UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Date of Report (Date of earliest event reported): March 30, 2000
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Sangui Biotech International, Inc.
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(Exact name of registrant as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation)
0-29233 84-1330732
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(Commission File Number) (IRS Employer Identification No.)
1508 Brookhollow Drive, Suite 354, Santa Ana, CA 92705
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(Address of principal executive offices) (Zip Code)
(714) 429-7807
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Registrant's telephone number, including area code:
Felnam Investments, Inc.
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
(949) 719-1977
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(Former name, address and telephone number)
1
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
(a) Pursuant to a Stock Exchange Agreement (the "Exchange Agreement") dated
as of March 30, 2000 between MRC Legal Services LLC ("MRC"), a California
limited liability company and the sole shareholder of Felnam Investments, Inc.
("Felnam"), a Nevada corporation, and Sangui Biotech International, Inc.
("SGBI"), a Colorado corporation, all the outstanding shares of common stock of
Felnam held by MRC were exchanged for 100,000 shares of common stock of SGBI in
a transaction in which SGBI effectively became the parent corporation of Felnam.
The Exchange Agreement was adopted by the unanimous consent of the Board of
Directors of Felnam, MRC and SGBI on March 30, 2000. No approval of the
shareholders of either SGBI or Felnam is required under applicable state
corporate law.
Prior to the merger, Felnam had 1,461,000 shares of common stock
outstanding which shares were exchanged by MRC for 100,000 shares of common
stock of SGBI. By virtue of the exchange, SGBI acquired 100% of the issued and
outstanding common stock of Felnam.
Prior to the effectiveness of the Exchange Agreement, SGBI had an aggregate
of 40,334,360 shares of common stock, no par value, issued and outstanding, and
no shares of preferred stock outstanding.
Upon closing of the Exchange Agreement, SGBI had an aggregate of 40,434,360
shares of common stock outstanding.
The officers of SGBI continue as officers of SGBI subsequent to the
Exchange Agreement. See "Management" below. The officers, directors, and
by-laws of SGBI will continue without change.
A copy of the Exchange Agreement is attached hereto as an exhibit. The
foregoing description is modified by such reference.
(b) The following table sets forth certain information regarding beneficial
ownership of the common stock of SGBI as of December 31, 1999 (prior to the
issuance of 100,000 shares pursuant to the Exchange Agreement) 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.
2
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner (1) Beneficial Ownership Class
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Common Stock Joerg Alte 101,000 0.2%
Brackleystr. 5
D-56410 Montabaur
Germany
Common Stock Dr. Wolfgang Barnikol (2) 1,853,600 4.6%
Arndtsr, 8, D-58453 Witten
Germany
Common Stock Dr. Oswald Burkhard 794,400 2.9%
Martinsgasse 1, D-67547 Worms
Germany
Common Stock Axel J. Kutscher 1,135,384 2.8%
Deutschhermufer 41, D-60554
Germany
Common Stock Helmut Kappes 1,086,848 2.7%
Franz-Liszt Str. 32a
D-46282 Dorstein
Germany
Common Stock Euro-American 10,076,377 24.9%
BeteiligungsVermittlungsgesellschaft mbH
Mulheim, Germany
Common Stock All Officers and Directors as
a Group (5 persons)
4,971,232 12.3 %
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1. The number is based upon 40,334,360 shares total issued and outstanding.
2. Does not Include options to purchase 3,000,000 shares of Common Stock at
$.01 per share for assignments of all of his relevant patents to the Company.
The shares can be exercised at the point the Company completes the development
of the artificial oxygen carrier or the implantable sensor and receives
regulatory approval from either German, Singapore or the United States.
3
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) The consideration exchanged pursuant to the Exchange Agreement was
negotiated between MRC and SGBI.
In evaluating SGBI as a candidate for the proposed acquisition, MRC used
criteria such as SGBI's present stock price as set forth on the over-the-counter
bulletin board, its biotech and other businesses and other anticipated
operations, and SGBI's business name and reputation. MRC and SGBI determined
that the consideration for the merger was reasonable.
(b) SGBI intends to continue its historical businesses and proposed
businesses as set forth more fully immediately below.
BUSINESS
HISTORY
Sangui Biotech, Inc. ("SBT"), a wholly-owned subsidiary of the Company, was
incorporated in the Delaware on August 2, 1996 and began operations in October
1996. In March 1997, some of the shareholders of SGBI acquired a majority of
the common shares of Citadel Investment Systems, Inc. ("Citadel") which was
publicly traded on the over-the-counter bulletin board under the symbol "CIIS".
On or around August 9, 1997, Citadel acquired one hundred percent (100%) of the
outstanding common shares of SBT, and as a result, SBT became a wholly-owned
subsidiary of Citadel. Thereafter, Citadel changed its name to Sangui Biotech
International, Inc. and changed its NASDAQ symbol to SGBI. The Company also
operates through three other subsidiaries: Gluko Meditech AG ("GMTAG"), Sangui
Biotech AG ("SBTAG") and Sangui Biotech (Singapore) Pte Ltd. ("SBTS").
SBT is principally engaged in the development and manufacturing of, namely
Immunodiagnostic kits, which are sold by SBT in niche markets in the United
States and Europe. The officers of SBT as at the date hereof consist of
Professor Wolfgang Barnikol, Axel Kutscher, Oswald Burkhard and Hemut Kappes.
SBT is located in Santa Ana, California. The California laboratory facility,
approximately 3,360 square feet, is devoted to immunodiagnostic research,
development, manufacturing, and marketing, as well as the Company's overall
administrative functions.
SBTAG was established and organised under the laws of Germanyin Mainz,
Germany, on November 25, 1995. SBTAG is in the business of developing a blood
volume substitute and blood additive product (i.e. the Company's oxygen carrier)
and by-products thereof. The officers of SBTAG are Prof. Wolfgang Barnikol,
M.D., Ph.D., Oswald Burkhard, M.D., Ph.D. and Harald Potzschke. The directors
of SBTAG are Axel Kutscher, Helmut Kappes, and Doris Barnikol, Ph.D
4
GMTAG was established and organised under the laws of Germany in Mainz,
Germany, on July 15, 1996. GMTAG is in the business of developing an in vivo
glucose implant sensor. The officers of GMTAG are Prof. Wolfgang Barnikol, M.D.,
Ph.D., Oswald Burkhard, M.D., Ph.D and Harald Potzschke. The directors of GMTAG
are Axel Kutscher, Helmut Kappes, and Doris Barnikol, Ph.D.
The facilities of SBTAG and GMTAG are located on the premises of the
University of Witten/Herbede, Witten, Germany since April 1998. Wolfgang
Barnikol, M.D., Ph.D., a director and Chairman of Sangui, is in charge of the
research and development of an implantable glucose sensor and artificial oxygen
carriers.
SBTS was incorporated in Singapore on May 15, 1999. The Singapore
subsidiary shall provide the head and regional office for SBGI and its
subsidiaries and will be engaged in the business of carrying out research &
development projects in Singapore for SBGI including the sale and marketing of
the the Company's products. The directors of the Singapore company are Ekkehard
Sahm and Tang Cheng Lin.
The principal activities of SBGI and its subsidiaries are those relating to
development, manufacturing and marketing of several products including (i)
immunodiagnostic kits; (ii) a hemoglobin based artificial oxygen carriers and
additives; and (iii) an implantable and long-term functioning glucose-sensor.
To date, neither SBGI nor any of its Subsidiaries has had profitable operations.
BUSINESS OF SBGI
SBGI's mission is the development of novel proprietary products with
special focus on providing for the first time in medical history:
artificial extracellular oxygen carriers capable of human organ support in
cases of acute and chronic lack of oxygen or blood loss due to surgery,
accident, arterial occlusion, anaemia or other causes. Its seeks to develop
and commercialise such artificial oxygen carriers with blood volume substitute/
blood additive technologies by reproducibly synthesizing polymers of defined
molecular sizes, in special formulations, with different oxygen affinities (low,
normal and high) and specially designed half-lives. The products, when
circulating in the blood system ,are designed to meet the varying clinical needs
arising from loss of blood or chronic oxygen deficiency. In chronic oxygen
deficiency, a new or second generation oxygen carrier with an oncotic pressure
lower than that of blood plasma is needed. SBGI believes that its technologies
can meet this need.
an in vivo implantable glucose sensor for the continuous monitoring of a
patient's glucose level, obviating the need for persistent blood sampling and
provides required information on a continuous basis, thereby minimizing the
harmful effects of peaks and troughs in the patient's blood sugar level.
The development of the abovementioned products are led by Professor
Barnikol and his staff including one deputy, four postdoctoral fellows, two
engineers and several technicians. Oswald Burkhard, M.D., Ph.D., a director and
Vice President of SBGI, is in charge of the necessary clinical trials for the
glucose sensor and the artificial oxygen carrier.
5
SBGI has also completed the development of nine (9) niche in vitro
diagnostics and for-research-use-only products.
ARTIFICIAL OXYGEN CARRIER
There are two products in development which are polymers of natural
hemoglobins with oxygen arrying abilities similar to blood products which are
being developed. One is a substitute product, and the other is an additive
product. The substitute product ("blood volume substitute") is designed for use
as to replace red cell transfusion in a range of applications, such as: (i)
replacement of blood loss due to trauma and surgery; (ii) perfusate for
preserving organs for transplantation; and (iii) stockpile of the product for
military and other emergencies. The costs for developing this product cannot be
determined accurately at this time. The oxygen carrying blood additive ("blood
additive") is defined for use in chronic oxygen deficiency like heart
infarcation, stroke, peripheral perfusionary disorders
SBTAG seeks to develop and commercialize proprietary artificial blood
volume substitute/artificial oxygen carrier technologies by synthesizing
reproducible polymers of defined molecular sizes in special formulations with
different oxygen affinities (low, normal and high) and different half-lives,
when in circulation, to meet the varying clinical needs arising from loss of
blood. This subsidiary also intends to develop a new or second generation oxygen
carrier with an oncotic pressure lower than that of blood plasma which is needed
to address a potential market in chronic oxygen deficiency. The pre-clinical
data demonstrated that it is possible to polymerize native mammalian hemoglobins
from humans, pigs and cattle, resulting in huge soluble molecules, the so-called
hyperpolymers. SBTAG has decided to polymerize hemoglobines from pigs (porcine
blood).
Blood Volume Substitute
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The need for blood volume substitutes is growing because of: (i) reduced
willingness of the population to give blood; and (ii) rising contamination of
donors with HIV and hepatitis viruses. The worldwide market for stored blood is
estimated to total about US $ 5 billion per year.
Invasive surgery, resulting from such causes as transplantation or
accidents, can result in substantial loss of blood. In such circumstances, blood
volume has to be substituted to avoid shock. Blood substitution must be done
with an isoncotic solution which has the same colloid-osmotic pressure as blood
plasma. Such blood volume substitutes are called "plasma expanders". These
expanders use macromolecules like polysaccharides or gelation to generate the
oncotic pressure.
Blood additive
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6
In cases where the native blood oxygen carrier system does not deliver
enough oxygen to tissues of the heart, brain, extremities, kidneys and other
organs, a critical clinical situation arises requiring another oxygen carrier
strategy. In these cases, the patients do not have a blood volume deficiency,
but suffer from an oxygen deficiency. To compensate for this oxygen deficiency,
an artificial oxygen carrier must be introduced into the circulatory system and
this additive must have no influence on the oncotic pressure, i.e., it must have
a negligible oncotic pressure as compared to normal, which is about 30hPa.
SBTAG has polymerised various hyperpolymers in small quantities, as described
above with characteristics such as sufficiently low viscosity and a negligible
oncotic pressure at the desired concentration and desired hematocrit
concentration. Pre-clinical trial data also suggested promise with respect to
safety. Experiments conducted in alert rats with a magnetometric method appear
to demonstrate that the hyperpolymer hemoglobins irritate the
reticulo-endothelial system of the liver far less than emulsions of fluorocarbon
or encapsulated hemoglobins solutions (a technology used by one of the
competitors).
The management of SBTAG believes that the additive feature of the oxygen
carrier, under development, could potentially address a market possibly equal to
or larger than that of blood volume substitutes. It has been reported that the
oxygenation of solid tumors makes them more sensitive to radiotherapy. This is
reported to be especially true with respect to tumors of the head and neck,
which are relatively common forms of cancer. Management believes that its blood
additive technologies, for which there are no known competitive products, could
be very attractive in the medical field. Nonetheless, there can be no
assurances that such therapeutics will be well accepted in the market, if
developed. Therefore, the development of an artificial oxygen carrier has
become the primary focus of the management of SBGI. However, such a market
projection for plasma expanders and additives, as therapeutics for oxygen
deficiency disorders, cannot be ascertained, since such products are not
available in the marketplace. There also cannot be assurances that such
therapeutics, if developed, will be favorably accepted by the medical community.
If oxygen carriers can be used successfully in the cancer field, this could
be expected to speed the approval process for the use of blood volume
substitutes based on similar technologies. However, there can be no assurances
that these applications will be approved by the various government regulatory
agencies, including but limited to the FDA in the United States and the similar
agencies in Germany and other Western European countries.
CE Mark approval on the initial product designed for patients receiving
radiation therapy is targeted for 2003 and FDA approval in 2006. It should be
noted, that, this specialized or niche application, if successfully developed,
would have a market potential substantially smaller than the overall market of
artificial blood volume substitute or the therapeutic market (with oxygen
carrier as an additive or therapeutic agent) for more widespread oxygen
deficiency disorders such as myocardial infarction and stroke.
Small animal exchange experiments with artificial oxygen carriers prepared
by SBTAG have demonstrated, that these carriers are very effective in oxygen
transport already in small concentrations within the blood plasma (0.5 gram per
decilitre), and that they show a synergistic effect with native transport
systems. Also it was possible to synthesize hyperpolymeric oxygen carriers
which exhibit no immunogenicity in mice sensitized to hemoglobin.
7
SBTAG has received a grant from the government of the German state
North-Rhine-Westphalia in an amount of more than US $ 2,000,000 which covers 40%
of the estimated costs of the research and pre-clinical development of the
Company's polymer hemoglobin based artificial oxygen carrier. SBTAG received
already the first portion of the grant to reimburse 40% of its relevant expenses
in the period from April 1998 to December 1998. The grant requires the Company's
economical ability to cover 60% of the project costs on its own as well as the
achievement of milestones. The Company has met these requirements.
GLUCOSE SENSOR
The need for a reliable, cost-effective and continuous glucose monitor for
diabetes patients is to prevent irreversible damage, i.e., damage to the kidney
and retina, and to avoid amputations of extremities. The management of GMTAG
believes that such a sensor could be the missing link to construct an artificial
pancreatic beta-cell. The implantable glucose sensor requires the successful
development of a stable miniaturized polarimeter and a biocompatible
ultrafiltration membrane. GMTAG presented its pre-prototype of a long-term
implantable glucose sensor at the Duesseldorf Medica Show in November 1998. At
the Dusseldorf Medica Show in November 1999, there was a demonstration of the
improved pre-prototype comprising of a final miniaturized optical system (which
includes the light source, diodes, light detectors) and an integrated sensor
electronics which is targeted to be miniaturized (using the one chip-technique)
by 2000.
In September 1999, GMTAG received a grant from the German state of
North-Rhine-Westphalia in the amount of DM4,340,764 for the long term
implantable glucose sensor. The grant will cover 40% of the budget project
costs from December 1998 to November 2001. The grant requires GMTAG to cover
60% of the project costs on its own as well as the achievement of milestones.
About 5% of the inhabitants of the industrialized countries suffer from
diabetes. About one tenth of these patients are afflicted with diabetes
mellitus Type 1, which means they are dependent for life on the parenteral
application of insulin.
diabetes Type I patients suffer from the irreversible destruction of the so
called beta cells of the pancreas (absolute insulin deficiency); the beta cells
normally produce the hormone, insulin
diabetes Type II patients suffer from a relative insulin deficiency; the
insulin receptors are insensitive to the hormone
The central problem of the diabetic is to properly and constantly measure
the blood glucose level, ideally 24 hours a day, and thereby to know how to
adjust, quantitatively, the glucose level in the tissues by administering
insulin, for example, in order to stabilise the blood sugar level at its normal
value of 1 g/L. Only a rough adjustment may be achieved during waking hours
when the patient is able to sample a drop of blood from the fingertips
periodically, and to determine the level of glucose with the aid of dipsticks.
Many patients have developed a sixth sense in adjusting their blood glucose
level.
Nevertheless, the permanent sampling of blood and the need to inject
insulin deteriorate the quality of life. An enormous danger for the diabetic
patient arises when he is asleep, i.e. one third of his life time, when he is
neither able to sample the glucose level in his blood system, nor to adjust it,
if necessary.
8
Furthermore, as shown by measurements using a short time (only 3 days)
glucose monitoring system based on the enzymatic detection of glucose, (even in
patients who seem to be well adjusted) dramatic changes of the blood sugar occur
during night and day.
Infectious diseases and vegetative disorders are also reasons for
uncontrollable disturbances and variations of the glucose level, even during
waking hours. Those are very dangerous for the patient as it is explained
below:
A glucose level which remains too low over long periods of time results in
damage to organs with high metabolism, such as the brain. Brain cells which die
cannot be replaced. If a glucose level remains too high, the typical long term
sequelae of Type I diabetes occur, such as peripheral circulatory deficiencies
resulting in the need for amputation of extremities and detachment of the retina
resulting in blindness.
For the reasons given above, it would be of enormous advantage to
constantly and automatically monitor the blood sugar level of the patient. To
do so, the glucose monitor must stay at or in the patient for a long period of
time making the procedure cost effective and efficacious. Problems of
infection, comfort, and the risk of detachment all favor a permanently
implantable sensor.
This device should communicate via radio signals with a control panel/modem
outside the body and supply the patient with the necessary information. In
combination with a dosage pump for insulin (internal or external) an artificial
beta-cell could be realized.
Until now, an implantable glucose sensor has been the missing link in the
development of a beta cell for the automatic dispensation of insulin.
German insurance companies have estimated the possible savings for a
patient with Type I diabetes to range from between approximately $6,000 to
$8,000 per annum. Based on a unit price of about $7,000, the market potential
for the developed countries could amount to several billion dollars per year, if
such a sensor receives favorable market acceptance.
The following experimental results were obtained in furtherance of SGBI's
objective of developing an implantable glucose sensor on the basis of
polarimetric and infrared methods:
* polarimetric and infrared measurements of glucose concentrations in the
physiological range resulted in an electronic signals, sufficiently
high for further processing
* glucose is responsible for at least 95% of the optical rotation of
ultrafiltered blood plasma
* the concentration of glucose in ultrafiltrated tissue fluid equals that of
blood
* the level of glucose in an implanted ultrafiltrating hollow fiber did not
drift, in the sense of decreasing, over a period of three weeks
* the adjusting time of the glucose level in the hollow fiber is about ten
minutes and is also stable over a period of three weeks
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The implantable glucose sensor, GlukoTektor, will be equipped with an
insulin reservoir and pump, the BetaMitator, which will function as an
artificial endocrine pancreas. The device will be in telemetric contact with a
matchbox-sized monitor, which must be placed close to the patient. It will have
the following functions:
* receive a signal every 5 to 10 minutes, and
* show the glucose level on a LCD display
* warn the patient:
* optically and acoustically in case of danger
* if there is no signal from the sensor
The management of GMTAG projects that it will take about 5 years to develop
this product completely. Moreover, FDA approval of this product is required
before this product can be marketed in the United States.
DIAGNOSTICS
Management of SBGI believes that it can be strategically positioned with a
breadth of in vitro diagnostic products which will be competitive in the health
care industry. SBGI's current strategy is to develop truly niche
immunodiagnostic products with only few competitors, like the CDT test kit.
SBGI has completed the research and development of certain health care
products which are intended to be produced, promoted, marketed, and used
world-wide. SBGI's products consist of: (i) a Carbohydrate-Deficient
Transferrin test kit, which is used to detect chronic alcohol abuse; (ii) a
urinary micro-albumin test, which is a diagnostic test to detect small amounts
of proteinuria in diabetes mellitus; (iii) a C-Reactive Protein, which is an
acute phase protein and sensitive indicator of inflammation; (iv) two different
kits for the measurement of Parathyroid Hormone, which is a diagnostics adjunct
to the differential diagnosis of hyper- and hypo-parathyroidism. ; (v) ACTH
(Adrenocorticotropic Hormone), a niche endocrine test for adrenal cortex
function; (vi) Calcitonin, another endocrine test for a rare disease; (viii)
Erythropoietin (EPO), a test for certain types of anemia; and (ix) TSH (Thyroid
Stimulating Hormone or Thyrotropin), a common and popular thyroid function test,
but faced with over forty (40) competitors' products on the same test.
Currently, the Company has a total of nine (9) niche immunodiagnostic
products for distribution. All the products are based on the microplate format,
except for the PTH and TSH IRMA. This microplate or microtiter platform was
chosen, because microplate readers are quite common in the clinical and hospital
medical laboratory setting. All the test kits, except TSH, are targeted at the
niche laboratory market.
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* CDT (Carbohydrate Deficient Transferrin). Has been reported as the most
reliable test for identification of chronic alcohol abuse. The worldwide market
potential is estimated at US $ 2.5 million per annum. This test uses
microplate format Turbidimetric Immunoassay with prepackaged chromatography
columns. One of the SBGI CDT kits (a second version), to be trademarked as
ChronAlco I.D., has recently been called best CDT kit in the market" by two
German scientists, who are the "opinion" leaders.
* Intact-PTH on the ELISA Microplate format (2nd Generation). This product
has been cleared under the 510(k) regulations by the FDA in late December 1997.
It has one distinct advantage over the two other ELISA microplate PTH kits on
the market. It is faster and easier, with performance characteristics similar or
superior to the competitors. Nonetheless, the Company has derived insignificant
sales to date, mostly likely due to the current market trend of complete
turn-key (hands off or complete) automation in the laboratory business.
* Intact-PTH IRMA (ImmunoRadioMetricAssay). The radioactive version will
compete mainly based on price. The worldwide market potential for all the PTH
kits, with over 10 competitors, is estimated at US $ 50 million per annum.
* CRP (C-Reactive Protein). Highly sensitive Turbidimetric Immunoassay (TIA),
for the differential diagnosis of viral vs. bacterial infection. Valuable to
preclude overuse of antibiotic treatment in infections of viral etiology.
Recently, the CRP test has been reported to have applications in predicting the
outcome of stable angina patients. The worldwide market potential is estimated
at US $ 7 million per annum. However, the Company has derived negligible sales
for the last three years (since the completion of product development on this
product) due to market dominance of large companies, such as Roche/ Boehringer
Mannheim.
* Microalbumin quantitative test via TIA. Highly sensitive determination of
small quantities of albumin in urine. Early detection of microalbuminuria can
prevent subsequent irreversible renal impairment in patients with Diabetics
Mellitus. The worldwide market potential is estimated at US $ 5 million per
annum. However, the Company has derived negligible sales for the last three
years (since the completion of product development on this product) due to
market dominance of large companies, such as Roche/ Boehringer Mannheim.
* ACTH (Adrenocorticotropic Hormone) ELISA. This product is the only 2nd
Generation ELISA Kit in the market. This test is intended for the assessment of
adrenal cortex function such as Addison Disease and the differential diagnosis
of Cushing Syndrome. The estimated market potential size is US $ 5 million per
annum.
* Calcitonin ELISA. This product is the only ELISA in the market. This is
another calcium metabolism test. The test volume has been increasing in Europe
and the US. The estimated market potential size is US $ 1 million per annum.
* Erythropoietin (EPO) ELISA. Quantitation of serum erythropoietin
concentration serves as a diagnostic adjunct in determining the cause of anemia
or erythrocytosis (an increase of red blood cell mass). Also, Amgen, Inc.
manufacturers the drug Erythropoietin, trade-name Epogen. Hence, it is believed
that there is a small market for drug monitoring as well. However, there are
several competitors including at least one competitor with fully automated
system.
11
* TSH IRMA. TSH (Thyrotropin) is a very useful, if not the most important
screening test for thyroid function assessment. However, there are at least
thirty (30) kits in the market-place, so this product is not a niche product.
The Company's kit is based on the ImmunoRadioMetricAssay and was developed
specifically for sale to a small German distributor, who currently purchases a
comparable kit (about US $1,000 per month) from a competitor. The worldwide
market for TSH is estimated at well over US $20,000,000 per annum.
The Company's two earlier products, developed in 1996 and 1997, CRP and
Microalbumin, have not been selling successfully, presumably due to competition
based on "turn-key" fully automated instrumentations marketed and distributed by
big corporations such as Boehringer Mannheim Corporation/Roche Diagnostics in
Germany and Beckman Instruments in the US. The Company intends to continue to
make efforts to sell these two products for at least another 12 months. The
majority of the sales and repeat orders are from Germany and the United States.
To date, the Company's efforts to sell its products to emerging markets such as
the mainland China, Hong Kong and Taiwan were unsuccessful and the sales to
date is very limited. At present, the Notified Bodies of the CE (European
Community) has not yet completed its final regulations on in vitro diagnostic
kits. The Company intends to comply with the CE Mark regulations in due course.
Although the Company has had positive experience with the US. FDA regulations in
clearing three (3) of its products filed under the 510 (k) process, there can be
no assurance that its effort in compliance with the CE Mark will be successful.
In the immunodiagnostic business, the Company continues to expand its sales
and distribution on products already developed and continually manufactured.
Such niche in vitro, immunodiagnostic tests which will enable physicians to
diagnose and treat patients for a variety of pathologic disorders.
OTHER BY PRODUCTS
During the course of developing the glucose sensor, Prof. Barnikol's long
term research and the sophisticated techniques of the glucose sensor result in
the development of the following by-products. They include:
A. Monitoring devices for patients in anesthesia, in intensive care and
sleep diagnostics
* a sensor tube
* a sensor connector for new borns
* a nose sensor
* a main stream respiratory oxygen sensor
* an oxygen sensor device for the skin
B. Equipment for small animal (also mice) experiments
* a respiratory microvalve
* a micro respiratory flow sensor
C. High precision analytical micro system for monitoring and controlling of
(bio)chemical processes in biotechnology, chemistry and Pharma industry.
12
D. Module micro controlling and heating system for setting defined levels of
temperature on basis of Peltier technique.
At the Medica 99 in Dusseldorf, the prototype for the module micro
controlling system, the sensor tube and the equipment for small animals are
demonstrated.
COLLABORATION WITH OTHER COMPANIES
In an effort to provide to the Company short term revenue which will be
utilised to fund the various research and development programmes, the Company's
US Diagnostic Division provides services in performing research and development
and manufacturing as a sub-contractor and/or consultant to unaffiliated
companies which do not compete with the Company. There is no assurance or
certainty, however, that such subcontracts will continue. The management of the
Company plans to continue to explore such opportunities if deemed advantageous
to the Company.
DEVELOPMENT PROCESS
OXYGEN CARRIER
At this point in time, the formula of the artificial oxygen carrier is not
finalized. A preliminary formula is set out as follows:
Sangui's oxygen carrier is prepared from porcine hemoglobin. First, pure
porcine blood must be obtained from slaughterhouses. It is of great importance
to make sure that the blood is not contaminated with endotoxins released by
bacteria or other contaminating material. Therefore it must be guaranteed that
the pigs, of which the blood is taken, were neither ill nor had received
medicine. The state of health of the pigs has to be contractually fixed with the
-
pig breeders. The erythrocytes are then separated from the other blood compounds
and opened by osmotic hemolysis, thus releasing the hemoglobin molecules. The
released hemoglobin molecules are then further purified.
Next, about fifteen of the molecules are cross-linked to a hyperpolymer
molecule by a chemical reaction using glutaraldehyde as a cross-linker. The
hemoglobin hyperpolymer is the artificial oxygen carrier. An advantage of the
hyperpolymer structure is that it prevents the oxygen carrier from secreting via
the kidneys which would have harmful effects on the patients.
Pyridoxalphosphate is used as an effector by which the oxygen binding
properties of the hemoglobin hyperpolymer molecules, for instance the functional
oxygen transport capacity, are adjusted properly. During all preparation steps
defined conditions have to be chosen and maintained carefully (e.g. temperature,
pH of the solutions). After preparation of the oxygen carrying hyperpolymers,
they are separated into a high molecular part and a low molecular part to obtain
the blood additive and the blood volume substitute, respectively.
13
The oxygen carrier will be injected or infused, normally into a vein
vessel. The elimination of the oxygen carrier takes place in the
reticuloentdothelium. The released hemoglobin momomers are then further degraded
via the physiological degradation mechanisms.
Timeline and stage of development:
November 1997 Decided that porcine hemoglobin should be used
as basic material
March 1999 Decided which hemoglobin heyperpolymer will go
into preclinical investigation and that
glutaraldehyde will be taken as cross-linker
and pyridoxalphoshate as effector
April 1999-December 1999 Fine adjustment of the formula for the
synthesis of the hyperpolymers, regarding
different conditions like amounts of
glutaraldehyde and pyridoxalphosphate,
incubation times, tempeature
Development of a method for the isolation
of larger amounts of pure hemoglobin from
porcine blood
Begin set up of an analytic unit (e.g. for
determining the purity of the oxygen carrier
and of the source materials)
January 2000- June 2000 Develop the method for the preparation of
large amounts of oxygen carrier for
preclinical trials
June 2000- November 2000 Drug production for preclinical* toxicology
aand pharmacology
November 2000 Begin preclinical toxicology
May 2001 Begin preclinical pharmacology
August 2001 Drug production for clinical trials
December 2001 Begin clinical trials phase I**
2002/2003 Simultaneous beginning of clinical trials
phase II*** and III****
2005/2006 Europeanb and FDA (Federal drug
administration) approval and beginning of
large scale production
14
* experiments using animal models and tissue culture models to evaluate efficacy
and safety of the developed drug
** phase I is called "human pharmacology": application in healthy volunteers
*** phase II is called "therapeutic explanatory": trials with a small number of
ill patients
**** phase III is called "therapeutic confirmation": trials with a huge number
of ill patients
All stages are necessary according to regulatory requirements. Finalization
of each stage is a further step to reach approval (e.g. FDA-approval) and market
launching.
LONG-TERM IMPLANTABLE GLUCOSE-SENSOR
The development process of the glucose sensor is not finalized at this
juncture. The preliminary development process of the sensor is set out as
follows:
GMTAG's glucose sensor is based on physical methods for the determination
of the glucose level. The sensor consists of two parts: the detection system
and a microdialysizing exchange system.
For the detection system, a sufficiently sensitive and specific
polarimetric and an infrared system were developed as measuring methods. At the
moment it is not settled which one of the systems will be used in the first
generation of the sensor. It is also possible that both systems will be used to
increase the specificity and accuracy of the glucose determination.
The function of the dialysizing exchange system is to protect the fluid
within the measuring chamber of the glucose sensor from large compounds of the
interstitial fluid, especially from proteins; the effect of which would be to
increase the specificity of the detection system.
The sensor will be implanted in the subcutaneous fat tissue in the stomach
area near the belly button. GlukoMediTech endeavors to develop a glucose sensor
which might be implanted for a period of three to five years.
During the day, the measuring signal will be sent telemetrically to a
glucose watch which the diabetic patient will carry at his wrist. During the
night, the telemetric signal will be sent to a receiver near the bed which will
monitor the glucose level and warn the patient of hypoglycaemia and
hyperglycaemia.
The development of an appropriate implantable insulin pump and its
combination with the glucose sensor to a closed loop will enable the company to
produce a technical _-cell, so that the patient will be automatically supplied
properly with the necessary amounts of insulin.
15
Timeline and stage of development:
November 1998 Presentation of a pre-prototype of the glucose
sensor at the MEDICA trade fair, Dusseldorf,
Germany: The pre-prototype of the glucose
sensor demonstrates that the optical systems
developed by GlukoMediTechare sufficiently
specific for the determination of glucose
levels in the physiological range of 50 to 500
milligram glucose per decilitre.
September 199 Completion of the miniaturization of the
sensors optical systems
October 1999 Currently Gluko's engineers are working on the
telemetric system. Begin development work on
the energy supply and the dialysis exchange
system
Beginning of 2000 Start of further and consequent miniaturization
of the sensors electronics("one-chip-
technique") with integrated light sources
(e.g. laser) Begin development work on insulin
pump and the glucose watch
Beginning of 2000 Targetted to present a prototype of a glucose
sensor
July 2000 First implantation into animals (sheep, monkey
or dog)
December 2001 Begin clinical trials* and first implantation
of the glucose sensor into patients
2002 Begin animal experiments for the technical
b-cell
2003 End of experimental phase for the glucose
sensor Begin clinical trials and first
implantation of the technical b-cell into
patients
2004 Except approval from CE Mark and FDA
Begin production and sales
2006/2007 Market entry of the technical b-cell
16
All stages of clinical trials are necessary according to regulatory
requirements. Finalization of each stage is necessary to obtain regulatory
approval (e.g. FDA-approval).
*Unlike the oxygen carrier which are classified under pharmaceutical products,
glucose sensor being a medical device have a separate approval process and hence
do not have separate phases for clinical trials. The clinical trials for the
glucose sensor do not have different phases and entails doing studies
immediately with diabetics patients.
MARKETING AND DISTRIBUTION
Other than the immunodiagnostic products, SGBI and its subsidiaries have
not yet manufactured their products in commercial quantities.
SGBI markets its immunodiagnostic products through a carefully selected
specialty product distributor in a particular country. The products are
targeted at the smaller laboratories in Western Europe and the United States,
who may have insufficient test volume to justify the installation of "turn-key"
fully automated proprietary instrumentation by the large competitors. It also
includes end users like independent clinical, hospital or physician operated
laboratories.
The Company sells its CDT kits mainly through one German distributor or
selling directly to one customer in the US. To date, it appears that
significant product sales have been realized only on the CDT test. On the four
(4) ELISA products, although comparative increases in turnover and number of
orders from various distributors have been significant, the impact on profit and
loss is not yet significant. SGBI has limited experience in sales and marketing
of products. In general, the distributor is required to commit to a minimum
sales volume in order to maintain an exclusive position in a given territory. It
is not uncommon to provide a 30 to 50 % discount from the product list price. To
date, no minimum sales volume was required, because there was no exclusive
distribution agreement.
To raise its profile, SGBI regularly participates in various medical and
health related products exhibitions and trade fairs, for instance the latest
Medica 1999 held in Dusseldorf.
RESEARCH AND DEVELOPMENT
GENERAL
SBTAG and GMTAG are focused on the research and development of the oxygen
carrier and glucose sensor respectively.
17
SBTAG seeks to develop two oxygen carrier products which are polymers of
natural hemoglobins with oxygen carrying abilities similar to blood products
which are being developed. One is a substitute product, and the other is an
additive product. The substitute product ("blood volume substitute") is
designed for use as to replace red cell transfusion in a range of applications,
such as: (i) replacement of blood loss due to trauma and surgery; (ii) perfusate
for preserving organs for transplantation; and (iii) stockpile of the product
for military and other emergencies. The oxygen carrying blood additive ("blood
additive") is defined for use in chronic oxygen deficiency like heart
infarction, stroke, peripheral perfusionary disorders
GMTAG seeks to develop an implantable glucose sensor which will be able to
monitor the blood sugar level in a continuous and automatic manner even during
the night. This depends on the successful development of a stable miniaturised
polarimeter and a biocompatible microdialysing system. Combined with an
implantable insulin pump, the sensor is the missing element on the way towards
developing a technical beta cell that would allow a regular and automatic supply
of the diabetic patient with insulin. At the D sseldorf Medica Show in November
1999, there was a demonstration of the improved pre-prototype comprising of a
final minaturized optical system (which includes the light source, diodes, light
detectors) and an integrated sensor electronics which is targeted to be
miniaturized (using the one chip-technique) by 2000.
RESEARCH AND DEVELOPMENT PROCEDURE
SBTAG and GMTAG have the following research and development procedures set
out as follows:
* Both companies establish the specification of their products to be
developed which may be continuously modified as new findings arise. Changes in
any condition and to new knowledge are reacted to immediately.
* Management establishes milestone schedules for product development so as to
control the progress of development. A fundamental basis of SGBI's research and
development is that at least two members of the companies' staff have the
necessary know how to carry out all experiments. By doing so, SBGI mitigates
---
the effect of possible staff turnover.
* The development of pharmaceuticals and medical devices requires compliance
with several guidelines. All researchers are obliged to keep detailed records in
compliance with the relevant guidelines. Such documents have to be
self-evident, i.e., any third party must be able to understand its content.
Standard operational procedures have to be drawn up for all processes.
* SGBI orients its research and development in such way that its products are
suitable for different applications and different market demands as well. SGBI
intends to develop its products for that application first, which offers
probably the soonest governmental approval in the countries of the targeted
major markets. The marketing of the products for those applications may support
the further promotion for other applications and the filing of approvals of
further indications.
18
INTANGIBLE ASSETS
There are three patents issued to SBTAG pertaining to the polymerization of
hemoglobin. Similarly, seven patent applications submitted by SBTAG are
undergoing review by the patent office and another four patent applications
regarding hemoglobin have been submitted. Additionally, six patents issued to
GMTAG including one (1) pending are associated with the measurement of oxygen
to facilitate the development of the Company's oxygen carrier/additive
technologies.
Two patent applications relating to polarimetric measurements for the
development of the Company's implantable glucose sensor have been submitted by
GMTAG and are currently undergoing review by the patent office.
In addition to formal patent protection, SGBI also relies on trade secrets
and other unpatented proprietary information in its development activities. All
of the Company's employees have entered into agreements providing for
confidentiality and the Company enters into non-disclosure agreements to protect
the confidential information delivered to third parties in conjunction with
possible corporate collaborations or other business purposes.
The Company intends to continue its research and development and to protect
its proprietary information and products with patents in the significant market
areas of the world. These will provide barriers to competition as well as the
possibility of cross licensing and or royalty income, if determined to be in the
best interests of the Company.
In addition to internal development, licensing or cross-licensing of other
technologies will be considered as a means of improving and/or broadening the
Company's product line.
While the Company cannot guarantee that its patents and patent applications
pending will block competitive products, they should help the Company become one
of the leaders in its respective marketplaces.
MANUFACTURING AND QUALITY ASSURANCE
IMMUNODIAGNOSTIC KITS
SBGI has its manufacturing facility and distribution center in Santa Ana,
California for its immunodiagnostic kit business.
19
SBGI has an established quality control testing procedure which is applied
to test for all diagnostic kits. The first released manufactured lot is
quality controlled and compared against the "GOLD" lot of materials. This
"GOLD" lot of materials is the basis for how the reagents should perform and how
specifications are determined, hence the performance of the first released
manufactured lot will set the precedence for future lots. The Quality Control
Manager is also the main technical research and development scientist. Hence,
there is minimal risk of lot to lot variability and reagent quality will be
maintained.
Quality control testing is performed at four stages:
* critical raw material qualification B testing is performed on samples of
raw material obtained from a qualified vendor. If the sample meets the
specifications (which are equivalent to improved performance compared to control
or previously released lot of materials), purchase bulk quantity. If the sample
does not meet specifications, reject the material and obtain additional samples
for testing.
* in process testing B testing is performed at the bulk reagent stage, which
refers to the final reagent not yet filled into vials or bottles, to assure
performance at that level. Testing at this stage allows for the bulk reagent to
be adjusted as needed if performance does not meet specifications. After
testing is done in accordance to the testing protocol against a previously
released lot of material, the data is reviewed with the Quality Control Manager
and the Manufacturing Chemist which will then either be approved for release for
filling/ labelling or the reagent adjusted accordingly if testing does not meet
specification.
* final component quality control testing B testing is performed after the
reagent is bottled which will make up the final kit configuration for
distribution. The component is tested against a previously released lot of
material.
* final kit quality control testing B testing is performed on the final kit
configuration containing the component lots selected to make up the final kit.
If testing meets specification, the kit will be released for packaging and
distribution. If it does not meet specifications, then re-work accordingly and
perform additional quality control testing. If re-work is not possible or is
unsuccessful, the lot will be rejected.
All documentation of the quality control testing will have to be filed and
maintained by Quality Assurance.
GOVERNMENT REGULATION
SGBI and its subsidiaries are, and will continue to be, subject to
governmental regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, and other
similar laws of general application, as to all of which SGBI believes it and its
subsidiaries are in material compliance. Any future of, and the cost of
compliance with, these laws and regulations could have a material adverse effect
on the business, financial condition, and results of operation of SGBI and its
subsidiaries.
20
Because of the nature of the operations of SGBI and its subsidiaries and
the use of hazardous substances and their ongoing research and development and
manufacturing activities, SGBI and its subsidiaries are subject to stringent
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacturing, storage, air emission, effluent discharge,
handling and disposal of certain materials and wastes. Although it is believed
that SGBI and its subsidiaries are in material compliance with all applicable
governmental and environmental laws, rules, regulations and policies, there can
be no assurance that the business, financial conditions, and results of
operations of SGBI and its subsidiaries will not be materially adversely
affected by current or future environmental laws, rules, regulations and
policies, or by liability occurring because of any past or future releases or
discharges of materials that could be hazardous.
Additionally, the clinical testing, manufacture, promotion and sale of a
significant majority of the products and technologies of the subsidiaries, and
to a much less extent to SGBI, if those products and technologies are to be
offered and sold in the United States, are subject to extensive regulation by
numerous governmental authorities in the United States, principally the FDA, and
corresponding state regulatory agencies. Additionally, to the extent those
products and technologies are to be offered and sold in markets other than the
United States, the clinical testing, manufacture, promotion and sale of those
products and technologies will be subject to similar regulation by corresponding
foreign regulatory agencies. In general, the regulatory framework for
biological health care products is more rigorous than for non-biological health
care products. Generally, biological health care products must be shown to be
safe, pure, potent and effective. There are numerous state and federal statutes
and regulations that govern or influence the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising,
distribution and promotion of biological health care products. Non-compliance
with applicable requirements can result in, among other things, fines,
injunctions, seizures of products, total or partial suspension of product
marketing, failure of the government to grant pre-market approval, withdrawal of
marketing approvals, product recall and criminal prosecution. Although the
Company has three of its four ELISA kits cleared by the FDA. Its lead product
in the diagnostics area, CDT test, has not yet been cleared by the FDA. The
competitor who sells another CDT test in significantly larger quantities does
not have FDA clearance either. Although, the Company may have certain
regulatory risks in offering this product to one American laboratory, who uses
this test for life insurance application, the legality for distributing this
product for such purposes is unclear. On the other hand, there are number of
diagnostic companies who have and still do distribute products as "for research
use only" with sales and capitalization much larger than that of the Company.
YEAR 2000 COMPLIANCE
The Y2K issue has arisen from the fact that some computer systems operate
on 2-digit year element and so are unable to make the proper transition from
year 1999 to year 2000 or process dates for the year 2000 and thereafter. This
problem affects information technology and all systems and equipment that rely
on embedded electronic chip technology. SGBI understands "Y2K Compliance" to
mean that the performance and functionality of its critical equipment or systems
will not be affected by data relating to dates prior to, during and after the
year 2000.
SGBI has set up a Y2K committee, comprising Mr Joerg Alte and Mr John Kiang
to review the extent of SGBI's exposure to the Y2K problem and to plan and
oversee systematic procedures to be taken to ensure that SGBI is Y2K ready.
21
SGBI's manufacturing process use very little date related computerization.
The only area where date arithmetic is used pertains to simple calculations of
assigning the expiration date from the expiration interval. SGBI has tested
the programs and have the assurances that the software programs that SGBI uses
are 100% Y2K complaint as claimed by the software manufacturers. SGBI is
currently Y2K ready.
There can be no absolute assurance that problems will not be encountered.
The full impact on SGBI of any failure of systems and products of SGBI or third
parties is not known at this juncture. Nevertheless, based on current
knowledge, SGBI does not anticipate the Y2K issue to have any significant impact
on SGBI's business, cost and revenues as the Y2K issue will be addressed through
planned corrections and replacement of equipment and computer systems.
COMPETITION
IMMUNODIAGNOSTIC KITS
TYPE OF IMMUNODIAGNOSTIC KIT COMPETITORS
Intact-PTH on the ELISA Microplate format DPC
(2nd Generation) Nichols Institute Diagnostics
Diagnostic Systems Laboratories
Bio Rad
IncStar (owned by DiaSorin)
Intact-PTH IRMA Nichols
ACTH ELISA DPC
Nichols Institute Diagnostics
Diagnostic Systems Laboratories
CIS
IncStar (now owned by DiaSorin)
Euro Diagnostics
Calcitonin ELISA Nichols Institute Diagnostics
DPC
Mitsubishi
IncStar (now owned by DiaSorin)
Diagnostic Systems Laboratories
CDT Axis Biochemical
22
Erythropoietin ELISA Amgen
Nichols Institute
Diagnostic Systems Laboratories
CRP BMC/ Hitachi
Beckman
Microalbumin quantitative test via TIA BMC/ Hitachi
Beckman
DPC
The market for the products and technologies of SBGI is highly competitive,
and SBGI expects competition to increase. SBGI will compete with many other
health care research product suppliers, most of which will be larger than SBGI.
Some of the competitors of SBGI offer a broad range of equipment, supplies,
products and technology, including many of the products and technologies
contemplated to be offered by SBGI. To the extent that customers exhibit
loyalty to the supplier that first supplies them with a particular product or
technology, the competitors of SBGI may have an advantage over SBGI with respect
to products and technologies first developed by such competitors. Additionally,
many of the competitors of SBGI have, and will continue to have, greater
research and development, marketing, financial and other resources than SBGI
and, therefore, represent and will continue to represent significant competition
in the anticipated markets of SBGI. As a result of their size and the breadth
of their product offerings, certain of these companies have been and will be
able to establish managed accounts by which, through a combination of direct
computer links and volume discounts, they seek to gain a disproportionate share
of orders for health care products and technologies from prospective customers.
Such managed accounts present significant competitive barriers for SBGI. It is
anticipated that SBGI will benefit from their participation in selected markets
which, as they expand, may attract the attention of the competitors of SBGI.
Since the diagnostic industry in general faces severe competition, SBGI
intended to select opportunities in which the price competition was less severe
and the potential return was attractive. To date, the Company has realised some
meaningful sales for CDT kits and therefore believes that its strategy has
succeeded. However, the Company's strategy of selling niche endocrine test
kits has not yet succeeded. The Carbohydrate-Deficient Transferrin test was one
such rare market opportunity in the crowded diagnostic industry.
The competition in the US $ 20 billion diagnostic business is fierce,
mainly dominated by the large pharmaceutical and larger established
biotechnology companies such as Abbott Laboratories, Hoffmann La Roche etc.
23
For its CDT kits, the Company's only competitor is Axis Biochemicals, ASA,
in Oslo, Norway which has entered into European and distributorship arrangements
with Bio Rad Laboratories, Inc. and Boehringer Mannheim Corporation/Roche
Diagnostics. Large competitors with complete automation with proprietary
instrumentation have offered packaged reagent rental programs to potential
customers, for which the use of instrument is not paid by the customers except
for some small commitment to purchase the products. Recently, these large
companies decided to offer such programs to end-users which only need to
purchase small quantities of kits, about 3 kits per month or about U.S. $900 per
month, in order either to increase or retain its market share. It is believed
that the profit margin of the in vitro diagnostics industry has eroded
significantly in recent years or even months.
BLOOD VOLUME SUBSTITUTE
In the business of blood volume substitute, there are at least six
companies who have obtained substantial capitalization either through equity
funding or through acquisition by large corporations, such as Baxter
International acquiring Somatogen. Other future competitors are Hemosol Inc. in
Canada, Northfield, Alliance Pharmaceutical and Enzon. Nearly all these
companies have already made strategic marketing alliances with large companies
with established marketing and distribution channels, such as Johnson and
Johnson, Eli Lilly and Company, and Pharmacia/Upjohn. Most of these companies
have already proceeded to Clinical Trial Phase II with the FDA. However, the
management of the Subsidiaries anticipate to withstand this competition by
developing 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.
There can be no assurances that the management's objectives can be achieved.
BLOOD ADDITIVE
In the business of blood additive, SBTAG is not aware of any existing or
potential competitors.
GLUCOSE SENSOR
The Company is not aware of any glucose sensing implants available in the
marketplace. However, Johnson & Johnson has a significant market share in the
in vitro glucose measuring device, using a small amount of blood from finger
tips. Other large companies, such as Abbott Laboratories, Inc. also have
similar in vitro glucose measuring devices on the market. On devices close to
an implantable glucose sensor, MiniMed Inc. of Sylmar, CA has submitted to FDA a
Notification on a Continuous Glucose Sensor For Diabetes in December, 1997.
MiniMed Inc. announced its intention to produce and market this product. It
expects to utilize the sensor for a series of products, the first two of which
will be a physician diagnostic device and an alarm product to warn people with
diabetes of dangerously low glucose levels. However, the reagents for the
MiniMed's sensor are stable for only three days. By contrast to the objective
of an implantable long term glucose sensor by GMTAG, the MiniMed's sensor does
not solve the problem in the long term.
COMPETITIVE STRENGTHS
The Directors are of the view that SBGI's competitive strengths are as
follows:
24
* Experienced professional team. Sangui is operated and managed by
-------------------------------
professionals with significant experience in various health care sciences and
----
technologies. There is a dedicated team of scientists led by Professor
Barnikol in the development of the glucose sensor and oxygen carrier which has
seen good progress. For the immunodiagnostic business, improvements in their
existing diagnostic kits e.g. the Chrono Alco I.D kit has seen the Group being
ranked by opinion leaders as being the "best CDT kit in the market". Staff in
SGBI I are able to improve their immunodiagnostic kits as they have a strong
understanding of the immunodiagnostic industry and its competitive market.
Further, having cultivated good relationships with outside collaborators which
have technical and/ or marketing strengths, SBT is able to get Their wide
ranging experiences in academic and applied sciences, as well as their knowledge
of industries and markets, will drive the Group's advancement in its product
development.
* Placing emphasis on technology and quality. The immunodiagnostic business
-------------------------------------------
is very competitive and SBT seeks to continuously innovate and deliver new
technology designs. For instance, its second generation ELISA format is an
improved one step sandwich reaction assay and reduces labor time and costs for
the end user. Unlike other ELISA kits which typically require a 2-step
incubation and washing in the sandwich reaction, only a single step incubation
is needed in our second generation ELISA.
* Efficiency of operations. SGBI is a lean organization as staff are
--------------------------
multi-tasked and are able to perform many functions minimising layers of upper
--
to middle management. Due to the size of the organization, there is more
sharing of research and development amongst SBTAG and GMTAG. SGBI is able to
respond to customers immediately and there is zero to minimal customer
backorders.
25
MARKET FOR SGBI'S SECURITIES
SGBI has been a non-reporting publicly traded company. SGBI's common
stock is presently traded on the OTC Bulletin Board operated by Nasdaq under the
symbol SGBIE. SGBI has not become or otherwise been a reporting company under
the Securities Exchange Act of 1934. The Nasdaq Stock Market has implemented a
change in its rules requiring all companies trading securities on the OTC
Bulletin Board to become reporting companies under the Securities Exchange Act
of 1934. SGBI is required to become a reporting company by the close of
business on April 5, 2000 or no longer be listed on the OTC Bulletin Board.
SGBI effected the stock exchange transaction with Felnam on March 30, 2000 and
became a successor issuer thereto in order to comply with the reporting company
requirements implemented by the over-the-counter bulletin board.
The following table sets forth the high and low closing prices for shares
of SGBI common stock for the periods noted, as reported by the National Daily
Quotation Service and the Over-The-Counter Bulletin Board. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
CLOSING PRICES
YEAR PERIOD HIGH LOW
----- ------ ---- ----
2000 First quarter $5.00 $2.00
1999 First quarter $4.75 $2.75
Second quarter $3.06 $2.06
Third quarter $4.19 $2.00
Fourth quarter $3.63 $1.50
1998 Second quarter $1.69 $1.31
Third quarter $2.25 $1.31
Fourth quarter $13.50 $1.13
In addition to freely tradeable shares, SGBI has numerous shares of common
stock outstanding which could be sold pursuant to Rule 144. In general, under
Rule 144, subject to the satisfaction of certain other conditions, a person,
including one of our affiliates, who has beneficially owned restricted shares of
common stock for at least one year is entitled to sell, in certain brokerage
transactions, within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of outstanding shares of the same
class, or the average weekly trading volume during the four calendar weeks
immediately preceding the sale. A person who presently is not and who has not
been an affiliate for at least three months immediately preceding the sale and
who has beneficially owned the shares of common stock for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above.
26
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the current directors
and executive officers of SGBI who will remain so with the combined entity,
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.
Our directors are as follows:
NAME . . . . . . . . . . . AGE ADDRESS RESIDENCE CURRENT POSITION
Prof. Wolfgang Barnikol. . 65 Arndtsr 8, D-58453 Germany Chairman, Senior Vice
M.D., Ph. D. Witten, Germany President, Executive Director
Axel J. Kutscher 48 Deutschherrnufer 41, Germany Executive Director
D-60554 Frankfurt
. . . . Germany
Helmut Kappes 42 Franz- Liszt- Str. 32a Germany Non-Executive Director
D-46282 Dorsten
Germany
Oswald Burkhard 49 Martinsgasse 1, D-67547 Germany Non-Executive Director
M.D., Ph.D. Worms, Germany
None of the Directors are related to one another. None of the independent
Directors has a business or professional relationship with SGBI and/or the other
Directors and substantial shareholders of the Company.
The day-to-day operations of SGBI are entrusted to the Executive Directors
of the Company who are assisted by a management team of key executive officers
("Executive Officers"). The particulars of the Executive Officers are set out
below:
NAME . . . . . . . . . . . AGE ADDRESS RESIDENCE CURRENT POSITION
Joerg Alte 38 Kirchweig 18 Germany President and Chief
57642 Alpenrod Executive Officer
Germany
Prof. Wolfgang Barnikol. . 65 Arndtsr 8, D-58453 Germany Senior Vice President
M.D., Ph. D. Witten, Germany
Oswald Burkhard 49 Martinsgasse 1, D-67547 Germany Vice President
M.D., Ph.D. Worms, Germany
The business and working experience of the Directors and key Executive
Officers of the Company are set out below:
27
PROF. WOLFGANG K. R. BARNIKOL, M.D., PH.D., Chairman, Vice President 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-Pfalc, Germany. His research interest in physical chemistry focused
on the polymerization of styrene and the determination of molecular weights of
polymers with the electron microscope. Dr. Barnikol's research areas in
medicine are: (i) respiration; and (ii) blood and circulation. In the field of
respiration, he works on the functional analysis of the bronchial system and gas
exchange. Moreover, he is engaged in the development of respiratory and skin
oxygen sensors. In the field of blood and circulation, he works on the
development of artificial oxygen carriers for medical use, which are based on
polymerised soluble hemoglobins. As a third sphere of work, Dr. Barnikol is
engaged in the development of an implantable glucose sensor for patients with
diabetes Type I. Dr. Barnikol has published more than 100 scientific articles,
a text book in physiology and a review on the situation of German universities.
(Prof awards)
OSWALD BURKHARD, M.D., PH.D., Vice President and Non-Executive Director of
the Company, has more than 16 years of clinical experience in the diagnosis and
treatment of hematological and oncological diseases. Since 1989, Dr. Burkhard
has operated his own facilities in Worms, Germany, which specialize in
hematology and oncology. His practice offers patients all diagnostic and
therapeutic possibilities, necessary for internal oncology. From 1982 to 1989,
Mr. Burkhard was trained in hematology and oncology at the University School of
Medicine at Mainz, Mainz, Germany. During this time, he cared almost daily for
patients with hematological or oncological problems. Additionally, he was
trained in transfusion medicine. He became a specialist in internal medicine
and hematology. He has significant experience in clinical trials. From 1975 to
1989, he worked at the Institute for Physiology at the University of Mainz,
Mainz, Germany where he was involved in the physical chemistry of hemoglobin
solutions and the measurement of oxygen by fluorescence quenching. In 1988, he
obtained the Doctorate in Medicine from University of Mainz, Mainz, Germany.
Dr. Burkhard received several patents for his scientific work. In 1989, he
obtained the Tancre award of the University of Mainz, Mainz, Germany. Dr.
Burkhard has studied chemistry, physics and medicine at the University of Mainz,
Mainz, Germany. He received a diploma in Chemistry in 1973 from University of
Mainz, Mainz, Germany. In 1976, he obtained the Doctorate in Physical Chemistry
from University of Mainz, Mainz, Germany. During his thesis, Dr. Burkhard
synthesized approximately 20 new compounds.
AXEL J. KUTSCHER, Non-Executive Director of the Company and director of the
Subsidiaries, SanguiBioTech AG and GlukoMediTech AG, brings to the Company
experience 14 years in sales management from a variety of industries, including
the German securities industry. From 1985 until 1987, Mr. Kutscher was a
salesman at Deutsch-Amerikanische Corporation and International Stock Broker
Corporation in Essen, Germany. From 1988 until 1991, Mr. Kutscher was an
account executive in charge of marketing and research at Hetkamp and Partner
GmbH, Gelsenkirchen, Germany. For the next two years, Mr. Kutscher was an
account manager for several private clients in Frankfurt, Germany. After one
year as the sales manager at Euro-Pacific Security Service GmbH & Co KG,
Dusseldorf, Germany, in 1995 Mr. Kutscher became the Vice President and manager
of EURO-AMERICAN GmbH, Mulheim, Germany.
28
HELMUT KAPPES, Director of the Company, and Director of the Subsidiaries,
SBTAG and GMTAG, brings to the Company 13 years experience in sales and general
management from a variety of industries, including the German securities
industry. In 1986, Mr. Kappes spent two years as a salesman at
Deutsch-Amerikanische Corporation and International Stock Broker Corporation in
Essen, Germany. From 1988 until 1991, Mr. Kappes was an account executive and
salesman at Hetkamp and Partner GmbH, Gelsenkirchen, Germany. For the next two
years, Mr. Kappes was a sport manager with Trotting Promotion GmbH, located in
Gelsenkirchen, Germany. After one year as the sales manager at Euro-Pacific
Security Service GmbH & Co KG, Dusseldorf, Germany, Mr. Kappes has been the Vice
President and manager of EURO-AMERICAN GmbH, Mulheim, Germany since 1994.
JOERG ALTE, President and Chief Executive Officer, is a German lawyer by
training and practice. After studying law and passing his second state
examination, he worked for more than 3 years at a German law office
predominantly engaged in economic and corporate laws with clients mainly of
public and private companies engaged in international businesses. Subsequently
he was a legal advisor with a well-known German diagnostic company, where he
also practised German and U.S. Securities laws.
EXECUTIVE COMPENSATION
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 December 31, 1998 and 1999. No executive officer's salary and bonus
exceeded $100,000 in any of the applicable years. The following information
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
------------------- -----------------------
Awards Payouts
------ -------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Salary Bonus Compensation Awards Options Payouts Compensation
Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
- ------------------ ------ ------- ----- ------------- ---------- ---------- ------ ------------
Wolfgang Barnikol 1999 -0- -0- -0- -0- 3,000,000 -0- -0-
Chairman and
Senior Vice President (1)
1998 -0- -0- -0- -0- -0- -0- -0-
Joerg Alte 1999 -0- -0- -0- -0- -0- -0- -0-
President and CEO (2)
1998 8,000 -0- -0- -0- -0- -0- -0-
John J. Kiang 1999 -0- -0- -0- -0- -0- -0- -0-
Former President and
Director (3)
1998 88,000 -0- -0- -0- -0- -0- -0-
Oswald Burkhard 1999 -0- -0- -0- -0- -0- -0- -0-
Vice-President (4)
1998 -0- -0- -0- -0- -0- -0- -0-
Patrick Onishi 1999 70,000 -0- -0- -0- -0- -0- -0-
Secretary
1998 70,000 -0- -0- -0- -0- -0- -0-
(1) Professor Barnikol receives a yearly salary of an aggregtae $140,000 as
President of the two German subsidiaries Sangui AG and Gluko AG. Professor
Barnikol was issued 3,000,000 options to purchase common stock of the Company
for $0.01 per share exercisable until June 30, 2009 in consideration
for the transfer of all his patent rights to the Company.
(2) Joerg Alte receives a monthly fee of $8,000 as consultant of the
subsidiaries.
(3) John J. Kiang was President, Chief Executive Officer and Director until
November 1998.
(4) Oswald Burkhard receives a yaer compensation of approximately $6,000 as
Vice-President of the two German subsidiaries.
Compensation of Directors
To date, Directors of the Company have not received any compensation for
serving in such capacity.
Employment Agreements
The Company has no existing employment agreements with 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.
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.
29
EA
EA is a venture capital investment corporation organised and established
in GermanyAxel Kutscher and Helmet Kappes, who are Directors and substantial
shareholders of the Company, are also directors and shareholders of EA. On
October 29, 1996, EA granted a loan of US$1,000,000 to SGBI. Pursuant to a
Common Stock Conversion and Subscription Agreement dated March 24, 1997 between
EA and SGBI, it was agreed that 10,000,000 shares at a conversion price of
US$0.10 per Share be issued to EA, in satisfaction and full repayment of the
said loan.
During the period beginning March 24, 1997 up to June 10, 1999, the
Company had received a total funding of US $4,922,500 from EA in consideration
of the issuance of 16,750,000 shares at an average subscription price ranging
from approximately US$0.20 to US$1.15 per share.
In addition, on September 21, 1998, the Company issued 4,591,389 Shares to
EA at a subscription price of US $0.50 per share in consideration of US $800,000
cash; the issue to the Company of 9,644,986 shares at US $0.10 per share in the
capital of AMDL, Inc., a public company incorporated in the United States with
its shares traded on OTCBB under the symbol AMDD; and an amount of US $531,197
in the form of a promissory note payable by EA in monthly instalments of US
$24,267 at an interest rate of 9%. As at the date of the transaction, Axel
Kutscher, one of the Executive Directors of the Company, was also a director of
AMDL Inc. He has since resigned from the board of AMDL Inc.
Stock Option granted in favour of Professor Wolfgang Barnikol
The Company entered into a stock option agreement which took effect on
September 24, 1999, with Professor Wolfgang Barnikol, an Executive Director and
substantial shareholder of the Company. The Professor 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. The
Professor 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.
Rental received from related parties
In fiscal year 1997, NOHIV, a biotechnology company of which Messrs Axel
Kutscher and Helmut Kappes were former directors, rented some office space from
SGBI's premises in Santa Ana for approximately three quarters of a year. The
rental charge was based on prevailing market rates conducted on an arm's length
basis.
30
Potential conflict of interests
None of the Directors, or Executive Officers has an interest in any company
carrying on the same business or dealing in similar products. Details of
internal control procedures undertaken or to be undertaken to ensure that the
interested person transactions are carried out on an arm's length basis are as
follows:
all interested person transactions shall be summarised and submitted to the
Audit Committee for regular and periodic review. Judgement as to whether the
terms are at arm's length shall be based on the following considerations;
when buying from an interested person, the prices and terms of at least two
other comparative offers from third parties, contemporaneous in time. The
purchase price shall not be higher than the most competitive price of the two
other comparative offers from third parties;
when selling to an interested person, the prices and terms of at least two
other successful sales to third parties, contemporaneous in time. The sale
price shall not be lower than the lowest sale price of the other two successful
sales to third parties; and,
before any agreement or arrangement that is not in the ordinary course of
business of the Company or its subsidiaries is transacted, prior approval must
be obtained from the Audit Committee.
The considerations in sub-paragraphs above will allow for variation from
the prices and terms of the comparative offers or, as the case may be, sales to
the extent that the volume of trade, creditworthiness of the buyer, differences
in service reliability or other relevant factors render justifiable and whether
or not a comparative offer or, as the case may be, sale, contemporaneous in
time, shall be judged on the reference to the volatility of the market for the
goods and services in question.
The Audit Committee will approve the internal control procedures and
arrangements for all future interested person transactions to ensure that they
are carried out on an arm's length basis and on normal commercial terms and will
not be prejudicial to the Company's shareholders. Ratification of the records
for all the interested person transactions to ensure that they comply with the
internal control procedures will be carried out by the Audit Committee during
its periodic review. The review includes the examination of the nature of the
transaction and its supporting documents or such other data deemed necessary by
the Audit Committee.
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 SGBI's future performance, including significant risks not normally
associated with investing in equity securities of United States companiesPrior
to making an investment decision, prospective investors should carefully read
and consider, along with other matters referred to herein:
31
LIMITED OPERATING HISTORY OF THE COMPANY
The Company is a relatively new entity and owns all of the issued and
outstanding capital stock of its subsidiaries. SGBI has limited operating
histories 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, commercialization, distribution, and commercialization of esoteric
medical technology, procedures, and products and related technologies. There can
be no assurance that unanticipated technical or other problems will not occur
which would result in material delays in product commercialization or that the
efforts of SGBI will result in successful product commercialization. SGBI has
been operating at a loss. Hence, the time frame for SGBI to achieve profitable
operations is uncertain.
DEPENDENCE ON KEY PERSONNEL
The future success of SGBI will depend on the service of their 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, their ability to identify, hire and retain additional qualified
personnel. There is intense competition for qualified personnel in the areas of
the activities of SGBI and there can be no assurance that SGBI will be able to
attract and retain personnel necessary for the development of the business of
SGBI. Because of the intense competition, there can be no assurance that SGBI
will be successful in adding technical personnel if needed to satisfy the
staffing requirements of the Subsidiaries. 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 Barnikol because he is instrumental
in the research of oxygen carrier and glucose sensor. There can be no assurance
that upon the departure of key personnel from the service of SGBI or its
subsidiaries that suitable replacement personnel will be available.
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FUNDING
To achieve and maintain competitiveness of their products and technologies
and to conduct costly and time-consuming research and development, SGBI will be
required to raise substantial funds. SGBI reserves the right to offer sales of
additional shares as private placements to potentially qualified investors.
32
Thus, SGBI will require additional cash to implement their business
strategies, including cash for: (i) payment of increased operating expenses;
(ii) payment of research and 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. If adequate funds are not available, SGBI may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require SGBI to relinquish rights
to certain of the technologies or product candidates that SGBI would not
otherwise relinquish. The inability of the Company to access the capital markets
or obtain acceptable financing could have a material adverse effect on the
results of operations and financial condition of the Company. Moreover, if
funds are not available from any sources, the Company may not be able to
continue to operate.
LICENSES AND CONSENTS
The utilization or other exploitation of the products and services
developed by SGBI or its subsidiaries may require SGBI or its subsidiaries to
obtain licenses or consents from the producers or other holders of copyrights or
other similar rights relating to the products and technologies of SGBI or its
subsidiaries. In the event SGBI or its subsidiaries are unable, if so required,
to obtain any necessary license or consent on terms which the management of SGBI
or its subsidiaries consider to be reasonable, SGBI or its subsidiaries may be
required to cease developing, utilizing, or exploiting products or technologies
affected by those copyrights or similar rights. In the event SGBI or its
subsidiaries is challenged by the holders of such copyrights or other similar
rights, there can be no assurance that SGBI or its subsidiaries will have the
financial or other resources to defend any resulting legal action, which could
be significant.
33
TECHNOLOGICAL FACTORS
The market for the products and technology developed by SGBI is
characterized by rapidly changing technology which could result in product
obsolescence or short product life cycles. Similarly, the industry is
characterized by continuous development and introduction of new products and
technology to replace outdated products and technology. Accordingly, the
ability of SGBI to compete will be dependent upon the ability of SGBI to provide
new and innovative products and technology. There can be no assurance that
competitors will not develop technologies or products that render the proposed
products and technology of SGBI obsolete or less marketable. SGBI will be
required to adapt to technological changes in the industry and develop products
and technology to satisfy evolving industry or customer requirements, any of
which could require the expenditure of significant funds and resources, and SGBI
does not have a source or commitment for any such funds and resources.
Development efforts relating to the technological aspects of the various
products and technologies to be developed by SGBI are not substantially
completed. Accordingly, SGBI will continue to refine and improve those products
and technologies. Continued refinement and improvement efforts remain subject
to the risks inherent in new product development, including unanticipated
technical or other problems which could result in material delays in product
commercialization or significantly increased costs. In addition, there can be
no assurance that those products and technologies will prove to be sufficiently
reliable or durable in wide spread commercial application. The products or
technologies to be developed by SGBI will be the result of significant research
and development. Such research and development may result in errors which
become apparent subsequent to wide spread commercial utilization. In such
event, SGBI would be required to modify such products or technologies and
continue with additional research and development, which may 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
SGBI and its subsidiaries were founded to develop, manufacture, promote,
and market: (i) immunodiagnostic kits; (ii) oxygen carrier which include a blood
volume substitute or a blood additive and (iii) a glucose sensor product. To
achieve profitable operations, SGBI independently or in collaboration with
others, must successfully identify, develop, manufacture, and market proprietary
products. SGBI has developed nine products for which sales are increasing but
significantly below the level of achieving profitability or financial
independence. Other potential products of SGBI are at various stages of research
and development.
34
The potential products of SGBI will require additional pre-clinical and
clinical development, regulatory approval and additional investment prior to
commercialization, either by SGBI independently or by others through
collaborative arrangements. Potential products that appear to be promising at
early stages of development may be ineffective or be shown to cause harmful side
effects during pre-clinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture, be uneconomical to
produce, fail to achieve market acceptance or be precluded from
commercialization by proprietary rights of others. There can be no assurance
that any potential products will be successfully developed, prove to be safe and
efficacious in clinical trials, satisfy applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs or
achieve commercial acceptance.
All products and technologies under development by SGBI will require
significant commitment of personnel and financial resources. Several products
will require extensive evaluation and pre-marketing clearance by the FDA and
comparable agencies in other countries prior to commercial sale. SGBI regularly
re-evaluate their product development efforts. On the basis of these
re-evaluations, SGBI may abandon development efforts for particular products. No
assurance can be given that any product or technology under development will
result in the successful introduction of any new product. The failure to
introduce new products into the market on a timely basis could have a material
adverse effect on the business, financial conditions or results of operation of
SGBI.
The technologies of SGBI have not yet been tested in humans and there can
be no assurance that human testing of potential products based on such
technologies will be permitted by regulatory authorities or, even if human
testing is permitted, that products based on such technologies will be shown to
be safe or efficacious. Potential products based on the technologies of SGBI
are at an early stage of testing and there can be no assurance that such
products will be shown to be safe or effective.
MARKET ACCEPTANCE
There can be no assurance that the products and technologies of SGBI will
achieve a significant degree of market acceptance, and that acceptance, if
achieved, will be sustained for any significant period or that product life
cycles will be sufficient ( or substitute products developed) to permit SGBI to
achieve or sustain market acceptance could have a material adverse effect on the
business, financial condition, and results of operations of SGBI.
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL
35
The clinical testing, manufacture, promotion, and sale of biotechnology and
pharmaceutical products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies prior to the introduction of
those products. Management of SGBI believes that many of the potential products
of SGBI will be regulated by the FDA under current regulations of the FDA.
Other federal and state statutes and regulations may govern or influence the
testing, manufacture, safety, effectiveness, labeling, storage, record-keeping,
approval, advertising, distribution and promotion of certain products developed
by SGBI. Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, seizure of products, suspensions of regulatory
approvals, product recalls, operating restrictions, re-labeling costs, delays in
sales, cessation of manufacture of products, the imposition of civil or criminal
sanctions, total or partial suspension of product marketing, failure of the
government to grant pre-market approval, withdrawal of marketing approvals and
criminal prosecution.
The FDA's requirements include lengthy and detailed laboratory and clinical
testing procedures, sampling activities and other costly and time-consuming
procedures. In particular, human therapeutic products are subject to rigorous
pre-clinical and clinical testing and other approval requirements by the FDA and
comparable foreign agencies. 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. The lengthy process of
obtaining regulatory approval and ensuring compliance with appropriate federal
statutes and regulations 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 their 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.
36
Clinical trials and the marketing and manufacturing of products are subject
to the rigorous testing and approval processes of the FDA and foreign regulatory
authorities. The process of obtaining FDA and other required regulatory
approvals is lengthy and expensive. There can be no assurance that SGBI will be
able to obtain the necessary approvals to conduct clinical trials for the
manufacturing and marketing of products, that all necessary clearances will be
granted to SGBI or their licensors for future products on a timely basis, or at
all, or that FDA review or other actions will not involve delays adversely
affecting the marketing and sale of the products or SGBI. In addition, the
testing and approval process with respect to certain new products which SGBI may
seek to introduce is likely to take a substantial number of years and involve
the expenditure of substantial resources. There can be no assurance that
pharmaceutical products currently in development will be cleared for marketing
by the FDA. Failure to obtain any necessary approvals or failure to comply with
applicable regulatory requirements could have a material adverse effect on the
business, financial condition or results of operations of SGBI. Further, future
government regulation could prevent or delay regulatory approval of the products
of SGBI.
There can be no assurance as to the length of the clinical trial period or
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and effectiveness of the products of
SGBI. SGBI may encounter significant delays or excessive costs in their efforts
to secure necessary approvals, and regulatory requirements are evolving and
uncertain. Future United States or foreign legislative or administrative acts
could also prevent or delay regulatory approval of the products of SGBI. If
commercial regulatory approvals are obtained, they may include significant
limitations on the indicated uses for which a product may be marketed. In
addition, a marketed product is subject to continual FDA review. Later
discovery of previously unknown problems or the failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product, or even the removal of the product from the market, as well as
possible civil or criminal sanctions. Failure of SGBI to obtain marketing
approval for any of their products under development on a timely basis, or FDA
withdrawal of marketing approval once obtained, could have a material adverse
effect on the business, financial condition and results of operations of SGBI.
The steps required before a product may be marketed in the United States
generally include pre-clinical studies and the filing of an investigational new
product application with the FDA. Reports of results of pre-clinical studies
and clinical trials for products are submitted to the FDA in the form of a
product license application ("PLA") for approval for marketing and commercial
shipment. Submission of a PLA does not assure FDA approval for marketing. The
PLA review process may take a number of years to complete, although reviews of
applications for treatments of life-threatening diseases may be accelerated or
expedited. Failure of SGBI or its subsidiaries to receive FDA marketing
approval for any of their products under development on a timely basis could
have a material adverse effect on the business, financial condition and results
of operations of SGBI. In addition to obtaining approval for each product, an
establishment license application ("ELA") usually must be filed and approved by
the FDA.
Among the other requirements for ELA approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices
("GMP") requirements. In complying with the FDA's GMP requirements,
manufacturers must continue to spend time, money and effort in production
record-keeping and quality control to assure that the product meets applicable
specifications and other requirements. Failure to comply with the FDA's GMP
requirements subjects the manufacturer to possible FDA regulatory action. There
can be no assurance that SGBI or its subsidiaries or their contract
manufacturers, if any, will be able to maintain compliance with the FDA's drug
GMP requirements on a continuing basis. Failure to maintain such compliance
could have a material adverse effect on the business, financial condition and
results of operations of SGBI.
37
Another requirement for many products is lot-by-lot release approval, which
necessitates FDA approval of the release of each lot of a biologic drug before
commercialization. The lot-by-lot release and ELA requirements may be applied
to some or all of the potential products of SGBI. Recently, the FDA amended its
regulations to permit certain products to be eligible for approval under a
product license that does not entail lot-to-lot release and establishment
licensing requirements. There can be no assurance that any of the products of
SGBI will be eligible for approval under a single product license or otherwise
be subject to less rigorous regulation than traditional products.
There can be no assurance that any approval will be granted on a timely
basis, or at all; that the FDA will not require post-marketing testing and
surveillance to monitor the product and continued compliance with regulatory
requirements; that the FDA will not require the submission of any lot of any
product for inspection and will not restrict the release of any lot that does
not comply with the FDA; that the FDA will not otherwise order the suspension of
manufacturing, recall or seizure of products; or that the FDA will not withdraw
its marketing clearance of any product if compliance with regulatory standards
is not maintained or if problems concerning safety or effectiveness of the
product are discovered following approval.
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.
There can be no assurance that the FDA will not change its position with
regard to the safety or effectiveness of the products of SGBI or that the FDA
will agree with the position of SGBI regarding the regulators or status of their
products. In the event that the FDA takes a contrary position regarding any of
the products of SGBI, SGBI may be required to change its labeling or formulation
or possibly cease manufacture and marketing of such products. In addition, even
prior to any formal regulatory action, SGBI could decide voluntarily to cease
distribution and sale, or to recall, any of its products if concern about the
safety or efficacy of any of their products were to develop. Any such action
could have a material adverse effect on the business, financial condition or
results of operations of SGBI.
38
There can be no assurance that unacceptable toxicities or side effects will
not occur at any time in the course of human clinical trials or, if any products
are successfully developed and approved for marketing, during commercial use of
the products of SGBI. The appearance of any such unacceptable toxicities or
side effects could interrupt, limit, delay or abort the development of any of
the products of SGBI or, if previously approved, necessitate their withdrawal
from the market. Furthermore, there can be no assurance that disease resistance
will not limit the effectiveness of potential products.
SGBI will be subject to foreign regulatory authorities governing clinical trials
and product sales if they seek to market their products outside the United
States. Whether or not FDA approval has been obtained, approval of a product by
the comparable regulatory authorities of foreign 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 will 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. If SGBI commence commercial sales of their products,
they will also be competing with respect to manufacturing efficiency and sales
and marketing capabilities, areas in which it has no experience.
39
Historically, biotechnology and pharmaceutical companies have maintained
close control over their research activities, including the synthesis, screening
and optimization of chemical compounds. Academic institutions, governmental
agencies and other research organizations are also conducting research in areas
in which SGBI and its subsidiaries are working, either on their own or through
collaborative efforts. In addition, SGBI and its subsidiaries compete with
several alternative technologies. The processes of SGBI and its subsidiaries
may be rendered obsolete or uneconomical by technological advances or entirely
different approaches developed by one or more of the competitors of SGBI. There
can be no assurance that the existing approaches of the competitors of SGBI and
its subsidiaries or new approaches or technology developed by those competitors
will not be more effective than those of SGBI.
UNCERTAINTIES ASSOCIATED WITH PATENTS AND PROPRIETARY RIGHTS
The success of SGBI and its subsidiaries may depend in large 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 thereunder will provide competitive advantages to SGBI.
Litigation, which could result in substantial cost to SGBI, may be necessary to
enforce the patent and license rights of SGBI or to determine the scope and
validity of its and others' proprietary rights.
Due to the length of time and expense associated with bringing new products
through development and the length of time required for the governmental
approval process, the biotechnology and pharmaceutical industries have
traditionally placed considerable importance on obtaining and maintaining patent
and trade secret protection for significant new technologies, products and
processes. The enforceability of patents issued to biotechnology and
pharmaceutical firms can be highly uncertain. Federal court decisions
establishing legal standards for determining the validity and scope of patents
in the field are in transition. In addition, there can be no assurance that
patents will be issued or, if issued, any such patents will afford SGBI
protection from infringing patents granted to others.
A number of biotechnology and pharmaceutical companies, and research and
academic institutions, have developed technologies, filed patent applications or
received patents on various technologies that may be related to the business of
Sangui and its Subsidiaries. Some of these technologies, applications or
patents may conflict with the technologies of SGBI. Such conflicts could also
limit the scope of the patents, if any, that SGBI or its subsidiaries may be
able to obtain or result in the denial of the patent applications of SGBI.
The lead product in SGBI's immunodiagnostic business segment pertains to a
Carbohydrate-Deficient Transferrin (CDT) serum (blood) test. The Company was
selling a CDT kit in small quantities since 1997. Later, the Company has
successfully developed a second assay, which has been registered as a trademark
in Germany as ChronAlco I.D.
40
Pharmacia/Upjohn owns a patent on the isolation of CDT isoforms and
announced in November 1998 that it would discontinue this product for
distribution in Germany effective in 1999. A second and smaller competitor,
Axis Biochemicals, ASA ("Axis"), has a U.S. patent granted and expects a German
or European patent granted for a competing product. Pharmacia/Upjohn advised
their customers to obtain the product from Bio Rad laboratories, which
distributes one version of the Axis product on an exclusive basis.
The Company believes that this second assay should be relatively more
resistant to the current claims of the Axis patent application. The Company's
German and American patent attorneys both estimate that mostly likely the
Company should prevail if and when the ChronAlco I.D. is challenged by the
Company's competitor. However, there can be no assurance that SGBI will not
become involved in patent infringement litigation with Axis regarding the sale
of SGBI's original version of the CDT test. Despite the assurances from the
patent attorneys, the possibility that the Company may lose in a patent
law-suit, no matter how remote, can still exist. The Company has provided
$25,000 for the potential costs associated with legal fees for the exposure
resulting from the relative small volume of sales of the Company's first CDT
kit. Litigation generally and patent litigation in particular is time
consuming and costly. In the event SGBI becomes involved in litigation, unless
such litigation is resolved quickly, the resources of SGBI may be utilized to
pay the costs and fees incurred in such litigation. Thus, the resources of SGBI
to pursue research and development of the products of SGBI could be reduced by a
significant amount. The Company has ceased to sell the first version of the CDT
kit to minimize the legal exposure.
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.
41
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 face an inherent business risk of
exposure to product liability and other claims in the event that the development
or use of its technology or products is alleged to have resulted in adverse
effects. Such risk exists even with respect to those products that are
manufactured in licensed and regulated facilities or that otherwise possess
regulatory approval for commercial sale. There can be no assurance that SGBI
will avoid significant product liability exposure. While SGBI have taken, and
will continue to take, what they believe are appropriate precautions, there can
be no assurance that they 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 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
42
Product recalls may be issued at the discretion of SGBI, the FDA or other
government agencies having regulatory authority for product sales and may occur
due to disputed labeling claims, manufacturing issues, quality defects or other
reasons. No assurance can be given that product recalls will not occur in the
future. Any product recall could materially adversely affect the business,
financial condition or results of operations of SGBI. There can be no assurance
that future recalls or returns would not have a material adverse effect upon the
business, financial condition and results of operations of SGBI.
RISKS OF INTERNATIONAL SALES AND OPERATIONS
SGBI's results of operations are subject to fluctuations in the value of
the German Deutschmark against the U.S. dollar due to SGBI's German
subsidiaries. Although management of SGBI will monitor exposure to currency
fluctuations, there can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the results of operations or financial
condition of SGBI. In the future, SGBI could be required to sell its products
in other currencies, which would make the management of currency fluctuations
more difficult and expose SGBI to greater risks in this regard.
The products of SGBI will be subject to numerous foreign government
standards and regulations that are continually being amended. Although SGBI
will endeavour 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 have not yet manufactured their products, other than their nine in
vitro immunodiagnostic products, in commercial quantities. Its subsidiaries
will be engaged in manufacturing pharmaceutical products which will be subject
to much more stringent regulatory requirements, as compared to the in vitro
diagnostic products engaged by the SGBI U.S. Diagnostic Division. 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.
43
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 quickly to replace its manufacturing capacity if
it were unable to use its manufacturing facilities as a result of a fire,
natural disaster (including an earthquake), equipment failure or other
difficulty, or if such facilities are deemed not in compliance with the FDA's
GMP requirements and the non-compliance could not be rapidly rectified. The
inability or reduced capacity of SGBI to manufacture their products would have a
material adverse effect on SGBI's business and results of operations.
SGBI may enter into arrangements with contract manufacturing companies to
expand its production capacities in order to satisfy requirements for its
products, or to attempt to improve manufacturing efficiency. If SGBI chooses to
contract for manufacturing services and encounters delays or difficulties in
establishing relationships with manufacturers to produce, package and distribute
its finished products, clinical trials, market introduction and subsequent sales
of such products would be adversely affected. Further, contract manufacturers
must also operate in compliance with the FDA's GMP requirements; failure to do
so could result in, among other things, the disruption of product supplies.
HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS
The research and development processes of SGBI involves the controlled
storage, use and disposal of hazardous materials and radioactive compounds.
SGBI is subject to federal, state and local laws and regulations governing the
use, generation, manufacturing, storage, handling, and disposal of such
materials and certain waste products. Although SGBI does not currently
manufacture commercial quantities of its product candidates, it produces limited
quantities of such products for its clinical trials and SGBI intends to
manufacture commercial quantities of its products. Although SGBI believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, SGBI could be held liable for any damages that
result, and any such liability could exceed the resources of SGBI. There can be
no assurance that SGBI will not be required to incur significant costs to comply
with current or future environmental laws and regulations nor that the
operations, business or assets of SGBI will not be materially or adversely
affected by current or future environmental laws or regulations.
UNCERTAINTY IN THE HEALTH CARE INDUSTRY
44
The health care industry is subject to changing political, economic and
regulatory influences that will affect the procurement practices and operation
of health care organizations. Changes in current health care financing and
reimbursement systems could result in the need for unplanned product
enhancements, in delays or cancellations of product orders or shipments or in
the revocation of endorsement of the products of SGBI. Any of such occurrences
could have a material adverse effect on SGBI's business, financial condition and
results of operations. During the past several years, the United States health
care industry has been subject to an increase in governmental regulation of,
among other things, reimbursement rates. Certain proposals to reform the United
States health care system are periodically under consideration by Congress.
These programs may contain proposals to increase government involvement in
health care and otherwise change the operating environment for the customers of
SGBI. Health care organizations to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments in cost
containment tools and related technology such as the products of SGBI. SGBI
cannot predict what impact, if any, such factors might have on its business,
financial condition and results of operations. In addition, many health care
providers are consolidating to create integrated health care delivery systems
with greater regional market power. As a result, these emerging systems could
have greater bargaining power, which may lead to price erosion of the products
of SGBI. The failure of SGBI to maintain adequate price levels would have a
material adverse effect on SGBI's business, financial condition and results of
operations. Other legislative or market-driven reforms could have unpredictable
effects on SGBI's business, financial condition and results of operations.
DEPENDENCE ON THIRD PARTY PROVIDERS
SGBI may become dependent upon various third parties for one or more
significant services or components required for the products or technology
developed by SGBI, which services or components, will be provided to SGBI
pursuant to agreements with such providers. In as much as the capacity for
certain services and components by certain third parties may be limited, the
inability of SGBI, for economic or other reasons, to continue to receive
services or components from existing providers or to obtain similar components
or services from additional providers could have a material adverse effect on
SGBI, e.g. in developing the long term implantable glucose sensor, the Company
requires the availability of microelectronic components developed by third
party.
DEPENDENCE ON MAJOR CUSTOMERS
The Company has a relatively small customer base. The Company's four
largest customers, Biodiagnostic GmbH, DPC Biermann GmbH, Heritage Labs,
Peninsular Laboratories, Inc. accounted for 82% of sales for the six months
ended June 30, 1999. Although the Company is currently the supplier of
certain immunodiagnostic kits to these customers, there is no assurance that
the Company will continue to be the supplier or the supplier of choice. In the
event that the Company loses the business from any of its major customers, this
would have a significant negative impact on the Company's sales.
ITEM 3. BANKRUPTCY OR RECEIVERSHIP
Not applicable
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
45
ITEM 5. OTHER EVENTS
Successor Issuer Election.
Upon execution of the Exchange Agreement and delivery of the SGBI shares to
MRC as the sole shareholder of Felnam, pursuant to Rule 12g-3(a) of the General
Rules and Regulations of the Securities and Exchange Commission, SGBI became the
successor issuer to Felnam for reporting purposes under the Securities Exchange
Act of 1934 and elected to report under the Act effective March 30, 2000.
ITEM 6. RESIGNATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
Not applicable.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of SGBI for the fiscal years ending December
31, 1998 and June 30, 1999 are included herein in reliance on the report of
Jones, Jenson & Company, our independent public accountant. The unaudited
financial statements of SGBI for the six months ended December 31, 1999 are also
included herein.
SANGUI BIOTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
F-1
CONTENTS
Independent Auditors' Report . . . . . . . . . . . . 3
Consolidated Balance Sheet . . . . . . . . . . . . .. 4
Consolidated Statements of
Operations and Comprehensive Income (Loss) . . . . . 5
Consolidated Statements of
Stockholders' Equity . . . . . . . . . . . . . . . . 6
Consolidated Statements of
Cash Flows . . . . . . . . . . . . . . . . . . . . . 8
Notes to the Consolidated
Financial Statements . . . . . . . . . . . . . . . . 10
F-2
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
Sangui BioTech International, Inc.
(A Development Stage Company)
Santa Ana, California
We have audited the accompanying consolidated balance sheet of Sangui BioTech
International, Inc. (a development stage company) as of December 31, 1998 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1998 and 1997 and from inception on
August 2, 1996 through December 31, 1998. 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 did not audit the financial statements of
Sangui BioTech, Inc., a consolidated subsidiary, for the year ended December 31,
1996 whose statements reflect total assets consisting of $122,017 of the related
consolidated total of $255,099. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it related to
the amounts included for Sangui USA, is based solely upon the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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
consolidated 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 consolidated financial position of Sangui
BioTech International, Inc. (a development stage company) as of December 31,
1998 and the results of their operations and their cash flows for the years
ended December 31, 1998 and 1997 and from inception on August 2, 1996 through
December 31, 1998, in conformity with generally accepted accounting principles.
Jones, Jensen & Company
Salt Lake City, Utah
March 31, 1999
F-3
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheet
ASSETS
------
December 31,
1998
-------------
CURRENT ASSETS
Cash $ 1,401,851
Accounts receivable 21,773
Inventory (Note 2) 39,886
Prepaids 113,140
-------------
Total Current Assets 1,576,650
-------------
PROPERTY AND EQUIPMENT - NET (Note 3) 597,561
-------------
OTHER ASSETS
Marketable securities (Note 4) 116,345
Patents and licenses 36,896
Other assets 20,579
-------------
Total Other Assets 173,820
-------------
TOTAL ASSETS $ 2,348,031
=============
F-4
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 24,267
Accrued expenses 60,022
Stock subscriptions (Note 6) 675,000
-----------
Total Current Liabilities 759,289
-----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY
Preferred stock: no par value; 5,000,000 shares authorized,
505,000 shares issued and outstanding 5,050
Common stock: no par value; 50,000,000 shares authorized,
28,151,390 issued and outstanding 5,531,491
Stock subscriptions receivable (Note 6) (467,974)
Currency translation adjustment 96,614
Unrealized loss on marketable securities (Note 4) (814,413)
Deficit accumulated during the development stage 2,762,026
-----------
Total Stockholders' Equity 1,588,742
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,348,031
===========
F-5
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Income (Loss)
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997
-------------- ------------
SALES $ 102,147 $ 8,294 $ 110,441
COST OF GOODS SOLD 69,303 - 69,303
-------------- ------------ ------------
GROSS MARGIN 32,844 8,294 41,138
-------------- ------------ ------------
COSTS AND EXPENSES
Depreciation expense 39,549 15,874 59,032
Research and development 825,069 408,927 1,488,721
General and administrative 533,673 509,027 1,255,172
-------------- ------------ ------------
Total Costs and Expenses 1,398,291 933,828 2,802,925
-------------- ------------ ------------
Net Loss From Operations (1,365,447) (925,534) (2,761,787)
-------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 32,557 5,984 39,958
Interest expense (59) - (15,564)
Other income 855 246 1,101
Loss on sale of marketable securities (25,731) - (25,731)
-------------- ------------ ------------
Total Other Income (Expense) 7,622 6,230 (236)
-------------- ------------ ------------
BASIC LOSS (1,357,825) (919,304) (2,762,023)
-------------- ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized losses on marketable securities (814,413) - (814,413)
Foreign currency adjustments (59,767) (126,924) 96,614
-------------- ------------ ------------
Total Other Comprehensive
Income (Loss) (874,180) (126,924) (717,799)
-------------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (2,232,005) $(1,046,228) $(3,479,822)
============== ============ ============
BASIC LOSS PER SHARE $ (0.06) $ (0.07)
============== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 22,809,003 12,397,341
============== ============
F-6
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity
Deficit
Accumulated
Currency During the
Preferred Stock Common Stock Stock Translation Development
Shares Amount Shares Amount Subscriptions Adjustment Stage
--------------- ------------- --------- ------------- -------------- ----------- ----------
Balance at inception - $ - - $ - $- $ - $ -
Issuance of preferred stock
for cash at $0.01 per share 505,000 5,050 - - - - -
Issuance of common stock
for cash at $0.005 per
share - - 5,000,000 900 (1,600) - -
Recapitalization - - - (4,350) - - -
Currency translation
adjustment - - - - - 29,457 -
Net loss for the year ended
December 31, 1996 - - - - - - (484,897)
--------------- ------------- --------- ------------- -------------- ----------- ----------
Balance,
December 31, 1996 505,000 5,050 5,000,000 (3,450) (1,600) 29,457 (484,897)
Common stock issued for
note payable at $0.10 per
share - - 6,000,000 600,000 - - -
Common stock issued for
cash at $0.10 per share - - 4,000,000 400,000 - - -
Receipt of stock
subscription receivable - - - - 1,600 - -
Common stock issued for
the acquisition of Sangui
BioTech recorded at
predecessor cost - - 1,800,000 - - - -
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - -
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - -
Stock offering costs - - - (212,509) - - -
Currency translation
adjustment - - - - - 126,924 -
Net loss for the year ended
December 31, 1997 - - - - - - (919,304)
------- ------ ---------- ----------- --------- -------- ------------
Balance,
December 31, 1997 505,000 $5,050 19,794,681 $1,529,041 $(25,000) $156,381 $(1,404,201)
------- ------ ------------ ----------- --------- -------- ------------
F-7
Deficit
Accumulated
Currency During the
Preferred Stock Common Stock Stock Translation Development
Shares Amount Shares Amount Subscriptions Adjustment Stage
--------------- ------------- ---------- ------------ --------------- ------------ ------------
Balance,
December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,529,041 $ (25,000) $ 156,381 $(1,404,201)
Issuance of common stock
for cash at $0.235 per
share - - 755,320 177,500 25,000 - -
Issuance of common stock
for subscriptions receivable
at $0.50 per share - - 1,062,394 531,197 (531,197) - -
Issuance of common stock
for marketable securities
at $0.50 per share (Note 4) - - 1,928,995 964,498 - - -
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - -
Issuance of stock options for
services valued at $1.375
per share - - - 13,650 - - -
Exercise of stock options at
$0.01 per share - - 10,000 100 - - -
Accrued interest
contributed to capital - - - 15,505 - - -
Receipt of stock
subscriptions (Note 6) - - - - 63,223 - -
Currency translation
adjustment - - - - - (59,767) -
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825)
--------------- ------------- ---------- ------------ --------------- ---------- -----------
Balance,
December 31, 1998 505,000 $ 5,050 28,151,390 $ 5,531,491 $ 467,974 $ 96,614 $(2,762,026)
=============== ============= ========== ============ =============== ========== ============
F-8
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997 1998
-------------- ----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (1,357,825) $ (919,304) $(2,762,023)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 39,549 15,874 59,032
Stock options issued for services 13,650 - 13,650
Loss on sale of securities 25,731 - 25,731
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (15,966) (5,807) (21,773)
(Increase) decrease in inventory (19,183) (19,708) (39,886)
(Increase) decrease in prepaid expenses
and deposits (110,620) 455 (113,140)
(Increase) decrease in other assets (8,645) (22,085) (57,873)
Increase (decrease) in accounts payable
and accrued expenses (25,564) 14,818 99,790
-------------- ----------- ------------
Net Cash (Used) by Operating Activities (1,458,873) (935,757) (2,796,492)
-------------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of marketable securities 8,008 - 8,008
Purchase of property and equipment (520,263) (75,668) (632,970)
-------------- ----------- ------------
Net Cash (Used) by Investing Activities (512,255) (75,668) (624,962)
-------------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of stock for cash 2,502,600 1,121,600 3,624,200
Proceeds from stock subscriptions 675,000 - 675,000
Stock offering costs - (212,509) (212,509)
Proceeds from notes payable - 40,000 640,000
Currency translation adjustment (59,767) 126,924 96,614
-------------- ----------- ------------
Net Cash Provided by Financing Activities 3,117,833 1,076,015 4,823,305
-------------- ----------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,146,705 64,590 1,401,851
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 255,146 190,556 -
---------- -------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $1,401,851 $255,146 $1,401,851
========== ======== ==========
F-9
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
From
Inception on
August 2,
For the Years Ended 1996 Through
December 31, December 31,
1998 1997 1998
------------- -------------- -----------
CASH PAID FOR:
Interest $ 59 $ - $ 59
Income tax $ - $ - $ -
NON-CASH INVESTING AND
AND FINANCING ACTIVITIES:
Conversion of notes payable to equity $ - $600,000 $600,000
Stock options issued for services $ 13,650 $ - $ -
Conversion of accrued interest to equity $ 15,505 $ - $ 15,505
Common stock issued for marketable
securities $ 964,498 $ - $964,498
F-10
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Activities and Summary of Significant Risk Factors
---------------------------------------------------------------------------
Sangui BioTech International, Inc. (a development stage Company) (the Company)
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc. is engaged in the development of
immunodiagnostic tests.
Sangui BioTech, Inc. (Sangui USA) develops and intends to manufacture and sell
immunodiagnostic tests based on research and technology already shown to be
feasible. Sangui USA's laboratory and headquarters are located in Santa Ana,
California, and this facility will be devoted to immunodiagnostic research,
development, manufacturing and distributing, marketing, and administrative
functions. The founders of Sangui USA are actively involved in the research and
development of the future products and were the only shareholders of Sangui USA
at December 31, 1996. Sangui USA was incorporated in the State of Delaware on
August 2, 1996. Sangui USA is the parent company of SanguiBioTech AG, and
GlukoMediTech, AG.
SanguiBioTech AG (SanguiAG) and GlukoMediTech, AG (Gluko) were incorporated in
Mainz, Germany on November 25, 1995 and July 15, 1996, respectively. These
wholly-owned subsidiaries of Sangui USA and are engaged in Germany in the same
business operations as the parent.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000
shares of common stock issued and outstanding.
The acquisition was accounted for as a recapitalization of Sangui USA because
the shareholders of Sangui USA controlled the Company after the acquisition.
Therefore, Sangui USA is treated as the acquiring entity. There was no
adjustment to the carrying value of the assets or liabilities of Sangui USA in
the exchange. The Company is the acquiring entity for legal purposes and Sangui
USA is the surviving entity for accounting purposes.
The Company's continued existence as a going concern is ultimately dependent
upon the success of future operations. Management's efforts have focused
primarily on raising capital and research and development of new products. As
such, the Company is subject to the risks and uncertainties associated with a
new business. The success of the Company's future operations is dependent in
part, upon the Company's ability to (i) develop commercially feasible products,
(ii) successfully market the products developed and (iii) obtain additional
capital. The Company's future capital requirements will depend on many factors,
including those imposed by Sangui AG and Gluko.
Although it cannot be assured that the Company will successfully develop and
market its proposed products or obtain additional financing, management believes
that its short term strategy of selling the Company's securities, developing new
products, and increased marketing efforts should enable the Company to meet its
obligations and sustain its operations. Management's plans are discussed
further in Note 5.
F-11
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Method
------------------
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
Cash and Equivalents
----------------------
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains cash
accounts in Germany which are not insured by the FDIC.
Inventories
-----------
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out ("FIFO") method. The Company
regularly monitors inventory for excess or obsolete items and makes any
valuation corrections when such adjustments are needed.
Property and Equipment
------------------------
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations
Estimated
Useful Life
------------
Laboratory equipment 5 years
Office equipment 3 years
Impairment of Long Lived Assets
-----------------------------------
The Company adopted the recognition of economic impairment of long lived assets
in accordance with Statement of Financial Accounting Standards No. 121 (SFAS
121) during its fiscal year ended December 31, 1997. The Company had recorded
organization costs of $42,036 at September 30, 1996, but later determined the
life of the intangible was impaired during the period ended December 31, 1996,
in accordance with SFAS 121. As a result, the amount was eliminated from the
Company's books and charged to other operating expense.
Concentrations of Risk
------------------------
The Company has a relatively small customer base. The Company's four largest
customers accounted for 84% of sales in 1998. The loss of one of these
customers could have a significant negative effect on future sales.
F-12
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
-------------
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
As of December 31, 1998, the Company had a net operating loss carryforwards for
federal income tax purposes of approximately $2,750,000 that may be used in
future years to offset taxable income. The net operating loss carryforwards
will begin to expire in 2011. The tax benefit of the cumulative carryforwards
has been offset by a valuation allowance of the same amount due to the
uncertainty that they will be utilized.
Research and Development Costs
---------------------------------
Research and development costs are charged to operations as they are
incurred.
Reclassification
----------------
Certain amounts have been reclassified within the prior period financial
statements to conform with the current period presentation.
Management Estimates
---------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Accounts Receivable
--------------------
The accounts receivable at December 31, 1998 and 1997 are shown net of an
allowance for doubtful accounts of $0 and $0, respectively.
NOTE 2 - INVENTORIES
The inventory balance of $39,886 at December 31, 1998 consists primarily of
finished goods. Inventories have been written down to estimated net realizable
value, and any adjustments are included in the results of operations. The
inventories are of immunodiagnostic products and related materials.
F-13
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consists of the following:
December 31,
1998
-------------
Leasehold improvements $ 302,952
Laboratory equipment 282,079
Office equipment 74,149
--------------
Total property and equipment 659,180
Less accumulated depreciation (61,619)
--------------
$ 597,561
==============
NOTE 4 - MARKETABLE SECURITIES
On September 15, 1998, the Company entered into a stock purchase agreement with
an investor. As part of the agreement, the Company accepted 9,644,986 shares of
a publicly traded company as payment for 1,928,995 shares of its common stock.
The share transaction was valued at $0.50 per share of the Company's stock or
$964,498. This value approximated the trading price of the stock received.
Subsequent to the exchange, the shares underwent a 1-for-20 reverse stock split,
reducing the Company's holdings to 482,250 shares. The Company sold 16,870 of
the post-split shares at a loss of $25,731. At December 31, 1998, the shares
were trading at $0.25 per share. The shares are classified as securities held
for sale and are valued at the estimated trading price as of December 31, 1998
or $116,345, which is the difference between the fair market value and the cost
of the shares. $814,413 has been classified as a separate component of equity.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Lease
----------------
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 1999, March 31, 2003 and March 31, 2003. One
lease carries an option to extend the term of the lease for an additional three
years.
Future minimum lease payments under this lease, at December 31, 1998, are :
1999 $ 121,224
2000 90,840
2001 90,840
2002 90,840
2003 22,710
---------
Total minimum lease payments $ 416,454
=========
Rent expense for the years ended December 31, 1998 and 1997 was $90,566 and
$47,391, respectively.
F-14
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
Patent Issues
--------------
The Company's lead product in its immunodiagnostic business segment is a blood
test kit (Kit 1). A competitor has filed patent applications in the U.S. and
Europe for a similar competing product. The Company's management is of the
opinion that the patent should not be granted. If the patent is granted, the
Company will no longer be able to sell Kit 1, and may be liable for damages
estimated to be approximately $12,000.
The Company has developed a similar blood test kit (Kit 2) which should
circumvent the patent if it is granted. The Company is seeking to sell Kit 2 in
place of Kit 1. Sales of Kit 1 in 1998 were approximately $25,000.
NOTE 6 - STOCK SUBSCRIPTIONS
During the year, the Company received cash payments which were subsequently
converted to common stock. The amounts were non-interest bearing and were
intended to be for the purchase of the Company's common stock. As of December
31, 1998, a balance of $675,000 had not been converted.
On September 15, 1998, the Company entered into an exchange agreement with the
same investor to sell 1,062,394 shares of its common stock at $0.50 per share,
or $531,197. Payment was in the form of a promissory note bearing interest at
9% with monthly payments of $24,267, maturing September 1, 2000. Principal
payments of $63,223 were made on the note during 1998.
NOTE 7 - MANAGEMENT PLAN
The Company is proceeding with its short-term business strategy of developing
niche immunodiagnostic tests which will enable physicians to diagnose and treat
patients for a variety of pathologic disorders, while the German companies
acquired during 1997 will perform the research and development on an artificial
blood substitute and an additive, long-term implantable glucose sensor and
oxygen detector.
Management is aware that it will have to raise additional capital or borrow
funds to continue operations. Management believes that its short-term strategy
of raising additional capital, developing new products, and increased marketing
efforts should enable the Company to meet its obligations and sustain its
operations.
The Company also anticipates that by completing its reorganization with Sangui
USA, a non-reporting publicly traded company, it will be better able to raise
additional capital in exchange for equity.
The operations of SanguiBioTech, AG and GlukoMediTech, AG are also expected to
contribute to the long-term profitability of the Company. However, since the
research performed by these companies related to the potential development of
pharmaceutical products is highly regulated and requires extensive clinical
trials by most countries, the time at which sales and profits may follow is
highly uncertain.
F-15
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to the Consolidated Financial Statements
December 31, 1998 and 1997
NOTE 8 - SUBSEQUENT EVENT
Research Grant
---------------
The Company's wholly-owned subsidiary Sangui Biotech AG received a grant from
the "Forschungszentrum" (Center of Research) Juelich, Germany, which acts on
behalf of the German State North Rhine Westphalia. This grant serves to promote
the Company's project of research and development of an artificial oxygen
carrier and amounts to approximately $1,950,000, which covers approximately 40%
of the estimated project costs of $4,875,000. The grant is non-repayable, and
40% of the subsidiary's expenses on the promoted project will be reimbursed
periodically within the term of the grant from April 8, 1998 to March 31, 2001
in amounts up to $3,185,253 in 1999, $519,523 in 2000, and $91,552 in 2001. In
the beginning of 1999, the "Forschungszentrum Juelich" reimbursed $353,438 of
the total project expenses of $967,898 for 1998."
F-16
Consolidated Financial Statements
Sangui BioTech International, Inc.
(A Development Stage Company)
Santa Ana
California/U.S.A.
Six months ended June 30, 1999
with Report of Independent Auditors
F-17
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Financial Statements
Six months ended June 30, 1999
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income and Comprehensive Income . . . . . 4
Consolidated Statements of Changes in Shareholders' Equity . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 9
F-18
Report of Independent Auditors
The Shareholders
Sangui Bio Tech International, Inc.
(A Development Stage Company)
Santa Ana, California
We have audited the accompanying consolidated balance sheet of Sangui Bio Tech
International, Inc. (a development stage company) (the Company) as of June 30,
1999 and the related statements of consolidated income and comprehensive income,
shareholders' equity and cash flows for the six months then ended and for the
period August 2, 1996 (inception) through June 30, 1999. 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 audit. The financial statements for the period August 2,
1996 (inception) through December 31, 1998, were audited by other auditors whose
report dated March 31, 1999 expressed an unqualified opinion on those
statements. The financial statements for the period August 2, 1996 (inception)
through December 31, 1998 include total revenues, shareholders' equity and net
loss of $110,441, $1,588,742 and $3,078,950, respectively. Our opinion on the
consolidated statements of operations, shareholders' equity, and cash flows for
the period August 2, 1996 (inception) through June 30, 1999, insofar as it
relates to amounts for prior periods through December 31, 1998, is based solely
on the report of other auditors.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sangui Bio Tech International, Inc. (a
development stage company) at June 30, 1999 and the results of its operations
and its cash flows for the six months then ended and the period from August 2,
1996 (inception) through June 30, 1999, in conformity with accounting
principles generally accepted in the United States of America.
Ernst & Young
Dusseldorf
Federal Republic of Germany
March 24, 2000
F-19
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
JUNE 30,
1999
-------------
ASSETS
Current assets:
Cash $ 305,501
Accounts receivable 99,574
Inventories (Note 2) 112,036
Marketable securities 1,288,620
Prepaid assets 1,703,099
------------
Total current assets 3,508,830
Property and equipment -
net (Note 4) 407,601
Patents and licenses 66,185
Other assets 1,174,701
------------
Total assets $5,157,317
============
See accompanying notes to consolidated financial statements
F-20
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Balance Sheet
JUNE 30,
1999
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses
$ 102,420
Stock subscriptions (Note 8) 50,000
-------------
Total current liabilities 152,420
Commitments and Contingencies
(Note 7) 25,000
Stockholders' equity:
Preferred stock: no par value;
5,000,000 shares authorized,
505,000 shares issued and
outstanding 5,050
Common stock: no par value;
50,000,000 shares authorized,
31,867,878 issued and outstanding 10,277,373
Stock subscriptions receivable
(Note 8) (341,072)
Currency translation adjustment (63,068)
Deficit accumulated during the
development stage (4,898,386)
-------------
Total stockholders' equity 4,979,897
------------
Total liabilities and stockholders' equity $ 5,157,317
=============
See accompanying notes to consolidated financial statements
F-21
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Income and Comprehensive Income
From Inception
Six months on August 2,
period ended 1996 thruough
June 30, 1999 June 30, 1999
--------------------------------
Sales $ 178,835 $ 289,276
Cost of sales 117,464 186,767
-------------------------------
Gross margin 61,371 102,509
Costs and expenses:
Research and development 505,270 1,993,991
General and administrative 731,200 2,303,299
Depreciation 55,343 114,375
------------------------------
Total costs and expenses 1,291,813 4,411,665
------------------------------
Net loss from operations (1,230,442) (4,309,156)
Other income (expense):
Interest income 33,842 73,800
Interest expense - (15,564)
Other income 257,302 258,403
Loss on marketable securities (880,138) (905,869)
------------------------------
Total other income (expense) (588,994) (589,230)
------------------------------
Basic loss $ (1,819,436) $(4,898,386)
-------------------------------
Other comprehensive loss:
Recognition of permanent losses on marketable securities
(814,413) -
Foreign currency adjustments (159,682) (63,068)
Total other comprehensive loss --------------------------------
654,731 (63,068)
--------------------------------
Comprehensive loss (1,164,705) (4,961,454)
===============================
Basic loss per share (0.06)
============
Weighted average number of shares outstanding
29,417,956
============
See accompanying notes to consolidated financial statements
F-22
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-----------------------------------------------------------------------------------------------
Balance at inception August 2,
- - 3,400,000 98,465 - - - 98,465
Issuance of common stock
for cash at $0.001 per share - - 1,600,000 1,600 (1,600) - - -
Currency translation adjustment - - - - - 29,457 - 29,457
Net loss for the period ended
December 31, 1996 - - - - - - (539,853) (539,853)
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,000,000 $100,065 $ (1,600) $29,457 $(539,853) $(411,931)
===========================================================================================
See accompanying notes to consolidated financial statements
F-23
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,000,000 $ 100,065 $ (1,600) $ 29,457 $(539,853) $(411,931)
Stock issued for the
acquisition of Sangui BioTech 505,000 5,050 1,800,000 900 - - - 5,950
recorded at predecessor cost
Common stock issued for
note payable at $0.10 per share - - 6.000,000 600,000 - - - 600,000
Common stock issued for cash
at $0.10 per share - - 4,000,000 400,000 - - - 400,000
Receipt of stock
subscription receivable - - - - 1,600 - - 1,600
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - - 100,000
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - - 620,000
Currency translation adjustment - - - - - 126,924 - 126,924
Net loss for the year ended
December 31, 1997 - - - - - - 1,181,272) (1,181,272)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 505,000 $ 5,050 19,794,681 $1,845,965 $(25,000) $ 156,381 $(1,721,125)$ 261,271
============================================================================================
See accompanying notes to consolidated financial statements
F-24
Sangui BioTech International, Inc.(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,845,965 $ (25,000) $ 156,381 $(1,721,125) $ 261,271
Issuance of common stock
for cash at $.235 per share - - 755,320 177,500 25,000 - - 202,500
Issuance of common stock
for subscriptions receivable at
$0.50 per share - - 1,062,394 531,197 (531,197) - - -
Issuance of common stock
for marketable securities at
$0.50 per share - - 1,928,995 964,498 - - - 964,498
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - - 2,300,000
Issuance of stock options for
services valued at $1.375 per
share - - - 13,650 - - - 13,650
Exercise of stock options at
0.01 per share - - 10,000 100 - - - 100
Accrued interest contributed
to capital - - - 15,505 - - - 15,505
Receipt of stock subscriptions - - - - 63,223 - - 63,223
Unrealized loss on marketable
securities - - - - - (814,413) - (814,413)
Currency translation adjustment - - - - - (59,767) - (59,767)
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825) (1,357,825)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 505,000 $5,050 28,151,390 $5,848,415 $(467,974) $(717,799) $(3,078,950) $ 1,588,742
============================================================================================
See accompanying notes to consolidated financial statements
F-25
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Changes in Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 505,000 $ 5,050 28,151,390 $5,848,415 $(467,974) $ (717,799) $ (3,078,950) $1,588,742
Issuance of common stock
for cash at $1.15 per share - - 650,000 747,500 - - - 747,500
Issuance of common stock
for services received valued at - 2,600,000 3,145,000 - - - 3,145,000
$1.21 per share
Issuance of common stock
for cash and forgiveness of - - 466,488 536,458 - - - 536,458
notes payable to shareholder
at $1.15 per share
Receipt of stock subscriptions - - - - 126,902 - - 126,902
Recognition of permanent loss
on marketable securities - - - - - 814,413 - 814,413
Currency translation adjustment - - - - - (159,682) - (159,682)
Net loss for the six months
ended June 30, 1999 - - - - - - (1,819,436) (1,819,436)
-------------------------------------------------------------------------------------------------
Balance at June 30, 1999 505,000 $ 5,050 31,867,878 $ 10,277,373 $ (341,072) $ (63,068) $(4,898,386) $4,979,897
=================================================================================================
See accompanying notes to consolidated financial statements
F-26
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
From Inception
Six months on August 2,
period ended 1996 through
June 30, 1999 June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES: ------------------------------------
Net loss $ (1,819,436) $(4,898,386)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 55,343 114,375
Stock options and stock issued for services
467,500 481,150
Loss recorded on marketable securities 880,138 905,869
Changes in operating assets and liabilities:
Increase in accounts receivable (77,801) (99,571)
Increase in inventory (72,150) (112,036)
Decrease in prepaid
expenses and deposits (44,959) (158,099)
Increase in other assets (21,623) (79,496)
Increase in accounts payable
and accrued expenses 18,131 117,921
Increase in accrued commitments and
contingencies 25,000 25,000
---------------------------------
Net cash used in operating activities (589,857) (3,703,273)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of securities 50,620 58,628
Purchase of marketable securities (1,288,620) (1,288,620)
Grants for property and equipment 185,000 185,000
Purchase of property and equipment (79,671) (712,641)
---------------------------------
Net cash used in investing activities (1,132,671) (1,757,633)
FINANCING ACTIVITIES:
Issuance of stock for cash 608,958 4,233,158
Reverse acquisition 5,950
Change of stock subscription receivable 126,902 126,902
Proceeds from stock subscriptions 50,000 725,000
Proceeds from notes payable - 640,000
Currency translation adjustment (159,682) (63,068)
---------------------------------
Net cash provided in financing activities 626,178 5,667,942
Net increase in cash and cash equivalents (1,096,350) 207,036
Cash and cash equivalents at beginning of period
1,401,851 98,465
-------------------------------
Cash and cash equivalents at end of period $ 305,501 $ 305,501
===============================
See accompanying notes to consolidated financial statements
F-27
Sangui BioTech International, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Six months From Inception on
period ended August 2, 1996
June 30, 1999 through June 30, 1999
CASH PAID FOR:
Interest $ - $ 59
Income tax - -
F-28
25
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEVELOPMENT STAGE ACTIVITIES AND BASIS OF PRESENTATION
Sangui BioTech International, Inc. (a development stage Company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly owned subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's laboratory
and headquarters are located in Santa Ana, California, and this facility is
devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly owned subsidiaries, SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively. Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued shares of its common stock in exchange
for all of the outstanding common stock of Sangui USA. The acquisition was
accounted for as a reverse acquisition of Sangui USA because the shareholders of
Sangui USA controlled the Company after the acquisition. The Company is the
acquiring entity for legal purposes and Sangui USA is the surviving entity for
accounting purposes. Accordingly, the accompanying financial statements present
the historical consolidated financial statements of Sangui USA from August 2,
1996 (date of inception), through the acquisition date of May 15, 1997 and the
consolidated financial statements of the Company and Sangui USA since that date.
Since the fair value of the net assets of the Company were equal to their net
book value on May 15, 1997 the assets and liabilities of the Company remained at
their historical cost following the acquisition.
F-29
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned domestic and foreign subsidiaries. All significant
inter-company accounts and transactions have been eliminated upon consolidation.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting from such translation are excluded from net earnings and accumulated
in a separate component of shareholders' equity. Income and expense accounts
are translated at weighted average exchange rates for the period.
CONCENTRATION OF RISK
The Company has a relatively small customer base. The Company's four largest
customers accounted for 82% of sales for the six months ended June 30, 1999. The
loss of one of these customers could have a significant negative effect on
future sales.
CASH AND EQUIVALENTS
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains bank
accounts in Germany.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out (FIFO) method. The Company regularly
monitors inventory for excess or obsolete items and makes any valuations
corrections when such adjustments are needed.
F-30
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
The Company invests in various short-term debt securities with maturity dates
less than one year. These securities are classified as available-for-sale as
defined by FAS 115 Accounting for Certain Investments in Debt and Equity
Securities. The securities are valued at amortized cost which approximates fair
market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations.
Estimated
Useful Life
------------
Leasehold improvements 5 years
Technical and laboratory equipment 5 years
Office equipment 3 years
Company cars 5 years
IMPAIRMENT OF LONG LIVED ASSETS
In accordance with FAS 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
PATENTS
Patents are recorded at cost and are depreciated using the straight-line method
over the expected useful lives noted below.
Estimated
Useful Life
------------
Patents 5 - 11 years
Licenses 3 years
F-31
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized when products are shipped to the customers.
RESEARCH AND DEVELOPMENT
Research and development are charged to operations as they are incurred. Legal
fees and other direct costs incurred in obtaining and protecting patents are
expensed as incurred.
GRANTS
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Revenue
from grants for the reimbursement of research and development expenses are shown
as other income when the related expenses are incurred. Grants related to the
acquisition of tangible property are recorded as a reduction of the properties'
historical cost.
STOCK-BASED COMPENSATION
The company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25., 'Accounting for Stock Issued to
Employees,' and related interpretation.
INCOME TAXES
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
F-32
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share is computed on the basis of the weighted average number of
common share outstanding each year.
RECENTLY ISSUED PRONOUNCEMENTS
In June 1998, the U.S. Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Transactions".
Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
statement requires all derivatives to be recorded on the balance sheet at fair
value and established "special accounting" for the following three types of
hedges: hedges of change in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of variable cash flows of net investments in foreign operations.
The Company will be required to adopt the statement during the year ended
December 31, 2001. Adoption of this statement is not expected to have a
material effect on the Company's financial condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-33
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
2. BUSINESS ACQUISITIONS
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000 and
505,000 shares of common stock and preferred stock, respectively, issued and
outstanding. Generally accepted accounting principles require that the Company
be considered the acquired company for financial statement purposes (a reverse
acquisition). The Company had no operations at the time of the reverse
acquisition. In conjunction with the transactions, the Company incurred
approximately $200,000 of transaction costs which were charged to operations
during the year-ended December 31, 1997.
In January 1997, Sangui USA acquired 100% of the outstanding stock of both
Sangui AG and Gluko in exchange for 3,400,000 newly issued shares of Sangui USA
common stock. Since the shareholders of Sangui USA were also the shareholders
of Sangui AG and Gluko, this was accounted for as a merger of entities under
common control and hence, was accounted for as a pooling of interest.
Accordingly, the consolidated financial statements for the period August 2, 1996
through December 31, 1996 have been restated to include the accounts of Sangui
AG and Gluko. The following table presents a reconciliation of net loss
previously reported by Sangui USA to those presented in the accompanying
consolidated financial statements:
From Inception
on August 2, 1996
through December 31, 1996
------------------------
Net loss
Sangui USA 144,324
Sangui AG and Gluko 395,529
Combined net loss 539,853
3. INVENTORIES
The inventory balance of $112,036 at June 30, 1999 consists primarily of
finished goods. Inventories have been written down to estimated net realizable
value, and any adjustments are included in the results of operations. The
inventories are of immunodiagnostic products and related materials.
F-34
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1999 consists of the following:
June 30, 1999
-------------
Leasehold improvements 216,666
Technical and laboratory equipment 305,001
Office equipment 10,310
Company cars 8,266
Total property and equipment 540,243
Less accumulated depreciation 132,643
Net book value 407,600
-------
5. INTANGIBLE ASSETS
Intangible assets as of June 30, 1999 consist of the following:
June 30, 1999
=============
Patents 78,406
Licenses 1,528
Total patents and licenses 79,934
------
Less accumulated amortization 13,749
66,185
------
6. MARKETABLE SECURITIES
On September 15, 1998, the Company entered into a stock purchase agreement with
Euro-American GmbH, its underwriter who is also a shareholder. As part of the
agreement, the Company accepted 9,644,986 shares of a publicly traded company as
payment for 1,928,995 shares of its common stock. The share transaction was
valued at $0.50 per share of the Company's stock or $964,498. This value
approximated the trading price of the stock received. The co-owner of
Euro-American GmbH and director of the Company was also a director of the
publicly traded company.
Subsequent to the exchange, the shares received underwent a 1-for-20 reverse
stock split, reducing the Company's holdings to 482,250 shares. As of December
31, 1998, the shares were classified as securities available-for-sale and were
valued at the market price. The $814,413 unrealized loss on the shares was
classified as a separate component of equity, at December 31, 1998
F-35
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
6. OTHER INVESTMENTS (CONTINUED)
During the six months ended June 30, 1999, the Company began to actively sell
these shares. Additionally, the shares underwent a 1-for-10 reverse stock split.
As of June 30, 1999, the Company had 31,810 remaining shares. As a result of
the decline of shares' value, which is viewed by the management of the Company
as other than temporary, the shares have been written down to $0 and the
unrealized loss of $814,413 has been charged directly to the statement of
operations.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 2002, March 31, 2003 and March 31, 2003.
Future minimum lease payments under this lease, at June 30, 1999 are:
1999 $ 66,419
2000 141,853
2001 147,278
2002 145,094
2003 189,217
2004 1,782
------------
Total minimum lease payments $ 691,643
Rent expense for the six months ended June 30, 1999 was $61,307.
PATENT ISSUES
The Company's lead product in its immunodiagnostic business is a blood test kit.
A competitor was granted a patent in the U.S. in August 1998 for a similar
competing product. The Company has reserved $25,000 for the potential costs
associated with defending its product against potential patent infringement
claims.
F-36
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GRANTS
In November 1998, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Sangui AG, Witten, Germany, German Marks (DM) 3,574,575
for the research and development of the Company's artificial oxygen carrier. The
grant covers the period from April 1998 to March 2001. The grant covers 40% of
eligible research and development costs and capital expenditures and is subject
to the Company's ability to cover the remaining 60% of the costs. An additional
condition of the grant is the product must be developed and produced in the
German state of North-Rhine-Westphalia, if developed by 2003.
On September 8, 1999, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Gluko, Witten, Germany, DM 4,340,764 for the research and
development of the Company's long-term implantable glucose sensor. The grant
covers the period from December 1998 to November 2001, including retroactive
months. This grant includes the same terms and as the Sangui AG grant.
Based on research and development expenditures and capital expenditures through
June 30, 1999, the Company had qualified for $425,000 of the grants.
Approximately $240,000 related to research and development expenditures while
the remaining related to capital expenditures. The $240,000 related to research
and development expenditures has been recorded as other income, while the
$185,000 related to capital expenditures was recorded as a reduction to the
historical costs of property and equipment. Through June 30, 1999, $328,000 of
the grants amount has been received.
SEC INVESTIGATION
Certain officers and directors of the Company are being investigated by the U.S.
Securities and Exchange Commission ("SEC") related to the timing and nature of
certain common stock transactions. Although these officers and directors are
exposed to potential fines and penalties stemming from the SEC's investigation,
management of the Company believes that any exposure to the Company is minimal.
F-37
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
8. 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 shareholders.
On September 15, 1998, the Company entered into an exchange agreement with
Euro-American GmbH to sell 1,062,394 shares of its common stock at $0.50 per
share, or $531,197. Payment was in the form of a promissory note bearing
interest at 9% with monthly payments of $24,267, maturing September 1, 2000.
Principal payments of $126,902 were made on the note during the six months ended
June 30, 1999.
Through December 31, 1998, the Company received $675,000 of cash payments from
Euro-American GmbH which were recorded as non-interest bearing notes payable and
were intended to be used for the purchase of the Company's common stock. During
the six months ended June 30, 1999, the Company issued 650,000 and 466,488
shares of common stock to Euro-American GmbH in exchange for the forgiveness of
these notes and $608,958 of cash.
Through June 30, 1999, the Company received $50,000 of cash payments which were
recorded as non-interest bearing notes payable and are intended to be used for
the purchase of the Company's common stock.
In April 1999, the Company issued 2,600,000 million shares of its common stock
in April 1999 to an independent promotions company in exchange for a public
relations/promotions contract covering the period January 1999-December 2000.
The fair value of the services received is estimated to be $3,145,000 and is
based on the original proposal that the promotions company submitted to the
Company when negotiating the contract. This proposal was prepared on the
assumption that the Company would be paying cash for the services. Accordingly,
the common stock was valued at $3,145,000 with a corresponding prepaid asset
recorded for the value of the public promotions contract. The $3,145,000 is
being amortized during the contract period as the services are provided. As of
June 30, 1999, the Company had recognized $467,500 of expense leaving a prepaid
asset of $2,677,500 ($1,545,000 classified as short-term, $1,132,500 classified
as long-term).
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors is empowered to issue liquidation
privileges, dividend, conversion or other rights. No such rights or privileges
have been granted.
F-38
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
In January 1998, a former director and officer of the Company issued, from his
personal holdings of the Company common stock, 266,000 options to three
employees of the Company to purchase Company common stock from him at an option
price of $0.001 per share. Since the Company is not a party to the agreement
and he is not a significant shareholder, this had no impact on the Company's
financial statements.
9. INCOME TAXES
During the six months ended June 30, 1999, the Company paid no income taxes. As
of June 30, 1999, the Company's German subsidiaries had net operating loss
carryforwards for corporate and trade income tax purposes of approximately
$550,000. These losses may be used in future years to offset taxable income and
do not expire. The Company has $800,000 of U.S. federal tax net operating loss
carryforwards which begin to expire in 2011. The tax benefit of the cumulative
carryforwards has been offset by a valuation allowance of the same amount due to
the uncertainty that they will be utilized.
F-39
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
10. COMPREHENSIVE INCOME
Effective at the beginning of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The statement
establishes standards for reporting and display of total comprehensive income
and its components in financial statements. The adoption of this statement has
no effect on the Company's net earnings or total stockholders' equity.
Total comprehensive income represents the net change in shareholders' equity
during a period from sources other than transactions with shareholders and as
such, includes net earnings. For the Company, the components of other
comprehensive income is the change in the cumulative foreign currency
translation adjustments and unrealized losses on other investments recorded in
shareholders' equity.
11. SEGMENT REPORTING
Substantially all of the Company's sales for the six months ended June 30, 1999,
of $178,835 to unaffiliated companies were derived from the US operations.
Property, plant, and equipment is broken down between the US operations of
$57,534 and the German subsidiaries of $350,067.
12. RELATED PARTY TRANSACTIONS
As described in Note 6, the Company received shares of a publicly traded company
in exchange for shares of the Company's common stock. At the date of the
exchange, the co-owner of Euro-American GmbH was also a director of the publicly
traded company.
As described in Note 8, the Company has sold shares of its common stock to
Euro-American GmbH. The co-owners of Euro-American also serves as directors of
the Company.
F-40
Sangui BioTech International, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements (continued)
13. SUBSEQUENT EVENTS
On November 3, 1999, the Company has entered into a stock option agreement with
the Company's chairman entitling him to purchase 3.000.000 shares of common
stock at an option price of $.01 per share in exchange for his contribution of
certain patents related to oxygen carrier, oxygen sensor and glucose sensor
technology. The options can be exercised at the point the Company completes the
development of the artificial oxygen carrier or the implantable sensor and
receives regulatory approval from either Germany, the United States of America
or Singapore.
On February 22, 2000, the Company entered into a subscription agreement to sell
8,000,000 shares of its common stock to Euro-American GmbH at $0.964 per share.
On March 23, 2000, the Company approved the issuance of 80,000 shares of its
common stock to an outside consultant for his assistance with the sale of its
shares of 8,000,000 common stock to Euro-American GmbH.
On March 24, 2000, the Company changed its fiscal year to June 30.
F-41
SANGUI BIOTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 1999
F-42
C O N T E N T S
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income and Comprehensive Income . . . . 5
Consolidated Statements of Changes in Shareholders' Equity . . . . 6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . 11
Notes to Consolidated Financial Statements . . . . . . . . . . .. . 13
F-43
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
December 31, June 30,
1999 1999
------------- ----------
(Unaudited)
CURRENT ASSETS
Cash $ 619,595 $ 305,501
Accounts receivable 55,235 99,574
Inventories (Note 2) 78,959 112,036
Marketable securities 788,018 1,288,620
Prepaid assets 1,545,000 1,703,099
------------- ----------
Total Current Assets 3,086,807 3,508,830
------------- ----------
PROPERTY AND EQUIPMENT - NET (Note 3) 487,073 407,601
------------- ----------
OTHER ASSETS
Patents and licenses (Note 4) 54,565 66,185
Other assets 346,250 1,174,701
------------- ----------
Total Other Assets 400,815 1,240,886
------------- ----------
TOTAL ASSETS $ 3,974,695 $5,157,317
============= ==========
F-44
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
December 31, June 30,
1999 1999
-------------- ------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 129,469 $ 102,420
Stock subscriptions (Note 7) - 50,000
-------------- ------------
Total Current Liabilities 129,469 152,420
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6) 25,000 25,000
-------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock: no par value; 5,000,000 shares
authorized, 505,000 shares issued and outstanding 5,050 5,050
Common stock: no par value; 50,000,000 shares
authorized, 32,334,463 and 31,867,878 issued
and outstanding, respectively 10,813,831 10,277,373
Stock subscriptions receivable (Note 7) (561,928) (341,072)
Currency translation adjustment (90,477) (63,068)
Deficit accumulated during the development stage (6,346,250) (4,898,386)
-------------- ------------
Total Stockholders' Equity 3,820,226 4,979,897
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,974,695 $ 5,157,317
============== ============
F-45
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Income
For the From
Six Months Inception on
For the and Year August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
- -
1999 1998 1999 1999
------------ -------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
SALES $ 215,457 $ 54,763 $ 178,835 $ 504,733
COST OF SALES 137,892 36,940 117,464 324,659
------------ -------------- ------------ ------------
GROSS MARGIN 77,565 17,823 61,371 180,074
------------ -------------- ------------ ------------
COST AND EXPENSES
Research and development 293,331 430,240 505,270 2,287,322
General and administrative 1,379,261 240,222 731,200 3,682,557
Depreciation 62,000 19,630 55,343 176,375
------------ -------------- ------------ ------------
Total Costs and Expenses 1,734,592 690,092 1,291,813 6,146,254
------------ -------------- ------------ ------------
NET LOSS FROM OPERATIONS (1,657,027) (698,000) (1,230,442) (5,966,180)
------------ -------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 35,761 17,600 33,842 109,561
Interest expense - - - (15,564)
Other income 173,402 - 257,302 431,802
Loss on marketable securities - (25,731) (880,138) (905,869)
------------ -------------- ------------ ------------
Total Other Income (Expense) 209,163 (8,131) (588,994) (380,070)
------------ -------------- ------------ ------------
BASIC LOSS (1,447,864) (680,400) (1,819,436) (6,346,250)
------------ -------------- ------------ ------------
OTHER COMPREHENSIVE LOSS
Foreign currency adjustments (27,409) (26,748) (159,682) (90,477)
------------ -------------- ------------ ------------
Total Other Comprehensive
Loss (1,475,273) (707,148) (1,979,118) (90,477)
------------ -------------- ------------ ------------
COMPREHENSIVE LOSS $(1,475,273) $ (707,148) $(1,979,118) $(6,436,727)
============ ============== ============ ============
BASIC LOSS PER SHARE $ (0.05) $ (0.05) $ (0.07)
============ ============== ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 31,469,875 12,603,000 29,417,956
============ ============== ============
F-46
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- ------- --------- ------- ------------- ------------- ------------ -------
Balance at inception August 2,
- - 3,400,000 98,465 - - - 98,465
Issuance of common stock
for cash at $0.001 per share - - 1,600,000 1,600 (1,600) - - -
Currency translation adjustment - - - - - 29,457 - 29,457
Net loss for the period ended
December 31, 1996 - - - - - - (539,853) (539,853)
--------- ------- --------- ------- ----------- --------- ----------- ------------
Balance, December 31, 1996 5,000,000 $100,065 $ (1,600) $29,457 $(539,853) $(411,931)
========= ======= =========== ======== =========== ========= =========== ============
F-47
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
-------- ------- --------- --------- ------------ ----------- ----------- --------
Balance, December 31, 1996 - - 5,000,000 $ 100,065 $ (1,600) $ 29,457 $(539,853) $(411,931)
Stock issued for the
acquisition of Sangui BioTech 505,000 5,050 1,800,000 900 - - - 5,950
recorded at predecessor cost
Common stock issued for
note payable at $0.10 per share - - 6.000,000 600,000 - - - 600,000
Common stock issued for cash
at $0.10 per share - - 4,000,000 400,000 - - - 400,000
Receipt of stock
subscription receivable - - - - 1,600 - - 1,600
Issuance of common stock
for cash at $0.40 per share - - 250,000 100,000 - - - 100,000
Issuance of common stock
for cash at $0.235 per share - - 2,744,681 645,000 (25,000) - - 620,000
Currency translation adjustment - - - - - 126,924 - 126,924
Net loss for the year ended
December 31, 1997 - - - - - - 1,181,272) (1,181,272)
---------- ---------- ---------- ---------- --------- --------- ----------- -----------
Balance at December 31, 1997 505,000 $ 5,050 19,794,681 $1,845,965 $(25,000) $ 156,381 $(1,721,125)$ 261,271
========== ========== ========== =========== ========= ========= =========== ==========
F-48
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance, December 31, 1997 505,000 $ 5,050 19,794,681 $ 1,845,965 $ (25,000) $ 156,381 $(1,721,125) $ 261,271
Issuance of common stock
for cash at $.235 per share - - 755,320 177,500 25,000 - - 202,500
Issuance of common stock
for subscriptions receivable at
$0.50 per share - - 1,062,394 531,197 (531,197) - - -
Issuance of common stock
for marketable securities at
$0.50 per share - - 1,928,995 964,498 - - - 964,498
Issuance of common stock
for cash at $0.50 per share - - 4,600,000 2,300,000 - - - 2,300,000
Issuance of stock options for
services valued at $1.375 per
share - - - 13,650 - - - 13,650
Exercise of stock options at
0.01 per share - - 10,000 100 - - - 100
Accrued interest contributed
to capital - - - 15,505 - - - 15,505
Receipt of stock subscriptions - - - - 63,223 - - 63,223
------- ------ ---------- ---------- ---------- ----------- ------------ -----------
Balance Forward 505,000 $5,050 28,151,390 $5,848,415 $(467,974) $ 156,381 $(1,721,125) $ 3,820,747
======= ====== ========== ========== ========== ========== ============ ===========
F-49
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance Forward 505,000 $ 5,050 28,151,390 $ 5,848,415 $ (467,974) $ 156,381 $ (1,721,125) $3,820,747
Unrealized loss in AMDD
investment - - - - - (814,413) - (814,413)
Currency translation adjustment - - - - - (59,767) - (59,767)
Net loss for the year ended
December 31, 1998 - - - - - - (1,357,825) (1,357,825)
--------------- ------------- ---------- -------------- ------------- ----------- -----------
Balance at December 31, 1998 505,000 5,050 28,151,390 5,848,415 (467,974) (717,799) (3,078,950) 1,588,742
Issuance of common stock
for cash at $1.15 per share - - 650,000 747,500 - - - 747,500
Issuance of common stock
for services received - - 2,600,000 3,145,000 - - - 3,145,000
Issuance of common stock
for cash at $1.15 per share - - 466,488 536,458 - - - 536,458
Receipt of stock subscriptions - - - - 126,902 - - 126,902
Recognition of loss on
investments - - - - - 814,413 - 814,413
Balance Forward 505,000 $ 5,050 31,867,878 $10,277,373 $ (341,072) $ 96,614 $(3,078,950) $6,959,015
--------------- ------------- ---------- -------------- ------------ ------------ -----------
F-50
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
Deficit
Accumulated
Other During the
Preferred Stock Common Stock Stock Comprehensive Development Total
Shares Amount Shares Amount Subscriptions Income (Loss) Stage Equity
---------- -------- --------- ----------- ------------- -------------- ----------- ---------
Balance Forward 505,000 $ 5,050 31,867,878 $ 10,277,373 $ (341,072) $ 96,614 $ (3,078,950) $6,959,015
Currency translation
adjustment - - - - - (159,682) - (159,682)
Net loss for the six months
and year ended
June 30, 1999 - - - - - - (1,819,436) (1,819,436)
-------- ------- ----------- ----------- --------- ----------- ------------- ----------
Balance at June 30, 1999 505,000 5,050 31,867,878 10,277,373 (341,072) (63,068) (4,898,386) 4,979,897
Common stock issued for
cash at $1.15 per share
(unaudited) - - 466,585 536,458 (220,856) - - 315,602
Currency translation
adjustment (unaudited) - - - - - (27,409) - (27,409)
Net loss for the six months
ended December 31, 1999
(unaudited) - - - - - - (1,447,864) (1,447,864)
---------- -------- ---------- ------------ ---------- ------------ ------------- -----------
Balance at December 31,
1999 (unaudited) 505,000 $ 5,050 32,334,463 $ 10,813,831 $ (561,928) $ (90,477) $ (6,346,250) $3,820,226
=========== ======== =========== ============ =========== =========== ============== ==========
F-51
From
For the Inception on
For the Six Months August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
1999 1998 1999 1999
------------ -------------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(1,447,864) $ (680,400) $ (1,819,436) $(6,346,250)
Adjustments to reconcile net loss to
cash (used) by operating activities:
Depreciation expense 62,000 19,630 55,343 176,375
Stock options and stock issued for
services 786,250 13,650 467,500 1,267,400
Loss on sale of securities - 25,731 880,138 905,869
Changes in operating asset and
liabilities:
(Increase) decrease in accounts
receivable 44,339 (6,987) (77,801) (55,235)
(Increase) decrease in inventory 33,077 (6,854) (72,150) (78,959)
(Increase) decrease in prepaid
expenses and deposits 149,812 (54,832) (44,959) (8,287)
(Increase) decrease in other assets 11,620 - (21,623) (67,876)
Increase in accounts payable
and accrued expenses 27,049 45,037 18,131 144,973
Increase in accrued commitments
and contingencies - - 25,000 25,000
----------- ------------ -------------- -----------
Net Cash Used in Operating
Activities (333,717) (645,025) (589,857) (4,036,990)
----------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of securities 71,573 - 50,620 130,201
Purchase of marketable securities - - (1,288,620) (1,288,620)
Grants for property and equipment 429,517 - 185,000 614,517
Purchase of property and equipment (141,472) (265,046) (79,671) (854,113)
---------- ------------ ------------- -----------
Net Cash Provided (Used)
in Investing Activities $ 359,618 $(265,046) $(1,132,671) $(1,398,015)
---------- ---------- ------------ ------------
F-52
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
From
For the Inception on
For the Six Months August 2,
Six Months Ended Ended 1996 Through
December 31, June 30, December 31,
1999 1998 1999 1999
------------ -------------- ----------- --------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM FINANCING
ACTIVITIES
Issuance of stock for cash $315,602 $826,000 $ 608,958 $4,548,760
Reverse acquisition - - - 5,950
Change of stock subscription receivable - - 126,902 126,902
Proceeds from stock subscriptions - 25,000 50,000 725,000
Proceeds from notes payable - - - 640,000
Currency translation adjustment (27,409) - (159,68 (90,477)
--------- --------- ------------ -----------
Net Cash Provided in Financing
Activities 288,193 851,000 626,178 5,956,135
--------- --------- ------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 314,094 (59,071) (1,096,350) 521,130
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 305,501 307,480 1,401,851 98,465
--------- --------- ------------ -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $619,595 $248,409 $ 305,501 $ 619,595
========= ========= ============ ===========
CASH PAID FOR:
Interest $ - $ - $ - 59
Income tax $ - $ - $ - $ -
F-53
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Development Stage Activities and Basis of Presentation
Sangui BioTech International, Inc. (a development stage company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly-owed subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's
laboratory and headquarters are located in Santa Ana, California, and this
facility is devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly-owned subsidiaries SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively, Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued shares of its common stock in exchange
for all of the outstanding common stock of Sangui USA. The acquisition was
accounted for as a reverse acquisition of Sangui USA because the shareholders of
Sangui USA controlled the Company after the acquisition. The Company is the
acquiring entity for legal purposes and Sangui USA is the surviving entity for
accounting purposes. Accordingly, the accompanying financial statements present
the historical consolidated financial statements of Sangui USA from August 2,
1996 (date of inception), through the acquisition date of May 15, 1997 and the
consolidated financial statements of the Company and Sangui USA since that date.
Since the fair value of the net assets of the Company were equal to their net
book value on May 15, 1997 the assets and liabilities of the Company were equal
to their net book value on May 15, 1997. The assets and liabilities of the
Company remained at their historical cost following the acquisition.
b. Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned domestic and foreign subsidiaries. All significant
intercompany accounts and transactions have been eliminated upon consolidation.
c. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected to change its year end from December 31 to
June 30. Accordingly, the income statement and statements of cash flows are for
the six months ended June 30, 1999.
F-54
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Foreign Currency Translation
Assets and liabilities of the Company's German operations are translated into
U.S. dollars at period-end exchange rates. Net exchange gains or losses
resulting form such translation are excluded from net earnings and accumulated
in a separate component of shareholders' equity. Income and expense accounts are
translated at weighted average exchange rates for the period.
e. Concentration of Risk
The Company has a relatively small customer base. The Company's four largest
customers accounted for 82% of sales for the six months ended December 31, 1999
and for the six months ended June 30, 1999. The loss of one of these customers
could have a significant negative effect on future sales.
f. Cash and Equivalents
The Company does not maintain its cash in bank depository accounts insured by
the Federal Deposit Insurance Corporation (FDIC). The Company has not
experienced any losses in such accounts. Cash and equivalents include time
deposits with a maturity of three months or less, and for which the Company has
no requirements for compensating balances. The Company also maintains bank
accounts in Germany.
g. Inventories
Inventories are stated at the lower of cost or market. The cost of inventories
is determined using the first-in, first-out (FIFO) method. The Company
regularly monitors inventory for excess or obsolete items and makes any
valuations corrections when such adjustments are needed.
h. Marketable Securities
The Company invests in various short-term debt securities with maturity dates
less than one year. These securities are classified as held-to-maturity
securities as defined by FAS 115 Accounting for Certain Investments in Debt and
Equity Securities. The securities are valued at amortized cost which
approximates fair market value.
i. Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the expected useful lives noted below. Expenditures
for normal maintenance and repairs are charged to income, and significant
improvements are capitalized. The cost and related accumulated depreciation of
assets are removed from the accounts upon retirement or other disposition; any
resulting gain or loss is reflected in the statement of operations.
F-55
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Property and Equipment (Continued)
Estimated
Useful Life
------------
Leasehold improvements 5 years
Technical and laboratory equipment 5 years
Office equipment 3 years
Company cars 5 years
j. Impairment of Long Lived Assets
In accordance with FAS 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. There was
no material effect for the Company in the current period.
k. Patents
Patents are recorded at cost and are depreciated using the straight-line method
over te expected useful lives noted below.
Estimated
Useful Life
------------
Patents 5-11 years
Licenses 3 years
l. Revenue Recognition
Revenues are recognized when products are shipped to the customers.
m. 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.
n. Grants
The Company receives grants from the German government which are used to fund
research and development activities and the acquisition of equipment. Revenue
from grants for the reimbursement of research and development expenses are shown
as other income when the related expenses are incurred. Grants related to the
acquisition of tangible property are recorded as a reduction of the properties'
historical cost.
F-56
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
o. Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of
Accounting Principles Board Opinion No. 25., Accounting for Stock Issued to
Employees,' and related interpretation.
p. Income Taxes
The Company accounts for deferred income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS No.
109). Deferred income taxes are computed based on the tax liability or benefit
in future years of the reversal of temporary differences in the recognition of
income or deduction of expenses between financial and tax reporting purposes.
The net difference between income tax expense and taxes currently payable is
reflected in the balance sheet as deferred taxes. Deferred tax assets and/or
liabilities are classified as current and non-current based on the
classification of the related asset or liability for financial reporting
purposes, or based on the expected reversal date for deferred taxes that are not
related to an asset or liability.
q. Earnings per Share
Basic earnings per share is computed on the basis of the weighted average number
of common shares outstanding each period. Fully diluted loss per share is not
presented becaue any common stock equivalents are antidilutive in nature.
r. Recently Issued Pronouncements
In June 1998, the U.S. Financial Accounting Standards board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Transactions".
Statement 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The new
statement requires all derivatives to be recorded on the balance sheet at fair
value and established "special accounting" for the following three types of
hedges: hedges of change in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of variable cash flows of net investments in foreign operations.
The Company will be required to adopt the statement during the year ended
December 31, 2001. Adoption of this statement is not expected to have a
material effect on the Company's financial condition or results of operations.
F-57
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
s. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
t. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the adjustments
which, in the opinion of management, are necessary for a fair presentation.
Such adjustments are of a normal recurring nature.
NOTE 2 - BUSINESS ACQUISITIONS
On May 15, 1997, the Company and Sangui USA completed an Agreement and Plan of
Reorganization whereby the Company issued 5,000,000 shares of its common stock
in exchange for all of the outstanding common stock of Sangui USA. Immediately
prior to the Agreement and Plan of Reorganization, the Company had 1,800,000 and
505,000 shares of common stock and preferred stock, respectively, issued and
outstanding. Generally accepted accounting principles require that the Company
be considered the acquired company for financial statement purposes (a reverse
acquisition). The Company had no operations at the time of the reverse
acquisition. In conjunction with the transactions, the Company incurred
approximately $200,000 of transaction costs which were charged to operations
during the year-ended December 31, 1997.
In January 1997, Sangui USA acquired 100% of the outstanding stock of both
Sangui AG and Gluko in exchange for 3,400,000 newly issued shares of Sangui USA
common stock. Since the shareholders of Sangui USA were also the shareholders
of Sangui AG and Gluko, this was accounted for as a merger of entities under
common control and hence, was accounted for as a pooling of interest.
Accordingly, the consolidated financial statements for the period August 2, 1996
through December 31, 1996 have been restated to include the accounts of Sangui
AG and Gluko. The following table presents a reconciliation of net loss
previously reported by Sangui USA to those presented in the accompanying
consolidated financial statements:
F-58
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 2 - BUSINESS ACQUISITIONS (Continued)
From
Inception on
August 2,
1996 Through
December 31,
1996
----------------
Net loss
Sangui USA $ 144,324
Sangui AG and Gluko 395,529
--------------
Combined Net Loss $ 539,853
===============
NOTE 3 - INVENTORIES
The inventory balance of $78,959 and $112,036 at December 31, 1999 and June 30,
1999 consisted primarily of finished goods. Inventories have been written down
to estimated net realizable value, and any adjustments are included in the
results of operations. The inventories are of immunodiagnostic products and
related materials.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and June 30, 1999 consisted of the
following:
December 31, June 30,
1999 1999
------------- ----------------
(Unaudited)
Leasehold improvements $ 216,666 $ 216,666
Technical and laboratory equipment 446,474 305,001
Office equipment 10,310 10,310
Company cars 8,266 8,266
------------- --------------
Total property and equipment 681,716 540,243
Less accumulated depreciation 194,643 132,642
------------ --------------
Net Book Value $ 487,073 $ 407,600
============= ===============
F-59
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 5 - INTANGIBLE ASSETS
Intangible assets as of December 31, 1999 and June 30, 1999 consisted of the
following:
December 31, June 30,
1999 1999
------------- --------------
(Unaudited)
Patents $ 78,406 $ 78,406
Licenses 1,528 1,528
-------------- --------------
Total patents and licenses 79,934 79,934
Less accumulated amortization 25,369 13,749
------------- ---------------
$ 54,565 $ 66,185
================ ================
NOTE 6 - OTHER INVESTMENTS
On September 15, 1998, the Company entered into a stock purchase agreement with
its underwriter and shareholder. As part of the agreement, the Company accepted
9,644,986 shares of a publicly traded company as payment for 1,928,995 shares of
its common stock. The share transaction was valued at $0.50 per share of the
Company's stock or $964,498. This value approximated the trading price of the
stock received. The transaction was a related party transaction as Axel
Kutscher, co-owner of the underwriting firm and director of the Company, was
also a director of the publicly traded company.
Subsequent to the exchange, the shares received underwent a 1-for-20 reverse
stock split, reducing the Company's holdings to 482,250 shares. As of December
31, 1998, the shares were classified as securities held for sale and were valued
at the shareholders trading price. The $814,413 unrealized loss on the shares
held was classified as a separate component of equity at December 31, 1998.
During the six months ended June 30 1999, the Company began to actively sell
these shares. Additionally, the shares underwent a 1-for-10 reverse stock
split. As of June 30 1999, the Company had 31,810 remaining shares. As a
result in the decline of shares' value, which is viewed by the management of the
Company as other than temporary, the shares have been written down to $-0- and
the unrealized loss has been charged directly to the statement of operations.
The Company sold the remaining shares for total consideration of $71,573. This
amount is recorded as other income.
F-60
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Operating Lease
----------------
The Company leases its office and laboratory facilities under three operating
leases which expire on December 1, 2002, March 31, 2003 and March 31, 2003.
Future minimum lease payments under this lease at December 31, 1999 are:
2000 $ 141,853
2001 147,278
2002 145,094
2003 189,217
2004 1,782
------------
Total minimum lease payments $ 625,224
=============
Rent expense for the six months ended December 31, 1999 and 1998, and for the
six months and year ended June 30, 1999 was $66,419, $62,408 and $61,307,
respectively.
Patent Issues
--------------
The Company's lead product in its immunodiagnostic business is a blood test kit.
A competitor was granted a patent in the U.S. in August 1998 for a similar
competing product. The Company has reserved $25,000 for the potential costs
associated with defending its product against potential patent infringement
claims.
Grants
------
In November 1998, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Sangui AG, Witten, Germany, $1,985,875 for the research an
development of the Company's artificial oxygen carrier. The grant covers the
period from April 1998 to March 2001. The grant covers 40% of eligible research
and development costs and capital expenditures and is subject to the Company's
ability to cover the remaining 60% of the costs. An additional condition of the
grant is the product must be developed and produced in the German state of
North-Rhine-Westphalia, if developed by 2003.
On September 8, 1999, the German state of North-Rhine-Westphalia granted the
Company's subsidiary, Gluko, Witten, Germany, $2,411,536 for the research and
development of the Company's long-term implantable glucose sensor. The grant
covers the period from December 1998 to November 2001, including retroactive
months. This grant includes the same terms as the Sangui AG grant.
F-61
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Based on research and development expenditures and capital expenditures through
June 30, 1999, the Company had qualified for $425,000 of the grants.
Approximately $240,000 related to research and development expenditures while
the remaining related to capital expenditures. The $240,000 related to research
and development expenditures has been recorded as other income, while the
$185,000 related to capital expenditures was recorded as a reduction to the
historical costs of property and equipment. Through June 30, 1999, $328,000 of
the grants amount has been received.
SEC Investigation
------------------
Certain officers and directors of the Company are being investigated by the U.S.
Securities and Exchange Commission related to the timing and nature of certain
common stock transactions. Although these offices and directors are exposed to
potential fines and penalties stemming from the SEC's investigation, management
of the Company believes that the Company has no contingency.
NOTE 8 - 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 shareholders.
On September 15, 1998, the Company entered into an exchange agreement with a
shareholder to sell 1,062,394 shares of its common stock at $0.50 per share, or
$531,197. Payment was in the form of a promissory note bearing interest at 9%
with monthly payments of $24,267, maturing September 1, 2000. Principal
payments of $126,902 were made on the note during the six months ended December
31, 1999.
In April 1999, the Company issued 2,600,000 million shares of its common stock
in April 1999 to an independent promotions company in exchange for a public
relations/promotions contract covering the period January 1999 - December 2000.
The fair value of the services received is estimated to be $3,145,000 and is
based on the original proposal that the promotions company submitted to the
Company when negotiating the contract. This proposal was prepared on the
assumption that the Company would be paying cash for the services. Accordingly,
the common stock was valued at $3,145,000 with a corresponding prepaid asset
recorded for the value of the public promotions contract. The $3,145,000 is
being amortized during the contract period as the services are provided. As of
December 31, 1999 and June 30, 1999, the Company had recognized $786,250 and
$467,500 of expense leaving a prepaid asset of $1,891,250 ($1,545,000 classified
as short-term, $346,250 classified as long-term):
F-62
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock
----------------
The Company is authorized to issue 5,000,000 shares of non-voting no par value
preferred stock. The Board of Directors is empowered to issue liquidation
privileges, dividend, conversion or other rights. No such rights or privileges
have been granted.
Stock Options
--------------
In January 1998, a former director and officer of the Company issued, from his
personal holdings of the Company common stock, 266,000 options to three
employees of the Company to purchase Company common stock from him at an option
price of $0.001 per share. Since the Company is not a party to the agreement
and he is not a significant shareholder, this had no impact on the Company's
financial statements.
The Company has entered into a stock option agreement with the Company's
chairman entitling him to purchase 3,000,000 shares of common stock at an option
price of $0.01 per share in exchange for his contribution of certain patents
related to oxygen carrier, oxygen sensor an glucose sensor technology. The
options can be exercised at the point the Company completes the development of
the artificial oxygen carrier or the implantable sensor and receives regulatory
approval from either Germany, the United States of America or Singapore.
Additionally, in consideration for his contribution of these patents, the
Company's chairman is entitled to receive a 3% royalty on all revenues generated
by Sangui AG and Gluko.
The proforma earnings prepared under the assumption that the stock options
granted to the Company's chairman had been accounted for based on their value as
determined under Statement of Financial Accounting Statements No. 13, Accounting
for Stock-Based Compensation, would be insignificant.
NOTE 9 - INCOME TAXES
During the six months ended December 31, 1999, the Company paid no income taxes.
As of December 31, 1999, the Company's German subsidiaries had net operating
loss carryforwards for corporate and trade income tax purposes of approximately
$1,200,000. These losses may be used in future years to offset taxable income
and do not expire. The Company has $1,800,000 of U.S. federal tax net operating
loss carryforwards which begin to expire in 2011. With the exception of the net
operating loss carryforwards, the Company has no significant temporary
differences. The tax benefit of the cumulative carryforwards has been offset by
a valuation allowance of the same amount due to the uncertainty that they will
be utilized.
F-63
SANGUI BIOTECH INTERNATIONAL, INC.
(A Development Stage Company)
Notes to Consolidated Financial Statements
December 31, 1999
NOTE 10 - COMPREHENSIVE INCOME
Effective at the beginning of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. The statement
establishes standards for reporting and display of total comprehensive income
and its components in financial statements. The adoption of this statement has
no effect on the Company's net earnings or total stockholders' equity.
Total comprehensive income represents the net change in shareholders' equity
during a period from sources other than transactions with shareholders and as
such, includes net earnings. For the Company, the component of other
comprehensive income is the change in the cumulative foreign currency
translation adjustments.
NOTE 11 - SEGMENT REPORTING
Substantially all of the Company's sales for the six months ended December 31,
1999, of $215,457 to unaffiliated companies were derived from the US operations.
Property, plant and equipment is broken down between the US operations of
$68,490 and the German subsidiaries of $418,583
F-64
FELNAM INVESTMENTS, INC.
CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
DECEMBER 31, 1999
F-65
C O N T E N T S
Consolidated Proforma Balance Sheet 3
Consolidated Proforma Statement of Operations 4
Statement of Assumptions and Disclosures 5
F-66
FELNAM INVESTMENTS, INC.
Consolidated Proforma Balance Sheet
December 31, 1999
(Unaudited)
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
--------------- ------------- ------------- -------------
CURRENT ASSETS
Cash. . . . . . . . . . . $ 619,595 $ - $ - $ 619,595
Inventory . . . . . . . . 78,959 - - 78,959
Prepaid expenses. . . . . 1,545,000 - - 1,545,000
Marketable securities . . 788,018 - - 788,018
Accounts receivable, net. 55,235 - - 55,235
--------------- ------------- ------------- -------------
Total Current Assets. . . 3,086,807 - - 3,086,807
--------------- ------------- ------------- -------------
FIXED ASSETS (NET). . . . 487,073 - - 487,073
--------------- ------------- ------------- -------------
OTHER ASSETS
Patents and licenses. . . 54,565 - - 54,565
Other assets. . . . . . . 346,250 - - 346,250
--------------- ------------- ------------- -------------
Total Other Assets. . . . 400,815 - - 400,815
--------------- ------------- ------------- -------------
TOTAL ASSETS. . . . . . . $ 3,974,695 $ - $ - $ 3,974,695
=============== ============= ============= =============
F-67
FELNAM INVESTMENTS, INC.
Consolidated Proforma Balance Sheet (Continued)
December 31, 1999
(Unaudited)
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
---------------- -------------- ------------- --------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 129,469 $ - $ 25,000 $ 154,469
Commitments . . . . . . . . . . . . . 25,000 - - 25,000
---------------- -------------- ------------- --------------
Total Current Liabilities . . . . . . 154,469 - 25,000 179,469
---------------- -------------- ------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares
authorized, no par value . . . . . . 5,050 - - 5,050
Common stock, 75,000,000 shares
authorized, no par value . . . . . . 10,813,831 1,146 (26,146) 10,788,831
Stock subscriptions receivable. . . . (561,928) - - (561,928)
Currency translation adjustments. . . (90,477) - - (90,477)
Retained deficit. . . . . . . . . . . (6,346,250) (1,146) 1,146 (6,346,250)
---------------- -------------- ------------- --------------
Total Stockholders' Equity. . . . . . 3,820,226 - (25,000) 3,795,226
---------------- -------------- ------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY. . . . . . . $ 3,974,695 $ - $ - $ 3,974,695
================ ============== ============= ==============
F-68
FELNAM INVESTMENTS, INC.
Consolidated Proforma Statement of Operations
(Unaudited)
Sangui Proforma
BioTech Felnam Adjustments
International, Investments, Increase Proforma
Inc. Inc. (Decrease) Consolidated
---------------- ------------- ------------- --------------
REVENUES . . . . . . . . . . . . . $ 394,292 $ - $ - $ 394,292
COST OF SALES. . . . . . . . . . . 255,356 - - 255,356
---------------- ------------- ------------- --------------
GROSS PROFIT . . . . . . . . . . . 138,936 - - 138,936
---------------- ------------- ------------- --------------
OPERATING EXPENSES
Research and development . . . . . 798,601 - - 798,601
Depreciation and amortization. . . 117,343 - - 117,343
General and administrative . . . . 2,110,461 - - 2,110,461
---------------- ------------- ------------- --------------
Total Operating Expenses . . . . . 3,026,405 - - 3,026,405
---------------- ------------- ------------- --------------
OPERATING INCOME (LOSS). . . . . . (2,887,469) - - (2,887,469)
OTHER EXPENSE
Other expense. . . . . . . . . . . (379,831) - - (379,831)
---------------- ------------- ------------- --------------
Total Other Expense. . . . . . . . (379,831) - - (379,831)
---------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES. (3,267,300) - - (3,267,300)
INCOME (TAXES) BENEFIT . . . . . . - - - -
---------------- ------------- ------------- --------------
NET INCOME (LOSS). . . . . . . . . $ (3,267,300) $ - $ - $ (3,267,300)
================ ============= ============= ==============
F-69
FELNAM INVESTMENTS, INC.
Summary of Assumptions and Disclosures
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business Organization
The accompanying proforma financial statements are prepared to present the
acquisition of Sangui BioTech International, Inc. (Sangui) by Felnam
Investments, Inc. (Felnam) to aid the user in understanding the acquisitions.
The proforma balance is presented as though the acquisition took place on
December 31, 1999 and the statement of operations as though the acquisition took
place on December 31, 1998.
Felnam Investments ("Company") is currently a development stage company under
the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7.
The Company was incorporated under the laws of the State of Nevada on March 12,
1996. It is managements' objective to seek a merger with an existing operating
company.
Felnam entered into an Agreement and plan of Reorganization with Sangui BioTech
International, Inc., a Colorado corporation, (Sangui), and the stockholders of
Sangui effective March 30, 2000, as a result of which Felnam acquired in excess
of 80% of the outstanding common stock of Sangui. Management of Felnam
presently intends that its sole business activity is to be the holding parent of
Sangui and to continue the business operations of Sangui.
Sangui BioTech International, Inc. (a development stage company) (the "Company")
was incorporated under the laws of the State of Colorado on July 14, 1995 to
engage in any business permitted by law. The Company, pursuant to the
recapitalization of Sangui BioTech, Inc., is engaged in the development of
immunodiagnostic tests.
The Company's wholly-owed subsidiary Sangui BioTech, Inc. ("Sangui USA")
develops, manufactures and sells immunodiagnostic tests. Sangui USA's
laboratory and headquarters are located in Santa Ana, California, and this
facility is devoted to immunodiagnostic research, development, manufacturing and
distributing, marketing, and administrative functions. Sangui USA was
incorporated in the State of Delaware on August 2, 1996. Sangui USA is the
parent company of two wholly-owned subsidiaries SanguiBioTech AG, and
GlukoMediTech, AG. SanguiBioTech AG ("Sangui AG") and GlukoMediTech, AG
("Gluko") were incorporated in Mainz, Germany on November 25, 1995 and July 15,
1996, respectively. Sangui AG and Gluko are engaged in Germany in the
development of artificial oxygen carriers and glucose sensors.
F-70
FELNAM INVESTMENTS, INC.
Summary of Assumptions and Disclosure
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
b. Proforma Adjustments
1. The proforma financial statements have been prepared as though the merger
of Sangui occurred on December 31, 1999.
Common stock $ 25,000
Accounts payable (25,000)
-------
$ -
=======
To record the estimated costs of the acquisition.
2. Common stock $ 1,461
Retained earnings (1,461)
------
$ -
=======
To eliminate the accumulated deficit of Felnam.
F-71
ITEM 8. CHANGE IN FISCAL YEAR
SGBI as the successor issuer has a fiscal year end of June 30. Felnam's
fiscal year was December 31. SGBI will retain its June 30 fiscal year end.
EXHIBITS
1.1 Exchange Agreement between MRC Legal Services LLC and Sangui Biotech
International, Inc., dated as of March 31, 2000.
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
23.1 Consent of Jones, Jenson & Company, independent public accountant
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 8-K to be signed on its behalf by
the undersigned hereunto duly authorized.
SANGUI BIOTECH INTERNATIONAL, INC.
/s/ Joerg Alte
----------------------------------
President and Director
Date: March 31, 2000