per common share - weighted
average shares 40,655,363 40,622,703
============== ============
Basic and diluted loss per common share $ (0.06) $ (0.12)
============== ============
NOTE 8 - DISCONTINUED OPERATIONS
Sangui USA manufactured in vitro immunodiagnostic blood test kits that have been
primarily sold in the United States and Europe. The Company decided to
discontinue the in vitro immunodiagnostics business in August 2002, sold Sangui
USA's inventory and property and equipment to an unrelated party for $60,000,
and closed the facility. The sale resulted in a gain of $16,980, which is
included as part of loss from discontinued operations in the accompanying
statements of operations for the year ended June 30, 2003. In July 2002, the
Company received $100,000 as part of an agreement to cease manufacturing and
selling certain blood test kits which is included in loss from discontinued
operations in the accompanying statements of operations for the year ended June
30, 2003. The Company decided to discontinue the operations of Sangui Singapore
in August 2002, recorded an impairment loss on property and equipment of
$106,927, and closed the facility effective December 31, 2002.
F-12
Components of amounts reflected in the accompanying consolidated statements of
operations and comprehensive loss for the years ended June 30, 2003 and 2002 are
presented below:
2003 2002
SANGUI SANGUI SANGUI SANGUI
USA SINGAPORE Total USA SINGAPORE Total
--------- --------- --------- --------- --------- ---------
Sales $ 138,542 $ -- $ 138,542 $ 571,742 $ -- $ 571,742
Cost of sales 94,747 -- 94,747 364,182 -- 364,182
Operating expenses 88,564 107,644 196,208 288,904 224,518 513,422
--------- --------- --------- --------- --------- ---------
Loss from operations (44,769) (107,644) (152,413) (81,344) (224,518) (305,862)
Other income 116,980 3,363 120,343 -- -- --
Impairment of assets -- (106,927) (106,927) -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from
discontinued
operations $ 72,211 $(211,208) $(138,997) $ (81,344) $(224,518) $(305,862)
========= ========= ========= ========= ========= =========
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has an agreement with 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 2003 and
2002.
Effective June 30, 2002, options to purchase 3,000,000 shares of the Company's
common stock, which were issued to the President and CEO of the Company in
fiscal 2000, were cancelled (see Note 5).
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
----------------
The Company leases its office and laboratory facilities in Germany under an
operating lease that expires in May 2004.
Future minimum lease payments under this lease at June 30, 2003 are $68,000 for
the fiscal 2004.
Rent expense was approximately $138,000 and $210,000 for the years ended June
30, 2003 and 2002, respectively.
Grants
------
In 1998 and 1999, Sangui AG and Gluko AG, respectively, received grants from the
government of the German state of North Rhine-Westphalia within the framework of
the state's technology program for business supporting their respective
development projects. These grants were 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 for Sangui AG and
Gluko AG originally totaled approximately $1.8 million and $2.2 million,
respectively.
Through December 31, 2002, Sangui AG and Gluko AG had received approximately
$1.3 million and $700,000, respectively, to promote their development projects.
In fiscal 2003 and 2002, the Company
F-13
recorded approximately $256,000 and $379,000 of research and development
expenditures, respectively, and $10,000 and $62,000 of capital expenditures,
respectively. The grants were recorded as a reduction of research and
development costs and as a reduction of the historical cost of certain property
and equipment.
At the beginning of 2003, the subsidization of the projects was halted because
it was determined that the counter-financing for the attainment of further
project milestones could no longer be secured with the remaining financial
resources of the Company. In addition, the Company will make efforts to sell all
of the subsidized equipment that it will no longer need first to its employees
and secondly to third parties. For any equipment that is sold to third parties
only, the Company must return the proportion of the proceeds that corresponds to
the subsidy level to the government of the German state of North
Rhine-Westphalia. The Company will also make efforts to find a successor tenant
for its clean room in order to avert the deconstruction costs that would be
incurred if Sangui AG had to return the premises to their original condition
when they were first occupied. At present, the Company has not been able to sell
any of the subsidized equipment or find a tenant. The Company is continuously
looking for industrial partners for the oxygen carrier and glucose sensor
projects. Should this succeed, the projects, for which experiments have now been
halted, would be reactivated.
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.
Indemnities and Guarantees
--------------------------
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liabilities have been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheet.
NOTE 11 - BUSINESS SEGMENTS
The Company reports it business segments based on geographic regions, which are
as follows as of June 30, 2003 and for the years ended June 30, 2003 and 2002:
2003 2002
----------- -----------
NET SALES
Sangui AG $ -- $ --
Sangui BioTech International, Inc. -- --
Sangui USA 138,542 571,742
Sangui Singapore -- --
----------- -----------
$ 138,542 $ 571,742
=========== ===========
NET INCOME (LOSS)
Sangui AG $(1,836,547) $(2,321,281)
Sangui BioTech International, Inc. (335,079) (2,170,365)
Sangui USA 72,211 (81,344)
Sangui Singapore (211,208) (224,518)
----------- -----------
$(2,310,623) $(4,797,508)
=========== ===========
DEPRECIATION AND AMORTIZATION
Sangui AG 309,024 148,262
Sangui BioTech International, Inc. -- --
Sangui USA -- 13,981
Sangui Singapore -- 32,338
----------- -----------
$ 309,024 $ 194,581
=========== ===========
IDENTIFIABLE ASSETS
Sangui AG $ 2,044,106
Sangui BioTech International, Inc. 165,650
Sangui USA --
Sangui Singapore --
-----------
$ 2,209,756
===========
F-14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON AN ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. Controls and Procedures
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our principal executive
officer and principal financial officer have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Exchange Act), as of a date within 90 days of the filing date of this
Annual Report on Form 10-KSB. Based on such evaluation, they have concluded that
as of such date, our disclosure controls and procedures are effective and
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
applicable SEC rules and forms and that such information is accumulated and
communicated to our management, including CEO, President and CFO, to allow
timely decisions regarding required disclosure.
(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of evaluation by our principal executive officer
and principal financial officer.
-19-
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 as of June 30, 2003 were as follows:
NAME AGE ADDRESS RESIDENCE CURRENT POSITION
-----------------------------------------------------------------------------------------------------------------
Prof. Wolfgang Barnikol, M.D., Ph.D: 69 Arndtstr. 8 Germany Chairman, President, Chief
58453 Witten Executive Officer, Executive
Director
Dora Malek 45 Saturnstr. 19 Germany Non-Executive Director
85609 Aschheim
Prof. Joachim Lutz, M.D., Ph.D. 70 Thueringer Str. 24 Germany Non-Executive Director
97078 Wuerzburg
Christoph Ludz, D of Business 40 Neuer Wall 54 Germany Non-Executive Director
Administration 20354 Hamburg
Markus Volpers, D of Biology. 43 Gleueler Str. 269 Germany Non-Executive Director
50935 Koln
Dora Malek has resigned from her position as member of the board of directors
effective September 15, 2003.
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,
2003 are set out below:
NAME AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol, M.D., 69 Arndtstr. 8 Germany President and Chief
Ph.D: 58453 Witten Executive Officer
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.
-20-
In the field of respiration, he works on the functional analysis of the
bronchial system and gas exchange. Moreover, he is engaged in the development of
respiratory and skin oxygen sensors. In the field of blood and circulation, he
works on the development of artificial oxygen carriers for medical use, which
are based on polymerised soluble hemoglobins. As a third sphere of work, Dr.
Barnikol is engaged in the development of an implantable glucose sensor. Dr.
Barnikol has published more than 100 scientific articles, a textbook in
physiology and a review on the situation of German universities.
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.
CHRISTOPH LUDZ, Doctor of Business Administration, (born 1963), has been a major
shareholder of Sangui BioTech International Inc. for over three years. Christoph
Ludz is the Managing Director of Treukonzept GmbH, a financial advisory company
located in Hamburg, Germany. Prior to founding Treukonzept in 1998 he served in
the Financial Advice and Private Placement departments of private bank
M.M.Warburg. He moved there after having passed a two year bank traineeship at
BHF Bank. Christoph Ludz studied business administration at Hamburg University
(examination 1988) and passed his doctoral examinations in business
administration at the same institution in 1997.
MARKUS VOLPERS, Doctor of Biology, (born 1960), is the CEO of ITB AG, a company
based in Cologne, Germany, which focuses on IT-consulting and software services
for health care. ITB's main product is a hospital information system. He also
founded two companies in India specialising in large software projects and
consulting services mainly for US clients. Prior to establishing ITB jointly
with two partners in 1993, he had directed EnviControl GmbH a company for
research and distribution of biological early warning systems since 1989. Markus
Volpers holds a Diploma in Biology of Cologne University (1988) and passed his
doctoral examinations in biology at the same institution in 1994.
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, 2003, 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.
-21-
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 three fiscal years
ended June 30, 2003, 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.
Name and Principal Position Year Salary (1) Other Stock Underlying
Annual Compen- Awards LTIP All other
Bonus sation SARs (#) Options compensation
-------------------------------------------------------------------------------------------------------------------------------
Prof. Wolfgang Barnikol 2003 115,927 0 0 0 0 0
Chairman, CEO 2002 115,884 0 0 0 0 0
2001 105,922 0 0 3,000,000 (2) 0 0
Oswald Burkhard 2003 0 0 0 0 0 0
Vice President 2002 0 0 0 0 0 0
2001 4775 0 0 0 0 0
Sieglinde Borchert 2003 0 0 0 0 0 0
2002 40,853 0 0 0 0 0
2001 54,697 0 0 0 0 0
Detlev Frhr. Von Linsingen 2003 0 0 0 0 0 0
2002 76,017 0 0 0 0 0
2001 6,512 0 0 0 0 0
Harald Poetzschke 2003 0 0 0 0 0 0
2002 46,972 0 0 0 0 0
2001 36,465 0 0 0 0 0
Patrick Onishi 2003 13,389 0 0 0 0 0
Secretary 2002 70,000 0 0 0 0 0
2001 70,000 0 0 0 0 0
(1) 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.
(2) These options were cancelled as of June 30, 2002.
COMPENSATION OF DIRECTORS
To date, Directors of the Company have not received any compensation for serving
in such capacity.
EMPLOYMENT AGREEMENTS
The Company and its subsidiaries have employment agreements with each of its
officers or key employees. Professor Barnikol has an agreement with the Company
pursuant to which he is entitled to 3% royalties of gross revenues earned with
any product based on his inventions.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the common stock of SGBI as of the date of this report by:
* each person or entity known to own beneficially more than 5% of the common
stock;
* each of SGBI's directors;
* each of SGBI's named executive officers; and * all executive officers and
directors of SGBI as a group.
-22-
Title of Class Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
------------------------------------------------------------------------------------------------------------
Common Stock Dr. Wolfgang Barnikol 1,853,600 (1) 4.56%
Arndstr.8
58453 Witten
Germany
Common Stock Dr. Christoph Ludz 1,420,000 3,49%
Neuer Wall 54
20354 Hamburg
Germany
Common Stock Dora Malek 200 *
Saturnstr. 19
85609 Aschheim
Germany
-----------------------------------------
Common Stock All Officers and Directors as a 2,648,200 6.51%
Group (8 persons)
(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, 2002, 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
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. No royalties were paid or earned in fiscal 2003,
2002, and 2001.
-23-
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,
2003).
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)
-24-
31 Certification of President, Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(a) and 15d-14(a), filed herewith.
32 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
(1) Filed as an Exhibit to the Report on Form 8-K filed on or about April 4,
2000 and incorporated herein by reference.
(2) Filed as an Exhibit to the original Report on Form 10-KSB filed on October
13, 2000.
(3) Filed as an Exhibit to the amended Report on Form 10-KSB filed on November
20, 2000.
(4) Filed as an Exhibit to the Report on Form 10-KSB filed on September 28,
2002.
(b) Reports on Form 8-K
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
INDEPENDENT PUBLIC ACCOUNTANTS
------------------------------
(a) AUDIT FEES. During the fiscal years ended 2003 and 2002, the aggregate
fees for services rendered for the audit of our annual financial statements and
the review of the financial statements included in our quarterly reports on Form
10-QSB and annual report on Form 10-KSB or services provided in connection with
the statutory and regulatory filings or engagements for those fiscal years, were
$50,510 and $66,339, respectively.
(b) AUDIT-RELATED FEES. During the fiscal years ended 2003 and 2002, fees
for any audit-related services other than as set forth in paragraph (a) above.
were $1,340 and $0, respectively.
(c) TAX FEES. During the fiscal years ended 2003 and 2002 no fees were
billed by Corbin & Company, LLP for tax compliance services. Our auditors did
not provide tax planning advice during the fiscal years ended 2003 and 2002.
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
-25-
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
---------- ----- ----
/s/ Wolfgang Barnikol President, Chief Executive Officer and September 27, 2003
---------------------------
Wolfgang Barnikol, M.D., Ph.D Director
/s/ Joachim Lutz Director September 27, 2003
---------------------------
Joachim Lutz, M.D.
/s/ Christoph Ludz Director September 27, 2003
Christoph Ludz, D of Business
Administration.
/s/ Markus Volpers Director September 27, 2003
Markus Volpers, D of Biology
-26-