Forward-looking Statements
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this quarterly report. Some of the information in this quarterly report contains forward-looking statements, including statements related to anticipated operating results, margins, growth, financial resources, capital requirements, adequacy of the Company's financial resources, trends in spending on research and development, the development of new markets, the development, regulatory approval, manufacture, distribution, and commercial acceptance of new products, and future product development efforts. Investors are cautioned that forward-looking statements involve risks and uncertainties, which may affect our business and prospects, including but not limited to, the Company's expected need for additional funding and the uncertainty of receiving the additional funding, changes in economic and market conditions, acceptance of our products by the health care and reimbursement communities, new development of competitive products and treatments, administrative and regulatory approval and related considerations, health care legislation and regulation, and other factors discussed in our filings with the Securities and Exchange Commission.
GENERAL
Our mission is the development of novel and proprietary pharmaceutical, medical and cosmetic products. We develop our products through our German subsidiary, Sangui GmbH. Currently, we are seeking to market and sell our products through partnerships with industry partners worldwide.
Our focus has been the development of oxygen carriers capable of providing oxygen transport in humans in the event of acute and/or chronic lack of oxygen due to arterial occlusion, anemia or blood loss whether due to surgery, trauma, or other causes, as well as in the case of chronic wounds. We have thus far focused our development and commercialization efforts on such artificial oxygen carriers by reproducing and synthesizing polymers out of native hemoglobin of defined molecular sizes. In addition, we have developed external applications of oxygen transporters in the medical and cosmetic fields in the form of sprays for the healing of chronic wounds and of gels and emulsions for the regeneration of the skin. A wound dressing that shows outstanding properties in the support of wound healing, is distributed by SastoMed GmbH, a former joint venture company in which we held a share of 25%, as global licensee under the Granulox brand name. Effective end of second quarter of our fiscal year 2016 we sold this stake to SanderStrohmann GmbH.
SanguiBioTech GmbH holds distribution rights for our Chitoskin wound pads for the European Union and various other countries. A European patent has been granted for the production and use of improved Chitoskin wound pads.
Our current key business focuses are: (a) selling our existing cosmetics and wound management products by way of licensing through distribution partners, or by way of direct sale, to end users; (b) identifying additional industrial and distribution partners for our patents, production techniques, and products; and, (c) obtaining the additional certifications on our products in development.
Artificial Oxygen Carriers
SanguiBioTech GmbH develops several products based on polymers of purified natural porcine hemoglobin with oxygen carrying abilities that are similar to native hemoglobin. These are (1) oxygen carrying blood additives and (2) oxygen carrying blood volume substitutes.
During the first quarter of our 2013 financial year the European Patent Office granted a patent based on Sangui
’
s application (01 945 245)
“
Mammalian hemoglobin compatible with blood plasma, cross-linked and conjugated with polyalkylene oxides as artificial medical oxygen carriers, production and use thereof
”
.
During the third quarter of our 2013 financial year the company had a feasibility study prepared by external experts inquiring into market potentials and further preclinical and clinical development requirements. The study came to the conclusion that an approval of Sangui's hemoglobin hyperpolymers as a blood additive appears possible, expedient and promising.
During the fourth quarter of our 2014 financial year the company filed a patent application aimed at significantly expanding the protection of our hemoglobin formulations. It will encompass a greater array of ischemic conditions of the human body, for instance in the case of severe dysfunctions of the lung.
During the first quarter of our 2015 financial year, we began together with Excellence Cluster Cardio-Pulmonary System (ECCPS) and TransMIT Gesellschaft für Technologietransfer mbH (TransMIT) to investigate therapeutic approaches to treating septic shock and acute respiratory distress syndrome (ARDS). The approach adopted here by Sangui, ECCPS and TransMIT presupposes that self-perpetuating septic shock, that has so far been highly resistant to treatment, can be interrupted by Sangui's artificial haemoglobin-based oxygen carrier, which would ultimately lower mortality rates. The preclinical trials commenced at ECCPS investigate the effect of various haemoglobin preparations on the oxygen supply of a number of organs in septic shock models and ARDS.
Also during the first quarter of our financial year 2015 we were notified that the period for objection against European Patent EP 2550973,Wound Spray
“
) elapsed without any objection being raised. The patent, therefore, has become effective and legally binding.
During the second quarter of our 2015 financial year the first phase of preclinical trials was concluded successfully. It could be demonstrated that applying an oxygen-carrying liquid (the hemoglobin hyperpolymer formulation SBT102) in the abdomen did significantly improve the oxygen supply to the intestines. The restoration of intestinal oxygenation will have an impact on tissue integrity and ultimately on patient survival.
During the third quarter of our 2015 financial year the preclinical trials were concluded successfully, the final results did fully confirm the interim results obtained in the second quarter.
According to regulatory requirements, all drugs must complete preclinical and clinical trials before approval (e.g. Federal Drug Administration approval) and market launch. The Company
’
s management believes that the European and FDA approval process will take at a minimum several years to complete.
Our most promising potential product in the area of artificial oxygen carriers, the blood additive is still in an early development stage. In the pursuit of these projects we will need to obtain substantial additional capital to continue their development.
The blood additives project was halted in the second quarter of our financial year 2016 due to the lack of financing the further authorization.
Nano Formulations for the Regeneration of the Skin
Healthy skin is supplied with oxygen both from the inside as well as through diffusion from the outside. A lack of oxygen will cause degenerative alterations, ranging from premature aging, to surface damage, and even as extensive as causing open wounds. The cause for the lack of oxygen may be a part of the normal aging process, but it may also be caused by burns, radiation, trauma, or a medical condition. Impairment of the blood flow, for example caused by diabetes mellitus or by chronic venous insufficiency, can also lead to insufficient oxygen supply and the resulting skin damage.
Sales of this series have remained at a low level. During the first quarter of the 2016 financial year we decided to decrease our operations in this particular segment and to abandon the patent protection for this range of products.
Chitoskin Wound Pads
Usually, normal (
“
primary
”
) wounds tend to heal over a couple of days without leaving scars following a certain sequence of phases. Burns and certain diseases impede the normal wound healing process, resulting in large, hardly healing (
“
secondary
”
) wounds which only close by growing new tissue from the bottom. Wound dressings serve to safeguard the wound with its highly sensitive new granulation tissue from mechanical damage as well as from infection. Using the natural polymer chitosan, Sangui
’
s Chitoskin wound dressings show outstanding properties in supporting wound healing.
It is the strategy of the company to find industry partners ready to acquire or license this product range as a whole.
Hemospray Wound Spray
SanguiBioTech GmbH has developed a novel medical technology supporting the healing of chronic wounds. Lack of oxygen supply to the cells in the wound ground is the main reason why those wounds lose their genuine healing power. Based on its concept of artificial oxygen carriers, our wound spray product bridges the watery wound surface and permits an enhanced afflux of oxygen to the wound ground.
In December 2010, SanguiBioTech GmbH established SastoMed GmbH, a joint venture company with SanderStrothmann GmbH of Georgsmarienhütte, Germany. SanguiBioTech GmbH has granted SastoMed GmbH global distribution rights. SastoMed GmbH started to distribute the product in Germany after having obtained the CE mark authorizing the distribution of the wound spray in the countries of the European Union in April 2012.
As licensor SanguiBioTech GmbH is awarded a fixed licensing fee as a percentage of each and every external revenues incurred by SastoMed from sales of the Granulox product (based on SastoMed selling prices). The percentage ranges in the uppermost zone of what is usually granted in the pharmaceutical and medical products industries and thus well above the average licensing rate of 7.5% of sales revenues as calculated by market analysts. In addition and complementing this basic agreement the percentage will be permanently increased by one fourth of the current rate as soon as cumulated sales revenues at SastoMed will have exceeded the total of
€
50,000,000.
In September 2011, the Mexican Health Authorities registered the entire current range of Sangui developed wound management products and thus granted the authorization to apply and sell these products on a nationwide level.
On April 5, 2012, SastoMed GmbH notified SanguiBioTech GmbH that the wound spray product was granted a certification as class III medical product. The CE mark according to sections 6 and 7 of the German Medical Devices Act authorizes production, distribution and sales of the product in all member countries of the European Union. According to SastoMed GmbH, sales of the product under the brand name
“
Granulox
”
started in Germany on April 16, 2012, other markets will be addressed in due course.
In August, 2012, Sangui BioTech GmbH and SastoMed GmbH cordially adjusted the existing sales strategy. In consideration of corresponding contributions the existing licensing contract was partially complemented resulting in the following conditions: As licensor SanguiBioTech GmbH is awarded a fixed licensing fee as a percentage of each and every external revenues incurred by SastoMed from sales of the Granulox product (based on SastoMed selling prices). The percentage ranges in the uppermost zone of what is usually granted in the pharmaceutical and medical products industries. In addition and complementing this basic agreement the percentage will be permanently increased by one fourth of the current rate as soon as cumulated sales revenues at SastoMed will have exceeded the total of
€
50,000,000.
In December, 2012, actual distribution of the product was initiated in Mexico under the management of SastoMed GmbH and their local distribution partner Bio-Mac Pharma. International distribution has been expanded since then through cooperation agreements with local distribution partners in the Benelux countries and South Eastern Europe.
In May, 2013, the Company declared in the course of the filing of its nine month report on form 10-QSB that according to information provided by SastoMed GmbH it now expects the Granulox market entry phase to last longer than initially expected. No assurance can be given that based on royalty revenues the Company may reach break-even in the course of its current financial year.
Since December 2013, international distribution outside Germany was initiated in collaboration with local partners in more than 40 countries in Europe and Latin American.
Effective December 31, 2015 Sangui BioTech GmbH sold its stake in Sastomed GmbH of 25% to SanderStrohmann GmbH . Also effective December 31, 2015 SanderStrohmann GmbH increased the nominal capital of Sastomed GmbH for an amount of Euro 500,000 to strengthen the capital base of Sastomed GmbH.
It has to be noted, however, that Granulox sales by our distribution partner SastoMed GmbH have become more volatile and declining from time to time. We remain confident, however, that SastoMed will be able to considerably increase its sales along with more international markets entering actual distribution of the product.
FINANCIAL POSITION
During the six months ended December 31, 2016, our total assets increased $55,419 from $110,419 at June 30, 2016 to $165,838 at December 31, 2016. An increase in the cash on hand from June 30 2016, to December 31, 2016, of $46,055 was primarily responsible for the increase in the total assets.
We funded our operations primarily through our existing cash reserves and cash received from the issuance of shares of common stock. Our stockholders
’
equity (deficit
)
decreased b
y
$24,242 from ($247,566) at June 30, 2016 to ($223,324) at December 31, 2016. The primary factor behind this was due to the issuance of stock for cash and services for $243,570, and an increase to accumulated deficit of $209,117 as well as an increase in accumulated other comprehensive income due to movements in the foreign exchange rate.
RESULTS OF OPERATIONS
For the three-month and six-month period ended December 31, 2016 and 2015:
REVENUES
–
Revenues reported were $25,797 and $15,383 for the three months ended December 31, 2016 and 2015 respectively. For the six months ended December 31, 2016 and 2015 revenues were $35,508 and $26,854. Revenues increased by $10,412 and $8,652 for the three and for the six months ended December 31, 2016. The increase of $8,652 from the revenues in the comparable period of our 2016 financial year can be traced back to a increase in royalties from the licensing agreement with SastoMed GmbH. Cost of sales in the first quarter were $376 and $144 for the three months ended December 31, 2016 and 2015 respectively. Cost of sales for the first six months (first and second quarters of the 2017 financial year) amounted to $658 compared to $229 for the years ended 2016 and 2015.
RESEARCH AND DEVELOPMENT
–
Research and development expenses increased by $2,453 to $3,908 from $1.455 for the three periods ending December 31, 2016 and 2015. Research and development expenses decreased $27,179 to approximately $8,328 in the first half-year of our 2017 financial year from approximately $35,507 in the comparable period of the previous year. This decrease is mainly attributed to lower R&D expenses after the conclusion of the animal tests of our hemoglobin hyperpolymers. The company has no plans to start activities in this area within the near future again.
GENERAL AND ADMINISTRATIVE and PROFESSIONAL FEES
–
For the three months ended December 31, 2016 and 2015 the combined general and administrative expenses and professional fees increased by $68,285 from $101,950. Accumulated general and administrative expenses and professional fees increased $4,427 to approximately $245,137 in the half-year ended December 31, 2016, from approximately $240,710 in the respective period of the previous year, mainly due to costs for legal advice occurred during the three month period.
INTEREST EXPENSE - interest expenses for the three-month period ended December 31, 2016 and 2015 were $1,053 and $14,926, a decrease of $13,873. For the six months ended December 31, 2016 and 2015, interest expense decreased by $13,492 to $2,835 from $16,327.
NET LOSS - As a result of the above factors, the net loss attributed to common shareholders increased to
a loss of $(141,217)
compared to a loss of $(89,858)
for the three months ended December 31, 2016 and 2015 respectively and a loss of $(209,117) compared to a loss of $(240,186) for the six month ended December 31, 2016 and 2015 respectively . The loss per share for both periods was $(0.00).
Our consolidated net loss before non-controlling interest was $(149,775), or $(0.00) per common share, for the three months ended December 31, 2016, compared to $(96,012) or $(0.00) per common share, during the comparable period in our 2015 financial year. Our consolidated net loss before non-controlling interest was $(221,450), or $(0.00) per common share, for the six months ended December 31, 2016, compared to $(258, 839) or $(0.00) per common share, during the comparable period in our 2015 financial year.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 2016, net cash used in operating activities decreased $3,739 to $186,212, compared to $189,951 in the corresponding period of the previous year mainly due to the decrease of the operating loss of approximately $39,000 from a loss of $(258,839) in 2015 to a loss of $(221,450) in 2016; refunds and receivables which decreased from 2015 to 2016 yielding a reduction in cash flow of about $20,000 and a net decrease in accounts payable and related party obligations of approximately $(30,000).
We had a working capital deficit of approximately $236,440 at December 31, 2016, a decrease of approximately $11,126 from June 30, 2016.
At December 31, 2016 compared to June 30, 2016, we had cash of $116,129 compared to $70,074, prepaid expenses of $30,297 compared to $30,292 and accounts receivable of $644 compared $504. We will need substantial additional funding to fulfill our business plan and we intend to explore financing sources for our future development activities. No assurance can be given that these efforts will be successful.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by § 229.10(f)(1) and are not required to provide the information under this item.
Item 4 - Controls and Procedures
Disclosure Controls and Procedures
As of the date of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC
’
s rules and forms.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC
’
s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The term
“
internal control over financial reporting
”
is defined as a process designed by, or under the supervision of, the registrant
’
s principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant
’
s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
(a)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;
(b)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and
(c)
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant
’
s assets that could have a material effect on the financial statements.