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SANGUI BIOTECH INTERNATIONAL INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2014 The following are our critical accounting policies: Revenue Recognition The Company derives revenue primarily from licensing fees on sales of its wound spray product as well as from the sale of its cosmetics products. The wound spray technology is licensed to an entity in which the Company holds a 25 percent equity interest. The Company is presently entitled to royalties on net sales of the wound spray product. The licensing fees are invoiced on a quarterly basis and are recognized as revenues as per the quarter for which the sales were reported by the licensee. 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. 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 $543,071 and $65,010 during the fiscal years ended June 30, 2014 and 2012, 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, 2014 and 2013. The exchange rates used to calculate values and results for the years ended June 30, 2014 and 2013 were as follows (USD1): Year-end Rates Average Period Rates June 30, 2014 0.7325 0.7370 June 30, 2013 0.7688 0.7732 FINANCIAL POSITION Our current assets decreased by $262,389, or 50.2%, from June 30, 2013 to $260,589 at June 30, 2014. The decrease is primarily attributable to a cancellation of notes receivables in the amount of $352,218 during the year ended June 30, 2014 as a payment for consulting services resulting in a corresponding increase in professional fees. The consulting fees related to the testing of our Granulox product in Mexico. We believe that the testing of our products in Mexico will result in additional market penetration of the wound spray product. Our net property and equipment decreased $449 or 100%, from June 30, 2013 to $-0- at June 30, 2014. The decrease is attributable to depreciation expense on information technology equipment. We funded our operations primarily through sales of unregistered securities. The Company's stockholders' equity decreased from $296,342 at June 30, 2013 to $7,276 as of June 30, 2014. The primary reason for the decrease was the Company's issuance of common stock totaling approximately $1.3 million offset by the net loss and non controlling interests of approximately $1.6 million. REVENUES. Revenues increased 27% to $133,470 during the year ended June 30, 2013 from $105,487 during 2013. This increase is due primarily to the income from royalties due from sales of the wound spray product. We incurred Cost of Sales totaling $793 during the 2014 fiscal year, a 93% decrease from the prior year. RESEARCH AND DEVELOPMENT. Research and development expenses increased significantly to $543,071 during the year ended June 30, 2014 from $65,010 during the 2013 fiscal year. This increase is due to the fact that the Company expanded its R&D activities in preparing animal tests aimed at preclinical results for the internal use of its artificial oxygen carriers as well as to the purchase of a comprehensive set of clinical data. OTHER OPERATING EXPENSES. Professional fees for 2014 increased to $650,640 from $304,021 in 2013 due to the transfer of $352,218 of notes receivable for consulting services discussed previously. However general and administrative expenses decreased by $712,893 primarily due to a one-time charge in 2013 for the value of shares issued to consultants, employees and business partners of the Company under the Long Term Incentive Plan. Overall Total Operating Expenses increased by $111,210 or 8.3%. OTHER INCOME (EXPENSE). Other expense decreased by $765,303 from 2013 to a loss of $254,434 in 2014. The decreased loss was primarily attributable to the impairment of receivables from our joint venture in the amount of $1,040,583 as of June 30, 2013 as opposed to a loss on equity investment of $245,800 in 2014. NET LOSS. As a result of the above and other factors, the Company's consolidated net loss attributable to common stockholders was $1,428,764 or $0.01 per common share in 2014, as compared to $2,095,494 or $0.02 per common share in 2013. 4 LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2014, net cash used in operating activities decreased to $760,234 from $841,606 for the year ended June 30, 2013, primarily related to a decrease in impairment of related party receivable. For the year ended June 30, 2014, net cash used in investing activities amounted to $234,634 compared to $880,463 in 2013. This is primarily due to the extending of $910,510 in loans to related and unrelated third parties in 2013 and the investment of additional $240,260 in the Company's subsidiary in 2014. For the year ended June 30, 2014, net cash provided by financing activities decreased to an inflow of $924,060 from an inflow of $1,366,887 for the year ended June 30, 2013. The decrease came about due to a reduction of shares issued for cash in 2014. We had net working capital of $7,276 at June 30, 2014, compared to net working capital of $295,893 at June 30, 2013; the decrease is due to our issuing less common stock for cash during the year as well as to the transfer of notes receivable for consulting services as previously discussed. The Company incurred a net loss applicable to common stockholders of $1,428,764 and used cash in operating activities of $760,234 for the year ended June 30, 2014. 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. While sales of our cosmetics products continued on a low level throughout our 2014 financial year, it is the core strategy of the Company to out license its technologies to industry partners. The current state of the sales efforts in particular with regard to the Granulox product distributed by our 25% joint venture SastoMed GmbH has induced management to believe that income from these agreements may be obtainable in the course of the 2014 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. |