The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States of America for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The unaudited consolidated financial statements and notes should, therefore, be read in conjunction with the consolidated financial statements and notes thereto in the Company's Form 10-K for the year ended June 30, 2016. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation, have been included. The results of operations for the three and six months ended December 31, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2017.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Sangui Biotech International, Inc., incorporated in Colorado in 1995, and its subsidiary, Sangui BioTech GmbH (Sangui GmbH). Sangui GmbH, which is headquartered in Witten, Germany, are engaged in the development of artificial oxygen carriers (external applications of hemoglobin, blood substitutes and blood additives) as well as in the development, marketing and sales of cosmetics and wound management products.
Consolidation
The consolidated financial statements include the accounts of Sangui BioTech International, Inc. and its ninety percent owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at period-end exchange rates. Net exchange gains or losses resulting from such translation are excluded from net loss but are included in comprehensive income (loss) and accumulated in a separate component of stockholders' equity. Income and expenses are translated at weighted average exchange rates for the period.
Exchanges rates used for the preparation of the consolidated balance sheet as of December 31, 2016 and June 30, 2016 and our unaudited consolidated statements of operations for the six month periods ended December 31, 2016 and 2015, were calculated as follows:
|
|
|
|
as of December 31, 2016
|
USD 1 : EUR 0.9501
|
as of June 30, 2016
|
USD 1 : EUR 0.9152
|
July 1 through December 31, 2016
|
USD 1 : EUR 0.9270
|
July 1 through December 31, 2015
|
USD 1 : EUR 0.932
|
4
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risk and Uncertainties
The Company's line of future pharmaceutical products (artificial oxygen carriers or blood substitute and additives) and medical products (wound dressings and other wound management products) being developed by Sangui GmbH, are deemed as medical devices or biologics, and as such are governed by the Federal Food and Drug and Cosmetics Act and by the regulations of state agencies and various foreign government agencies. The pharmaceutical, under development in Germany, will be subject to more stringent regulatory requirements, because they are in vivo products for humans. The Company and its subsidiaries have no experience in obtaining regulatory clearance on these types of products. Therefore, the Company will be subject to the risks of delays in obtaining or failing to obtain regulatory clearance.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has accumulated deficit of $36,878,435 as of December 31, 2016. The Company incurred an net operating loss of $218,615 during the six months ended December 31, 2016 and used cash in operating activities of $186,212 during the six months ended December 31, 2016. These conditions raise substantial doubt about the Company's ability to 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, is not able to collect its outstanding receivables 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. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Cash and Cash Equivalents
The Company maintains its cash in bank accounts in Germany. Cash and cash equivalents include time deposits for which the Company has no requirements for compensating balances. The Company has not experienced any losses in its uninsured bank accounts.
5
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development costs are charged to operations as they are incurred. Legal fees and other direct costs incurred in obtaining and protecting patents are expensed as incurred.
Revenue Recognition
Product sales revenue is recognized when the sales amount is determined, shipment of goods to the customer has occurred and collection is reasonably assured. Product is shipped FOB origination. Product royalty revenue is recognized when the licensee has reported the product sales to the Company. Product royalty revenue is calculated based upon the contractual percentage of reported sales.
Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted earnings (loss) per share give effect to all potential dilutive common shares outstanding during the period of compensation. The computation of diluted earnings (loss) per share does not assume conversion, exercise or contingent exercise of securities that would have an antidilutive effect on earnings. As of December 31, 2016, the Company had no potentially dilutive securities that would affect the loss per share if they were to be dilutive.
Comprehensive Income (Loss)
Total comprehensive income (loss) represents the net change in stockholders' equity during a period from sources other than transactions with stockholders and as such, includes net earnings (loss). For the Company, the components of other comprehensive income (loss) are the changes in the cumulative foreign currency translation adjustments and unrealized gains (losses) on marketable securities and are recorded as components of stockholders' equity.
RECLASSIFICATIONS - Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company may, from time to time, be involved in various legal disputes resulting from the ordinary course of operating its business. Management is currently not able to predict the outcome of any such cases. However, management believes that the amount of ultimate liability, if any, with respect to such actions will not have a material effect on the Company's financial position or results of operations.
Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include certain agreements with the Company's officers, under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these
6
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
indemnities and guarantees in the accompanying consolidated balance sheet.
NOTE 4
–
DEBT
Notes Payable Related Parties
On March 6, 2015, the Company entered into a note payable with a shareholder for 100,000 Euros ($110,940 as of December 31, 2016). The note payable accrues interest at 5 percent per annum, is due on March 31, 2017 and is unsecured. As of December 31, 2016, the note has an accrued interest balance of $10,155.
Notes payable
On June 15, 2015 the Company entered into an unsecured note for 32,963 Euros and accrues interest annually at 4%. The note was originally entered into with a related-party. As of December 31, 2016, due to a change in nature of relationship with the note holder, the Company has discontinued recording it as a related party obligation. As of December 31, 2016, the balance of the note $35,388. The Company made an interest payment of $1,542 and as of period end, the outstanding accrued interest owed on the note was $573.
7
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
NOTE 5
–
CONVERTIBLE NOTE PAYABLE
On May 11, 2015, the Company entered into an unsecured note payable for $50,000 (related to the Equity Purchase Agreement or
“
EPA
”
disclosed in Note 6) due on November 30, 2015 with interest accruing at 10% annually. The note payable was entered into as consideration to the investor for execution of the EPA. Accordingly, the Company recorded $50,000 to Deferred financing costs which will be amortized ratably over the period ending December 31, 2016. During the period ended December 31, 2015, the Company amortized 10,685 of the deferred financing costs.
On December 9, 2015, the Company agreed to change the terms of the note representing the deferred financing costs, making the note convertible and extending the repayment of the note as due on or before December 31, 2016. The repayment is subject to the convertible features of the note. The creditor has a conversion option allowing it to choose to receive repayment of the stated principal and interest (10% per annum) either in cash or, at the creditor
’
s option, in the Company
’
s restricted common stock. If paid in cash the principal repayment is $50,000.
The change in the status of the note from a note payable of $50,000 to a convertible note payable of $50,000, results in an extinguishment of debt wherein a debt discount of $50,000 was recorded. At December 31, 2015, the Company had recognized amortization of debt discount of $2,706, resulting in a debt discount balance of $47,294.
In connection with the change in the status of the note, it was treated as a convertible note. The Company identified embedded derivatives related to the Convertible Promissory Note entered into as of December 9, 2015 and December 31, 2015. These embedded derivatives included certain conversion features, including a variable exercise price calculated by taking 60% the average of the 5 lowest days
’
trading prices in the 20 days leading up to conversion. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Convertible Promissory Note provisions and to adjust the fair value as of each subsequent balance sheet date. The fair value of the embedded derivative was determined using the Black-Scholes Model based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
Dividend yield:
|
|
|
0
|
%
|
Volatility
|
|
|
157.93
|
%
|
Risk free rate:
|
|
|
0.49
|
%
|
The initial fair value of the derivative liability was $74,650, of which $50,000 was recorded as a debt discount against the $50,000 Convertible Promissory Note. At December 31, 2015 the Company determined a fair value of $47,060 of the embedded derivative resulting in a net gain derivative liability of $2,940.
On December 14, 2015, the Company issued 165,144 shares of common stock valued at $2,973 to pay the accrued interest on the note as interest expense. The change to a convertible note was treated as effective on December 9, 2015 and the value of the stock to be issued was included as accrued expense and interest was charged $4,954 during the quarter, based upon the trading value of the common stock at the date issued. On January 5, 2016, $23,700 in principal and $301 in accrued interest was converted into 2,000,114 shares of common stock. In March 2016, the Company repaid the remaining principal of $26,300 and additional interest of $9,820. As of December 31, 2016 and June 30, 2016, the outstanding balances were $0 and $0, respectively.
8
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
NOTE 6
–
CAPITAL STOCK
Preferred Stock
–
The Company is authorized to issue 10,000,000 shares of preferred stock. No preferred stock has been issued so far. The authorized preferred shares are non-voting and the Board of Directors has not designated any liquidation value or dividend rates.
Common Stock
–
The Company is authorized to issue 250,000,000 shares of no par value common stock. The holders of the Company's common stock are entitled to one vote for each share held of record on all matters to be voted on by those stockholders. As of December 31, 2016 and June 30, 2016, the Company had 181,761,503 shares and 165,372,503 shares of common stock issued and 181,707,747 and 165,318,747 shares outstanding, respectively.
On May 11, 2015, the Company entered into an equity purchase agreement (the
“
EPA
”
) with an unrelated investor (
“
the Investor
”
). The EPA is a put option contract wherein, at the Company
’
s sole discretion, up to $5,000,000 of common stock may be sold to the Investor for a period of 3 years ending May 2018. Under the terms of the EPA, the Company issued 208,333 shares pursuant to a put notice for $10,000 during the period ending December 31, 2015 (no shares during the year ended June 30, 2015). The put notice yielded $1,500 in cash against 37,037 of the 208,333 shares. In addition to these 37,037 shares, concurrent with the extension of the related $50,000 Convertible Promissory Note (see Note 5), the investor converted $2,973 in accrued interest into 165,144 shares leaving 6,152 shares held by the investor that are receivable by the Company.
During the six months ended December 31, 2016, the Company sold 15,555,000 shares of common stock to 9 individuals for $233,950 ($0.02 per share) and issued 834,000 shares for services valued at $9,620 ($0.01 per share).
NOTE 7
–
INVESTMENT IN JOINT VENTURE AND NOTE PAYABLE
During the six months ended December 31, 2015, the Company sold its interest in the Sastomed joint venture, for 6,250 Euros, resulting in a gain recorded in Other Income. The sale of the joint venture terminated the relationship with Sastomed. Accordingly, the note payable of $35,388, which was previously recorded as a related party note payable, is now classified as non-related party note payable. The note payable accrues interest at 4% annum and is due June 8, 2016.
NOTE 8
–
REVISION FOOTNOTE
The Company identified an error relating to the
loss recognized in connection to the sale of the Joint Venture as described in Note 7 for
the
six month period
ended December 31, 2015
. The effect of the error
is an overstatement of the Company
’
s net loss
by $
194,871
for the
six month period
ended
December 31, 2015
.
In accordance with the guidance provided by the SEC
’
s Staff Accounting Bulletin 99,
Materiality
and Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued
quarterly
consolidated financial statements. Accordingly, these changes are disclosed herein and will be disclosed prospectively.
As a result of the aforementioned correction of accounting errors, the relevant annual financial statements have been restated as follows:
9
SANGUI BIOTECH INTERNATIONAL, INC.
Notes to the Condensed Consolidated Financial Statements
December 31, 2016 and June 30, 2016
(Unaudited)
Effects on financials for the
Period
Ended
December 31, 201
5
: