Sangui BioTech, Inc. was incorporated in Delaware on August 2, 1996, and began operations in October 1996. In August 1997 a publicly held company, Citadel Investment System, Inc., a Colorado corporation (Citadel), acquired one hundred percent (100%) of the outstanding common shares of Sangui BioTech, Inc.; as a result, Sangui BioTech, Inc. became a wholly owned subsidiary of Citadel. Thereafter, Citadel changed its name to Sangui BioTech International, Inc. (the "Company" or "SGBI"). Until the end of fiscal year 2001/2002, SGBI's business operations were conducted through four wholly owned subsidiaries: Sangui BioTech, Inc., SanguiBioTech AG, GlukoMediTech AG, and Sangui Biotech Singapore Pte Ltd.
Sangui BioTech, Inc. -------------------
Sangui, BioTech, Inc. ("SBT") was principally engaged in the development and manufacturing of immunodiagnostic kits, which were sold by SBT in niche markets in the United States and Europe. During the first quarter of the June 30, 2003 fiscal year SBT sold its assets, and commenced the wind-down, of its U.S. business operation. SBT was merged with and into the SGBI effective December 31, 2002.
SanguiBioTech AG ----------------
SanguiBioTech AG ("Sangui GmbH") was established and organized under the laws of Germany in Mainz, Germany, on November 25, 1995. Sangui GmbH is in the business of developing hemoglobin-based artificial oxygen carriers as blood additive and blood volume substitutes and variant products thereof. Sangui GmbH is also developing an anti-aging cosmetic based on these artificial oxygen carriers. The members of Sangui GmbH's supervisory board as of June 30, 2003 were Professor Joachim Lutz, M.D., Dora Malek, attorney-at-law, Oswald Burkhard, M.D., Ph.D., and Doris Barnikol-Keuten, Ph.D. Dora Malek resigned from her position as member of the supervisory board effective September 15, 2003. Effective November 4, 2003, SanguiBioTech AG was converted into SanguiBioTech GmbH, a limited liability company under German law.
The facilities of Sangui GmbH are located on the premises of the Forschungs- und Entwicklungszentrum of the University of Witten/Herdecke, Witten, Germany.
GlukoMediTech AG ----------------
GlukoMediTech AG ("Gluko AG") was established and organized under the laws of Germany in Mainz, Germany, on July 15, 1996. Gluko AG was developing long-term implantable glucose sensors, including by-products thereof, and diverse other sensors. Since additional financing for the next planned step of product development could not be secured Gluko AG was merged with Sangui GmbH effective June 30, 2002. While further development work in this area was halted, Sangui GmbH is working to secure the key patents relating to the Glucose Sensors and will continue to address potential strategic financial or industry partners.
Sangui Biotech Singapore Pte Ltd. --------------------------------
Sangui Biotech Singapore Pte Ltd. ("Sangui Singapore") was incorporated as a wholly owned subsidiary of SGBI in Singapore on May 15, 1999. Sangui Singapore was the Asia regional office for SGBI and was engaged in animal experiments in conjunction with the German subsidiaries. Effective January 31, 2003 the business was wound down and Sangui Singapore closed. As of February 25, 2004, the Registry of Companies and Businesses of the Republic of Singapore informed the company, that it would announce the projected strike-off from the register in its official Gazette on March 31, 2004. Upon expiration of another 3 months the name of Sangui Singapore would be struck off the register without further notice. The company assumes, therefore, that the strike-off was executed as of June 30, 2004.
On March 30, 2000, SGBI acquired all the outstanding common stock of Felnam Investments, Inc., a Nevada corporation (Felnam). The transaction was funded through the issuance of 100,000 shares of SGBI's stock valued at $0 per share due to SGBI treating the transaction as a recapitalization of SGBI. In conjunction with the transaction, SGBI incurred approximately $180,000 of transaction costs that were charged to operations.
To date, neither SGBI nor any of its subsidiaries has had profitable operations. The Company has never been profitable and, through June 30, 2004, SGBI's accumulated deficit has exceeded $20.3 million. The Company expects to continue to incur substantial losses over at least the next several years as it pursues its research and development efforts, testing activities and manufacturing operations. All of SGBI's potential products are in development stages. The Company will need to obtain substantial additional capital to fulfil its business plan.
The Company has adopted a program aimed at cost reductions and at refocusing SGBI's funds to accelerate time to market for its most promising and mature products. Effective August 31, 2004, the company further reduced its activities for cost saving purposes. The Company's current key focus is on identifying industrial and distribution partners for its patents and products and on obtaining additional financial resources to finalize the certification processes of certain products. No assurance can be given that SGBI's program will be successful.
BUSINESS OF THE COMPANY
The Company's mission is the development of novel proprietary products. The Company is developing its products through its wholly owned German subsidiary Sangui GmbH. The Company and Sangui GmbH are seeking to market and sell all or some of their products through partnerships with industry partners.
The traditional focus of Sangui GmbH is on developing oxygen carriers capable of support of oxygen transport in humans in cases of acute and chronic lack of oxygen due to arterial occlusion, anaemia or blood loss due to surgery, accident, or other causes. Sangui GmbH is engaged in the development and commercialization of such artificial oxygen carriers by reproducibly synthesizing polymers out of native hemoglobin of defined molecular sizes. Sangui GmbH also develops external applications in the medical and cosmetic fields in the form of gels and emulsions for the regeneration of the skin.
Sangui GmbH holds exclusive distribution rights for Chitoskin wound pads for the European Union and other countries. In addition, Sangui GmbH is a co-filer for a PTE patent for the production and use of glycosaminoglycans based on Chitosan and its derivatives.
ARTIFICIAL OXYGEN CARRIER -------------------------
Sangui GmbH develops several products based on polymers of purified natural porcine hemoglobin with oxygen carrying abilities similar to native hemoglobin. These are (1) oxygen carrying blood additives and (2) oxygen carrying blood volume substitutes.
In December 1997, Sangui GmbH decided that porcine hemoglobin should be used as basic material for its artificial oxygen carriers. In March 1999, Sangui GmbH came to the fundamental decision as to which hemoglobin hyperpolymer will go into preclinical investigation and that glutaraldehyde will be taken as cross linker and the polymer hemoglobin is chemically masked to prevent protein interaction in blood plasma. The fine adjustment of the formula of the artificial oxygen carriers - optimized for laboratory scale production - was finalized in the summer of 2000.
The experiments completed in Sangui GmbH's laboratories demonstrated that it is possible to polymerize hemoglobins isolated from porcine blood resulting in huge soluble molecules, so-called hyperpolymers. In August 2000, Sangui GmbH finalized its work on the pharmaceutical formulation of the oxygen carrier for laboratory scale. In February 2001 a pilot production in a laboratory scale was carried out in SGBI's clean room. The product was applied in single volunteers in pilot self-experiments.
The project of developing blood additives and blood substitutes was halted due to the lack of financing for the pre-clinical test phase of the blood additives. Sangui GmbH is continuing to address potential strategic financing and industry partners in order to enter pre-clinical testing. Subsequent to the period covered by this report, the first and second quarter of fiscal year 2004/2005, promising talks have been initiated with a leading German pharmaceutical company. No assurance can be given, however, that these talks will lead to any cooperation or contract in the course of the current fiscal year.
According to regulatory requirements, all drugs have to pass through preclinical and clinical trials before approval (e.g. Federal Drug Administration approval, see Certain Business Risks below) and launching to the market. The Company's management believes that the European and FDA approval process will take at least several years.
OXYGEN CARRIERS AND OTHER FORMULATIONS FOR REGENERATION OF THE SKIN -------------------------------------------------------------------
The healthy skin is supplied with oxygen, both through the supply from inside and also through diffusion from outside. Lack of oxygen will cause degenerative alterations of various extent, ranging from premature aging, to surface damage, and open wounds. The cause for the lack of oxygen may be the normal aging process, but it may also be caused by burns or radiation. Impairment of the blood flow, for example caused by diabetes mellitus or by chronic venous insufficiency, can also lead to insufficient oxygen supply and resulting skin damage.
The new hemoglobin-based preparations under development by Sangui GmbH have been designed to contribute to supporting the regeneration of the skin by improving its oxygen supply. In addition to this regenerative therapy, these preparations are also intended for purposes of prevention, for example, the improved oxygen supply of the skin in the course of a radiation therapy or in the course of an acne treatment. The key product Sangui GmbH is currently focussing on is an anti-aging formulation and treatment for the cosmetics market. The product was thoroughly tested by an independent research institute and received top marks for skin moisturization. Another row of tests is currently being carried out with regard to its anti-cellulite capacities that have shown encouraging interim results.
As of June 30, 2004, Sangui GmbH had signed a letter of intent with cosmetics vendor Mercatura Biocosmetics AG, Achim, Germany ("Mercatura"). This letter of intent led to a marketing and distribution contract, which was signed in July 2004. Under the terms of the contract, Mercatura obtained from Sangui the exclusive right to manufacture, market und distribute the Sangui formulation for skin regeneration and anti-aging. The Company has sold to Mercatura a quantity of 60 kg of the preparation to be used in test sales, which began in September 2004. Mercatura will pay Sangui per unit licensing fees for each product package sold. The licensing fees will be between 5.5% and 8% of the ex-works price for the product, depending on the total revenue amount.
Initially, the contract covers German-speaking areas only. Mercatura is obliged to submit on completion of its quarterly accounting its sales reports for the preceding quarter confirmed by an independent auditor. These reports will be the basis for the calculation of the royalties due to Sangui. The parties have agreed to extend the reach of this agreement to target markets world wide, if Sangui's formulation is included in the proposed cooperation between Mercatura and Wolfgang Joop GmbH. Mercatura is contractually obliged to confirm by February 28, 2005, whether or not Wolfgang Joop GmbH is willing to include the Anti-Aging formulation in their "Wunderkind" marketing program. Global distribution rights outside the German speaking countries will be returned to Sangui if Wolfgang Joop GmbH refrains from using the product.
CHITOSKIN WOUND PADS --------------------
The company is currently in the final phase of the CE certification of "CHITOSKIN" wound pads authorizing the distribution of these medical products in the European markets. It is anticipated that the CE certification will be granted in the course of the third quarter of Sangui's fiscal year 2004/2005. The "CHITOSKIN" trademark has been granted to the company for the European countries effective November 1, 2004. In the German market the wound pads will be distributed by Beese GmbH, of Norderstedt, Germany, a leading medical products distributor. A contract to this effect is currently being negotiated and will be entered into following CE certification. Joint pre-marketing activities have started. Negotiations with distributors in other regions including Spain, Turkey, various Middle Eastern countries, and China are under way.
PUBLIC GRANTS -------------
Sangui GmbH was granted a subsidy amounting to $1,535,300 for the period from April 8, 1998 to March 31, 2001 to promote a project known as "Development of a procedure for the production of synthetic oxygen carriers on the basis of hyperpolymer hemoglobins as a blood additive and a so-called blood substitute." In March 2001, an application to have the subsidy period extended to June 30, 2002 was approved. In March 2002, SGBI submitted a second application to the project authority, Julich (PtJ), to have the subsidy period extended; this was approved for the period up to December 31, 2002 with the notification of alteration dated July 2, 2002. Funds in the amount of $1,166,210 were received through December 31, 2002.
On September 1, 1999, Gluko AG was granted $1,864,383 in funds approved for a period of three years to promote the project "Development of a permanently implantable glucose sensor and a controllable insulin pump for diabetics into a technical beta cell." In October 2001, an application was submitted to the project authority, Juelich (PtJ), to have the subsidy period extended until December 31, 2002; this was approved with the notification of alteration dated November 28, 2001. SGBI had received funds amounting to $563,775 through December 31, 2002.
All remaining funds from both of the above-subsidized projects were returned as of December 31, 2002.
The accomplishment of further milestones for 2003 would have required the allocation of funds for the 60% counter-financing of the subsidies at the beginning of the working phase. This was not possible due to lack of resources. The Company was therefore asked to either return the remaining funds or furnish immediate proof of the necessary counter-financing.
To complete the project, a site inspection was held on March 10, 2003, by the project manager from the subsidizing authority, the goal of the discussions being to conclude the project by mutual consent.
The parties agreed on the following:
1. Efforts will be made to sell all of the equipment that was no longer needed. The first priority would be to offer subsidized equipment to employees on favorable terms. In this case, no proceeds (usually 40% of the proceeds in accordance with the 40% subsidy ratio) would have to be returned to the federal state of North-Rhine Westfalia.
2. If equipment is sold to third parties, the proportion of the proceeds that correspond to the level of subsidy as a proportion of the development funds must be returned to the state of North Rhine-Westphalia. None of the subsidized equipment has been sold to date.
3. Efforts will be made to find a successor tenant for the clean room in order to avert the deconstruction costs that would be incurred if Sangui GmbH had to return the premises to their original condition when they were first occupied. To date no new tenant has been found. In connection with this, Sangui GmbH submitted an offer to the landlord, the research and development centre (FEZ), according to which it would transfer the fixtures to FEZ for the symbolic price of one euro. There have been no additional negotiations or activities in this respect.
It was agreed that the subsidizing authority would put together a written document of the results of the site inspection and send it to Sangui GmbH. No correspondence of this kind has been received to date.
Sangui GmbH is still looking for industrial partners for the oxygen carrier and glucose sensor projects. Should this succeed, the projects, for which experiments have now been halted, would be reactivated and the clean room put back into operation.
PATENTS AND PROPRIETARY RIGHTS ------------------------------
The Company has the policy of seeking patents covering its research and development and all modifications and improvements thereto. Sangui GmbH has been granted eighteen (18) patents. Furthermore, the subsidiary has applied for twenty-four (24) patents, most of which have been filed in Germany (DE), the USA (US), and as an international patent application with the European Patent Office (EP). Global patent applications are marked PCT. Four (4) patent applications are related to progress made in the final development stages of the external application of the artificial oxygen carriers.
MARKETING AND DISTRIBUTION --------------------------
Sangui GmbH has not yet manufactured any of its products in commercial quantities. Sangui GmbH has limited experience in sales and marketing of products. It is, therefore, dependent on attracting industrial, marketing and distribution partners in order to succeed in selling its products in the respective markets.
RESEARCH AND DEVELOPMENT ------------------------
Research and development expenses increased 5% to approximately $887,000 in 2004 from approximately $847,000 in 2003. This increase of $40,000 is due to the refocusing of research and development activities in 2004. Research and development expenses are mainly the salaries and fees of the company's employees and consultants. The increase this fiscal year is due to the employment of an additional certification expert, working on the CE certification of the Chitoskin wound pads.
GOVERNMENT REGULATION ---------------------
SGBI and its former US subsidiary were subject to governmental regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, and other similar laws of general application, as to all of which SGBI believes it and its subsidiaries are in material compliance.
Although it is believed that SGBI and its US subsidiary were in material compliance with all applicable governmental and environmental laws, rules, regulations and policies, and although no government concerns were put forward during or after the closing of the Santa Ana operations, there can be no assurance that the business, financial condition, and results of operations of SGBI and its subsidiaries will not be materially adversely affected by future government claims with regard to unlikely but not impossible infringements on these or other laws resulting from SGBI's former US operations.
Additionally, the clinical testing, manufacture, promotion and sale of a significant majority of the products and technologies of the subsidiaries, and to a much less extent of SGBI, if those products and technologies are to be offered and sold in the United States, are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state regulatory agencies. Additionally, to the extent those products and technologies are to be offered and sold in markets other than the United States, the clinical testing, manufacture, promotion and sale of those products and technologies will be subject to similar regulation by corresponding foreign regulatory agencies. In general, the regulatory framework for biological health care products is more rigorous than for non-biological health care products. Generally, biological health care products must be shown to be safe, pure, potent and effective. There are numerous state and federal statutes and regulations that govern or influence the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising, distribution and promotion of biological health care products. Non-compliance with applicable requirements can result in, among other things, fines, injunctions, seizures of products, total or partial suspension of product marketing, failure of the government to grant pre-market approval, withdrawal of marketing approvals, product recall and criminal prosecution.
COMPETITION -----------
The market for the products and technologies of SGBI is highly competitive, and SGBI expects competition to increase. Experiments and clinical testing in the field of artificial oxygen carriers are being carried out by Sangart Inc. of San Diego, California. Companies researching into the possibility of developing implantable glucose sensors include Roche Diagnostics, Animas, Corp., Frazer, Pennsylvania, and Medtronic Inc. of Sylmar, California. In the fields of anti-aging and anti-cellulite cosmetics, all major cosmetic vendors are actively marketing proprietary formulations. Leading wound pad providers include Johnson&Johnson, Bristol-Myers Squibb, as well as Beiersdorf AG.
DEPENDENCE ON MAJOR CUSTOMERS -----------------------------
At present the company entertains business relationships with only one customer, Mercatura Biocosmetics AG. No assurance can be given that this company will be successful in marketing the anti-aging product covered by the contract of July 12, 2004 mentioned previously.
HUMAN RESOURCES ---------------
The Company considers its relations with its employees to be favorable. As of June 30, 2004 SGBI and its subsidiaries had 8 fulltime employees of which 5 were involved in research and development and 3 were responsible for administrative matters. Additionally, the Company had consulting arrangements with one individual as of that date. Subsequent to the period covered by this report, August 31, 2004, contracts with most of the employees were cancelled. As of December 1, 2004, the company employs 2 fulltime employees and have consulting arrangements with 5 persons. idends No Dividends
DIVIDENDS ---------
The Company anticipates that it will use any funds available to finance its growth and that it will not pay cash dividends to stockholders in the foreseeable future.
REPORTS TO SECURITY HOLDERS ---------------------------
Copies of SGBI's reports, as filed with the Securities and Exchange Commission, are available and may be viewed as filed at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549 or by calling 1-800-SEC-0330. Additionally they can be accessed and downloaded via the internet at http://www.sec.gov/cgi-bin/srch-edgar by simply typing in "Sangui Biotech International" or at the corporate website http://www.sanguibiotech.com.
CERTAIN BUSINESS RISKS
The risks and uncertainties described below are not the only ones facing SGBI and there may be additional risks that are not presently known or are currently deemed immaterial. All of these risks may impair business operations.
The Company's present and proposed business operations will be highly speculative and subject to the same types of risks inherent in any new or unproven venture, as well as risk factors particular to the industries in which it will operate, as well as other significant risks not normally associated with investing in equity securities of United States companies, among other things, those types of risk factors outlined below.
Risk that SGBI's Common Stock may be deemed a "Penny Stock" ----------------------------------------------------------
The Company's common stock may be deemed to be a "penny stock" as that term is defined in Rule 3a51-1 of the Exchange Act of 1934. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets of less than US$2,000,000 (if the issuer has been in continuous operation for at least three years) or US$5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than US$6,000,000 for the last three years.
A principal exclusion from the definition of a penny stock is an equity security that has a price of five dollars ($5.00) of more, excluding any broker or dealer commissions, markups or markdowns. As of the date of this report SGBI's common stock has a price less than $5.00.
If SGBI's Common Stock is at any time deemed a penny stock, section 15(g) and Rule 3a51-1 of the Exchange Act of 1934 would require broker-dealers dealing in SGBI's Common Stock to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in SGBI's common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 of the Exchange Act of 1934 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in SGBI's common stock to resell their shares to third parties or to otherwise dispose of them.
Conflicts of Interest; Related Party Transactions -------------------------------------------------
The possibility exists that the Company may acquire or merge with a business or company in which the Company's executive officers, directors, beneficial owners or their affiliates may have an ownership interest. Although there is no formal bylaw, stockholder resolution or agreement authorizing any such transaction, corporate policy does not forbid it and such a transaction may occur if management deems it to be in the best interests of the Company and its stockholders, after consideration of all factors. A transaction of this nature would present a conflict of interest to those parties with a managerial position and/or an ownership interest in both the Company and the acquired entity, and may compromise management's fiduciary duties to the Company's stockholders. An independent appraisal of the acquired company may or may not be obtained in the event a related party transaction is contemplated. Furthermore, because management and/or beneficial owners of the Company's common stock may be eligible for finder's fees or other compensation related to potential acquisitions by the Company, such compensation may become a factor in negotiations regarding such potential acquisitions. It is the Company's intention that all future transactions be entered into on such terms as if negotiated at arms length, unless the Company is able to receive more favorable terms from a related party.
Limited Operating History Of The Company; Losses Are Expected To Continue -------------------------------------------------------------------------
There can be no assurance that unanticipated technical or other problems will not occur which would result in material delays in product commercialisation or that the efforts of SGBI will result in successful product commercialisation. SGBI has been operating at a loss and expects its costs to increase as soon as its development efforts and testing activities accelerate. It is currently unknown when profitable operations might be achieved.
Substantial Doubt that the Company Can Continue as a Going Concern ------------------------------------------------------------------
The Company expects to continue to incur significant capital expenses in pursuing its business plan to market its products and expand its product line, while obtaining additional financing through stock offerings or other feasible financing alternatives. In order for the Company to continue its operations at its existing levels, the Company will require significant additional funds over the next twelve months. Therefore, the Company is dependent on funds raised through equity or debt offerings. Additional financing may not be available on terms favorable to the Company, or at all. If these funds are not available the Company may not be able to execute its business plan or take advantage of business opportunities. The ability of the Company to obtain such additional financing and to achieve its operating goals is uncertain. In the event that the Company does not obtain additional capital or is not able to increase cash flow through the increase of sales, there is a substantial doubt of its being able to continue as a going concern.
Future Capital Needs And Uncertainty Of Additional Funding ----------------------------------------------------------
Although management believes that SGBI's cash position should be sufficient to cover its financing for at least the current fiscal year, substantial funds will be required to effect SGBI's development plans. The Company will require additional cash for: (i) payment of increased operating expenses; (ii) payment of development expenses; and (iii) further implementation of those business strategies. Such additional capital may be raised by additional public or private financing, as well as borrowings and other resources. To the extent that additional capital is received by SGBI by the sale of equity or equity-related securities, the issuance of such securities will result in dilution to SGBI's shareholders. There can be no assurance that additional funding will be available on favorable terms, if at all. SGBI may also seek arrangements with collaborative partners in order to gain additional funding, marketing assistance or other contributions. However, such arrangements may require SGBI to relinquish rights or reduce its interests in certain of its technologies or product candidates. The inability of SGBI to access the capital markets or obtain acceptable financing could have a material adverse effect on the results of operations and financial condition of SGBI. Moreover, if funds are not available from any sources, SGBI may not be able to continue to operate.
Dependence On Key Personnel ---------------------------
The future success of SGBI will depend on the service of its key scientific personnel and, additionally, its ability to identify, hire and retain additional qualified personnel. There is intense competition for qualified personnel in this industry and there can be no assurance that SGBI will be able to attract and retain personnel necessary for the development of the business of SGBI. Because of the intense competition, there can be no assurance that SGBI will be successful in adding technical personnel if needed to satisfy its staffing requirements. Failure to attract and retain key personnel could have a material adverse effect on SGBI.
SGBI and its subsidiaries are dependent on the efforts and abilities of their senior management. The loss of various members from management could have a material adverse effect on the business and prospects of SGBI. In particular, SGBI will depend on the service of Professor Wolfgang Barnikol because he is instrumental in his expertise in the development of the oxygen carrier and glucose sensor products. There can be no assurance that upon the departure of key personnel from the service of SGBI or its subsidiaries suitable replacements will be available.
Licenses and Consents ---------------------
The utilization or other exploitation of the products and services developed by SGBI or its subsidiaries may require SGBI or its subsidiaries to obtain licenses or consents from the producers or other holders of copyrights or other similar rights relating to the products and technologies of SGBI or its subsidiaries. In the event SGBI or its subsidiaries are unable, if so required, to obtain any necessary license or consent on terms which the management of SGBI or its subsidiaries consider to be reasonable, SGBI or its subsidiaries may be required to cease developing, utilizing, or exploiting products or technologies affected by those copyrights or similar rights. In the event SGBI or its subsidiaries are challenged by the holders of such copyrights or other similar rights, there can be no assurance that SGBI or its subsidiaries will have the financial or other resources to defend any resulting legal action, which could be significant.
Technological Factors ---------------------
The market for the products and technology developed by SGBI is characterized by rapidly changing technology, which could result in product obsolescence or short product life cycles. Similarly, the industry is characterized by continuous development and introduction of new products and technology to replace outdated products and technology. Accordingly, the ability of SGBI to compete will be dependent upon the ability of SGBI to provide new and innovative products and technology. There can be no assurance that competitors will not develop technologies or products that render the proposed products and technology of SGBI obsolete or less marketable. SGBI will be required to adapt to technological changes in the industry and develop products and technology to satisfy evolving industry or customer requirements, any of which could require the expenditure of significant funds and resources, and SGBI does not have a source or commitment for any such funds and resources. Development efforts relating to the technological aspects of the various products and technologies to be developed by SGBI are not substantially completed. Accordingly, SGBI will continue to refine and improve those products and technologies. Continued refinement and improvement efforts remain subject to the risks inherent in new product development, including unanticipated technical or other problems, which could result in material delays in product commercialisation or significantly increased costs. In addition, there can be no assurance that those products and technologies will prove to be sufficiently reliable or durable in wide spread commercial application. The products or technologies sought to be developed by SGBI will be the result of significant efforts, which may result in errors that become apparent subsequent to widespread commercial utilization. In such event, SGBI would be required to modify such products or technologies and continue with additional research and development, which could delay the plans of SGBI and cause SGBI to incur additional cost.
Early Stage Of Product Development; Lack Of Commercial Products; No Assurance Of -------------------------------------------------------------------------------- Successful Product Development ------------------------------
The Company's primary efforts are devoted to the development of proprietary products involving artificial oxygen carriers and glucose sensors.
The potential products of SGBI will require additional pre-clinical and clinical development, regulatory approval and additional investment prior to commercialisation, either by SGBI independently or by others through collaborative arrangements. Potential products that appear to be promising at early stages of development may be ineffective or be shown to cause harmful side effects during pre-clinical testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture, be uneconomical to produce, fail to achieve market acceptance or be precluded from commercialisation by proprietary rights of others. There can be no assurance that any potential products will be successfully developed, prove to be safe and efficacious in clinical trials, satisfy applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or achieve commercial acceptance.
All products and technologies under development by SGBI will require significant commitment of personnel and financial resources. Several products will require extensive evaluation and pre-marketing clearance by the FDA and comparable agencies in other countries prior to commercial sale. SGBI regularly re-evaluates its product development efforts. On the basis of these re-evaluations, SGBI may abandon development efforts for particular products. No assurance can be given that any product or technology under development will result in the successful introduction of any new product. The failure to introduce new products into the market on a timely basis could have a material adverse effect on the business, financial conditions or results of operation of SGBI.
There can be no assurance that human testing of potential products based on such technologies will be permitted by regulatory authorities or, even if human testing is permitted, that products based on such technologies will be shown to be safe and efficacious. Potential products based on the technologies of SGBI are at an early stage of testing and there can be no assurance that such products will be shown to be safe or effective.
Market Acceptance -----------------
There can be no assurance that the products and technologies of SGBI will achieve a significant degree of market acceptance, and that acceptance, if achieved, will be sustained for any significant period or that product life cycles will be sufficient (or substitute products developed) to permit SGBI to achieve or sustain market acceptance which could have a material adverse effect on the business, financial condition, and results of operations of SGBI.
Government Regulation; No Assurance of Product Approval -------------------------------------------------------
The clinical testing, manufacture, promotion, and sale of biotechnology and pharmaceutical products are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state and foreign regulatory agencies prior to the introduction of those products. Management of SGBI believes that many of the potential products of SGBI will be regulated by the FDA under current regulations of the FDA. Other federal and state statutes and regulations may govern or influence the testing, manufacture, safety, effectiveness, labeling, storage, record-keeping, approval, advertising, distribution and promotion of certain products developed by SGBI. Non-compliance with applicable requirements can result in, among other things, fines, injunctions, seizure of products, suspensions of regulatory approvals, product recalls, operating restrictions, re-labeling costs, delays in sales, cessation of manufacture of products, the imposition of civil or criminal sanctions, total or partial suspension of product marketing, failure of the government to grant pre-market approval, withdrawal of marketing approvals and criminal prosecution.
The FDA's requirements include lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming procedures. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical testing and other approval requirements by the FDA, agencies in Germany, Singapore and other countries. Although the time required for completing such testing and obtaining such approvals is uncertain, satisfaction of these requirements typically takes a number of years and varies substantially based on the type, complexity and novelty of each product. Neither SGBI nor its subsidiaries can accurately predict when product applications or submissions for FDA or other regulatory review may be submitted. Management of SGBI has no experience in obtaining regulatory clearance on these types of products. The lengthy process of obtaining regulatory approval and ensuring compliance with applicable law requires the expenditure of substantial resources. Any delays or failure by SGBI or its subsidiaries to obtain regulatory approval and ensure compliance with appropriate standards could adversely affect the commercialization of such products, the ability of SGBI to earn product or royalty revenue, and its results of operations, liquidity and capital resources.
Pre-clinical testing is generally conducted in laboratory animals to evaluate the potential safety and effectiveness of a drug. The results of these studies are submitted to the FDA, which must be approved before clinical trials can begin. Typically, clinical evaluation involves a time consuming and costly three-phase process. In Phase I, clinical trials are conducted with a small number of subjects to determine the early safety profile, the pattern of drug distribution and metabolism. In Phase II, clinical trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large-scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical trials and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the patient.
Clinical trials and the marketing and manufacturing of products are subject to the rigorous testing and approval processes of the FDA and foreign regulatory authorities. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive. There can be no assurance that SGBI will be able to obtain the necessary approvals to conduct clinical trials for the manufacturing and marketing of products, that all necessary clearances will be granted to SGBI or their licensors for future products on a timely basis, or at all, or that FDA review or other actions will not involve delays adversely affecting the marketing and sale of the products or SGBI. In addition, the testing and approval process with respect to certain new products which SGBI may seek to introduce is likely to take a substantial number of years and involve the expenditure of substantial resources. There can be no assurance that pharmaceutical products currently in development will be cleared for marketing by the FDA. Failure to obtain any necessary approvals or failure to comply with applicable regulatory requirements could have a material adverse effect on the business, financial condition or results of operations of SGBI. Further, future government regulation could prevent or delay regulatory approval of the products of SGBI.
There can be no assurance as to the length of the clinical trial period or the number of patients the FDA will require to be enrolled in the clinical trials in order to establish the safety and effectiveness of the products of SGBI. SGBI may encounter significant delays or excessive costs in their efforts to secure necessary approvals, and regulatory requirements are evolving and uncertain. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the products of SGBI. If commercial regulatory approvals are obtained, they may include significant limitations on the indicated uses for which a product may be marketed. In addition, a marketed product is subject to continual FDA review. Later discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product, or even the removal of the product from the market, as well as possible civil or criminal sanctions. Failure of SGBI to obtain marketing approval for any of their products under development on a timely basis, or FDA withdrawal of marketing approval once obtained, could have a material adverse effect on the business, financial condition and results of operations of SGBI.
Any party that manufactures therapeutic or pharmaceutical products is required to adhere to applicable standards for manufacturing practices and to engage in extensive record keeping and reporting. Any manufacturing facilities of SGBI are subject to periodic inspection by state and federal agencies, including the FDA and comparable agencies in foreign countries.
The effect of governmental regulation may be to delay the marketing of new products for a considerable period of time, to impose costly requirements on the activities of SGBI or to provide a competitive advantage to other companies that compete with SGBI. There can be no assurance that FDA or other regulatory approval for any products developed by SGBI will be granted on a timely basis, if at all or, if granted, that compliance with regulatory standards will be maintained. Adverse clinical results by SGBI could have a negative impact on the regulatory process and timing. A delay in obtaining, or failure to obtain, regulatory approvals could preclude or adversely affect the marketing of products and the liquidity and capital resources of SGBI. The extent of potentially adverse governmental regulation that might result from future legislation or administrative action cannot be predicted.
SGBI will be subject to regulatory authorities in Germany and other countries governing clinical trials and product sales. Even if FDA approval is obtained, approval of a product by the comparable regulatory authorities of other countries must be obtained prior to the commencement of marketing the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country. There can be no assurance that any foreign regulatory agency will approve any product submitted for review by SGBI.
SGBI is subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with its research work. The extent and character of governmental regulation that might result from future legislation or administrative action cannot be accurately predicted.
Intense Competition -------------------
Competition in the biotechnology, pharmaceutical and cosmetic industries is intense and is expected to increase. In the field of its medical and cosmetic products SGBI and its subsidiaries compete directly with the research departments of biotechnology and pharmaceutical companies, chemical companies and, possibly, joint collaborations between chemical companies and research and academic institutions. Management of SGBI is aware that other companies and businesses have developed and are in the process of developing technologies and products, which may be competitive with the products and technologies developed and offered by SGBI. Eventually, this might include the field of blood additives where there is no direct competition at present. The biotechnology and pharmaceutical industries continue to undergo rapid change. There can be no assurance that competitors have not or will not succeed in developing technologies and products that are more effective than any which have been or are being developed by SGBI or which would render the technology and products of SGBI obsolete. Many of the competitors of SGBI have substantially greater experience, financial and technical resources and production, marketing and development capabilities than SGBI. Accordingly, certain of those competitors may succeed in obtaining regulatory approval for products more rapidly or effectively than SGBI.
Uncertainties Associated With Patents And Proprietary Rights ------------------------------------------------------------
The success of SGBI and its subsidiaries may depend in part on their ability to obtain patents for their technologies and products, if any, resulting from the application of such technologies, to defend patents once obtained and to maintain trade secrets, both in the United States and in foreign countries.
The success of SGBI will also depend upon avoiding the infringement of patents issued to competitors. There can be no assurance that SGBI will be able to obtain patent protection for products based upon the technology of SGBI. Moreover, there can be no assurance that any patents issued to SGBI or its subsidiaries will not be challenged, invalidated or circumvented or that the rights granted there under will provide competitive advantages to SGBI. Litigation, which could result in substantial cost to SGBI, may be necessary to enforce the patent and license rights of SGBI or to determine the scope and validity of its and others' proprietary rights.
Due to the length of time and expense associated with bringing new products through development and the length of time required for the governmental approval process, the biotechnology and pharmaceutical industries have traditionally placed considerable importance on obtaining and maintaining patent and trade secret protection for significant new technologies, products and processes. The enforceability of patents issued to biotechnology and pharmaceutical firms can be highly uncertain. U.S. Federal court decisions establishing legal standards for determining the validity and scope of patents in the field are in transition. In addition, there can be no assurance that patents will be issued or, if issued, any such patents will afford SGBI protection from infringing patents granted to others.
A number of biotechnology and pharmaceutical companies, and research and academic institutions, have developed technologies, filed patent applications or received patents on various technologies that may be related to the business of SGBI and its subsidiaries. Some of these technologies, applications or patents may conflict with the technologies of SGBI. Such conflicts could also limit the scope of the patents, if any, that SGBI or its subsidiaries may be able to obtain or result in the denial of the patent applications of SGBI.
Many of the competitors of SGBI have, or are affiliated with companies having, substantially greater resources than SGBI, and such competitors may be able to sustain the costs of complex patent litigation to a greater degree and for longer periods of time than SGBI. Uncertainties resulting from the initiation and continuation of any patent or related litigation could have a material adverse effect on the ability of SGBI to compete in the marketplace pending resolution of the disputed matters. Moreover, an adverse outcome could subject SGBI to significant liabilities to third parties and require SGBI to license disputed rights from third parties or cease using the technology. In the event that third parties have or obtain rights to intellectual property or technology used or needed by SGBI, there can be no assurance that any licenses would be available to SGBI or would be available on terms reasonably acceptable to SGBI.
SGBI may rely on certain proprietary technologies, trade secrets, and know-how that are not patentable. Although SGBI has taken steps to protect their unpatented trade secrets and technology, in part through the use of confidentiality agreements with their employees, consultants and certain of its contractors, there can be no assurance that: (i) these agreements will not be breached; (ii) SGBI would have adequate remedies for any breach; or (iii) the proprietary trade secrets and know-how of SGBI will not otherwise become known or be independently developed or discovered by competitors.
Risk Of Product Liability; Potential Unavailability Of Insurance ----------------------------------------------------------------
The business of SGBI will expose it to potential product liability risks that are inherent in the testing, manufacturing and marketing of human pharmaceutical and therapeutic products. SGBI does not currently have product liability insurance, and there can be no assurance that SGBI will be able to obtain or maintain such insurance on acceptable terms or, if obtained, that such insurance will be adequate to cover potential product liability claims or that a loss of insurance coverage or the assertion of a product liability claim or claims would not materially adversely affect the business, financial condition and results of operations of SGBI. SGBI faces an inherent business risk of exposure to product liability and other claims in the event that the development or use of its technology or products is alleged to have resulted in adverse effects. Such risk exists even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise possess regulatory approval for commercial sale. There can be no assurance that SGBI will avoid significant product liability exposure.
While SGBI has taken, and will continue to take, what it believes are appropriate precautions, there can be no assurance that it will avoid significant liability exposure. An inability to obtain product liability insurance at acceptable cost or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of products developed by SGBI. A product liability claim could have a material adverse effect on the business, financial condition and results of operations of SGBI.
Uncertainties Relating To Pricing And Third-Party Reimbursement ---------------------------------------------------------------
The operating results of SGBI may depend in part on the availability of adequate reimbursement for the products of SGBI from third-party payers, such as government entities, private health insurers and managed care organizations. Third-party payers are increasingly seeking to negotiate the pricing of medical services and products. In some cases, third-party payers will pay or reimburse a user or supplier of a product for only a portion of the purchase price of the product. In the case of the products of SGBI, payment or reimbursement by third-party payers of only a portion of the cost of such products could make such products less attractive, from a cost perspective, to users, suppliers and physicians. There can be no assurance that reimbursement, if available, will be adequate. Moreover, certain of the products of SGBI may not be of the type generally eligible for third-party reimbursement. If adequate reimbursement levels are not provided by government entities or other third-party payers for the products of SGBI, the business, financial condition and results of operations of SGBI would be materially adversely affected. A number of legislative and regulatory proposals aimed at changing the nation's health care system have been proposed in recent years. While SGBI cannot predict whether any such proposals will be adopted, or the effect that any such proposal may have on its business, such proposals, if enacted, could have a material adverse effect on the business, financial condition or results of operations of SGBI.
Risk Of Product Recall; Product Returns ---------------------------------------
Product recalls may be issued at the discretion of SGBI, the FDA or other government agencies having regulatory authority for product sales and may occur due to disputed labeling claims, manufacturing issues, quality defects or other reasons. No assurance can be given that product recalls will not occur in the future. Any product recall could materially adversely affect the business, financial condition or results of operations of SGBI. There can be no assurance that future recalls or returns would not have a material adverse effect upon the business, financial condition and results of operations of SGBI.
Risks Of International Sales And Operations -------------------------------------------
SGBI's results of operations are subject to fluctuations in the value of the Euro against the U.S. Dollar due to SGBI's German subsidiaries. Although management of SGBI will monitor exposure to currency fluctuations, there can be no assurance that exchange rate fluctuations will not have a material adverse effect on the results of operations or financial condition of SGBI. In the future, SGBI could be required to sell its products in other currencies, which would make the management of currency fluctuations more difficult and expose SGBI to greater risks in this regard.
The products of SGBI will be subject to numerous foreign government standards and regulations that are continually being amended. Although SGBI will endeavor to satisfy foreign technical and regulatory standards, there can be no assurance that the products of SGBI will comply with foreign government standards and regulations, or changes thereto, or that it will be cost effective for SGBI to redesign its products to comply with such standards or regulations. The inability of SGBI to design or redesign products to comply with foreign standards could have a material adverse effect on SGBI's business, financial condition and results of operations.
Lack Of Commercial Manufacturing And Marketing Experience ---------------------------------------------------------
SGBI has not yet manufactured its products, in commercial quantities. Its subsidiaries will be engaged in manufacturing pharmaceutical products which will be subject to stringent regulatory requirements. No assurance can be given that its subsidiaries, on a timely basis, will be able to make the transition from manufacturing clinical trial quantities to commercial production quantities successfully or be able to arrange for contract manufacturing. SGBI and its subsidiaries have no experience in the sales, marketing and distribution of products. There can be no assurance that SGBI will be able to establish sales, marketing and distribution capabilities or make arrangements with collaborators, licensees or others to perform such activities or that such efforts will be successful.
The manufacture of the products of SGBI involves a number of steps and requires compliance with stringent quality control specifications imposed by SGBI and by the FDA. Moreover, SGBI's products can only be manufactured in a facility that has undergone a satisfactory inspection by the FDA. For these reasons, SGBI would not be able to quickly replace its manufacturing capacity if it were unable to use its manufacturing facilities as a result of a fire, natural disaster (including an earthquake), equipment failure or other difficulty, or if such facilities are deemed not in compliance with the FDA's Good Manufacturing Practice ("GMP") requirements and the non-compliance could not be rapidly rectified. The inability or reduced capacity of SGBI to manufacture their products would have a material adverse effect on SGBI's business and results of operations.
SGBI may enter into arrangements with contract manufacturing companies to expand its production capacities in order to satisfy requirements for its products, or to attempt to improve manufacturing efficiency. If SGBI chooses to contract for manufacturing services and encounters delays or difficulties in establishing relationships with manufacturers to produce, package and distribute its finished products, clinical trials, market introduction and subsequent sales of such products would be adversely affected. Further, contract manufacturers must also operate in compliance with the FDA's GMP requirements; failure to do so could result in, among other things, the disruption of product supplies.
Hazardous Materials And Environmental Matters ---------------------------------------------
The research and development processes of SGBI involve the controlled storage, use and disposal of hazardous materials. SGBI is subject to federal, state and local laws and regulations governing the use, generation, manufacturing, storage, handling, and disposal of such materials and certain waste products. Although SGBI does not currently manufacture commercial quantities of its product candidates, it produces limited quantities of such products for its clinical trials and SGBI intends to manufacture commercial quantities of its products. Although SGBI believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, SGBI could be held liable for any damages that result, and any such liability could exceed the resources of SGBI. There can be no assurance that SGBI will not be required to incur significant costs to comply with current or future environmental laws and regulations nor that the operations, business or assets of SGBI will not be materially or adversely affected by current or future environmental laws or regulations.
