SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21271
SANGUI BIOTECH INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1330732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Alfred-Herrhausen-Str. 44
58455 Witten
Germany
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 011-49-2302-915-204
Former Address: 1508 BROOKHOLLOW DRIVE, SUITE 354, SANTA ANA, CALIFORNIA 92705
(Former name, former address and former fiscal year, if changed since last
report)
-----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that 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 [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
Title of each class of Common Stock Outstanding at February 13, 2003
----------------------------------------- --------------------------------
Common Stock, no par value 40,655,363
Transitional Small Business Disclosure Format
(Check one);
Yes [ ] No [ X ]
INDEX
SANGUI BIOTECH INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at December 31, 2002 (Unaudited).........3
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)Three and Six Months Ended December 31, 2002 and 2001....4
Consolidated Statements of Cash Flows (Unaudited)Six Months
Ended December 31, 2002 and 2001....................................5
Notes to Consolidated Financial Statements (Unaudited)..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................12
Item 3. Controls and Procedures............................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................16
Item 2. Change in Securities and Use of Proceeds...........................17
Item 3. Defaults Upon Senior Securities....................................17
Item 4. Submission of Matters to a Vote of Securities Holders..............17
Item 5. Other Information..................................................17
Item 6. Exhibits and Reports on Form 8-K...................................17
-2-
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
December 31
2002
(Unaudited)
------------
Current assets
Cash and cash equivalents $ 245,874
Available for sale securities 1,911,332
Grant receivable 53,193
Prepaid expenses and other assets 314,445
------------
Total current assets 2,524,844
Property and equipment-net 362,598
Patents and licenses-net 40,637
------------
Total assets $ 2,928,079
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 134,840
------------
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 loss (72,653)
Accumulated deficit (17,479,599)
------------
Total stockholders' equity 2,793,239
------------
Total liabilities and stockholders' equity $ 2,928,079
============
-3-
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For The For The
Three Months Ended Six Months Ended
December 31, December 31,
(Unaudited) (Unaudited)
------------ ------------ ------------ ------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ --
Operating expenses:
Research and development 174,623 244,204 404,329 536,333
General and administrative 242,088 462,698 516,690 850,587
Depreciation and amortization 45,902 35,467 91,497 69,999
Compensation expense related to stock options -- 250,000 -- 500,000
Amortization of prepaid consulting fees -- 110,000 -- 220,000
------------ ------------ ------------ ------------
Total operating expenses 462,613 1,102,369 1,012,516 2,176,919
Other income:
Interest income 24,295 16,104 39,436 60,174
Other income 29,000 39,572 76,112 68,051
------------ ------------ ------------ ------------
Total other income 53,295 55,676 115,548 128,225
Loss from continuing operations (409,318) (1,046,693) (896,968) (2,048,694)
Loss from discontinued operations (91,938) (189,368) (138,997) (303,523)
------------ ------------ ------------ ------------
Net loss (501,256) (1,236,061) (1,035,965) (2,352,217)
Other comprehensive income (loss):
Foreign currency translation adjustments 54,593 (20,876) (154,631) 196,460
Unrealized (loss) gain on marketable securities (19,318) (11,253) (80,964) 146,469
------------ ------------ ------------ ------------
Comprehensive loss $ (465,981) $ (1,268,190) $ (1,271,560) $ (2,009,288)
============ ============ ============ ============
Net loss available to common
shareholder per common share:
Net loss from continuing operations $ (0.01) $ (0.03) $ (0.02) $ (0.05)
============ ============ ============ ============
Net loss from discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.01)
============ ============ ============ ============
Net loss $ (0.01) $ (0.03) $ (0.02) $ (0.06)
============ ============ ============ ============
Basic and diluted weighted average
number of common shares outstanding 40,655,363 40,514,363 40,655,363 40,514,363
============ ============ ============ ============
-4-
SANGUI BIOTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The
Six Months Ended
December 31,
(Unaudited)
----------- -----------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,035,965) $(2,352,217)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 91,497 77,187
Realized gains on marketable securities (45,170) --
Realized gain on sale of assets of discontinued operations (16,980) --
Loss on impairment of assets 106,927 --
Compensation expense related to stock options -- 500,000
Amortization of prepaid consulting fees -- 220,000
Changes in operating assets and liabilities:
Accounts receivable 84,919 22,095
Grant receivable 161,128 --
Inventories 16,362 (32,916)
Prepaid expenses and other assets 79,927 89,020
Accounts payable and accrued expenses (432,391) (105,490)
----------- -----------
Net cash used in operating activities (989,746) (1,582,321)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in marketable securities (1,684,600) (4,212,845)
Maturities of marketable securities 2,296,671 4,360,886
Purchase of property and equipment (53,950) (17,132)
----------- -----------
Net cash provided by investing activities 558,121 130,909
----------- -----------
Effect of exchange rate changes (154,631) 196,460
----------- -----------
Net decrease in cash and cash equivalents (586,256) (1,254,952)
Cash and cash equivalents, beginning of period 832,130 2,354,584
----------- -----------
Cash and cash equivalents, ending of period $ 245,874 $ 1,099,632
=========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
During the six months ended December 31, 2002, 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.
-5-
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying consolidated financial statements have been prepared without
audit in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to
Form 10-QSB and Item 301 of Regulation S-B. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. The
unaudited consolidated financial statements and notes should, therefore, be read
in conjunction with the consolidated financial statements and notes thereto in
the Company's Form 10-KSB for the year ended June 30, 2002. In the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair presentation, have been included. The results of
operations for the three and six month periods ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending June 30, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------
Nature of Business
------------------
Sangui BioTech International, Inc., incorporated in Colorado in 1995, and its
subsidiaries (collectively, the "Company") have been engaged in the research,
development, manufacture, and sales of medical products.
The operations of Sangui BioTech, Inc. ("Sangui USA"), a wholly owned subsidiary
of the Company, 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 5). The merger of the two German subsidiaries SanguiBioTech AG
("Sangui AG") and GlukoMediTech AG ("Gluko AG) is planned to be finalized during
the third quarter of fiscal 2003.
After completion of this merger, Sangui AG, will be engaged in the development
of artificial oxygen carriers (external applications of haemoglobin, blood
substitute and blood additives) as well as in the development of glucose implant
sensors.
Sangui Singapore, incorporated in Singapore in 1999, was a regional office for
the Company that carried out research and development projects in conjunction
with Sangui AG and Gluko AG. The Company decided to discontinue the operations
of Sangui Singapore in August 2002 (see Note 5). 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 subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts in the three and six months ended December 31, 2001 have been
reclassified to conform to the three and six months ended December 31, 2002
presentation.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the respective reporting period. Actual results could differ from those
-6-
estimates. Significant estimates made by management are, among others, the
realization of receivables, long-lived assets, and valuation allowance on
deferred tax assets.
Risk and Uncertainties
----------------------
The Company's line of future pharmaceutical products (artificial oxygen carriers
or blood substitute and additives) and in vivo biosensors (glucose implant
sensor) being developed by Sangui AG and Gluko AG, are deemed as medical devices
or biologics, and as such are governed by the Federal Food and Drug and
Cosmetics Act and by the regulations of state agencies and various foreign
government agencies. The pharmaceutical and biosensor products, under
development in Germany, will be subject to more stringent regulatory
requirements, because they are in vivo products for humans. The Company and its
subsidiaries have no experience in obtaining regulatory clearance on these types
of products. Therefore, the Company will be subject to the risks of delays in
obtaining or failing to obtain regulatory clearance.
The Company's management believes, based on its current operating plan, its
current cash and highly liquid marketable securities totaling approximately $2.2
million at December 31, 2002, are sufficient to fund the Company's operations
and working capital requirements at least through December 31, 2003. 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.
Foreign Currency Translation
----------------------------
Assets and liabilities of the Company's foreign operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting from such translation are excluded from net loss but are included in
comprehensive income (loss) and accumulated in a separate component of
stockholders' equity. Income and expenses are translated at weighted average
exchange rates for the period.
Cash and Cash Equivalents
-------------------------
The Company maintains its cash in uninsured accounts and not in bank depository
accounts insured by the Federal Deposit Insurance Corporation (FDIC). The
Company has not experienced any losses in these uninsured accounts. Cash and
cash equivalents include time deposits for which the Company has no requirements
for compensating balances. The Company also maintains bank accounts in Germany
and Singapore.
Marketable Securities
----------------------
Marketable securities are classified as available-for-sale. Unrealized gains and
losses are excluded from net loss and are reported as a separate component of
other comprehensive loss 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 3).
Revenue Recognition
-------------------
Revenues from product sales are recognized at the time of shipment.
Research and Development
------------------------
Research and development costs are charged to operations as they are incurred.
Legal fees and other direct costs incurred in obtaining and protecting patents
are expensed as incurred.
Stock Compensation
------------------
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), as
amended. Under the intrinsic value based method, compensation is the excess, if
any, of the fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation, if any,
is recognized over the applicable service period, which is usually the vesting
-7-
period. The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This standard, if fully adopted, changes the method of accounting
for all stock-based compensation to the fair value based method. For stock
options and warrants, fair value is determined using an option pricing model
that takes into account the stock price at the grant date, the exercise price,
the expected life of the option or warrant and the annual rate of quarterly
dividends. Compensation expense, if any, is recognized over the applicable
service period, which is usually the vesting period.
The adoption of the accounting methodology of SFAS No. 123 for employees is
optional and the Company has elected to continue accounting for stock-based
compensation issued to employees using APB 25; however, pro forma disclosures,
as if the Company adopted the cost recognition requirements under SFAS No. 123,
are required to be presented (see Note 4).
Basic and Diluted Earnings (Loss) Per Common Share
--------------------------------------------------
Basic earnings (loss) per common share is computed based on the weighted average
number of shares outstanding for the period. Diluted earnings (loss) per share
is computed by dividing net income (loss) by the weighted average shares
outstanding assuming all dilutive potential common shares were issued (at
December 31, 2002, there were no potential common shares).
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. 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 securities and are
recorded as components of stockholders' equity.
Segments of an Enterprise and Related Information
-------------------------------------------------
The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 establishes standards for the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues and its major customers
(see Note 7).
New Accounting Pronouncements
-----------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within these fiscal years, with early adoption encouraged. The
adoption of SFAS No. 144 did not have a material effect on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", to update,
clarify and simplify existing accounting pronouncements. SFAS No. 4, which
required all gains and losses from debt extinguishment to be aggregated and, if
material, classified as an extraordinary item, net of related tax effect, was
rescinded. Consequently, SFAS No. 64, which amended SFAS No. 4, was rescinded
because it was no longer necessary. The Company does not expect SFAS No. 145 to
have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 addresses accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. The adoption of SFAS No. 146 did not
have a material effect on the Company's financial statements.
-8-
NOTE 3 - AVAILABLE FOR SALE SECURITIES
--------------------------------------
Available for sale securities consist of the following at December 31, 2002:
Cost Fair market Unrealized
value Gain (Loss)
Mutual funds $ 215,653 $ 135,385 $(80,268)
Corporate bonds due within one year 783,477 785,064 1,587
Corporate bonds due within five years 993,166 990,883 (2,283)
---------- ----------- ---------
$1,992,296 $ 1,911,332 $(80,964)
========== =========== =========
NOTE 4 - COMPENSATION EXPENSE RELATED TO STOCK OPTIONS
------------------------------------------------------
Per APB No. 25, "Accounting for Stock Issued to Employees", the Company
recognized compensation expense for previously issued options in the amount of
$250,000 and $500,000 in the accompanying statements of operations for the three
and six months ended December 31, 2001, respectively. Effective June 30, 2002,
these options were cancelled by mutual agreement between the Company and the
option holder. As a result, no compensation expense related to stock options was
recorded for the three and six months ended December 31, 2002.
NOTE 5 - 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 six months ended December 31, 2002. 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 a loss
from discontinued operations in the accompanying statements of operations for
the six months ended December 31, 2002. The Company decided to discontinue the
operations of Sangui Singapore in August 2002, took an impairment charge on
property and equipment of $106,927, and closed the facility effective December
31, 2002.
Components of amounts reflected in the accompanying income statements for the
three months ended December 31, 2002 and 2001 are presented below:
2002 2001
---- ----
Sangui Sangui Sangui Sangui
USA Singapore Total USA Singapore Total
------------- ------------ -------------- ------------ ------------ --------------
Sales $ $ $ $ 141,012 $ $ 141,012
- - - -
Cost of sales - - - 89,218 - 89,218
Operating expenses 12,504 82,797 95,301 183,854 57,308 241,162
------------- ------------ -------------- ------------ ------------ --------------
Loss from operations (12,504) (82,797) (95,301) (132,060) (57,308) (189,368)
Other income - 3,363 3,363 - - -
------------- ------------ -------------- ------------ ------------ --------------
Loss from
discontinued
operations $ (12,504) $ (79,434) $ (91,938) $ (132,060) $ (57,308) $ (189,368)
============= ============ ============== ============ ============ ==============
-9-
Components of amounts reflected in the accompanying income statements for the
six months ended December 31, 2002 and 2001 are presented below:
2002 2001
---- ----
Sangui Sangui Sangui Sangui
USA Singapore Total USA Singapore Total
------------- ------------ -------------- ------------ ------------ --------------
Sales $ 138,542 $ $ 138,542 $ 242,253 $ $ 242,253
- -
Cost of sales 94,747 - 94,747 170,419 - 170,419
Operating expenses 88,564 107,644 196,208 248,768 126,589 375,357
------------- ------------ -------------- ------------ ------------ --------------
Loss from operations (44,769) (107,644) (152,413) (176,934) (126,589) (303,523)
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) $ (176,934) $ (126,589) $ (303,523)
============= ============ ============== ============ ============ ==============
NOTE 6 - LITIGATION RELATED TO THE OPERATING BUSINESS
------------------------------------------------------
The Company may, from time to time, be involved in various litigation resulting
from the ordinary course of operating its business. Management is currently not
able to predict the outcome of any such cases. However, management believes that
the amount of ultimate liability, if any, with respect to such actions will not
have a material effect on the Company's financial position and results of
operations.
-10-
NOTE 7 - BUSINESS SEGMENTS
--------------------------
The Company reports it business segments based on geographic regions, which are
as follows:
Three months ended December 31, Six months ended December 31,
------------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales:
----------
Sangui USA $ -- $ 141,012 $ 138,542 $ 242,253
Sangui BioTech International, Inc. -- -- -- --
Sangui BioTech AG -- -- -- --
GlukoMediTech, AG -- -- -- --
Sangui BioTech PTE Ltd, Singapore -- -- -- --
------------------------------ -----------------------------
$ -- $ 141,012 $ 138,542 $ 242,253
============================== =============================
Net income (loss):
------------------
Sangui USA $ (12,504) $ (132,060) $ 72,211 $ (176,934)
Sangui BioTech International, Inc. (20,304) (527,119) (109,626) (1,122,072)
Sangui BioTech AG (262,982) (308,193) (467,038) (514,981)
GlukoMediTech, AG (126,032) (211,381) (320,304) (411,641)
Sangui BioTech PTE Ltd, Singapore (79,434) (57,308) (211,208) (126,589)
------------------------------ -----------------------------
$ (501,256) $(1,236,061) $ (1,035,965) $ (2,352,217)
============================== =============================
Depreciation and amortization
-----------------------------
Sangui USA $ -- $ 3,595 $ -- $ 7,188
Sangui BioTech International, Inc. -- -- -- --
Sangui BioTech AG 33,606 25,421 67,097 50,107
GlukoMediTech, AG 12,296 10,046 24,400 19,892
Sangui BioTech PTE Ltd, Singapore -- -- -- --
------------------------------ -----------------------------
$ 45,902 $ 39,062 $ 91,497 $ 77,187
============================== =============================
Identifiable assets
-------------------
Sangui USA $ --
Sangui BioTech International, Inc. 212,943
Sangui BioTech AG 780,148
GlukoMediTech,AG 1,934,988
Sangui BioTech PTE Ltd, Singapore --
-------------
$ 2,928,079
=============
-11-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
Forward-looking Statements
--------------------------
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and the
related notes thereto included elsewhere in this quarterly report. Some of the
information in this quarterly report contains forward-looking statements,
including statements related to anticipated operating results, margins, growth,
financial resources, capital requirements, adequacy of the Company's financial
resources, trends in spending on research and development, the development of
new markets, the development, regulatory approval, manufacture, distribution,
and commercial acceptance of new products, and future product development
efforts. Investors are cautioned that forward-looking statements involve risks
and uncertainties, which may affect our business and prospects, including but
not limited to, the Company's expected need for additional funding and the
uncertainty of receiving the additional funding, changes in economic and market
conditions, acceptance of our products by the health care and reimbursement
communities, new development of competitive products and treatments,
administrative and regulatory approval and related considerations, health care
legislation and regulation, and other factors discussed in our filings with the
Securities and Exchange Commission.
GENERAL
-------
The Company is primarily involved in the development of artificial oxygen
carriers and glucose sensors.
The Company's development projects are primarily in the preliminary stages. The
Company is diligently developing several applications for its primary
development projects, but does not anticipate beginning any government protocols
or clinical trials in the near term.
In 2002, the Board of Directors analyzed progress and outlook for all units and
current projects within the group and assessed the key cost factors. In order to
improve the probability of successful market entry for its key projects in the
haemoglobin area, the Board initiated a comprehensive refocusing program aimed
at cost reduction and fast market entry.
Group Structure
---------------
In the pursuit of this program, the Company has begun to reduce the complexity
of the group structure by closing the Singapore subsidiary, merging Sangui USA
with the parent company Sangui BioTech International, Inc. and planning the
merger of the two German subsidiaries, GlukoMediTech AG and SanguiBioTech AG,
into SanguiBioTech AG. The Company should benefit from the clearer focus of
management attention and the decrease in consolidation efforts. Management
expects to save approximately 50% of the group's total accounting and auditing
expenses, which, in fiscal 2002, amounted to more than $180,000.
Sangui Singapore's operations used to encompass mainly a test laboratory serving
the purpose of carrying out experiments on animals. The closing of the
operations in Singapore is expected to result in annual savings of approximately
$200,000 as the net loss of Sangui BioTech PTE Ltd. was $220,156 and $183,068
for the years ended June 30, 2002 and 2001, respectively.
After having sold the immunodiagnostic test kit business to Axis/Shield ASA and
Biomerica, Inc. in the first quarter of fiscal year 2003, Sangui USA no longer
had any significant operations within the group. Sangui USA, therefore, was
merged with the parent company at the end of the second quarter of fiscal year
2003. In accordance with the Company's goals and plan of restructuring, Sangui
Singapore and Sangui USA are presented as discontinued operations in the
accompanying consolidated financial statements.
In the course of the merger of the two German subsidiaries it was resolved to
reduce further expenditures in the blood substitute, blood additive and glucose
sensor projects to the amount necessary to find financing, industrial or
distribution partners for further development and marketing of the resulting
products.
-12-
Cost Savings
------------
As will be discussed below, the ongoing cost-cutting exercise has already
contributed to reducing the operating expenditures of the Company. Management
has begun to implement more efficient processes and shift to alternative
suppliers and materials offering better price-performance ratios. Staff has been
shifted to work on the most promising projects, while expenses for long-term
development projects have been reduced. Long-term projects are currently being
continued by in-house scientists and technicians, while costly external projects
and orders have been terminated or delayed. In the course of this process, the
number of employees was reduced by 40% to 18 fulltime employees at December 31,
2002 from 30 employees at June 30, 2002. Contracts with 8 employees are due to
expire during the third quarter of fiscal 2003.
On the other hand, consulting and legal fees related to the restructuring have
resulted in non-recurring expenses of approximately $130,000 in the first six
months of fiscal 2003. Management believes, that additional opportunities for
significant cost savings will be identified. Special attention is being paid to
the pending lawsuits (see below). Management has requested its attorneys to take
the steps necessary to dismiss the liability claim.
In total, management has been able to reduce the Company's operating expenses by
55% to approximately $1 million in the first six months of fiscal 2003, compared
to approximately $2.2 million in the respective period of last fiscal year. This
is partially due to the elimination of amortization expense related to prepaid
consulting fees which were written off at June 30, 2002, and to the cancellation
of stock options at the end of fiscal 2002. Research and development expenses
and general and administrative expenses have been reduced by 25% and 39%,
respectively, in the first six months of fiscal 2003 as compared to the
respective period of last fiscal year. This effort is also reflected in the net
cash used in operating activities which decreased 37% to approximately $1
million from last year's approximately $1.6 million. Management, therefore,
assumes that the current planning is realistic and that the Company's funds and
liquidity are sufficient to finance its activities at least through the period
ending December 31, 2003.
FINANCIAL POSITION
------------------
The Company's current assets decreased approximately $1.5 million, or 38%, from
June 30, 2002 to approximately $2.5 million at December 31, 2002. The decrease
is primarily attributable to a decrease in cash and cash equivalents of
approximately $586,000, a decrease in available for sale securities of
approximately $648,000, a decrease in grant receivable of approximately
$161,000, a decrease in accounts receivable of approximately $85,000, and a
decrease in inventories of approximately $52,000. The decrease in cash and cash
equivalents and available for sale securities results primarily from funding the
current year's operations of the Company with little or no revenues in the three
and six month period ended December 31, 2002.
The Company's net property and equipment decreased approximately $147,000, or
29%, from June 30, 2002 to approximately $363,000 at December 31, 2002. The
decrease is primarily attributable to the Company's write-off of approximately
$107,000 of leasehold improvements at Sangui Singapore.
The Company funded its operations primarily through its existing cash reserves.
The Company's stockholders' equity decreased approximately $1.3 million. The
primary decrease is caused by the Company's current period net loss of
approximately $1 million, and an increase in accumulated other comprehensive
loss of approximately $236,000 due to foreign currency translation adjustments
and unrealized losses on marketable securities.
-13-
RESULTS OF OPERATIONS
---------------------
Three Months Ended December 31, 2002 and 2001:
Sangui AG
---------
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 36% to
approximately $85,000 in 2002 from approximately $132,000 in 2001. The decrease
is due to the refocusing of research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 12% to
approximately $170,000 in 2002 from approximately $193,000 in 2001. This
decrease is mainly attributed to the ongoing refocusing program.
Gluko AG
--------
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 20% to
approximately $90,000 in 2002 from approximately $112,000 in 2001. The decrease
is due to the refocusing of research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 49% to
approximately $50,000 in 2002 from approximately $98,000 in 2001. This decrease
is mainly attributed to the ongoing refocusing program.
Sangui BioTech International, Inc.
----------------------------------
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 87% to
approximately $22,000 in 2002 from approximately $172,000 in 2001. This decrease
is related to legal costs incurred in 2001 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 $250,000 in 2001, 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 the three months ended December
31, 2002.
AMORTIZATION OF PREPAID CONSULTING FEES. Amortization of prepaid consulting fees
was $110,000 in 2001. 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. Thus, there
was no amortization in the three months ended December 31, 2002.
Consolidated
------------
NET LOSS. As a result of the above factors and the loss from discontinued
operations (see Note 5), the Company's consolidated net loss was approximately
$501,000, or $0.01 per common share, in 2002, compared to approximately $1.2
million, or $0.03 per common share, in 2001.
RESULTS OF OPERATIONS
---------------------
Six Months Ended December 31, 2002 and 2001:
--------------------------------------------
Sangui AG
---------
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 31% to
approximately $170,000 in 2002 from approximately $247,000 in 2001. The decrease
is due to the refocusing of research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 4% to
approximately $279,000 in 2002 from approximately $291,000 in 2001. This
decrease is mainly attributed to the ongoing refocusing program.
Gluko AG
--------
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 19% to
approximately $235,000 in 2002 from approximately $289,000 in 2001. The decrease
is due to the refocusing of research and development activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 13% to
approximately $122,000 in 2002 from approximately $141,000 in 2001. This
decrease is mainly attributed to the ongoing refocusing program.
-14-
Sangui BioTech International, Inc.
----------------------------------
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 72% to
approximately $115,000 in 2002 from approximately $416,000 in 2001. This
decrease is related to legal costs incurred in 2001 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 $500,000 in 2001, 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 the six months ended December
31, 2002.
AMORTIZATION OF PREPAID CONSULTING FEES. Amortization of prepaid consulting fees
was $220,000 in 2001. 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. Thus, there
was no amortization in the six months ended December 31, 2002.
Consolidated
------------
NET LOSS. As a result of the above factors and the loss from discontinued
operations (see Note 5), the Company's consolidated net loss was approximately
$1 million, or $0.02 per common share, in 2002, compared to approximately $2.4
million, or $0.05 per common share, in 2001.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
For the six months ended December 31, 2002, net cash used in operating
activities decreased to approximately $1 million from approximately $1.6 million
in the corresponding period in 2001, primarily related to a decrease in the
Company's consolidated net loss as a result of the ongoing refocusing program.
For the six months ended December 31, 2002, net cash provided by investing
activities increased to approximately $558,000 from approximately $131,000 in
the corresponding period in 2001. The principal increase in cash is due to the
maturity of marketable securities and decrease in purchases of marketable
securities.
Working capital was approximately $2.4 million at December 31, 2002, a decrease
of approximately $1.1 million from June 30, 2002 due primarily to the Company's
net loss for the six month period. A substantial portion of the Company's total
assets consists of cash and highly liquid marketable securities classified as
available for sale securities. Marketable securities at December 31, 2002
include approximately $135,000 of investments in money market mutual funds,
which are convertible to cash daily. The highly liquid nature of these assets
provides the Company with flexibility in financing and managing its business.
For the six-months ended December 31, 2002, realized gains on the Company's
marketable securities were approximately $45,000, and unrealized net losses were
approximately $81,000.
At December 31, 2002, the Company had cash and liquid marketable securities of
approximately $2.2 million. The Company believes that its available cash will be
sufficient to satisfy its requirements at least through the period ending
December 31, 2003. 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.
ITEM 3 - CONTROLS AND PROCEDURES
--------------------------------
As of February 3, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO/CFO, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including CEO/CFO, concluded that the Company's disclosure controls and
procedures were effective as of February 3, 2003. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to February 3, 2003.
-15-
ITEM 4 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The Company has no derivative financial instruments. Exposure to foreign
currency exchange rates is limited as the Company has no operating business nor
staff outside Germany since December 31, 2002.
PART II - OTHER INFORMATION
---------------------------
ITEM 1 - 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' 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. Kappas 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 Schwabe-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 submitted to the
Court for approval. The settlement did not materially affect the financial
position or results of operations of the Company for the six months ended
December 31, 2002.
In December 2000, Axis/Shields ASA, a Norway corporation (Axis), filed a lawsuit
against Sangui USA alleging that Sangui USA's Carbohydrate-Deficient Transferrin
("CDT") test kit, which is used to detect chronic alcohol abuse, constituted an
infringement of patent rights owned by Axis. In March 2001, a settlement was
reached and Sangui USA agreed to cease manufacture and sale of the CDT test kit.
Sangui USA subsequently designed a new test kit, which was then manufactured and
sold. In December 2001, Axis filed another lawsuit in the U.S. District Court
for the Central District of California against Sangui USA alleging that the new
test kit also infringed on Axis' patent rights. Sangui USA filed an answer
denying the claims of Axis and counterclaimed against Axis for a declaratory
judgment of invalidity of the patent of Axis and for antitrust violations.
Because of the substantial funds required to defend itself against the lawsuit
filed by Axis, despite of a high probability of not being found infringing the
patent held by Axis, the Company decided to offer its CDT business for sale to
Axis. In July, 2002, an agreement was entered into between Axis and the Company,
according to which the Company agreed to cease to sell CDT kits among other
intangible information for consideration of U.S. $100,000 paid by Axis to the
Company. As a result of this settlement, Axis caused a dismissal with prejudice
of all its claims, and the Company caused a dismissal with prejudice of the
Company's counterclaim. In summary, this lawsuit from Axis has been resolved.
Further, with the loss of sales from its CDT business, which was expected to
negatively impact its immunodiagnostics business, the Company also decided to
-16-
discontinue its small in vitro immunodiagnostic operations in the United States
by the end of September 2002, so that it can focus its resources on the product
development projects in Germany.
ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS
-------------------------------------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
--------------------------------------------------------------
Not applicable
ITEM 5 - OTHER INFORMATION
--------------------------
As of October 29, 2002, Edgar Fritschi, VM.D., has resigned from his position as
a Director of Sangui BioTech International, Inc. and from all other positions he
previously held in the Company.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT.
Effective January 1, 2003, certain principals of Corbin & Wertz ("C&W"), the
Company's independent auditors, formed Corbin & Company LLP ("C&C"), as a
successor public accounting firm and transferred significantly substantially all
of C&W's audit and attest engagements clients to C&C. As a result, on February
10, 2003, the Board of Directors has approved the engagement of C&C by the
Company as its independent auditors for the fiscal year ending June 30, 2003.
C&W did not resign or decline to stand for reelection, but were dismissed on
February 10, 2003 to allow the appointment of C&C.
During the past two fiscal years ending June 30, 2002, C&W's audit opinion on
the Registrant's financial statements did not contain an adverse opinion or a
disclaimer of opinion, nor was it modified as to audit scope or accounting
principles. C&W's report was modified to include an explanatory paragraph where
they expressed substantial doubt about the Registrant's ability to continue as a
going concern.
There were no disagreements with C&W during the past two most recent fiscal
years and through the date of their dismissal on any matter of accounting
principals or practices, financial statement disclosure or auditing scope or
procedure. Additionally, there were no other reportable matters as defined in
Item 304(a)(1)(iv)(B) of Regulation S-B, during that period of time.
Registrant has provided C&W with a copy of the disclosures Registrant is making
in this 10-QSB in response to the disclosures required by Regulation S-B, Item
304(a). C&W has furnished Registrant with a letter addressed to the Commission
stating its agreement and absence of any disagreement with the statements made
by Registrant in response to this Item. Registrant has filed herewith C&W's
letter as Exhibit 16.1 to this Form 10-QSB.
-17-
EXHIBITS
16.1 Corbin & Wertz letter
99.1 Certification of Chief Executive Officer/Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
By: /s/ Wolfgang Barnikol
---------------------------------------
Wolfgang Barnikol
President, Chief Executive Officer and
Chief Financial Officer
Date: February 13, 2003
CERTIFICATION
The undersigned, Prof. Dr. Wolfgang Barnikol, Chief Executive Officer and Chief
Financial Officer, certifies that:
CERTIFICATION UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sangui BioTech International, Inc.
(the "Company") on Form 10-QSB for the period ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that:
1. I have reviewed this quarterly report on Form 10-QSB of Sangui
Biotech International, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit committee
of Company's board of directors (or persons performing the equivalent
functions):
-18-
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 By: /s/ Wolfgang. Barnikol
-------------------------------------
Wolfgang Barnikol, Chief Executive
Officer and Chief Financial Officer
Exhibit 16.1
February 10, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 6 of Form 10-QSB of Sangui BioTech International, Inc. for the
event that occurred on February 10, 2003, and are in agreement with the
statements contained therein insofar as they relate to our firm.
/s/Corbin & Wertz
------------------------
CORBIN & WERTZ
Irvine, California
Exhibit 99.1
CERTIFICATION
The undersigned, Prof. Dr. W. Barnikol, Chief Executive Officer and Chief
Financial Officer, certifies that:
CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Sangui BioTech International, Inc.
(the "Company") on Form 10-QSB for the period ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: February 13, 2003 /s/ Wolfgang Barnikol
-------------------------------------
Wolfgang Barnikol
President, Chief Executive
Officer and Chief Financial Officer
-19-