SANGUI BIOTECH INTERNATIONAL INC - Annual Report: 2009 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: June 30, 2009

Commission File Number: 0-21271

_______________________

SANGUI BIOTECH INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

Colorado	84-1330732
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

Alfred Herrhausen Street 44, Witten Germany	58455
(Address of Principal Executive Offices)	(Zip Code)

49 (2302) 915-200

(Registrant’s Telephone Number, including Area Code)

Securities registered under Section 12(b) of the Exchange Act:

None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      . No  X .

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes      . No  X .

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for such shorter period that a Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      . No  X .

Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.      .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	.	Accelerated filer	.
Non-accelerated filer	. (Do not check if a smaller reporting company)	Smaller reporting company	X .

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      . No  X .

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of December 31, 2009 based upon the price at which the common stock was last sold, was approximately $11,848,606.

The number of shares of the Registrant's common stock issued and outstanding on November 30, 2010 was 86,587,446

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Table of Contents

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CAUTIONARY STATEMENT

Some of the statements contained in this Form 10-K for Sangui Biotech International, Inc. (the “Company” or “SGBI”) discuss future expectations, contain projections of results of operation or financial condition or state other “forward-looking” information. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Important factors that may cause actual results to differ from projections include, for example:

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the success or failure of management's efforts to implement their business strategy;

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the ability of the Company to raise sufficient capital to meet operating requirements;

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the uncertainty of consumer demand for our products;

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the ability of the Company to protect its intellectual property rights;

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the ability of the Company to compete with major established companies;

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the effect of changing economic conditions;

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the ability of the Company to attract and retain quality employees; and

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other risks which may be described in future filings with the SEC.

Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under “Risk Factors” as well as those noted in the documents incorporated herein by reference. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1. BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

 

Sangui BioTech, Inc. (SBT) was incorporated in Delaware on August 2, 1996, and began operations in October 1996. Shortly after the formation of SBT, the shareholders of SanguiBioTech AG (Sangui GmbH) and GlukoMediTech AG (Gluko AG) agreed to a share swap in which all of the outstanding shares held by the shareholders would be exchanged for shares of SBT, thereby making Sangui GmbH and Gluko AG wholly owned subsidiaries of SBT. 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., and 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 its fiscal year 2003, SGBI's business operations were conducted through wholly owned subsidiaries. During the first quarter of the 2003 fiscal year, SBT sold its assets, and commenced a wind-down of its U.S. business operations. SBT was merged with and into SGBI effective December 31, 2002. Gluko AG was merged with Sangui GmbH effective June 30, 2003.

Sangui GmbH, the only remaining subsidiary of SGBI, develops hemoglobin-based artificial oxygen carriers for use as blood additives, blood volume substitutes and variant products thereof. Sangui GmbH has also developed an anti-aging cosmetic and a number of related products aimed at improving oxygen supply to the skin. Enhanced oxygen supply is the key to improved wound healing; therefore the Company has extended its product portfolio to contain wound pads and other wound management products. The facilities of Sangui GmbH are located on the premises of the Forschungs- und Entwicklungszentrum of the University of Witten/Herdecke, Witten, Germany.

To date, neither SGBI nor its subsidiaries has had profitable operations. The Company has never been profitable, and through June 30, 2009, SGBI's accumulated deficit has exceeded $25.9 million. The Company expects to continue to incur substantial losses over the next several years as it pursues its research and development efforts, testing activities and other growth operations. SGBI's most promising potential products in the area of artificial oxygen carriers are still in early development stages. As such the Company will need to obtain substantial additional capital to continue its research and development. At this time, given the current market conditions, 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. The Company’s current key sales focus is on selling its existing cosmetics and wound management products to distribution partners, identifying additional industrial and distribution partners for its patents and products, and on obtaining the additional financial resources necessary to finalize the certification processes of its development 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 and proprietary pharmaceutical, medical and cosmetic products. The Company develops its products through its German subsidiary, Sangui GmbH. We are seeking to market and sell some, or all, of our products through partnerships with industry partners.

The Company’s 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. We have thus far focused our development and commercialization efforts of 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.

SanguiBio GmbH holds the exclusive distribution rights for Chitoskin wound pads for the European Union and various other countries. We have filed a patent cooperation treatment application (PCT) for the production and use of improved Chitoskin wound pads using gelatine instead of collagen as the carrier substance.

 

PRODUCTS OF THE COMPANY

Artificial Oxygen Carriers

 

We develop several products based on polymers of purified natural porcine hemoglobin with oxygen carrying abilities that are similar to those of native hemoglobin. These are (1) oxygen carrying blood additives, and (2) oxygen carrying blood volume substitutes.

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In December 1997, we decided that porcine hemoglobin should be used as the basic material for artificial oxygen carriers. In March 1999, we decided which hemoglobin hyperpolymer would go into preclinical investigation, that glutaraldehyde would be utilized as a cross linker, and further that the polymer hemoglobin be chemically masked to prevent protein interaction in blood plasma. The fine adjustment of the molecular formula of the artificial oxygen carriers - optimized for laboratory scale production - was finalized in the summer of 2000.

The experiments completed in our laboratories demonstrated that it is possible to polymerize hemoglobins isolated from porcine blood resulting in huge soluble molecules, so-called hyperpolymers. In August 2000, we finalized our 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 our clean room. The resulting product was successfully applied in animal tests, moreover, single volunteers underwent pilot self-experiments.

The blood additives and blood substitute projects were halted in 2003 due to the lack of financing for the pre-clinical test phase. In October 2006, a contract was entered into between SanguiBioTech GmbH and ERC Nano Med S.A. de C.V. of Monterrey, Mexico (ERC), which provides that ERC will establish a production facility in Mexico to produce sufficient quantities of the blood additive. In cooperation with the Mexican National Health Organizations, ERC will initiate the necessary steps to begin the pre-clinical test phase for the products in due course.

 

According to regulatory requirements, all drugs must complete preclinical and clinical trials before approval (Government Regulation; No Assurance of Product Approval, see Certain Business Risks below) and market launch. The Company’s management believes that the European and United States FDA approval process will take at a minimum several years to complete.

Nano Formulations for the Regeneration of the Skin

 

Healthy skin is supplied with oxygen both from the inside, by way of the blood circulation, 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.

Our nano-emulsion-based preparations have been designed to support the regeneration of the skin by improving its oxygen supply. The products were thoroughly tested by an independent research institute and received top marks for skin moisturization, and enhanced skin elasticity, respectively.

In the course of its 2008 fiscal year, we developed a comprehensive cosmetics series comprising five separate formulations including a novel skin purifier and a face care formulation using hyaluronic acid as an additional moisturizing agent. Marketing and distribution of the new series started in September, 2008. Sales of this series have remained at a low level throughout the 2009 fiscal year.

 

Our cosmetic business model is reliant upon cooperation with our manufacturing and distribution partners. We have our various formulations produced by a contract manufacturer and sell quantities of the products either in bulk or in customized private label packaging as requested. In addition, we started to sell our cosmetic products under our own brand “Pure MO2isture” via an internet shop in September 2006.

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.

In March 2005, SanguiBioTech GmbH was awarded the CE mark for this product. The CE mark authorizes the Company to distribute and sell this medical product in the member countries of the European Union and such other countries that accept the CE mark as a valid product authorization. At the same time, we successfully passed the ISO 9001:2000 (General Quality Management System) and ISO 13485:2003 (Quality Management System Medical Products) audits, and obtained the respective certifications. The “Chitoskin” trademark was granted to the company for the European countries effective November 1, 2004.

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Our business model in this field is reliant upon cooperation with our manufacturing and distribution partners. We have our wound pads produced by a certified contract manufacturer and sell the products to specialized industry partners. For the European markets, Karl Beese GmbH (“KB”), a leading German vendor and distributor of hospital supplies, acted as the lead distributor until September 2010, when our contract with KB expired. As of the date of this report we have not sought to renew our contract with KB, nor have we sought out other distribution partners.

In the course of our 2008 fiscal year we started to develop a new and improved wound pad formulation for surgical applications. Different variations of the formulation were tested in the USA and in Europe. After diligent evaluation of the test results, we now plan to amend the test design in order to arrive at a comprehensive set of basic data for future clinical testing.

In the course of our 2009 fiscal year we have intensified our search for a new contract manufacturer able and willing to produce wound dressings at a reasonable price and of the required quality. Test productions were carried out at different facilities. The impact of the then critical economic situation, especially on manufacturing industries, thus far prevented the closing of a production and delivery agreement with one of the possible manufacturing partners.

Hemospray Wound Spray

SanguiBioTech GmbH has developed a novel medical product aimed at the healing of chronic wounds. Chronic wounds are a medical problem of increasing importance as they originate from widespread risk factors such as diabetes, obesity, smoking etc. 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 Hemospray wound spray product bridges the watery wound surface and permits an enhanced afflux of oxygen to the wound ground.

In 2007, subsequent to a series of successful individual therapies in Germany, and under a cooperation agreement with SanguiBioTech GmbH signed October 2006, ERC Nano-Med of Monterrey, Mexico, established its wholly-owned subsidiary Sangui Latino-America (SLA). SLA opened two wound ambulances and carried out a large number of successful wound treatments using our products in preparation of the planned registration of Hemospray for the Latin American markets.

Product registration procedures have been initiated in Mexico and Europe. In the course of our 2008 fiscal year we submitted the required independent expert opinions about the toxicological and virological status of Hemospray to the Notified Body. A Notified Body, in the European Union, is an organization that has been accredited by a Member State to assess whether a product meets certain preordained standards. Assessment can include inspection and examination of a product, its design and manufacture. For example, a Notified Body may designate that a medical device conforms to the EU Medical Devices Directive, which defines the standards for medical devices. With this Declaration of Conformity, the manufacturer can label the product with the CE Mark, which is required for distribution and sale in the EU.

In the course of our 2009 fiscal year, we provided the required comprehensive documentation to the Notified Body, another important milestone in the registration according to the CE standards of the European Union. The documentation is currently being investigated by experts representing the Notified Body. Their consent provided the final stage of the certification process will be the establishing and validating of the production facility.

Starting in January, 2009, the Health Authorities of the Mexican State of Tamaulipas in cooperation with SLA and supported by SanguiBioTech GmbH carried out a randomised comparative clinical study with numerous patients in the Civil Hospital of Ciudad Victoria, the state capital. The vast majority of the patients treated with our Hemospray were healed, their wounds closed, while the patients of the control group did not respond in similar manner to the conventional treatment. For ethical reasons the control group was abandoned, the patients were successfully being treated using the Sangui system. Only three patients did not respond to either therapy, in one case the wound reappeared shortly after the treatment.

After a successful registration of Hemospray, our business model in this field will be reliant upon cooperation with its manufacturing and distribution partners. Sangui has its wound spray produced by a certified contract manufacturer and intends to sell the product to specialized industry partners. As a substitute the Company is planning to prepare establishing a proprietary distribution channel.

PATENTS AND PROPRIETARY RIGHTS

 

The Company seeks patent protection for all of its research and development, and all modifi­ca­tions and improvements thereto. As of November 30, 2010 SanguiBioTech GmbH had been gran­ted 8 patents. Fur­thermore, it has applied for several additional patents, most of which have been filed in the United States of America (US), and as an international patent application with the European Pa­tent Office (EP). Validation of EP patents includes Germany, France, Great Britain, Ita­ly, and Spain. Below are listed the most pertinent of the rights held by the Company.

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1. Haemoglobin-Hyperpolymers

 

2. Cosmetics

3. Wound Management

 

Previously held patents related to the implantable Glucose Sensors were abandoned during the 2009 financial year.

MANUFACTURING, MARKETING AND DISTRIBUTION

 

For the manufacturing of our products we rely on certified specialist contract manufacturers who specialize in the fields of cosmetic and medical products. Production processes have been certified and comply with the respective best practices in the industry. Production is constantly being monitored by us and by the respective certifying authorities.

We still have limited experience in the selling and marketing of our products. We are therefore dependent on attracting industry marketing and distribution partners in order to succeed in selling our products in their respective markets.

RESEARCH AND DEVELOPMENT

 

Research and development are charged to operations as they are incurred. Legal fees and other direct costs incurred in obtaining and protecting patents are expensed as incurred. Research and development costs totaled $195,581 and $213,614 during the fiscal years ended June 30, 2009 and 2008, respectively.

 

GOVERNMENT REGULATION

 

Sangui BioTech International, Inc. and its former United States subsidiaries are and 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 we believe we and our subsidiaries were in material compliance.

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Although it is believed that we and our former United States subsidiaries have been in material compliance with all applicable governmental and environmental laws, rules, regulations and policies, and although no government concerns were put forward during the operation of or after the closing of the operations, there can be no assurance that the business, financial condition, and our results of operations of and those of our 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 our former United States operations.

Additionally, the clinical testing, manufacture, promotion and sale of a significant majority of the products and technologies, 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 Federal Drug Administration (FDA), and corresponding state regulatory agencies. 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, and failure of the government to grant pre-market approval, withdrawal of marketing approvals, product recall and criminal prosecution.

COMPETITION

 

The market for our products and technologies is highly competitive, and we expect competition to increase. Experiments and clinical testing in the field of artificial oxygen carriers are being carried out by Alliance Pharmaceutical Corp. of San Diego, 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, Coloplast A/S of Denmark as well as BSNmedical, a former part of Beiersdorf AG. Currently, however, there is no product comparable to Hemospray. To the best of our knowledge, our system is the only one which may rightfully claim to systematically and regularly heal chronic wounds.

 

DEPENDENCE ON MAJOR CUSTOMERS

 

As of June 30, 2009, and 2008 the Company had no significant concentrations of sales or receivables from specific customers.

HUMAN RESOURCES

 

We consider our relations with our employees to be favorable. As of June 30, 2009 we and our subsidiary had one fulltime employee, who was not involved in research and development. For research and development purposes, the Company had consulting arrangements with six individuals.

DIVIDENDS

We anticipate that we will use any funds available to finance our growth and that we will not pay cash dividends to stockholders in the foreseeable future.

REPORTS TO SECURITY HOLDERS

Copies of our 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 via the web links at the corporate website http://www.sanguibiotech.com.

 

ITEM 1A. RISK FACTORS

The risks and uncertainties described below are not the only ones facing the company, and there may be additional risks that are not presently known or are currently deemed immaterial. All of these risks may impair business operations.

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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 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) or 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.

Moreover, market prices of penny stocks tend to show a higher volatility than others. Market activities by even a small number of individuals may cause unexpected, but significant changes of share price.

 

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 commercialization or that the efforts of SGBI will result in successful product commercialization. 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.

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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

Management believes that SGBI's cash position is insufficient to cover its financing requirements for the current fiscal year, and anticipates that substantial funds will be required in order 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 its 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. During the year ended June 30, 2009 the Company increased its authorized common shares from 50 million to 250 million. This increase has given the Company increased flexibility to raise funds and/or satisfy debt obligations via equity issuances.

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 subsidiary 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. There can be no assurance that upon the departure of key personnel from the service of SGBI or its subsidiary suitable replacements will be available.

Licenses and Consents

The utilization or other exploitation of the products and services developed by SGBI or its subsidiary may require SGBI or its subsidiary to obtain licenses or consents from the producers or other holders of patents, trademarks, copyrights or other similar rights (Intellectual Property) relating to the products and technologies of SGBI or its subsidiary. In the event SGBI or its subsidiary are unable, if so required, to obtain any necessary license or consent on terms which the management of SGBI or its subsidiary consider to be reasonable, SGBI or its subsidiary may be required to cease developing, utilizing, or exploiting products or technologies affected by those Intellectual Property rights. In the event SGBI or its subsidiary are challenged by the holders of such Intellectual Property rights, there can be no assurance that SGBI or its subsidiary will have the financial or other resources to defend any resulting legal action, which could be significant.

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Technological Factors

The market for the products and technology developed by SGBI is characterized by rapidly changing technology, which could result in product obsolescence or short product life cycles. Similarly, the industry is characterized by continuous development and introduction of new products and technology to replace outdated products and technology. Accordingly, the ability of SGBI to compete will be dependent upon the ability of SGBI to provide new and innovative products and technology. There can be no assurance that competitors will not develop technologies or products that render the proposed products and technology of SGBI obsolete or less marketable. SGBI will be required to adapt to technological changes in the industry and develop products and technology to satisfy evolving industry or customer requirements, any of which could require the expenditure of significant funds and resources, and SGBI does not have a source or commitment for any such funds and resources. Development efforts relating to the technological aspects of the various products and technologies to be developed by SGBI are not substantially completed. Accordingly, SGBI will continue to refine and improve those products and technologies. Continued refinement and improvement efforts remain subject to the risks inherent in new product development, including unanticipated technical or other problems, which could result in material delays in product commercialization or significantly increased costs. In addition, there can be no assurance that those products and technologies will prove to be sufficiently reliable or durable in wide spread commercial application. The products or technologies 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.

The potential products of SGBI will require additional pre-clinical and clinical development, regulatory approval and additional investment prior to commercialization, either by SGBI independently or by others through collaborative arrangements. Potential products that appear to be promising at early stages of development may be ineffective or be shown to cause harmful side effects during pre-clinical testing or clinical trials, fail to receive necessary regulatory approvals, be difficult to manufacture, be uneconomical to produce, fail to achieve market acceptance or be precluded from commercialization by proprietary rights of others. There can be no assurance that any potential products will be successfully developed, prove to be safe and efficacious in clinical trials, satisfy applicable regulatory standards, be capable of being produced in commercial quantities at acceptable costs or achieve commercial acceptance.

 

All products and technologies under development by SGBI will require significant commitment of personnel and financial resources. Several products will require extensive evaluation and pre-marketing clearance by the Federal Drug Administration 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.

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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 Federal Drug Administration (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, subject to the then 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, and other like 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 subsidiary 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 subsidiary 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 of the manufacturing facilities of SGBI are subject to periodic inspection by state and federal agencies, including the FDA and comparable agencies in foreign countries.

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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.

Additionally, 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 subsidiary 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 known 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 subsidiary 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 subsidiary 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 subsidiary. 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 subsidiary may be able to obtain or result in the denial of the patent applications of SGBI.

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Many of the competitors of SGBI are, 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 United State'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.

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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 subsidiary. 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. The Company and its manufacturing contractors and partners will be engaged in manufacturing pharmaceutical products which will be subject to stringent regulatory requirements. No assurance can be given that the Company, 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 subsidiary 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 effort 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 or similar regulatory bodies under the law of the respective countries. 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 one of its manufacturing contractors or partners were unable to use their manufacturing facilities as a result of a fire, natural disaster, 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 has entered and 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.

Currently, SGBI has its products manufactured by contract manufacturers in Germany and anticipates future production in Mexico. No assurance can be given, that these vendors will be willing or able to produce the products in the required quality or quantitities or at prices which will enable SGBI to sell the end products as requested by its customers.

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 or comparable testing and SGBI may eventually intend to manufacture commercial quantities of its products. Although SGBI has passed the ISO 9001:2000 (General Quality Management System) and ISO 13485:2003 (Quality Management System Medical Products) audits, and obtained the respective certifications, and although it 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.

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Fluctuations in Foreign Currency Exchange Rates could have an Adverse Impact.

Because a portion of our total revenue is derived from international operations that are conducted in foreign currencies, changes in value of these foreign currencies relative to the US dollar may affect our results of operation and financial position. If for any reason exchange or price controls or other restriction on the conversion of foreign currencies were imposed, our business could be adversely affected.

ITEM 2. PROPERTIES

The Company leases its office and laboratory facilities and is housed in approximately 8,600 square feet based in the Forschungs-und Entwicklungszentrum of the University Witten/Herdecke, Germany. Rent expense was approximately $84,840 and $90,500 during the years ended June 30, 2009 and 2008, respectively.

ITEM 3. LEGAL PROCEEDINGS

 

On February 14, 2007, Dr. Rainer Felfe, filed a claim (4 Ca 431/07) against the Company and its subsidiary, SanguiBioTech GmbH, with the Industrial Relations Court in Bochum, Germany (Arbeitsgericht Bochum). The plaintiff’s claim states that he is entitled to receive outstanding wages and salaries owed to Prof. Dr. Dr. Wolfgang Barnikol by the Company, or its subsidiary, in the amount of approximately EUR370,000 (approximately US $503,200) as partial relief of a judgment rendered in a civil case against Dr. Barnikol (Oberlandesgericht Düsseldorf I 6 U 96/06). Dr. Barnikol has never made a claim against the Company, or its subsidiary, for outstanding wages with any governmental agency and acknowledges there are no outstanding wages due to him by either the Company or its subsidiary. We believe the claim lacks merit and plan to vigorously defend our position. No briefs were exchanged nor hearings called for by the Court in our fiscal years ended June 30, 2009 and subsequent to the period covered by this report through November 30, 2010.

The plaintiff’s claim had been declared pending by the Industrial Relations Court until a final judgment is rendered by the Federal Supreme Court in the appeal to the above civil case. The appeal was turned down by the Court in the course of our 2009 fiscal year.

We are not aware of pending claims or assessments, other than as described above, which may have a material adverse impact on our financial position or results of operations.

ITEM 4. [REMOVED AND RESERVED]

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

As of June 30, 2009, our common stock was traded on the Pink Sheets under the symbol SGBI as well as on the OTC market of the Hamburg stock exchange in Germany.

The following table sets forth the high and low closing prices for shares of SGBI common stock for the fiscal periods noted, as reported by Pink Sheets. Quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.

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		Common Stock Closing Prices (US$)
		High			Low
2009
Quarter ended September 2008		$	0.24		$	0.13
Quarter ended December 2008		0.18			0.03
Quarter ended March 2009		0.15			0.07
Quarter ended June 2009		0.15			0.06
2008
Quarter ended September 2007		$	0.16		$	0.11
Quarter ended December 2007		0.30			0.12
Quarter ended March 2008		0.27			0.18
Quarter ended June 2008		0.35			0.20

In addition to freely tradable shares, SGBI has numerous shares of common stock outstanding that could be sold pursuant to Rule 144. In general, under Rule 144, subject to the satisfaction of certain other conditions, a person, including one of our affiliates, who has beneficially owned restricted shares of common stock for at least one year is entitled to sell, in certain brokerage transactions, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or the average weekly trading volume during the four calendar weeks immediately preceding the sale. A person who presently is not and who has not been an affiliate for at least three months immediately preceding the sale and who has beneficially owned the shares of common stock for at least six months is entitled to sell such shares under Rule 144 without regard to any of the volume limitations described above.

 

HOLDERS

 At June 30, 2009, the number of record holders of the Company's common stock was approximately 879.

DIVIDENDS

We did not pay any cash dividends during the past two fiscal years and do not contemplate paying dividends in the foreseeable future.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information as of June 30, 2009 and 2008, with respect to our equity compensation plans previously approved by stockholders and equity compensation plans not previously approved by stockholders.

		Equity Compensation Plan Information
Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		(a)		(b)				(c)
Equity compensation plans approved by stockholders		0[1]		$	0.00			10,000,000
Equity compensation plans not approved by stockholders		0				0.00		0
Total		0		$	0.00			10,000,000

^[1] On October 22, 2008 the Company adopted the 2008 Amended and Restated Long-Term Equity Incentive Plan, whereby the Board was authorized to issue up to 10,000,000 shares of common stock (including incentive stock options) to certain eligible employees, directors, and consultants of the Company or its subsidiaries. To date, no shares have been issued or options granted pursuant to this Plan.

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ISSUER PURCHASES OF EQUITY SECURITIES

There were no stock repurchases during the fourth quarter of 2009.

RECENT SALES OF UNREGISTERED SECURITIES

On February 18, 2009 the Company issued an aggregate of 18,163,500 shares of its Common Stock to 21 individuals and/or entities, at an average $0.15 per share, in exchange for the conversion of promissory notes totaling approximately $2,368,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On June 11, 2009 the Company issued an aggregate of 1,275,000 shares of its Common Stock to 4 individuals and/or entities, at an average $0.06 per share, in exchange for cash proceeds of approximately $72,000. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

Subsequent to the period covered by this Report

On August 31, 2009 the Company issued an aggregate of 2,578,949 shares of its Common Stock to three (3) individuals and/or entities, at $ 0.09 per share, in exchange for cash proceeds of $228,972. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On October 27, 2009 the Company issued an aggregate of 2,010,000 shares of its Common Stock to two (2) individuals and/or entities, at $ 0.07 per share, in exchange for cash proceeds of $147,636. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

 On November 5, 2009 the Company issued an aggregate of 2,388,476 shares of its Common Stock to five (5) individuals and/or entities, at $0.08 per share, in exchange for cash proceeds of $189,713. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On December 17, 2009 the Company issued an aggregate of 708,340 shares of its Common Stock to three (3) individuals and/or entities, at $0.09 per share, in exchange for cash proceeds of $66,436. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On February 5, 2010 the Company issued an aggregate of 875,000 shares of its Common Stock to two (2) individuals and/or entities, at $0.10 per share, in exchange for cash proceeds of $88,582. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On March 2, 2010 the Company issued an aggregate of 166,670 shares of its Common Stock to one (1) individual and/or entity, at $0.09 per share, in exchange for cash proceeds of $14,764. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On May 4, 2010 the Company issued an aggregate of 144,150 shares of its Common Stock to one (1) individual and/or entity, at $0.09 per share, in exchange for cash proceeds of $12,710. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On May 14, 2010 the Company issued an aggregate of 327,083 shares of its Common Stock to two (2) individuals and/or entities, at $0.08 per share, in exchange for cash proceeds of $25,489. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

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On July 19, 2010 the Company issued an aggregate of 1,520,000 shares of its Common Stock to five (5) individuals and/or entities, at $0.09 per share, in exchange for cash proceeds of $133,716. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On August 11, 2010 the Company issued an aggregate of 350,115 shares of its Common Stock to two individuals and/or entities, at approximately $0.12 per share, in exchange for services valued at $40,642. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On August 24, 2010 the Company issued an aggregate of 1,600,000 shares of its Common Stock to three individuals and/or entities, at approximately $0.09 per share, in exchange for cash and services totaling $138,217. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On October 4, 2010 the Company issued an aggregate of 2,134,000 shares of its Common Stock to various individuals and/or entities, at approximately $0.05 per share, in exchange for cash proceeds of $98,326. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

On October 27, 2010 the Company issued an aggregate of 2,346,563 shares of its Common Stock to five (5) individuals and/or entities, at $0.04 per share, in exchange for cash proceeds of $102,800. No underwriters were used. The securities were sold pursuant to an exemption from registration provided by Regulation S and Section 4(2) of the Securities Act of 1933. The certificate representing the shares contained a restricted legend.

ITEM 6. SELECTED FINANCIAL DATA

As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this Item.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

CRITICAL ACCOUNTING POLICIES: Our significant accounting policies are described in Note 1 to the consolidated financial statements for the year ended June 30, 2009. The following are our critical accounting policies:

 

Revenue Recognition

 

 The Company derives its revenue primarily from the sale of wound treatment products, and of its cosmetics products. The majority of the Company’s sales are generated via online orders, with credit card payment. The Company recognizes revenues when: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii) title and risk of loss have transferred, and (iv) collectability is reasonably assured — generally when products are shipped to the customer, except in situations in which title passes upon receipt of the products by the customer. In this case, revenues are recognized upon notification that customer receipt has occurred. The Company does not have customer acceptance provisions, but it does provide its customers a limited right of return. As warranted the Company accrues an estimated amount for sales returns and allowances at the time of sale based on its ability to estimate sales returns and allowances using historical information. Shipping and handling fees are included as part of net sales. The related freight costs and supplies associated with shipping products to customers are included as a component of cost of goods sold.

19

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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. Research and development costs totaled $195,581 and $213,614 during the fiscal years ended June 30, 2009 and 2008, respectively.

 

Foreign Currency Translation

 

The functional currency of the Company’s Sangui GmbH subsidiary is the local currency, the Euro. Accordingly, assets and liabilities of the subsidiary are translated into U.S. dollars at period-end exchange rates. Sales and expenses are translated at the average exchange rates in effect for the period. The resulting translation gains or losses are recorded as a component of accumulated other comprehensive income in the consolidated statement of stockholders’ equity (deficit). There were no gains or losses resulting from foreign currency transactions as of June 30, 2009 and 2008.

 

FINANCIAL POSITION

 

The Company’s current assets decreased by $754,957, or 94%, from June 30, 2008 to $51,038 at June 30, 2009. The decrease is primarily attributable to the satisfaction of the Company’s shareholder loans receivable, and a significant depletion of the Company’s cash balances. 

 

The Company's net property and equipment decreased $3,837 or 55%, from June 30, 2008 to $3,184 at June 30, 2009. The decrease is primarily attributable to the current year depreciation of approximately $3,311 during the year.

 

The Company funded its operations primarily through borrowings on promissory notes payable. The Company’s stockholders’ deficit decreased $1,679,098 from June 30, 2008, to a deficit of $301,005 as of June 30, 2009. The primary reason for the increase was the Company's issuance of common stock for debts totaling approximately $2.4 million.

 

REVENUES. Revenues increased 70% to $31,526 during the year ended June 30, 2009 from $18,588 during 2008. This increase is due primarily to the Company’s current focus on the development of new products The Company incurred Cost of Sales totaling $27,240 during the 2009 fiscal year, a 63% decrease from the prior year.

 

RESEARCH AND DEVELOPMENT. Research and development expenses decreased 8% to $195,581 during the year ended June 30, 2009 from $213,614 during the 2008 fiscal year. This decrease is due primarily to the Company working to improve and perfect its current inventory items in addition to further developing various new inventory products utilizing its existing technology and production methods.

 

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased 17% to $596,733 in 2009 from $715,432 in 2008. This decrease of $118,699 is attributed to decreases in legal and accounting and other expenses, as well as decreases in expenses incurred in pursuing new international markets for the Company’s products.

INTEREST EXPENSE. Interest expense increased 1,498% to $1,545,901 in 2009 from $97,923 in 2008. This increase resulted primarily from the Company’s recognition of a beneficial conversion feature pertaining to its convertible promissory notes during 2009.

 

NET LOSS. As a result of the above and other factors, the Company's consolidated net loss was $2,315,932, or $0.04 per common share in 2009, compared to $1,105,848, or $0.02 per common share, in 2008.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the year ended June 30, 2009, net cash used in operating activities decreased to $786,493 from $996,846 for the year ended June 30, 2008, primarily related to variations in net losses for the periods,.

For the year ended June 30, 2009, net cash flows from investing activities increased to $-0-, from a outflow of $5,539 for the year ended June 30, 2008. The principal reason for the decrease was the purchase of equipment items during the 2008 fiscal year.

 

For the year ended June 30, 2009, net cash provided by financing activities decreased to an inflow of $584,663, from an inflow of $1,343,070 for the year ended June 30, 2008. The principal reason for the decrease relates to the Company’s sale of the common stock of a subsidiary during the 2008 fiscal year.

20

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The Company had a working capital deficit of $349,518 at June 30, 2009, compared to working capital deficit of $2,049,400 at June 30, 2008, an overall decrease of $1,699,882, due primarily to the Company’s conversion of promissory notes into common stock during the year.

 

The Company incurred a net loss applicable to common stockholders of $2,315,932 and used cash in operating activities of $786,493 for the year ended June 30, 2009. These and other 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 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Sales of our anti-aging formulation started in early 2005, sales of our product skin regeneration as well as wound pad products started in the course of the first quarter of 2007. The current state of the different sales efforts has induced management to believe that revenues from these products may be obtainable in the course of the 2011 fiscal year. However, the Company will need substantial additional funding to fulfill its business plan and the Company intends to explore financing sources for its future development activities. No assurance can be given that these efforts will be successful.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this item.

21

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Sangui Biotech International, Inc.:

We have audited the accompanying consolidated balance sheets of Sangui Biotech International, Inc. (the Company) as of June 30, 2009 and 2008 and the related statements of operations, stockholders' equity, and cash flows for the years ended June 30, 2009 and 2008. These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sangui Biotech International, Inc. as of June 30, 2009 and 2008, and the results of operations and cash flows for the years ended June 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that Sangui Biotech International, Inc. will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses, has negative working capital and negative cash flows from operations.  These issues raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

As discussed in Note 12 to the consolidated financial statements, the accompanying consolidated financial statements as of and for the fiscal year ending June 30, 2008, have been restated.

/s/ Mantyla McReynolds, LLC

Mantyla McReynolds, LLC

December 2, 2010

Salt Lake City, Utah

F-1

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SANGUI BIOTECH INTERNATIONAL, INC.
Consolidated Balance Sheets
ASSETS
			June 30,
			2009			2008
CURRENT ASSETS						(Restated)
	Cash		$	12,353		$	229,717
	Accounts receivable, net			5,150			-
	Inventory			29,818			11,543
	Shareholder loans receivable			-			533,059
	Prepaid expenses and other assets			3,717			31,676
		Total Current Assets		51,038			805,995
PROPERTY AND EQUIPMENT, Net				3,184			7,021
OTHER ASSETS
	Tax refunds receivable			24,755			40,166
	Other non-current assets			20,574			22,110
		Total Other Assets		45,329			62,276
		TOTAL ASSETS	$	99,551		$	875,292

The accompanying notes are an integral part of these consolidated financial statements.

F-2

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SANGUI BIOTECH INTERNATIONAL, INC.
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
			June 30,
			2009			2008
CURRENT LIABILITIES						(Restated)
	Accounts payable and accrued expenses		$	283,181		$	252,615
	Accounts payable - related parties			117,375			61,163
	Convertible promissory notes			-			1,353,111
	Convertible promissory notes - related parties						1,041,140
	Accrued interest payable			-			147,366
		Total Current Liabilities		400,556			2,855,395
		TOTAL LIABILITIES		400,556			2,855,395
STOCKHOLDERS' EQUITY (DEFICIT)
	Preferred stock, no par value; 5,000,000 shares
	authorized, -0- shares issued and outstanding			-			-
	Common stock, no par value; 250,000,000 shares
	authorized, 69,438,500 and 50,000,000 shares issued
	and outstanding, respectively			21,409,838			18,969,358
	Additional paid-in capital			4,621,430			3,099,135
	Stock subscriptions payable			167,179			167,179
	Accumulated other comprehensive income			(559,751)			(592,006)
	Accumulated deficit			(25,939,701)			(23,623,769)
		Total Stockholders' Equity (Deficit)		(301,005)			(1,980,103)
		TOTAL LIABILITIES AND STOCKHOLDERS'
		EQUITY (DEFICIT)	$	99,551		$	875,292

The accompanying notes are an integral part of these consolidated financial statements.

F-3

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SANGUI BIOTECH INTERNATIONAL, INC.
Consolidated Statements of Operations
			For the Years Ended
			June 30,
			2009			2008
						(Restated)
REVENUES			$	31,526		$	18,588
COST OF SALES				17,139			45,724
		GROSS PROFIT (LOSS)		14,387			(27,136)
OPERATING EXPENSES
	Research and development			195,581			213,614
	Depreciation and amortization			3,311			3,961
	Bad debt expense			1,321			22,764
	Impairment of inventory			-			78,518
	General and administrative			596,733			715,432
		Total Operating Expenses		796,946			1,034,289
		OPERATING LOSS		(782,559)			(1,061,425)
OTHER INCOME (EXPENSE)
	Interest income			11,699			3,500
	Interest expense			(1,545,901)			(97,923)
	Other income			829			50,000
		Total Other Income (Expense)		(1,533,373)			(44,423)
		Loss before income taxes and non-controlling
		interest		(2,315,932)			(1,105,848)
Provision for income taxes				-			-
		NET LOSS		(2,315,932)			(1,105,848)
OTHER COMPREHENSIVE INCOME
	Foreign currency translation adjustments			32,255			(458,442)
	Unrealized gain on marketable securities			-			-
		Total Other Comprehensive Income (Loss)		32,255			(458,442)
		COMPREHENSIVE INCOME (LOSS)	$	(2,283,677)		$	(1,564,290)
		BASIC AND DILUTED
		LOSS PER SHARE	$	(0.04)		$	(0.02)
		WEIGHTED AVERAGE NUMBER OF SHARES
		OUTSTANDING		59,280,627			50,000,000

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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SANGUI BIOTECH INTERNATIONAL, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
													Accumulated
							Additional			Stock			Other
		Common Stock					Paid-In			Subscriptions			Comprehensive			Accumulated
		Shares		Amount			Capital			Payable			Income			Deficit
Balance, June 30, 2007		50,000,000		$	18,969,358		$	1,958,376		$	-		$	(133,564)		$	(22,517,921)
Common shares of subsidiary
issued for cash		-			-			1,140,759			-			-			-
Currency translation adjustment		-			-			-			-			(458,442)			-
Stock subscriptions payable		-			-			-			167,179			-			-
Net loss for the year ended
June 30, 2008		-			-			-			-			-			(1,105,848)
Balance, June 30, 2008		50,000,000			18,969,358			3,099,135			167,179			(592,006)			(23,623,769)
Currency translation adjustment		-			-			-			-			32,255			-
Amortization of beneficial
conversion feature on
promissory notes converted		-			-			1,522,295			-			-			-
Common shares issued in
conversion of promissory
notes at prices from $0.06
to $0.24 per share		18,163,500			2,367,958			-			-			-			-
Common shares issued for
cash at $0.057 per share		1,275,000			72,522			-			-			-			-
Net loss for the year ended
June 30, 2009		-			-			-						-			(2,315,932)
Balance, June 30, 2009		69,438,500		$	21,409,838		$	4,621,430		$	167,179		$	(559,751)		$	(25,939,701)

The accompanying notes are an integral part of these consolidated financial statements.

F-5

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SANGUI BIOTECH INTERNATIONAL, INC.
Statements of Cash Flows
				For the Years Ended
				June 30,
				2009			2008
							(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss			$	(2,315,932)		$	(1,105,848)
	Adjustments to reconcile net loss to net cash
	used by operating activities:
		Depreciation			3,311			3,961
		Impairment of inventory			-			78,518
		Bad debt expense			1,321			22,764
		Amortization of beneficial conversion feature			1,545,901			-
	Changes in operating assets and liabilities
		Increase in accounts receivable			(6,335)			16,627
		Increase in inventory			(19,043)			6,472
		Increase in prepaid expenses and other assets			34,198			39,235
		Increase in accounts payable and accrued expenses			(29,914)			(58,575)
			Net Cash Used by Operating Activities		(786,493)			(996,846)
CASH FLOWS FROM INVESTING ACTIVITIES
		Purchases of fixed assets			-			(5,539)
			Net Cash Provided by (Used in) Investing Activities		-			(5,539)
CASH FLOWS FROM FINANCING ACTIVITIES
		Cash received on promissory notes			50,638			762,792
		Increase in stock subscriptions payable			-			19,184
		Common stock sold for cash			72,522			-
		Common stock of subsidiary issued for cash			-			1,053,254
		Change in notes receivable - related			461,503			(492,160)
			Net Cash Provided by Financing Activities		584,663			1,343,070
EFFECTS OF EXCHANGE RATES					(15,534)			(129,465)
		NET DECREASE IN CASH			(217,364)			211,220
		CASH AT BEGINNING OF PERIOD			229,717			18,497
		CASH AT END OF PERIOD		$	12,353		$	229,717
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
	CASH PAID FOR:
		Interest		$	-		$	-
		Income Taxes		$	-		$	-
	NON CASH FINANCING ACTIVITIES:
		Common stock issued for debt		$	2,525,535		$	-

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Sangui Biotech International, Inc., incorporated in Colorado in 1995, and its wholly owned subsidiaries, Sangui Biotech, Inc., SanguiBioTech AG, GlukoMediTech AG, and Sangui BioTech PTE Ltd., (collectively, the "Company") were engaged in the research, development, manufacture, and sales of pharmaceuticals and medical products.

The operations of Sangui BioTech, Inc. ("Sangui USA") were discontinued during 2002 upon the sale of its in vitro immunodiagnostics business and the subsequent merger of Sangui USA with and into the parent company, Sangui BioTech International, Inc., effective December 31, 2002. Sangui BioTech PTE Ltd ("Sangui Singapore") was a regional office for the Company that carried out research and development projects in conjunction with Sangui GmbH and Sangui Singapore. The Company discontinued the operations of Sangui Singapore in August 2002. The Singapore office was closed effective December 31, 2002.

On June 30, 2003, GlukoMediTech AG ("Gluko AG") was merged into Sangui BioTech AG ("Sangui AG"). Effective November 4, 2003, Sangui AG was converted into Sangui BioTech GmbH (Sangui GmbH). After completion of the restructuring, Sangui GmbH, which is headquartered in Witten, Germany, is engaged in the development of artificial oxygen carriers (external applications of haemoglobin, blood substitutes and blood additives) cosmetics and wound management products, in particular wound dressings based on Chitosan and a wound spray based on natural, porcine hemoglobin. The development of glucose implant sensors was abandoned in the course of the financial year 2009.

Going Concern

The Company incurred a net loss applicable to common stockholders of $2,315,932 and used cash in operating activities of $786,493 for the year ended June 30, 2009. These and other 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 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Principles of Consolidation

The consolidated financial statements include the accounts of Sangui BioTech International, Inc. and its wholly-owned foreign subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the respective reporting period. As future events and their effects cannot be determined with precision, actual results could differ from those estimates. Significant estimates made by management are, among others, the realization of receivables, inventories, long-lived assets, and valuation allowance on deferred tax assets.

Risks and Uncertainties

 

The Company's line of future pharmaceutical and cosmetic products (artificial oxygen carriers or blood substitute and additives) as well as other medical 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 products, under development in Germany, will be subject to more stringent regulatory requirements, because they are in vivo products for humans. The Company and its subsidiaries have no experience in obtaining regulatory clearance on these types of products. Therefore, the Company will be subject to the risks of delays in obtaining or failing to obtain regulatory clearance.

F-7

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Financial Instruments

 

The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash and cash equivalents, and accounts payable and accrued expenses. The carrying amount of the Company's cash and cash equivalents and accounts payable and accrued expenses approximate their estimated fair values due to the short-term nature of these financial statements.

Foreign Currency Translation

 

The functional currency of the Company’s Sangui GmbH subsidiary is the local currency, the Euro. Accordingly, assets and liabilities of the subsidiary are translated into U.S. dollars at period-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect for the period. The resulting translation gains or losses are recorded as a component of accumulated other comprehensive income in the consolidated statement of stockholders’ equity (deficit). For the years ended June 30, 2009 and 2008, the Company recognized gains (losses) on translation adjustment in the amount of $32,255 and $(458,442), respectively. There were no gains or losses resulting from foreign currency transactions as of June 30, 2009 and 2008.

Cash and Cash Equivalents

 

The Company considers highly liquid investments with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents. The Company maintains its cash in uninsured 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. The Company had no cash equivalents outstanding as of June 30, 2009 and 2008.

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated or amortized using the straight-line method over the expected useful lives, which range from three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the related lease terms. Depreciation expense for the years ended June 30, 2009 and 2008 was $3,311 and $3,961, respectively. Expenditures for normal maintenance and routine repairs are charged to expense, and significant improvements are capitalized. The cost and related accumulated depreciation of assets are removed from the accounts upon retirement or other disposition; any resulting gain or loss is reflected in the statement of operations.

Patents and Licenses

 

Patents and licenses are recorded at cost and are amortized using the straight-line method over their estimated useful lives, which range from four to eight years. Amortization expense for the year ended June 30, 2008 was $-0-. The amounts were written-down from $2,216 to an ending balance of $-0- during the year ended June 30, 2009, as future cash flows to be derived from the patents and licenses became less certain.

Impairment of Long-Lived Assets

 

Long-lived assets, including property and equipment and certain identifiable intangibles to be held and used are reviewed by the management of the Company for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company evaluates, regularly, whether events and circumstances have occurred that indicate possible impairment and relies on a number of factors, including business plans, economic projections, and anticipated future cash flows. Measurement of the amount of impairment, if any, is based upon the difference between the asset’s carrying value and estimated fair value. As of June 30, 2009 and 2008, management of the Company believes that no impairment has been indicated. There can be no assurances, however, that market conditions will not change or demand for the Company's products will continue which could result in impairment on long-lived assets in the future.

F-8

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

 

The Company derives its revenue primarily from the sale of wound treatment products, and of its cosmetics products. The majority of the Company’s sales are generated via online orders, with credit card payment. The Company recognizes revenues when: (i) persuasive evidence of a sales arrangement exists, (ii) the sales terms are fixed and determinable, (iii) title and risk of loss have transferred, and (iv) collectibility is reasonably assured — generally when products are shipped to the customer, except in situations in which title passes upon receipt of the products by the customer. In this case, revenues are recognized upon notification that customer receipt has occurred. The Company does not have customer acceptance provisions, but it does provide its customers a limited right of return. As warranted the Company accrues an estimated amount for sales returns and allowances at the time of sale based on its ability to estimate sales returns and allowances using historical information. Shipping and handling fees are included as part of net sales. The related freight costs and supplies associated with shipping products to customers are included as a component of cost of goods sold.

Sales Tax Collected from Customers

 

As a part of the Company’s normal course of business, sales taxes are collected from customers. Sales taxes collected are remitted, in a timely manner, to the appropriate governmental tax authority on behalf of the customer. The Company’s policy is to present revenue and costs, net of sales taxes.

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 also expensed as incurred, due to the uncertainty with respect to future cash flows resulting from the patents. Research and development costs totaled $195,581 and $213,614 during the fiscal years ended June 30, 2009 and 2008, respectively.

Income Taxes

 

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are reviewed for recoverability and the Company records a valuation allowance to reduce deferred income tax assets when it is more likely than not that such deferred tax assets will not be realized.

The Company has a foreign subsidiary formed or acquired to conduct or support its business outside the United States. The Company provides for income taxes, net of applicable foreign tax credits, on temporary differences in its investment in foreign subsidiaries which are not considered to be permanently invested outside of the United States.

The Company adopted FIN No. 48 “Accounting for Uncertainty in Income Taxes” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. FIN 48 applies to all tax positions accounted for under FIN 48. Estimated interest and penalties related to the underpayment of income taxes are recorded as a component of provision for income taxes in the consolidated statements of operations. For the years ended June 30, 2009 and 2008, the Company did not recognize any such interest or penalties, nor were any interest or penalties accrued as of June 30, 2009 and 2008.

Basic and Diluted Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share excludes dilution and 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 gives 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 June 30, 2009 and 2008, the Company had no potentially dilutive securities that would affect the loss per share if they were to be included in the loss per share.

F-9

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Segments of an Enterprise and Related Information

 

The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to stockholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers, if any. As of June 30, 2009 and 2008, the Company has one business segment, which is the manufacturing and sales of its wound treatment and cosmetics products.

Inventory

 

Inventory is stated at the lower of cost (computed on a first-in, first-out basis) or market value. Provisions to value the inventory at the lower of the actual cost to purchase or manufacture the inventory, or the current estimated market value of the inventory, are based upon assumptions about future demand and market conditions. The Company also performs evaluations of inventory and records a provision or impairment for estimated excess and obsolete items based upon demand, and any other known factors at the time. During the years ended June 30, 2009 and 2008, the Company recognized impairment of inventory in the amounts of $-0- and $78,581, respectively. As of June 30, 2009 and 2008, inventory was comprised of the following components:

		June 30,
		2009		2008 (Restated)
Raw materials	$	-	$	-
Work-in process		2,708		11,543
Finished goods		27,110		-
Total inventory	$	29,818	$	11,543

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reflected at estimated net realizable value, do not bear interest nor do they generally require collateral. The Company maintains an allowance for doubtful accounts based upon a variety of factors. The Company reviews all open accounts and provides specific reserves for customer collection issues when it believes the loss is probable, considering such factors as the length of time receivables are past due, the financial condition of the customer, and historical experience. The Company also records a reserve for all customers, excluding those that have been specifically reserved for, based upon evaluation of historical losses, which exceeded the specific reserves the Company had established. For the years ended June 30, 2009 and 2008, the Company recognized Bad Debt Expense in the amounts of $1,321 and $22,764, respectively.

 

Fair Value Measures

 

The Company discloses fair value measures for financial assets and financial liabilities reported or disclosed at fair value in the consolidated financial statements on a recurring basis in accordance with Statement of Financial Accounting Standards No. 157, Fair Value Measures, (SFAS 157). The Company prospectively implemented the provisions of SFAS 157 for financial assets and financial liabilities as of July 1, 2008 and elected to defer implementation of the provisions of SFAS 157 for non-financial assets and non-financial liabilities until July 1, 2009 as permitted by FASB Staff Position SFAS 157-2, Effective Date of FASB Statement No. 157. In accordance with SFAS 157, the Company discloses fair value measures based on a hierarchy for categorizing inputs used to measure fair value, whereby Level 1 represents quoted market prices in active markets for identical assets or liabilities; Level 2 represents significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs); and Level 3 represents unobservable inputs in which there is little or no market data and requires the reporting unit to develop its own assumptions.

F-10

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements

 

In May 2008, FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), (FSP APB 14-1). FSP APB 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, FSP APB 14-1 requires retrospective application back to the issuance date of convertible debt. The implementation of FSP APB 14-1 is not anticipated to materially impact the Company’s consolidated financial position or results of operations.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of Statement of Financial Accounting Standards No. 133, (SFAS 161). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s financial position, financial performance, and cash flow. SFAS 161 applies to derivative instruments within the scope SFAS 133 as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosure and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The adoption of the provisions of SFAS 161 is not anticipated to materially impact the Company’s consolidated financial position or results of operations.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations, (SFAS 141(R)). SFAS 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and the liabilities assumed in a business combination. SFAS 141(R) is effective for annual periods beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption. The Company expects the impact of adopting SFAS 141(R) will depend on future acquisitions.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires (i) that noncontrolling (minority) interests be reported as a component of shareholders’ equity, (ii) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations, (iii) that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, (iv) that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value, and (v) that sufficient disclosures are provided that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for annual periods beginning after December 15, 2008 and should be applied prospectively. However, the presentation and disclosure requirements of the statement shall be applied retrospectively for all periods presented. The adoption of the provisions of Statement No. 160 is not anticipated to materially impact the Company’s consolidated financial position and results of operations.

 

In September 2006, SFAS 157 was released and defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Additionally, in October 2008 the FASB issued FASB Staff Position SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, (FSP SFAS 157-3) which clarifies the application of SFAS 157 in a market that is not active. SFAS 157 is applicable under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS 157 were originally to be effective beginning July 1, 2008 and FSP SFAS 157-3 is effective for the year ended June 30, 2009. Subsequently, the FASB provided for a one-year deferral of the provisions for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis. Effective July 1, 2008 and June 30, 2009, the Company implemented the provisions SFAS 157 and FSP FAS 157-3, respectively, for financial assets and financial liabilities reported or disclosed at fair value. The adoption of SFAS 157 and FSP FAS 157-3 for financial assets and liabilities did not have a material impact on the consolidated financial statements.

F-11

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NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements (Continued)

 

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”). FAS 167 amends FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, (“FIN 46 (R)”) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires a qualitative analysis to determine whether an enterprise’s variable interest gives it a controlling financial interest in a variable interest entity. FAS 167 amends certain guidance in FIN 46(R) for determining whether an entity is a variable interest entity. This statement also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. FAS 167 will be effective for fiscal years beginning after November 15, 2009. The adoption of the provisions of FAS 167 is not anticipated to materially impact the Company’s consolidated financial position and results of operations.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“FAS 168”). Under FAS 168, the FASB Accounting Standards Codification (the “Codification”) will become the exclusive source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will supersede all then-existing non-SEC accounting and reporting standards, with the exception of certain non-SEC accounting literature which will become nonauthoritative. FAS 168 is effective for interim and fiscal years ending after September 15, 2009. The adoption of FAS 168 will not have a material impact on the Company’s Financial Statements. All references to U.S. GAAP provided in the notes to the Financial Statements will be updated to conform to the Codification.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS No. 165). SFAS No. 165 provides guidance on management’s assessment of subsequent events and incorporates this guidance into accounting literature. SFAS No. 165 is effective prospectively for interim and annual periods ending after June 15, 2009. The implementation of this standard did not have a material impact on the Company’s financial position and results of operations.

 

 

In June 2009, the FASB issued FAS 166, “Accounting for Transfers of Financial Assets” an amendment of FAS 140. FAS 140 is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets: the effects of a transfer on its financial position, financial performance, and cash flows: and a transferor’s continuing involvement, if any, in transferred financial assets. This statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The adoption of the provisions of FAS 166 is not anticipated to materially impact the Company’s consolidated financial position and results of operations.

Concentrations of Credit Risk

     

During the years ended June 30, 2009 and 2008 the Company had no significant concentrations of sales or receivables from specific customers.

Minority Interests

 

On June 11, 2008, the Company’s wholly-owned German subsidiary, Sangui Biotech GmbH (GmbH) issued 11,400 shares of its previously unissued common stock for cash proceeds of $1,140,759. These shares amount to 9.62% of the GmbH’s total outstanding common stock, which totaled 113,800 shares of as June 30, 2009 and 2008. The Company has accounted for this transaction in accordance with Staff Accounting Bulletin No. 5H, “Accounting for Sales of Stock by a Subsidiary” (“SAB 5H”) and Accounting Research Bulletin No. 51, “Consolidated Financial Statements”. SAB 5H requires that the difference between the carrying amount of the Company’s investment in the subsidiary and the underlying net book value of the subsidiary after the issuance of the shares be recognized either as a gain or loss in the consolidated statement of operations or as a capital transaction. In these instances it is the Company’s policy to consider gains and losses arising from such issuances of shares by a subsidiary as a capital transaction; as such, no gain or loss has been recognized in the income statement. However, due to the fact that the net equity of the GmbH subsidiary was negative at the time the 11,400 shares were issued, the Company has valued the minority interest in the GmbH at zero. As such the Company recorded an increase to additional paid-in capital in the amount of $1,140,759 pursuant to this transaction.

F-12

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NOTE 2 - PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at June 30, 2009 and 2008:

		2009		2008 (Restated)
Technical and laboratory equipment	$	641,326	$	721,310
Leasehold improvements		285,189		320,756
Office equipment and furniture		309,016		347,555
Total property and equipment		1,235,531		1,389,621
Less accumulated depreciation and amortization		(1,232,347)		(1,382,600)
Total property and equipment, net	$	3,184	$	7,021

NOTE 3 - STOCKHOLDERS' EQUITY

Common Stock – During the year ended June 30, 2008, the Company’s Board of Directors resolved to increase the number of authorized shares of common stock from 50,000,00 to250,000,000 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.

Common Stock Subscriptions - During the period ended June 30, 2008 the Company received $19,184 from an unrelated third party in exchange to issue common stock at a future date. This amount has been recorded as a common stock subscription in the Company’s consolidated financial statements. In addition, during the year ended June 30, 2008 the company converted $147,995 in notes payable to common stock subscriptions. Total common stock subscriptions totaled $167,179 as of June 30, 2009 and 2008, all of which is issuable to a single unrelated third-party entity. Subsequent to June 30, 2009 (on August 31, 2009) the Company satisfied its common stock subscriptions obligation in full through the issuance of 1,298,929 shares of common stock.

Common Stock Issuances - During the period ended June 30, 2009, the Company’s Board of Directors resolved to convert $2,367,958 in promissory notes and related accrued interest into 18,163,500 shares of common stock, at conversion rates of $0.06 to $0.24 per share. This issuance satisfied in full the Company’s obligations pursuant to the convertible notes. In addition, the Company issued 1,275,000 shares of common stock for cash at approximately $0.057 per share, yielding total cash proceeds of $72,522 for the period.

Preferred Stock - The Company is authorized to issue 5,000,000 shares of non-voting no par value preferred stock. The Board of Directors has not designated any liquidation value or dividend rates.

Stock Options - From time to time, the Company may issue stock options pursuant to various agreements and other contemporary agreements. At June 30, 2009 and 2008, and during the years ended June 30, 2009 and 2008, no options were issued or outstanding.

NOTE 4 - INCOME TAX PROVISION

 

The Company’s provision for income taxes was $-0- for the years ended June 30, 2009 and 2008 respectively, since the Company incurred net operating losses through June 30, 2009.

 

Income tax expense for the years ended June 30, 2009 and 2008 differed from the amounts computed by applying the U.S. federal income tax rate of 34 percent as follows:

		2009		2008 (Restated)
Income tax benefit at U.S. federal statutory rates	$	(781,259)	$	(375,463)
Effect of:
Foreign tax rate differential		28,513		39,242
Beneficial conversion feature		517,580		-
Change in effective foreign tax rates		-		1,845,757
Increase/(decrease) in valuation allowance		235,932		(1,537,050)
Other, net		(766)		27,514
Provision for income taxes	$	-	$	-

F-13

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NOTE 4 - INCOME TAX PROVISION (Continued)

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at June 30, 2009 and 2008 are presented below:

 

		2009		2008 (Restated)
Deferred tax assets
Net operating losses	$	6,398,882	$	6,162,950
Less valuation allowance		(6,398,882)		(6,162,950)
Net deferred tax assets -			-
Deferred tax liabilities		-		-
Net deferred taxes	$	-	$	-

 

As of June 30, 2009, the Company had net operating loss carryforwards of approximately $7.7 million, $3.4 million and $12.1 million available to offset future taxable federal, state and foreign income, respectively. The federal and state carryforward amounts expire in varying amounts between 2009 and 2029. The foreign net operating loss carryforwards do not have an expiration period. The valuation allowance increased by $236,932 to $6,398,882 during the year ended June 30, 2009.

The Company has evaluated its uncertain tax positions and determined that any required adjustments for unrecognized tax benefits would not have a material impact on the Company’s balance sheet, income statement, or statement of cash flows.

The Company’s tax filings for 2005 through 2009 remain subject to examination by tax authorities for federal income tax purposes and by other major taxing jurisdictions to which we are subject. The Company has identified potential penalties for the late filing of reports to taxing authorities. The Company believes that it is more likely than not the penalties will be waived and accordingly has not accrued the penalties in the financial statements.

NOTE 5 - BASIC AND DILUTED LOSS PER COMMON SHARE

 

The following is a reconciliation of the numerators and denominators of the basic and diluted loss per common share computations for the years ended June 30, 2009 and 2008:

		2009		2008 (Restated)
Numerator for basic and diluted loss per common share – net loss	$	(2,315,932)	$	(1,105,848)
Denominator for basic and diluted loss per common share – weighted average shares		59,280,627		50,000,000
Basic and diluted loss per common share	$	(0.04)	$	(0.02)

NOTE 6 - RELATED PARTY TRANSACTIONS

 

The Company has an agreement with Professor Barnikol, the Company's former President and CEO, pursuant to which he is entitled to 3% royalties of gross revenues earned with any product based on his inventions. No royalties were outstanding, paid or earned in fiscal years 2009 and 2008. The former President and CEO amicably resigned his executive positions with the Company on April 3, 2008, and resigned as a member of the Company’s Board of Directors on September 30, 2008.

Shareholder Loans Receivable

On June 26, 2008, the Company’s German subsidiary paid a total of $86,893 to Mr. Hubertus Schmelz, the managing director of the German subsidiary, who was owed salary due to him by the subsidiary.  This amount was reconciled on January 15, 2009, pursuant to Mr. Schmelz’ purchase of an ownership interest in the German subsidiary.  

The Company advanced a total of $446,166 to Feedback AG, a publicly traded German corporation and also a shareholder of the Company.  This amount was fully paid back and satisfied during the year ended June 30, 2009.

F-14

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NOTE 6 - RELATED PARTY TRANSACTIONS (Continued)

Promissory Notes Payable

   

From July 2, 2007 through March 31, 2009, the Company received cash inflows pursuant to promissory notes with Feedback AG, a German entity of which Thomas Striepe is the chief financial officer. During the period ended June 30, 2009 the entire principal balance, plus accrued interest, of $584,052 was converted into 4,453,500 shares of common stock. During fiscal year 2007, the Company also received cash inflows pursuant to a promissory note with Hubertus Schmelz.  The principal balance of the promissory note, plus related accrued interest, of $431,016 was converted into 3,409,500 shares of common stock during the year ended June 30, 2009.

NOTE 7 - COMMITMENTS AND CONTINGENCIES

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. The Company has recorded a reserve for indemnities and guarantees of $-0- as of June 30, 2009 and 2008.

Leases

 

The Company leases office facilities from an unrelated third party at $7,070 per month. The office lease contract is maintained on a month-to-month basis.

 

The Company leases an automobile for $972 per month. The automobile lease expires on November 11, 2011.

NOTE 8 - STOCK-BASED COMPENSATION

 

The Company has applied the disclosure provisions of Statement of Financial Accounting Standards No. 123(R), "Share Based Payment,” for the years ended June 30, 2009 and 2008. There were no common shares or stock options outstanding, issued or granted to employees during these reporting periods.

On April 28, 2004, the Company adopted the 2004 Employee Stock Incentive Plan (the Plan). Under the terms of this plan the Board was authorized to issue up to 1,000,000 shares of common stock to certain eligible employees of the Company or its subsidiaries. All of these shares were issued pursuant to the plan prior to June 30, 2007.

On September 22, 2008 the Company adopted the 2008 Amended and Restated Long-Term Equity Incentive Plan, whereby the Board was authorized to issue up to 10,000,000 shares of common stock (including incentive stock options) to certain eligible employees, directors, and/or consultants of the Company or its subsidiaries. As of June 30, 2009 the Company had issued no shares pursuant to this Plan.

NOTE 9 - NOTES PAYABLE

During the year ended June 30, 2009 the Company converted $2,367,958 in notes payable and related accrued interest to various entities into 18,163,500 shares of the Company’s common stock, at an average conversion price of approximately $0.13 per share. Of these converted notes, a total of $1,041,140 was due to the related parties Feedback AG ($598,774 total principal balance) and Hubertus Schmelz ($442,366 total principal balance) at June 30, 2008. Pursuant to these convertible notes, the Company recognized a beneficial conversion feature in the amount of $1,522,295 during the year ended June 30, 2009. This amount was recorded to interest expense during the period. The beneficial conversion feature and related interest expense was not recognized until such time that the Company was authorized by the Company shareholders to increase its authorized common shares, as the convertible notes were not able to be converted prior to this increase in authorized shares, as the Company had previously issued 100% of its authorized common shares at the time the convertible notes were issued.

F-15

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NOTE 10 – FOREIGN CURRENCY TRANSLATION

 

During the years ended June 30, 2009 and 2008, the Company has transacted the majority of its business activities in Germany, and the transactions have been primarily consummated in the Euro currency. Due to the fact that the Company’s functional currency is the Euro and its reporting currency is the U.S. dollar, the Company must recognize the effects of variations in foreign currency exchange rates as gains and losses as a component of other comprehensive income (loss), pursuant to FAS 52 “Foreign Currency Translation.” To calculate this other comprehensive income and loss, the Company utilizes the “current method,” whereby assets and liabilities of the German subsidiary are translated from Euro into U.S. dollars at the exchange rate at the balance sheet date. All equity items, other than retained earnings, are specifically identified where possible and exchange rates on transaction dates are implemented. Profit and loss accounts are translated using an average rate for the period. During the years ended June 30, 2009 and 2008, the Company recognized other comprehensive income (loss) of $32,255 and $(458,442), respectively. Such other comprehensive income (loss) had no effect on liquidity.

NOTE 11 - SUBSEQUENT EVENTS (Continued)

 

On August 31, 2009 the Company issued an aggregate of 2,578,949 shares of its Common Stock to three (3) individuals and/or entities, at approximately $ 0.09 per share, in exchange for cash proceeds of $228,972.

 

On October 27, 2009 the Company issued an aggregate of 2,010,000 shares of its Common Stock to two (2) individuals and/or entities, at approximately $ 0.07 per share, in exchange for cash proceeds of $147,636.

 

On November 5, 2009 the Company issued an aggregate of 2,388,476 shares of its Common Stock to five (5) individuals and/or entities, at approximately $0.08 per share, in exchange for cash proceeds of $189,713.

 

On December 17, 2009 the Company issued an aggregate of 708,340 shares of its Common Stock to three (3) individuals and/or entities, at approximately $0.09 per share, in exchange for cash proceeds of $66,436.

 

On February 5, 2010 the Company issued an aggregate of 875,000 shares of its Common Stock to two (2) individuals and/or entities, at approximately $0.10 per share, in exchange for cash proceeds of $88,582.

 

On March 2, 2010 the Company issued an aggregate of 166,670 shares of its Common Stock to one (1) individual and/or entity, at approximately $0.09 per share, in exchange for cash proceeds of $14,764.

 

On May 4, 2010 the Company issued an aggregate of 144,150 shares of its Common Stock to one (1) individual and/or entity, at approximately $0.09 per share, in exchange for cash proceeds of $12,710.

 

On May 14, 2010 the Company issued an aggregate of 327,083 shares of its Common Stock to two (2) individuals and/or entities, at approximately $0.08 per share, in exchange for cash proceeds of $25,489.

 

On July 19, 2010 the Company issued an aggregate of 1,520,000 shares of its Common Stock to various individuals and/or entities, at approximately $0.09 per share, in exchange for cash proceeds of $133,716.

On August 11, 2010 the Company issued an aggregate of 350,115 shares of its Common Stock to two individuals, at approximately $0.12 per share, in exchange for services valued at $40,642.

On August 24, 2010 the Company issued an aggregate of 1,600,000 shares of its Common Stock to three individuals, at approximately $0.09 per share, in exchange for cash and services totaling $138,217.

On October 4, 2010 the Company issued an aggregate of 2,134,000 shares of its Common Stock to various individuals and/or entities, at approximately $0.05 per share, in exchange for cash proceeds of $98,326.

On October 27, 2010 the Company issued an aggregate of 2,346,163 shares of its Common Stock to various individuals and/or entities, at approximately $0.04 per share, in exchange for cash and services totaling $102,800.

F-16

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NOTE 12 - CORRECTION OF AN ERROR

 The Company has restated its financial statements and disclosures for the year ended June 30, 2008 due to an overstatement of inventory and long-term receivables, a misstatement relating to the recognition of beneficial conversion features and accrued interest pertaining to convertible debt, and a misstatement pertaining to accounts payable and accrued expenses. In addition, the Company has corrected an error in which the accumulated other comprehensive income and accumulated deficit figures were misstated. The Company also corrected errors pertaining to June 30, 2007 accumulated deficit and accumulated other comprehensive income figures. The Company has also corrected various typographical errors and made wording changes in the disclosures. The effects of the restatements on the effected accounts are detailed in the tables below:

ASSETS
							Previously
				As Restated			Reported			Adjustments
				2008			2008
CURRENT ASSETS
	Cash			$	229,717		$	229,717	$	-
	Accounts receivable, net				-			5,021		(5,021)
	Inventory				11,543			127,109		(115,566)
	Shareholder loans receivable				533,059			533,059		-
	Prepaid expenses and other assets				31,676			28,627		3,049
		Total Current Assets			805,995			923,533		(117,538)
PROPERTY AND EQUIPMENT, Net					7,021			7,021		-
OTHER ASSETS
	Tax refunds receivable				40,166			40,166		-
	Other non-current assets				22,110			221,208		(199,098)
		Total Other Assets			62,276			261,374		(199,098)
		TOTAL ASSETS		$	875,292		$	1,191,928	$	(316,636)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
							Previously
				As Restated			Reported			Adjustments
				2008			2008
CURRENT LIABILITIES
	Accounts payable and accrued expenses			$	252,615		$	317,378	$	(64,763)
	Accounts payable - related parties				61,163			-		-
	Convertible promissory notes				1,353,111			1,952,841		(599,730)
	Convertible promissory notes - related parties				1,041,140			-		-
	Accrued interest payable				147,366			-		147,366
		Total Current Liabilities			2,855,395			2,270,219		585,176
		TOTAL LIABILITIES			2,855,395			2,270,219		585,176
STOCKHOLDERS' EQUITY (DEFICIT)
	Preferred stock, no par value; 5,000,000 shares
	authorized, -0- shares issued and outstanding				-			-		-
	Common stock, no par value; 250,000,000 shares
	authorized, 69,438,500 and 50,000,000 shares issued
	and outstanding, respectively				18,969,358			18,969,358		-
	Additional paid-in capital				3,099,135			3,138,674		(39,539)
	Stock subscriptions payable				167,179			-		167,179
	Accumulated other comprehensive income				(592,006)			154,272		(746,278)
	Accumulated deficit				(23,623,769)			(23,340,595)		(283,174)
		Total Stockholders' Equity (Deficit)			(1,980,103)			(1,078,291)		(901,812)
		TOTAL LIABILITIES AND STOCKHOLDERS'
		EQUITY (DEFICIT)		$	875,292		$	1,191,928	$	(316,636)

F-17

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NOTE 12 - CORRECTION OF AN ERROR (Continued)

						Previously
			As Restated			Reported			Adjustments
			2008			2008
REVENUES			$	18,588		$	207,176	$	(188,588)
COST OF SALES				45,724			45,724		-
		GROSS PROFIT		(27,136)			161,452		(188,588)
OPERATING EXPENSES
	Research and development			213,614			213,614		-
	Depreciation and amortization			3,961			3,961		-
	Bad debt expense			22,764			-		22,764
	Impairment of inventory			78,518			-		78,518
	General and administrative			715,432			663,947		51,485
		Total Operating Expenses		1,034,289			881,522		152,767
		OPERATING LOSS		(1,061,425)			(720,070)		(341,355)
OTHER INCOME (EXPENSE)
	Interest income			3,500			3,500		-
	Interest expense			(97,923)			(137,591)		39,668
	Other income			50,000			-		50,000
		Total Other Income (Expense)		(44,423)			(134,091)		89,668
		Loss before income taxes and non-controlling
		interest		(1,105,848)			(854,161)		(251,687)
Provision for income taxes				-			-		-
		NET LOSS		(1,105,848)			(854,161)		(251,687)
OTHER COMPREHENSIVE INCOME
	Foreign currency translation adjustments			(458,442)			993,610		(1,452,052)
	Unrealized gain on marketable securities			-			-		-
		Total Other Comprehensive Income (Loss)		(458,442)			993,610		(1,452,052)
		COMPREHENSIVE INCOME (LOSS)	$	(1,564,290)		$	139,449	$	(1,703,739)
		BASIC AND DILUTED
		LOSS PER SHARE	$	(0.02)		$	(0.02)	$	(0)
		WEIGHTED AVERAGE
		NUMBER OF SHARES
		OUTSTANDING		50,000,000			50,000,000		-

F-18

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NOTE 12 - CORRECTION OF AN ERROR (Continued)