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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB/A-2
REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUER UNDER SECTION 12(g)
OF THE SECURITIES ACT OF 1934
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CORGENIX MEDICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 93-1223466
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12061 TEJON STREET
WESTMINSTER, COLORADO 80234
(303) 457-4345
(Name, address and telephone number of principal executive office)
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY THAT FOLLOWS AT THE
END OF THIS PART.
COMPANY OVERVIEW
Corgenix Medical Corporation ("Corgenix" or the "Company") is a diagnostic
biotechnology company whose principal focus has been the discovery and
development of novel diagnostic markers for the detection and management of
important immunological disorders. Until May 22, 1998, this business was
conducted by and under the name of REAADS Medical Products, Inc., a Delaware
corporation ("REAADS"). On May 22, 1998, REAADS became a subsidiary of Corgenix,
and its name was changed to Corgenix, Inc., when a wholly owned subsidiary of
the Company merged (the "Merger") with and into REAADS. In connection with the
Merger, the Company issued to the REAADS stockholders a total of 6,120,000
shares of the Company's common stock, $.001 par value (the "Common Stock"),
together with the contingent obligation to issue up to 4,000,000 additional
shares of Common Stock upon the occurrence (or non-occurrence) of certain
events. In addition, the REAADS management assumed the management of the
Company. See "Part I. Item 5. Directors, Executive Officers, Promoters and
Control Persons," "Item 7. Certain Relationships and Related Transactions --
Contingent Common Stock " and "Item 8. Description of Securities."
The Company was incorporated under the name Benjun Chemicals Inc. on April
22, 1994 as a wholly owned subsidiary of Superior Equities Limited (the
"Predecessor"). The Predecessor was incorporated on April 9, 1985 under the laws
of the Province of British Columbia, Canada. In 1987 and 1991, the Predecessor
issued a total of 1,957,259 shares of its common stock in two private placements
to sophisticated investors in the Province of British Columbia, Canada. On April
27, 1994, the shareholders of the Predecessor exchanged all of the outstanding
shares of common stock of the Predecessor on a one-for-one basis for shares of
common stock in the Company, and on March 5, 1996, the Company changed its name
to Gray Wolf Technologies, Inc. ("Gray Wolf"). During the three fiscal years
prior to the Merger, Mike M. Mustafoglu, a current director of the Company, was
a director and the president and treasurer of Gray Wolf. However, from the time
of the Predecessor's incorporation until the Merger, neither the Predecessor nor
the Company engaged in any significant business activity other than the search
for acquisition opportunities, and in the three fiscal years prior to the
Merger, the Company did not have any significant assets or liabilities.
In connection with the Merger, the Company offered and sold in a private
transaction (the "Offering") 3,950,000 shares of Common Stock for gross proceeds
of $1,000,000. The net proceeds of such sale, which were approximately $720,000,
were used by the Company to redeem certain preferred stock of REAADS in
connection with the Merger, to repay debt, to reduce accounts payable and for
working capital.
Immediately following the Merger and the Offering, the Common Stock was
held by the following groups of persons in the approximate percentages
indicated:
<TABLE>
<CAPTION>
STOCKHOLDERS(1) NUMBER OF SHARES PERCENTAGE OWNERSHIP(1)
<S> <C> <C>
Former REAADS Stockholders(2) 6,120,000 50.3%
Former Gray Wolf Stockholders 1,957,259 16.1%
Offering Stockholders 3,950,000 32.4%
</TABLE>
(1) Excludes 153,000 shares held by TransGlobal Financial Corporation ("TGF"),
a consultant to the Company, which were received by TGF in consideration of
financial advisory services provided to Gray Wolf in connection with the
Merger.
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(2) Assumes that the former REAADS stockholders will not receive up to
4,000,000 shares of contingent Common Stock. Such contingent Common Stock
is issuable to the former REAADS stockholders upon the occurrence or
non-occurrence of certain events. See "Item 7. Certain Relationships and
Related Transactions -- Contingent Common Stock." If all of such contingent
Common Stock had been issued to the former REAADS stockholders at the time
of the Merger, the former REAADS Stockholders, the former Gray Wolf
Stockholders, and the Offering Stockholders would have held approximately
62.5%, 12.1% and 24.4% of the outstanding shares of Common Stock,
respectively.
The determination of the consideration, including the contingent Common Stock,
paid or payable to the former REAADS stockholders and the determination of the
purchase price of the Common Stock sold in the Offering was made in consultation
with the Company's and REAADS' financial advisors.
Also in connection with the Merger, the Company entered into a consulting
agreement with TransGlobal Financial Corporation ("TGF"). The president and
controlling shareholder of TGF is Mike M. Mustafoglu, who also serves as a
director of the Company. Under the terms of the consulting agreement, TGF
provides advice to the Company regarding financial and business matters,
including assistance with fundraising to implement the Company's business plans,
review and assessment of capitalization, merger and acquisition prospects, and
other transactions, on an exclusive basis. The consulting agreement is effective
for a three-year term ending May 22, 2001. TGF's fee for its financial and
business advisory services is $180,000.00 (payable in 36 monthly installments of
$5,000) plus a transaction fee equal to a percentage of any funds committed to
the Company, the value of any acquisition, or the income generated by any joint
venture, in each case to the extent that TGF assisted the Company in obtaining
such funds, acquisition or venture. See "Item 7. Certain Relationships and
Related Transactions -- TGF Consulting Agreement."
The Company's consulting agreement with TGF also requires the Company to
nominate for election two designees selected by TGF to the Company's Board of
Directors each year during the term of the agreement, and requires that there
shall be no more than five directors of the Company unless TGF consents to a
greater number. The consulting agreement also requires the Company to obtain
TGF's consent to the issuance of more than 5% of any class of its equity
securities. See "Item 7. Certain Relationships and Related Transactions -- TGF
Consulting Agreement."
The Company is also a party to an option agreement with TGF, whereby TGF
has the option to purchase 1,000,000 units, each unit comprised of one share of
the Company's authorized but unissued Series A 5% Convertible Preferred Stock
and one warrant to purchase one share of Common Stock at an exercise price of
$2.00, for an aggregate purchase price of $1,000,000. See "Item 7. Certain
Relationships and Related Transactions -- Option Agreement."
BUSINESS OVERVIEW
The Company's research program has resulted in the successful development
of 23 products currently used in clinical laboratories for the diagnosis and/or
monitoring of four important areas of health care:
- Autoimmune disorders (diseases in which an individual creates
antibodies to one's self, for example systemic lupus erythematosus
("SLE") and rheumatoid arthritis ("RA"));
- Vascular diseases (diseases associated with certain types of
thrombosis or clot formation, for example antiphospholipid syndrome,
deep vein thrombosis, stroke and coronary occlusion);
- Bone and joint diseases (such as osteoporosis and osteoarthritis); and
- Liver diseases (cirrhosis and transplanted organ rejection).
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In addition to its current products, the Company is actively developing new
laboratory tests in other important diagnostic testing areas. See "-- Chugai
Strategic Relationship" and "-- Other Strategic Relationships." In this
connection, the Company manufactures and markets to clinical laboratories and
other testing sites worldwide. Its customers include large and emerging health
care companies such as Chugai Diagnostics Science ("Chugai"), a wholly owned
subsidiary of Chugai Pharmaceuticals Co., Ltd. ("Chugai Pharma"), which owns
approximately 4.6% of the Common Stock of the Company. See "-- Chugai Strategic
Relationship."
Corgenix products are based on its patented and proprietary application of
Enzyme Linked ImmunoSorbent Assay ("ELISA") technology, a clinical testing
methodology commonly used worldwide. All of the Company's current products are
based on this platform technology in a delivery format convenient for clinical
testing laboratories. The delivery format ("Microplate") allows the testing of
up to 96 samples per plate, and is one of the most commonly used formats,
employing conventional testing equipment found in virtually all clinical
laboratories. The availability and broad acceptance of ELISA Microplate products
reduces entry barriers worldwide for the Company's new products that employ this
technology and delivery format. Corgenix's products are sold as "kits" that
include all of the materials required to perform the test except for routine
laboratory chemicals and instrumentation. A test using ELISA technology involves
a series of reagent additions into the Microplate triggering a complex
immunological reaction in which a resulting color occurs. The amount of color
developed in the final step of the test is directly proportional to the amount
of the specific marker being tested for in the patient or unknown sample. The
amount of color is measured and the results calculated using laboratory
instrumentation. The Corgenix technology specifies a process by which biological
materials are attached to the fixed surface of a diagnostic test platform.
Corgenix's diagnostic tests are intended to aid in the identification of
the causes of illness and disease, enabling a physician to select appropriate
patient therapy. Internally and through collaborative arrangements, the Company
is developing additional products that are intended to broaden the range of
applications for its existing products and to result in the introduction of new
products. Corgenix is specifically engaged in the development of a line of
diagnostic products that applies the ELISA technology into a different testing
format. This format involves the addition of a single patient sample into a test
system in which color is developed in a very short period of time with a minimal
number of reagents. This format, unlike the Microplate format, does not require
instrumentation and is better suited for testing outside of a typical testing
laboratory. Testing can be performed by medical personnel such as physicians and
nurses, but also can be designed so that testing can by performed directly by
the patient. This format is referred to as rapid testing ("Rapid Test") as the
results are available in only a few minutes.
Products developed in a Rapid Test format allow the prompt detection of a
variety of medical conditions. Development of this product line will enable the
Company to expand its product base beyond the conventional testing laboratory
into point of care ("POC") market segments, which include physician's office
laboratories ("POL"), and also directly to the medical consumer through retail
distribution, referred to as over-the counter ("OTC").
Since 1990, Corgenix's sales force and distribution partners have sold over
10 million tests worldwide under the REAADS label, as well as labels of other
companies under private label, or original equipment manufacture ("OEM"),
agreements. An integral part of Corgenix's strategy is to work with corporate
partners to develop market opportunities and access important resources. In this
regard, Corgenix has established strategic relationships with a number of
companies, including Chugai, Cambridge Life Sciences ("Cambridge"), a division
of Byk Gulden located in Cambridge, UK, and Helena Laboratories Corporation
("Helena"), a privately held company located in Beaumont, Texas. Corgenix
believes that its relationships with these and other potential partners will
enable Corgenix to enhance its menu of diagnostic products and accelerate its
ability to penetrate the worldwide markets for new products
The Company currently uses the REAADS trademarks and tradenames in the sale
of its products.
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INDUSTRY OVERVIEW
In vitro diagnostic ("IVD") testing is the process of analyzing the
components of a wide variety of body fluids outside of the body to identify the
presence of markers for diseases or other human health conditions. The worldwide
human health IVD market consists of reference laboratory and hospital laboratory
testing, testing in physician offices and the emerging OTC market, in which
testing is done at home by the consumer.
Traditionally, diagnostic testing has been performed in large, high-volume
commercial or hospital-based laboratories using instruments operated by skilled
technicians. Corgenix products in a Microplate format are designed for such
instrumentation and are marketed to these types of laboratories. The
instrumentation and supportive equipment required to use the Corgenix ELISA
tests is relatively simple, and typically is used by a laboratory for many
different products.
One of the fastest growing segments of the human health IVD market is the
market for highly accurate tests that can be used logistically close to the
point of patient care (such as clinics, physician offices, homes, patient
bedsides and emergency rooms) as well as in laboratories. The growth in this POC
market is primarily due to pressure on health care providers to reduce the
overall cost of health care as well as the availability of technology that
enables health care providers to process tests on-site, rather than sending them
to remote laboratories. POC testing helps to reduce overall health care delivery
costs and can improve patient outcomes by enabling the primary caregiver to
determine a diagnosis of the medical condition during the patient's initial
visit, minimizing the time to medical intervention and reducing the need for
additional patient follow-up.
The IVD industry has undergone major consolidation over the last few years.
As a result, the industry is characterized by a small number of large companies
or divisions of large companies that manufacture and sell numerous diagnostic
products incorporating a variety of technologies. In addition, there are many
small diagnostic companies, which generally have limited resources to
commercialize new products. As a result of technological fragmentation and
customer support requirements, Corgenix believes that there may be a substantial
competitive advantage for companies with unique and differentiated technologies
that can be used to generate a broad menu of diagnostic products and that have
developed successful customer support systems.
STRATEGY
Corgenix's primary objective is to apply its proprietary ELISA technology
to the development and commercialization of products for use in a variety of
markets. Corgenix's strategies for achieving this objective include the
following:
APPLY THE COMPANY'S ELISA TECHNOLOGY TO ADDITIONAL DIAGNOSTIC MARKETS.
Corgenix has focused its resources on development of highly accurate tests
in the Microplate format for sale to clinical testing laboratories. The
Company believes it can expand its market focus with the addition of new
tests complementary to the current product line.
DEVELOP A LINE OF RAPID TESTS USING THE COMPANY'S ELISA TECHNOLOGY. The
Company intends to broaden the ELISA application into a line of Rapid Tests
enabling expansion into new market areas including POC and OTC.
EXPAND INTO ADDITIONAL LARGE DIAGNOSTIC MARKET. Corgenix has focused its
product development and sales efforts on the human diagnostic market in
autoimmunity, bone and joint disease, vascular disease, and liver disease.
The Company intends to target other large indication human health
applications (such as cancer,
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infectious diseases and critical care diagnostic tests) through both
expanded internal research and development efforts and collaborations
with strategic partners.
LEVERAGE SALES AND MARKETING RESOURCES. Corgenix maintains a nationwide
marketing and sales organization, which is experienced in selling
diagnostic tests into the laboratory market. The Company expects to expand
this sales organization, adding distribution channels into the outpatient
market. The Company will also expand its product menu with more high value,
quality products through internal development, acquisition or in-licensing
of complementary products and technologies.
CONTINUE TO DEVELOP STRATEGIC ALLIANCES TO LEVERAGE COMPANY RESOURCES.
Corgenix has developed, and expects to continue to develop, strategic
alliances to access complementary resources (such as proprietary markers,
funding, marketing expertise and research and development assistance), to
leverage its technology, expand its product menu and maximize the use of
its sales force.
PURSUE SYNERGISTIC PRODUCT AND/OR TECHNOLOGY ACQUISITIONS. Corgenix intends
to proactively evaluate strategic acquisitions of companies, technologies
and product lines where the Company identifies a strategic opportunity to
expand its core business while increasing revenues and earnings from these
new technologies.
PRODUCTS AND MARKETS
Corgenix and its distribution partners are currently selling ELISA tests in
major markets worldwide. To date, Corgenix's sales force and distribution
partners have sold over 10 million tests since Corgenix first received product
marketing clearance from the United States Food and Drug Administration (the
"FDA") for the first anti-cardiolipin antibody ("aCL") test in 1990. Several
peer reviewed medical publications, abstracts and symposia have been presented
on the favorable technical differentiation of Corgenix's tests over competitive
products.
To extend the product offering for current product lines, and to complement
its premium-priced, existing assays, Corgenix will continue to add products from
strategic partners. Corgenix's current product menu, commercialized under the
trademark "REAADS," includes the following:
AUTOIMMUNE DISEASE PRODUCTS
Corgenix's ELISA Autoimmune Disease Product line consists of nine products
including a screening test for antinuclear antibodies (ANA), and specific tests
to measure antibodies to rheumatoid factor, dsDNA, Sm, SM/RNP, SSA, SSB, Jo-1
and anti-Scl-70. The products are used for the diagnosis and monitoring of
autoimmune diseases including RA, SLE, Mixed Connective Tissue Disease,
Sjogren's Syndrome, Dermatopolymyositis and Scleroderma.
The Company's autoimmune disease products are formatted in the ELISA
Microplate format, and are differentiated from the competition by their user
convenience. Historically, diagnostic tests utilized antiquated technologies
that presented significant limitations for the clinical laboratory environment,
including greater labor requirements and the need for a subjective
interpretation of the results. Corgenix's ELISA Autoimmune Tests overcome these
technology shortfalls, permitting a clinical laboratory to automate its tests,
lowering the laboratory's labor costs as well as providing objectivity to test
result interpretation.
ANTIPHOSPHOLIPID ANTIBODY TESTING PRODUCTS
The Company has five products for antiphospholipid antibody testing, which
in 1997 represented over 58% of Corgenix's total product sales. These include
aCL IgG, aCL IgA, aCL IgM, antiphosphatidylserine ("aPS") IgG and aPS IgM. These
tests are used in the diagnosis of SLE, antiphospholipid syndrome and
thrombosis. The Company has
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completed the development and clinical testing of three additional test kits
that detect human antibodies to Beta 2-Glycoprotein I, and has made Premarket
Notification 510(k) submissions to the FDA with respect to these products. Upon
receipt of marketing clearance letters from the FDA, the Company expects to
manufacture, distribute and market these three new tests to clinical
laboratories worldwide.
Antiphospholipid antibodies are measured in clinical laboratories primarily
using ELISA technology with cardiolipin as the most commonly used antigen. High
levels of these antibodies are seen in venous and arterial thrombosis,
thrombocytopenia and/or recurrent abortion, now considered the main clinical
criteria for the diagnosis of a clinical entity referred to as the
antiphospholipid syndrome. The antiphospholipid syndrome may be seen in
association with an underlying disease (i.e. autoimmune such as SLE or SLE-like
disease), or may be seen in patients without any obvious or apparent disease.
When high serum levels of antiphospholipid antibodies are found in individuals
without any clinical manifestations, it is regarded as an important risk factor
for the development of antiphospholipid syndrome.
The importance of the antiphospholipid syndrome resides in its association
with serious clinical manifestations such as chronic and recurrent venous (deep
vein) thrombosis, as well as arterial thromboembolic disease including heart
attacks, strokes and pulmonary embolism. Thrombocytopenia has been attributed to
the temporary removal of platelets from circulation during a thrombotic episode
(clot formation).
VASCULAR DISEASE PRODUCTS
The Company markets seven tests for vascular diseases. Three products
(Protein C Antigen ELISA, Protein S Antigen ELISA and von Willebrand Factor
Antigen ELISA) are manufactured by Corgenix, and four others (ABP von Willebrand
Factor Activity Test, GTI Platelet Factor 4 Test, and the ABS Thrombus Precursor
Protein and Functional Intact Fibrinogen kits) are manufactured for Corgenix by
other companies. These products are useful in the diagnosis of certain clotting
and bleeding disorders including von Willebrand's Disease (Hemophilia B).
Hemostasis (the normal stable condition in which there is neither excessive
bleeding nor excessive clotting) is maintained in the body by the complex
interaction of the endothelial cells of blood vessels, coagulation cells such as
platelets, coagulation factors, lipids (cholesterol) and antibodies
(autoantibodies). All play important roles in maintaining this hemostasis. In
clinical situations in which an individual demonstrates excessive clotting or
bleeding, a group of laboratory tests is typically performed to assess the
source of the disorder using the tests marketed by the Company.
BONE AND JOINT DISEASE PRODUCTS; LIVER DISEASE PRODUCTS
The Company developed and manufactures the Chugai Hyaluronic Acid
("Hyaluronic Acid" or "HA") Test in a Microplate format in collaboration with
Chugai. This product is currently distributed through the Chugai distribution
network in Japan, and through the Company's United Kingdom subsidiary in the
United Kingdom, and is used in the diagnosis and monitoring of rheumatoid
arthritis and liver cirrhosis.
Hyaluronic Acid is a component of the matrix of connective tissues, found
in synovial fluid of the joints where it acts as a lubricant and for water
retention. It is produced in the synovial membrane and may leak into the
circulation via the lymphatic system where it is quickly removed by specific
receptors located in the liver. Increased serum levels of HA have been described
in patients with rheumatoid arthritis due to increased production from synovial
inflammation, and in patients with liver disease due to interference with the
removal mechanism. Patients with cirrhosis will have the highest serum HA
levels, which correlate with the degree of liver involvement.
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TECHNOLOGY
The Corgenix ELISA application technology was developed to provide the
clinical laboratory with a more sensitive, specific, and objective technology to
measure clinically relevant antibodies in patient serum samples. High levels of
these antibodies are frequently found in individuals suffering from various
immunological diseases, and their serologic determination is useful not only for
specific diagnosis but also for assessing disease activity and/or response to
treatment. To accomplish these objectives, the current Corgenix product line
applies the ELISA technology in a 96-Microplate format as a delivery system.
ELISA provides a solid surface to which purified antigens are attached, allowing
their interaction with specific autoantibodies during incubation. This
antigen-antibody interaction is then objectively measured by reading the
intensity of color generated by an enzymeconjugated secondary antibody and a
chemical substrate added to the system.
The Corgenix technology overcomes two basic problems seen in many other
ELISA systems. First, the material coated onto the plate can be consistently
coated without causing significant alteration of the molecular structure (which
ensures maintenance of immunologic reactivity), and the stability of these
coated antigens on the surface can be maintained (which provides a product shelf
life acceptable for commercial purposes). Corgenix's proprietary immunoassay
technology is useful in the manufacture of ELISA test kits for the detection of
many analytes for the diagnosis and management of immunological diseases. This
same ELISA technology will also be applied to the Rapid Test products allowing
entry into additional market segments.
The Corgenix technology results in products demonstrating performance
characteristics that exceed those of competitive testing procedures. Many
testing laboratories worldwide subscribe to external quality control schemes or
programs conducted by independent, third-party organizations. These programs
typically involve the laboratory receiving unknown test samples on a routine
basis, performing certain diagnostic tests on the samples, and providing results
of their testing to the third party. Reports are generally provided by the third
party that tells the testing laboratory how it compares to other testing
laboratories in the program. Several of the Company's products are included in a
third-party survey periodically conducted by an unaffiliated entity, and
Corgenix's products routinely demonstrate the best standard deviation for its
products when compared to other manufacturers included in such survey.
A Corgenix product typically requires less hands-on time by laboratory
personnel and provides an objective, quantitative or semi-quantitative
interpretation to improve and standardize the clinical significance of results.
The Corgenix proprietary technology will continue to be the mainstay for future
Corgenix diagnostic products. Most of the products in development will
incorporate the basic Corgenix technology, even in alternate delivery formats
(including Rapid Test products).
Additional technologies may be required for some of the newly identified
tests, particularly for the POC business. Management believes that, in
additional to internal expertise, most technology and delivery system
requirements are available through joint venture or licensing arrangements or
through acquisition.
DELIVERY SYSTEMS
All of the current Corgenix products employ the Microplate delivery system
using ELISA technology. This format is universally accepted in clinical
laboratory testing and requires routine equipment currently available in most
clinical labs.
The Company is developing a line of Rapid Test products configured as
single test delivery systems. These products will be intended for testing by a
physician or other medical personnel at the patient's bedside, for example in an
emergency room setting, a general care unit, or an ICU or specialized treatment
site. In this case a sample is obtained
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from the patient and applied directly to a test module so that results can be
read immediately. Rapid Tests can also be configured in a format for home
testing for sale directly to the consumer through OTC retail outlets, such as
pharmacies.
SALES AND MARKETING
Corgenix currently markets and sells its products to the traditional
clinical laboratory market, both hospital based and free standing laboratories.
The Company utilizes a diverse distribution program for its products. Corgenix
labeled products are sold directly to testing laboratories in the United States
through 14 sales representatives.
Internationally, Corgenix labeled products are sold through established
diagnostic companies in Austria, Belgium, Canada, Denmark, Egypt, France,
Germany, Greece, Hong Kong, Hungary, India, Israel, Italy, Japan, Korea, Kuwait,
Mexico, Norway, Peoples Republic of China, Peru, Portugal, Saudi Arabia,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan and the United
Kingdom. Discussions are underway that are expected to provide access to
additional markets in Europe, South America, Asia and the Pacific Rim.
Corgenix's agreements with its international distribution partners are on terms
that are generally terminable by Corgenix if the distributor fails to achieve
certain sales targets. The Company also has established private labeled product
agreements with several United States and European companies. The Company has
international distribution headquarters in the United Kingdom and will add
direct commercialization and distribution in selected additional countries as
appropriate.
The Company has an active marketing and promotion program for its
diagnostic testing products. Corgenix publishes technical and marketing
promotional materials, which it distributes to current and potential customers.
The Company attends major industry trade shows and conferences, and the
Company's scientific staff actively publishes articles and technical abstracts
in peer review journals.
With the planned expansion into a Rapid Test product line, Corgenix expects
to expand its distribution network to sell into the outpatient primary care
market.
MANUFACTURING
Corgenix's manufacturing process for its products utilizes a semi-automated
production line for the manufacturing, assembly and packaging of its ELISA
Microplate products. Corgenix's current production capacity is 10,000 tests per
day with a single eight-hour shift. Since 1990, Corgenix's manufacturing group
has successfully produced over 10 million tests in its Westminster, Colorado
facility, and the Company expects that current manufacturing facilities will be
sufficient to meet expected customer demand for the foreseeable future.
The Company's manufacturing operations are fully integrated and consist of
reagent purification, reagent and Microplate processing, filling, labeling,
packaging and distribution. The Company has considerable experience in
manufacturing its products using its proprietary technology. The Company expects
increases in the demand for its products, and plans to increase its
manufacturing capability while remaining in compliance with regulatory
requirements at acceptable costs to meet that increased demand. The Company also
maintains ongoing investigation of scale-up opportunities for manufacturing to
meet future requirements. Corgenix expects production costs to decline if more
products are added to the product menu in the future, permitting the Company to
achieve greater economies of scale as higher volumes are attained. Corgenix has
registered its facility with the FDA and operates in compliance with the FDA
Quality System Regulations ("QSR") requirements for its products.
The manufacturing process starts with the qualification of raw materials.
The Microplates are then coated and bulk solutions prepared. The components and
the Microplates are checked for performance by the Company's quality control
department and adjustments in the bulk solutions are performed to provide
optimal performance and lot-to-lot consistency. The bulk solutions are then
dispensed and packaged into planned kit configurations. The final packaging
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step in the manufacturing process includes kit assembly, where all materials are
packaged into finished product. The final kit has one final kit performance
performed by the Company's quality control department. The final stage before
product release for sale is quality assurance, verification that all quality
control testing and manufacturing processes have been completed, documented and
have met all performance specifications.
The majority of raw materials and purchased components used to manufacture
the Company's products are readily available. The Company has established good
working relationships with its primary vendors, particularly those that supply
unique or critical components for the Company's products. Corgenix mitigates the
risk of a loss of supply by maintaining a sufficient supply of antibodies and
critical components to ensure an uninterrupted supply for at least three months.
Corgenix also believes that it can substitute a new supplier with regard to any
of these components in a timely manner. However, there can be no assurances that
Corgenix will be able to substitute a new supplier in a timely manner, and
failure to do so could have a material adverse effect on Corgenix's business,
financial condition and results of operations.
Corgenix purchases components for six products (anti-Sm, antiSM/RNP,
anti-SSA, anti-SSB, anti-Jo-1, and anti-Scl-70) from Cambridge and performs
final assembly and shipping at the Company's United Kingdom facility. These
products are warehoused at this facility until shipped directly to customers.
The Company purchases four additional products from other manufacturers. The von
Willebrand Factor Activity Test is manufactured by American Biochemical &
Pharmaceutical Corporation ("ABP"), the Platelet Factor 4 test is manufactured
by GTI, Inc. ("GTI"), and the Thrombus Precursor Protein and Functional Intact
Fibrinogen tests are manufactured by American Biogenic Science ("ABS").
A significant percentage of the Company's product revenues are derived from
sales outside of the United States. International regulatory bodies often
establish varying regulations governing product standards, packaging and
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. As a result of the Company's sales in Europe, the Company intends
to obtain ISO certification and to receive a "CE" mark certification, an
international symbol of quality and compliance with applicable European medical
device directives for certain of its products. The Company is currently
preparing for ISO certification and also expects to receive CE mark
certification.
CHUGAI STRATEGIC RELATIONSHIP
Chugai Diagnostics Science, Co. Ltd. is a wholly owned subsidiary of Chugai
Pharmaceutical Co., Ltd., a Tokyo based pharmaceutical company. The relationship
between Corgenix and Chugai was established in June 1993 with the execution of a
letter of intent to negotiate and execute a series of agreements including a
Manufacturing Memorandum, Stock Purchase Agreement and a Distribution Agreement.
The relationship is a multifaceted strategic affiliation that can be summarized
as follows:
EQUITY OWNERSHIP. In 1993, Chugai Pharma purchased common stock of REAADS
and currently owns approximately 4.6% of the Common Stock. Under the terms of
the September 1, 1993 stock purchase agreement, Chugai has certain rights,
including antidilution rights and rights to a board seat on the Corgenix Board
of Directors.
DISTRIBUTION OF CORGENIX PRODUCTS. In 1993, Corgenix and Chugai executed a
distribution agreement (the "Japanese Distribution Agreement") whereby Corgenix
granted to Chugai certain distribution rights in Japan of Corgenix products. The
distribution rights provide Chugai with non-exclusive rights for certain
existing Corgenix products, and exclusive rights for all future Corgenix
products. The initial term of the Japanese Distribution Agreement is for 7
years, expiring August 26, 2000, with successive one year extension options.
JOINT DEVELOPMENT OF CORGENIX PRODUCTS. In 1993, Corgenix and Chugai
executed a memorandum, which established a joint product development program
whereby Corgenix, in collaboration with Chugai, developed a unique
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second generation immunodiagnostic assay for the measurement of HA. The product
replaced a first generation HA product that was being manufactured and
distributed in Japan by Chugai. This product is used to measure HA in serum to
aid in the diagnosis of certain liver diseases and the monitoring of rheumatoid
arthritis patients. In 1997, Corgenix and Chugai executed a contract research
agreement whereby Corgenix and Chugai made certain technical improvements to the
HA product, and Chugai provided certain financial support.
MANUFACTURING OF CORGENIX PRODUCTS. In 1994, Corgenix and Chugai executed a
manufacturing agreement (the "HA Manufacturing Agreement") whereby Corgenix has
the exclusive right to manufacture the HA product for Chugai for sale in Japan.
Corgenix began the manufacture of the HA product in 1995 and sales of the
product were initiated in Japan by Chugai. The HA Manufacturing Agreement has
been amended several times, and Corgenix now manufactures the HA product for
other distribution outlets to be designated by Chugai. In 1997, sales of the HA
product began in the United Kingdom through Corgenix's sales and distribution
channels. In 1995, Corgenix and Chugai executed a letter agreement whereby
Chugai agreed, under certain conditions, to reimburse Corgenix for the purchase
of certain pieces of equipment required for HA manufacturing.
REGULATORY AFFAIRS. In 1995, Corgenix and Chugai executed a regulatory
letter of understanding whereby Corgenix agreed to manage the regulatory
application prosecution of the HA kit in the United States for Chugai. Corgenix
managed the clinical trial testing of the HA product, and has filed a 510(k)
application on the HA product with the FDA on behalf of Chugai. See "--
Regulation."
HA PRODUCT DISTRIBUTION. In 1997, Corgenix and Chugai executed a
distribution agreement (the "UK Agreement") whereby Corgenix was granted
exclusive distribution rights for the Chugai HA product in the United Kingdom.
The UK Agreement is initially for a two-year period expiring on November 17,
1999, with one-year extension rights. The UK Agreement establishes certain
minimum sales target requirements for Corgenix, and provides early cancellation
rights to Chugai if Corgenix does not meet annual sales targets. The UK
Agreement is the only international distribution rights granted by Chugai.
OTHER STRATEGIC RELATIONSHIPS
In addition to the Chugai strategic relationship, an integral part of
Corgenix's strategy has been and will continue to be entering into other
strategic alliances as a means of accessing unique technologies or resources or
developing specific markets. The primary aspects of Corgenix's corporate
partnering strategy with Chugai and other strategic affiliations include:
- Companies that are interested in co-developing diagnostic tests that
use the Corgenix technology;
- Companies with complementary technologies;
- Companies with complementary products and novel disease markers;
and/or
- Companies with access to distribution channels that supplement
Corgenix's existing distribution channels.
In furtherance of the foregoing strategies, Corgenix has established
strategic relationships with the following companies in addition to Chugai:
CAMBRIDGE LIFE SCIENCES. Cambridge, a division of Byk Gulden and located in
Cambridge, United Kingdom, is a leading manufacturer of immunology and
microbiology diagnostic tests. In 1993, Corgenix and Cambridge entered into an
agreement by which the Company provides to Cambridge certain products that are
sold worldwide under the
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Cambridge label. These products are primarily sold in the United Kingdom, and
in the remainder of Europe through the Byk Gulden distribution network.
Cambridge also manufactures certain products for Corgenix under the Corgenix
label including the anti-Sm, anti-SM/RNP, anti-SSA, anti-SSB, anti-Jo-1, and
anti-Scl-70, all of which are distributed by Corgenix worldwide.
HELENA LABORATORIES CORPORATION. Helena, a privately held company located
in Beaumont, Texas, is one of the world market leaders in clinical
electrophoresis instrumentation and technology. In 1993, Corgenix and Helena
entered into a development and manufacturing agreement pursuant to which
Corgenix developed a series of vascular disease products for joint distribution.
Three of these received FDA clearance in 1997 and one is currently in
development. Corgenix manufactures these products for worldwide distribution
through the Helena network, as well as under the Corgenix label for distribution
through the Corgenix network. Pursuant to the agreement, Helena has the right to
incorporate several of the Company's current products and technology (both those
jointly developed and also other Corgenix products) into a proprietary Helena
instrumentation for sale to hospitals and clinical laboratories. Corgenix and
Helena have also entered into an agreement under which the Company has agreed to
provide additional products to be sold worldwide under the Helena label. There
can be no assurance that the product development program will be successful, and
if successful, that the products developed will achieve broad market acceptance.
AMERICAN BIOCHEMICAL & PHARMACEUTICAL CORPORATION. ABP is a privately held
company located in Marlton, New Jersey that sells a line of diagnostic products
in coagulation and vascular medicine. In June 1998, Corgenix became a
non-exclusive distributor of ABP's von Willebrand Factor Activity in the United
States. Corgenix distributes this product under the Corgenix label through
Corgenix's distribution network, primarily in the United States. This product
complements Corgenix's expanding line of vascular disease products. The initial
term of the distribution arrangement with ABP will expire in June 2001 and it
may be renewed at Corgenix's election for additional successive one-year terms.
ABP also sells this test under the Corgenix label through its own distribution
network. Under the terms of a separate distribution agreement, ABP will sell the
Corgenix von Willebrand Factor Antigen Kit worldwide under the Corgenix label
through its distribution network.
AMERICAN BIOGENETIC SCIENCE ("ABS"). ABS is a publicly traded company
located in Boston, Massachusetts that has developed patented antigen-free
technology. In June 1998, Corgenix became a non-exclusive distributor of ABS's
Thrombus Precursor Protein and Functional Intact Fibrinogen products in the
United States and North America, marketing them through the Corgenix
distribution network. The initial term of the distribution agreement with ABS
will expire in August 1999 and it may be renewed at Corgenix's election for two
additional successive one-year terms. ABS also sells these tests under their own
labeling through a small network of regional distributors.
GTI, INC. GTI is a privately held company located in Brookfield, Wisconsin
that manufactures ELISA diagnostic products. In April 1998, Corgenix and GTI
signed an agreement by which Corgenix became a co-exclusive distributor of GTI's
Platelet Factor 4 ELISA test kit in the United States. The initial term of the
agreement is one year and may be renewed at Corgenix's option. This product is
also part of Corgenix's vascular disease product strategy.
The Company has established OEMs agreements with several international
diagnostic companies. Under these agreements, Corgenix manufactures selected
products under the partner's label for worldwide distribution. These
partnerships include MeditechBioPool (United States), Chromogenix (Sweden),
Medic (Italy), and Schiapparelli Biosystems (The Netherlands).
RESEARCH AND DEVELOPMENT
Corgenix is directing its research and development efforts towards
continuously improving its proprietary platform ELISA technology in the
Microplate format, as well as applying the technology to a Rapid Test format to
address operator ease-of-use and expand the Company's market opportunities. In
that regard, Corgenix has organized
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its research and development department into three major areas: (i) new product
development, (ii) technology assessment, and (iii) technical and product
support.
The product development group is responsible for research and development
of new clinical diagnostic products for commercialization. This group evaluates
the performance of reagents (prepared internally or purchased commercially),
creates working prototypes of potential products, performs internal studies,
participates in clinical trials, produces pilot lots of new products, produces a
validated method that can be consistently manufactured, creates documentation
required for manufacturing and testing of new products, and works closely with
the Company's quality assurance department to satisfy regulatory requirements
and support regulatory clearance. This group includes individuals skilled in
immunology, assay development, protein biochemistry, biochemistry and basic
sciences. Group leaders are also skilled in planning and project management
under FDA-mandated design control. See "-- Regulation."
The technology assessment group is responsible for assessing the
performance of new technologies and determining the technical feasibility of
their introduction by Corgenix. The technology assessment group investigates the
patent / license issues associated with new technologies. This group includes
individuals skilled in immunology, assay development, protein biochemistry,
biochemistry, basic sciences and intellectual property review.
The technical and product support group are responsible for supporting all
products on the market through scientific investigation, and are responsible for
design transfer to manufacturing for all new products developed. This group also
assesses the performance of and validates all externally-sourced products. This
group includes individuals skilled in immunology, assay development, protein
biochemistry, biochemistry and basic sciences. Corgenix maintains facilities to
support its development efforts at its Westminster, Colorado headquarters.
PRODUCTS AND TECHNOLOGY IN DEVELOPMENT
Corgenix intends to expand its product menu through internal development,
development in collaboration with strategic partners and acquisition or
licensing of new products and technologies. Corgenix is currently working with
partners to develop additional tests to supplement the existing product lines.
The following summarizes Corgenix's current product and technology development
programs:
ANTIPHOPHOLIPID ANTIBODY TESTING PRODUCTS
The Company has completed the development of three additional
antiphospholipid products to complement the existing line of five products in
the ELISA Microplate format. These new tests, anti-Beta2 Glycoprotein I - IgG,
anti-Beta2 Glycoprotein I - IgM and anti-Beta2 Glycoprotein I - IgA, will be
marketed for the diagnosis of antiphospholipid syndrome and related
immunological disorders. Corgenix is one of the market leaders in development of
innovative tests in the antiphospholipid market, and these future products will
help ensure the Company's strong position. These new antiphospholipid products
have been found to be more specific for thrombosis and the antiphospholipid
syndrome over the conventional aCL and aPS tests, and will be configured for
sale to hospital based and free-standing independent laboratories. Filing of the
510(k) application on the new tests was made during the third quarter of 1998.
See "-- Regulation."
VASCULAR DISEASE TESTS
The Company has entered into a joint development agreement to develop
additional assays for the measurement of selected coagulation factors that are
significant in the diagnosis and treatment of certain clotting and bleeding
disorders. The measurement of Free Protein S using a monoclonal antibody
provides a more direct and specific assay for the functionally active "free"
form of Protein S in the assessment of thrombosis. This project is currently at
the preclinical stage with FDA filing expected during the fourth quarter of
1998. These tests will use the Company's ELISA
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format and will provide significant improvement over existing technology in
the market. These assays will also be formatted as Rapid Tests for the POC
market. The Company is also is early stage development of several unique
immunological tests to measure risk of coronary artery disease and stroke.
These markers may prove to be far more specific and functional than
conventional cholesterol or lipid testing, and could significantly change the
risk assessment market worldwide.
Two of the products in early stage development are anti-oxidized LDL and
Lp(a). Atherosclerotic cardiovascular disease is the leading cause of death in
the industrialized world and in the United States alone there are over 1.5
million individuals suffering a heart attack every year. Application of Corgenix
technology to the measurement of anti-oxidized LDL antibodies and Lp(a) will
provide more clinically relevant tests compared with current conventional tests
for cholesterol.
RAPID TEST DELIVERY SYSTEM
Corgenix believes that the Rapid Test delivery technology will
significantly expand the POC market opportunity. This technology will allow the
introduction of next generation products, which will require a substantially
shorter period to develop, test and submit for regulatory approval. Each test
piece will contain all of the reagents necessary to conduct the assay, following
the simple step of sample addition. If successful, this technology could enable
the Company to make products that are easier to use and provide immediate
analysis of biological samples. Initial development will focus on qualitative
measurement of markers that aid in the establishment of the diagnosis or
prognosis of disease conditions. Products in early stage development include
tests for pregnancy, diagnosis of certain infectious diseases, and tests to
measure cardiac markers.
LIVER DISEASE MARKERS
The Company has a letter of intent with a medical university that, if
consummated, would grant Corgenix exclusive worldwide marketing rights to a
recently discovered, very sensitive liver enzyme. In early clinical testing,
this enzyme appears to be a unique indicator of the pending rejection of a
transplanted liver, and could also be a sensitive indicator of other causes of
cellular damage to liver tissue. Corgenix expects that development of a
diagnostic test for this enzyme, in multiple formats to address many market
segments, may begin in late 1998.
Corgenix's goal is to continue to develop and bring to the marketplace
innovative, unique diagnostic products with significant market potential,
resulting in more effective and less costly health care delivery. The Company
will take advantage of the many advances in biotechnology by developing new
products for the diagnosis and treatment of immunological disease. As discussed
above, future projects will include expansion into additional high growth areas
including infectious diseases.
ACQUISITIONS
On September 17, 1998, the Company executed a letter of intent to acquire
all of the assets of Integrated Diagnostics, Inc., a privately held, Baltimore,
Maryland diagnostics company, for cash and restricted Common Stock valued at
approximately $2.2 million. The closing of the transaction is dependent upon the
results of the Company's due diligence and upon the negotiation and execution of
a definitive agreement. There can be no assurance that this transaction will be
successfully consummated. See "Part I. Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward Looking
Statements and Risk Factors -- Risks Regarding Potential Future Acquisitions."
The Company continually evaluates a variety of company, product and/or
technology acquisition opportunities. Although the Company intends to pursue
acquisitions that provide strategic opportunities to expand the Company's core
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business while increasing revenues and earnings from these new technologies,
there can be no assurance that it will be successful in doing so. See "Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Forward Looking Statements and Risk Factors -- Risks Regarding
Potential Future Acquisitions."
COMPETITION
Competition in the human medical diagnostics industry is significant. The
Company's competitors range from development stage diagnostics companies to
major domestic and international pharmaceutical companies. Many of these
companies have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than Corgenix. In
addition, many of these companies have name recognition, established positions
in the market and long standing relationships with customers and distributors.
The diagnostics industry has recently experienced a period of consolidation
during which many of the large domestic and international pharmaceutical
companies have been acquiring mid-sized diagnostics companies, further
increasing the concentration of resources. However, competition in diagnostic
medicine is highly fragmented, with no company holding a dominant position in
autoimmune, vascular diseases or bone and joint disease. There can be no
assurance that new, superior technologies will not be introduced that could be
directly competitive with or superior to Corgenix's technologies.
Corgenix's competitors include Inova Diagnostics, Inc., Sanofi Diagnostics
Pasteur (a licensee of Corgenix technology under a paid up license), INCSTAR
Corporation, Pharmacia Upjohn, Diagnostica Stago, American Bioproducts, Helena
Laboratories Corporation (an existing licensee of Corgenix technology), Organon
Teknika, Helix Diagnostics, Hemagen Diagnostics, Sigma Diagnostics and Diamedix
Corporation. Some of these companies are larger than Corgenix and have
substantial resources and market presence. Corgenix competes against these
companies on the basis of product performance and customer service.
PATENTS, TRADE SECRETS AND TRADEMARKS
Corgenix has built a strong patent and intellectual property position
around its proprietary application of ELISA technology. Corgenix holds five
United States patents that expire beginning in 2004 and ending in 2010. Corgenix
has no pending patent applications. The Hyaluronic Acid product is protected by
U.S., Japanese and European patents held by Chugai. As part of the agreement
with Chugai, Corgenix has a license to use the Chugai patents to manufacture
this product.
Patent applications in the United States are maintained in secrecy until
patents issue. There can be no assurance that Corgenix's patents, and any
patents that may be issued to it in the future, will afford protection against
competitors with similar technology. In addition, no assurances can be given
that patents issued to Corgenix will not be infringed upon or designed around by
others or that others will not obtain patents that Corgenix would need to
license or design around. If the courts uphold existing or future patents
containing broad claims over technology used by Corgenix, the holders of such
patents could require Corgenix to obtain licenses to use such technology. See
"Part I. Item 2. Management's Discussion and Analysis -- Forward-Looking
Statements and Risk Factors -- Uncertainty of Protection of Patents, Trade
Secrets and Trademarks."
Corgenix has registered its trademark "REAADS" on the principal federal
trademark register and with the trademark registries in many countries of the
world. This trademark is eligible for renewal in 2006 and will expire in 2007.
The Company has a federal trademark registration pending for the name
"Corgenix."
The Company intends to obtain patent protection for its products and
processes, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Corgenix also relies on trade secrets and
proprietary know-how in its manufacturing processes. The Company requires each
of its employees, consultants and advisors to
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execute a confidentiality agreement upon the commencement of any employment,
consulting or advisory relationship with the Company. Each agreement provides
that all confidential information developed or made known to the individual
during the course of the relationship will be kept confidential and not
disclosed to third parties except in specified circumstances. In the case of
employees, the agreements provide that all inventions conceived of by an
employee shall be the exclusive property of the Company.
REGULATION
The testing, manufacturing and sale of Corgenix's products are subject to
regulation by numerous governmental authorities, principally the FDA and foreign
regulatory agencies. The FDA regulates the clinical testing, manufacture,
labeling, distribution and promotion of medical devices, which includes
diagnostic products. Corgenix is restricted from marketing or selling diagnostic
products in the United States until clearance is received from the FDA. In
addition, various foreign countries in which Corgenix's products are or may be
sold impose local regulatory requirements. The preparation and filing of
documentation for FDA and foreign regulatory review can be a lengthy, expensive
and uncertain process.
In the United States, medical devices are classified by the FDA into one of
three classes (Class I, II or III) on the basis of the controls deemed necessary
by the FDA to ensure their safety and effectiveness in a reasonable manner.
Class I devices are subject to general controls (e.g., labeling, premarket
notification and adherence to QSR requirements). Class II devices are subject to
general and special controls (e.g., performance standards, post-market
surveillance, patient registries and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and effectiveness (e.g., life-sustaining, life-supporting and
implantable devices or new devices that have been found not to be substantially
equivalent to legally marketed devices). All of Corgenix's current products and
products under development are or are expected to be classified as Class I or
Class II devices.
Before a new device can be introduced in the market, the Company must
obtain FDA clearance or approval through either clearance of a 510(k) premarket
notification or approval of a product marketing approval ("PMA") application,
which is a more extensive and costly application. All of the Company's products
have been cleared using a 510(k) application, and the Company expects that most,
if not all, future products will also qualify for clearance using a 510(k)
application.
It generally takes from four to 12 months from submission to obtain 510(k)
premarket clearance but may take longer. The FDA may determine that a proposed
device is not substantially equivalent to a legally marketed device or that
additional information is needed before a substantial equivalence determination
can be made. A "not substantially equivalent" determination, or a request for
additional information, could prevent or delay the market introduction of new
products that fall into this category. For any devices that are cleared through
the 510(k) process, modifications or enhancements that could significantly
affect safety or effectiveness, or constitute a major change in the intended use
of the device, will require new 510(k) submissions. There can be no assurance
that Corgenix will be able to obtain necessary regulatory approvals or
clearances for its products on a timely basis, if at all, and delays in receipt
of or failure to receive such approvals or clearances, the loss of previously
received approvals or clearances, limitations on intended use imposed as a
condition of such approvals or clearances, or failure to comply with existing or
future regulatory requirements could have a material adverse effect on
Corgenix's business, financial condition and results of operations. See "Part I.
Item 2. Management's Discussion and Analysis -- Forward-Looking Statements and
Risk Factors -- Governmental Regulation of Diagnostic Products."
Corgenix's customers using diagnostic tests for clinical purposes in the
United States are also regulated under the Clinical Laboratory Information Act
of 1988 (the "CLIA"). The CLIA is intended to ensure the quality and reliability
of all medical testing in laboratories in the United States by requiring that
any health care facility in which testing is performed meets specified standards
in the areas of personnel qualification, administration, participation in
proficiency
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testing, patient test management, quality control, quality assurance
and inspections. The regulations have established three levels of regulatory
control based on test complexity: "waived," "moderately complex" and "highly
complex." Corgenix's current ELISA tests are categorized as "moderately complex"
tests for clinical use in the United States. Under the CLIA regulations, all
laboratories performing high or moderately complex tests are required to obtain
either a registration certificate or certification of accreditation from the
United States Health Care Financing Administration ("HCFA"). There can be no
assurance that the CLIA regulations and future administrative interpretations of
CLIA will not have an adverse impact on the potential market for Corgenix's
future products. Corgenix expects that the to be developed Rapid Tests will be
categorized as CLIA "waived" tests. Laboratories performing CLIA "waived" tests
face less stringent registration and certification requirements.
Corgenix also is subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that Corgenix will
not incur significant costs to comply with laws and regulations in the future or
that such laws or regulations will not have a material adverse effect upon
Corgenix's business, financial condition and results of operations.
REIMBURSEMENT
Corgenix's largest market segment is the hospital based and free standing
independent laboratory market. Payment for testing in this segment is largely
based on third party payor reimbursement. The site, which performs the test,
will submit an invoice to the patient's insurance provider (or the patient if
not covered by a program). Each diagnostic procedure (and in some instances,
specific technologies) is assigned a current procedural terminology ("CPT") code
by the American Medical Association. Each CPT code is then assigned a
reimbursement level by HCFA. Third party insurance payors typically establish a
specific fee to be paid for each code submitted. Third party payor reimbursement
policies are generally determined with reference to the reimbursement for CPT
codes for Medicare patients, which themselves are determined on a national basis
by HCFA.
EMPLOYEES
As of June 18, 1998, Corgenix employed 32 employees, 27 full time and 5
part-time. Of these, 6 hold advanced scientific or medical degrees. None of
Corgenix's employees is covered by a collective bargaining agreement. Corgenix
believes that it maintains good relations with its employees.
FACILITIES
Corgenix currently leases approximately 12,000 square feet of space in one
building in Westminster, Colorado, which is used for its administrative offices,
research and development facilities and manufacturing operations. The lease
expires May 30, 2001 with renewal options. Corgenix also leases approximately
1,400 square feet of office space in Peterborough, Cambridgeshire, United
Kingdom under a lease that expires September 25, 2001. Corgenix believes that
suitable additional or alternative space will be available on commercially
reasonable terms as needed, but that its existing facilities will be sufficient
for its operational purposes through the end of the leases.
LEGAL PROCEEDINGS
Corgenix is not a party to any material litigation or legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in this Registration
Statement.
GENERAL
Since the Company's inception, Corgenix has been primarily involved in the
research, development, manufacturing and marketing of diagnostic tests for sale
to clinical laboratories. Corgenix currently markets 23 products covering
autoimmune disorders, vascular diseases, bone and joint diseases and liver
disease. Corgenix's products are sold in the United States through the Company's
marketing and sales organization that includes 14 sales representatives,
internationally through an extensive distributor network, and to several
significant OEM partners.
Corgenix manufactures products for inventory based upon expected sales
demand, shipping products to customers, usually within 24 hours of receipt of
orders. Accordingly, Corgenix does not operate with a backlog, and the Company
anticipates that its inventory will increase significantly in the future.
Except for the fiscal year ending June 30, 1997, the Company has
experienced revenue growth since its inception, primarily from sales of products
and contract revenues from strategic partners. Contract revenues consist of
licensing fees, milestone payments, and royalty payments from research and
development agreements with strategic partners.
Beginning in fiscal year 1996, Corgenix added third-party OEM licensed
products to its diagnostic product line, licensing six diagnostic products from
Cambridge. In 1998, the Company added four additional products to its product
line through OEM licenses from other third party manufacturers. Corgenix expects
to expand its relationships with other companies in the future to gain access to
additional products.
Although Corgenix has experienced growth in revenues every year since 1990
except for 1997, there can be no assurance that, in the future, Corgenix will
sustain revenue growth or achieve profitability. Corgenix's results of
operations may fluctuate significantly from period-to-period as the result of
several factors, including: (i) whether and when new products are successfully
developed and introduced, (ii) market acceptance of current or new products,
(iii) seasonal customer demand, (iv) whether and when Corgenix receives R&D
milestone payments and license fees from strategic partners, (v) changes in
reimbursement policies for the products that Corgenix sells;,(vi) competitive
pressures on average selling prices for the products that Corgenix sells, and
(vii) changes in the mix of products that Corgenix sells.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
NET SALES. From its inception in 1990, the Company has achieved average
annual net sales growth of 30.9%. Net sales for the year ended June 30, 1998 was
$2.59 million, a 6.4% increase from $2.44 million in 1997. A component of net
sales, product sales, increased 13.7% to $2.58 million in 1998 from $2.27
million in 1997. Sales of Hyaluronic Acid product (HA) to Chugai for
distribution in Japan increased 14.3% from $671,000 in 1997 to $767,000 in 1998,
due to an increased marketing effort by Chugai following resolution of a
component design flaw in 1997.
Also included in net sales are partnership payments from strategic
alliances that decreased from $200,000 in 1997 to $46,000 in 1998 due to timing
of ongoing development projects.
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COST OF SALES. Cost of sales decreased 31.6% to $902,000 in 1998 from
$1,318,000 in 1997, due primarily to resolution of the design flaw in a critical
raw material component used in the HA product. In 1997, an additional $479,000
was charged to cost of sales because of this problem. The gross profit increased
from 45.9% in 1997 to 65.2% in 1998 due to this resolution. Excluding $479,000
in expense to correct the design flaw, gross profit would have been
approximately 65.5% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses were flat,
increasing only 2.0% to $387,000 in 1998 from $380,000 in 1997. During 1998,
several ongoing projects remained in development but no new projects were added
during this period.
SELLING AND MARKETING. Selling and marketing expenses were also flat,
$751,000 in 1998 versus $742,000 in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
82.6% to $1,322,000 in 1998 from $724,000 in 1997, due in part to legal,
accounting and other costs relating to strategic partnering activities,
financing activities and the costs of transforming into a public company.
Transaction costs of $342,000 for merger expenses and success fees are included
in general and administrative expenses in 1998. These costs are expensed due to
the assets of both entities being reflected in the financial statements at their
historical carrying amounts, due to the merger transaction with a "shell"
company.
OTHER EXPENSES. Other expenses increased 60.5% to $152,000 in 1998 from
$95,000 in 1997 due primarily to higher interest expense resulting from higher
debt levels throughout the year. Interest expense increased to $150,000 in 1998
from $50,000 in 1997, while factoring expenses decreased to $2,000 in 1998 from
$45,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
sales of common and preferred stock, raising net proceeds of approximately $2.7
million from sales of these securities. In 1998, the Company raised $1,000,000
before offering expenses through a Reg. 504 offering related to the Merger
Transaction.
Corgenix has also received financing for operations from sales of
diagnostic products and agreements with strategic partners. At June 30, 1998 and
June 30, 1997, Corgenix had invested $215,084 and $349,427, respectively, (net
of accumulated depreciation) in leasehold improvements, laboratory and computer
equipment and office furnishings and equipment to support its development and
administrative activities.
Corgenix's principal sources of liquidity are short and long term debt
financing, of which $1,141,114 remained outstanding as of June 30, 1998.
Management believes that the Company needs to enter into new debt agreements
and/or sell additional equity securities in fiscal year 1999 to maintain
appropriate liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards, No. 130, REPORTING COMPREHENSIVE
INCOME ("Statement No. 130"), effective for years beginning after December 15,
1997. Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The Company is not required and therefore has not yet
adopted Statement No. 130. The Company will comply with the reporting and
display requirements under this statement when required.
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<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards,
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
("Statement No. 131"), effective for years beginning after December 15, 1997.
Statement No. 131 establishes standards for reporting information about
operating segments and the methods by which such segments were determined. The
Company is not required and therefore has not yet adopted Statement No. 131. The
Company will comply with the reporting requirements under this statement when
required.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS ("Statement No. 132"), effective for fiscal years
beginning after December 15, 1997. Statement No. 132 revises disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Statement No. 132 standardizes the
disclosure requirements and suggests combined formats for presentations of such
disclosures. The Company is not required and therefore has not yet adopted
Statement No. 132. The Company will comply with the reporting requirements under
this statement when required.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (the "SOP") REPORTING ON THE COSTS OF START-UP
ACTIVITIES, effective for fiscal years beginning after December 15, 1998 and
encouraging earlier adoption. The SOP broadly defines start-up activities as
those one time activities related to, among other things, opening a new
facility. In general, the SOP requires the Company to expense as incurred those
costs. Currently, the Company expenses such costs.
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (Statement No.
133), effective for fiscal years beginning after June 15, 1999. Statement No.
133 establishes accounting and reporting standards for derivative instruments
and requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company has not yet adopted Statement No. 133. The Company
believes the accounting and reporting standards required by this statement will
not be significant. The Company will comply with the accounting and reporting
requirements under this statement when required.
YEAR 2000 EFFECT
The Year 2000 will impact computer programs written using two digits rather
than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence. Corgenix recently reviewed all of its software for exposure to Year
2000 issues, including network and workstation software, and does not believe
that such software poses significant risks associated with the Year 2000
problem. Corgenix primarily uses third-party software programs written and
updated by outside firms, each of whom has stated that its software is Year 2000
compliant. To assure that all software programs can successfully work in
conjunction with each other using the Company's computer hardware after the year
1999, Corgenix tested all of its software and hardware during the third quarter
of 1998 using a combination of past and future dates. Such testing revealed that
some of the Company's computer hardware could not correctly process dates after
December 31, 1999. The Company will be required to replace such equipment, at a
cost not expected to exceed $20,000, before December 31, 1999.
The Company has set in motion an effort to obtain written assurances from
the Company's material suppliers regarding their Year 2000 compliance. As a
result of this effort, the Company expects to generate by the second quarter of
1999 a validated list of suppliers that are Year 2000 compliant, and will use
the entities on this list to obtain its supplies. If any of the Company's
single-source suppliers are not Year 2000 compliant by the third quarter of
1999,
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<PAGE>
the Company plans to increase its inventories of the materials provided by
such suppliers and to carry a one-year supply of such materials.
The Company has also begun the process of obtaining written assurances from
the Company's material customers regarding their Year 2000 compliance. In
addition, the Company has instituted a requirement that all new customers
placing standing orders of the Company's products must certify in writing that
they are Year 2000 compliant or provide written assurances as to the steps they
are taking to become Year 2000 compliant. The Company's goal is to obtain by the
second quarter of 1999 written assurances from customers representing at least
85% of its revenues that such customers are Year 2000 compliant or that they are
expecting to become Year 2000 compliant before December 31, 1999.
Although the Company has taken significant steps to address the Year 2000
problem, there can be no assurance that the failure of the Company and/or its
material customers or suppliers to timely attain Year 2000 compliance will not
materially reduce the Company's revenues or income, or that these failures
and/or the impacts of broader compliance failures by telephone, mail, data
transfer or other utility or general service providers or government or private
entities will not have a material adverse effect on the Company.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Registration Statement includes statements that are not purely
historical and are "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1934, as amended, including statements regarding
the Company's expectations, beliefs, intentions or strategies regarding the
future. All statements other than historical fact contained in this Registration
Statement, including, without limitation, statements regarding future product
developments, acquisition strategies, strategic partnership expectations,
technological developments, the availability of necessary components, research
and development programs and distribution plans, are forward-looking statements.
All forward-looking statements included in this Registration Statement are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update such forward-looking statements. Although the
Company believes that the assumptions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct or that the Company will take any
actions that may presently be planned.
Certain factors that could cause actual results to differ materially from
those expected include the following:
LOSSES INCURRED; FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company has incurred operating losses and negative cash flow from
operations for the last three fiscal years. Losses incurred by the Company
since its inception have aggregated over $3 million, and there can be no
assurance that the Company will be able to generate positive cash flow to
fund its operations in the near future. Assuming no significant uses of cash
in acquisition activities or other significant changes, the Company believes
it will have sufficient cash to satisfy its funding needs for at least the
next four months. If the Company is not able to operate profitably and
generate a positive cash flow, however, it may need to raise additional
capital to fund its continuing operations. If the Company needs additional
financing to meet its requirements, there can be no assurance that it will be
able to obtain such financing on terms satisfactory to it, if at all.
Alternatively, any additional equity financing may be dilutive to existing
stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company might be required
to limit its research and development activities, which could have a material
adverse effect on the future of the Company's business.
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<PAGE>
DEPENDENCE ON COLLABORATIVE RELATIONSHIPS AND THIRD PARTIES FOR PRODUCT
DEVELOPMENT AND COMMERCIALIZATION
The Company has entered into licensing and research and development
agreements with collaborative partners, from which it derived a significant
percentage of its revenues in 1997. Pursuant to these agreements, the Company's
collaborative partners have specific responsibilities for the costs of
development, promotion, regulatory approval and/or sale of the Company's
products. The Company will continue to rely on present and future collaborative
partners for the development of products and technologies. There can be no
assurance that the Company will be able to negotiate future such collaborative
arrangements on acceptable terms, if at all, or that current or future
collaborative arrangements will be successful. To the extent that the Company is
not able to establish such arrangements, it could experience increased capital
requirements or be forced to undertake such activities at its own expense. The
amount and timing of resources that any of these partners devotes to these
activities will generally be based on progress by the Company in its product
development efforts. Usually, collaborative arrangements may be terminated by
the partner upon prior notice without cause and there can be no assurance that
any of these partners will perform its contractual obligations or that it will
not terminate its agreement. With respect to any products manufactured by third
parties, there can be no assurance that any third-party manufacturer will
perform acceptably or that failures by third parties will not delay clinical
trials or the submission of products for regulatory approval or impair the
Company's ability to deliver products on a timely basis. See "-- Dependance on
Distribution Partners for Sales of Diagnostic Products in International
Markets," "Part I. Item 1. Description of Business -- Chugai Strategic
Relationship" and "-- Other Strategic Relationships."
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF ADDITIONAL PRODUCTS
The Company's business strategy includes the development of additional
diagnostic products. The Company's success in developing new products will
depend on its ability to achieve scientific and technological advances and to
translate these advances into commercially competitive products on a timely
basis. Development of new products requires significant research, development
and testing efforts. The Company will have limited resources to devote to the
development of products and, consequently, a delay in the development of one
product or the use of resources for product development efforts that prove
unsuccessful may delay or jeopardize the development of other products. Any
delay in the development, introduction and marketing of future products could
result in such products being marketed at a time when their cost and performance
characteristics would not enable them to compete effectively in their respective
markets. If the Company is unable, for technological or other reasons, to
complete the development and introduction of any new product or if any new
product is not approved or cleared for marketing or does not achieve a
significant level of market acceptance, the Company's results of operation could
be materially and adversely affected. See "Part I. Item 1. Description of
Business -- Products and Markets" and "-- Regulation."
COMPETITION IN THE DIAGNOSTICS INDUSTRY
Competition in the human medical diagnostics industry is, and is expected
to remain, significant. The Company's competitors range from development stage
diagnostics companies to major domestic and international pharmaceutical
companies. Many of these companies have financial, technical, marketing, sales,
manufacturing, distribution and other resources significantly greater than those
of the Company. In addition, many of these companies have name recognition,
established positions in the market and long standing relationships with
customers and distributors. Moreover, the diagnostics industry has recently
experienced a period of consolidation, during which many of the large domestic
and international pharmaceutical companies have been acquiring mid-sized
diagnostics companies, further increasing the concentration of resources. There
can be no assurance that technologies will not be introduced that could be
directly competitive with or superior to the Company's technologies. See "Part
I. Item 1. Description of Business -- Competition."
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<PAGE>
GOVERNMENTAL REGULATION OF DIAGNOSTICS PRODUCTS
The testing, manufacture and sale of the Company's products is subject to
regulation by numerous governmental authorities, principally the FDA and certain
foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic
Act, and the regulations promulgated thereunder, the FDA regulates the
preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. The Company will not be able to commence marketing
or commercial sales in the United States of new products under development until
it receives clearance from the FDA. The testing for, preparation of and
subsequent FDA regulatory review of required filings can be a lengthy, expensive
and uncertain process. Noncompliance with applicable requirements can result in,
among other consequences, fines, injunctions, civil penalties, recall or seizure
of products, repair, replacement or refund of the cost of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals, and criminal prosecution. See "Part I. Item 1. Description of
Business -- Regulation."
There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances for its products on a timely basis, if at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, limitations
on intended use imposed as a condition of such approvals or clearances or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on the Company's business.
DEPENDENCE ON DISTRIBUTION PARTNERS FOR SALES OF DIAGNOSTIC PRODUCTS IN
INTERNATIONAL MARKETS
The Company has entered into distribution agreements with collaborative
partners in which Corgenix has granted distribution rights for certain Corgenix
products to these partners within specific international geographic areas.
Pursuant to these agreements, the Company's collaborative partners have certain
responsibilities for market development, promotion, and sales of the products.
If any of these partners fails to perform its contractual obligations or
terminates its agreement, this could have a material adverse effect on the
Company's business, financial condition and results of operation.
Additionally, the Company intends to expand its distribution network into
additional countries and into different market segments including the POC
market. There can be no assurance that Corgenix will be successful in the
expansion of the distribution network, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operation.
GOVERNMENTAL REGULATION OF MANUFACTURING AND OTHER ACTIVITIES
As a manufacturer of medical devices for marketing in the United States,
the Company is required to adhere to applicable regulations setting forth
detailed good manufacturing practice requirements, which include testing,
control and documentation requirements. The Company must also comply with
Medical Device Report ("MDR") requirements, which require that a manufacturer
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product malfunctioned
and, if the malfunction were to recur, it would be likely to cause or contribute
to a death or serious injury. The Company is also subject to routine inspection
by the FDA for compliance with QSR requirements, MDR requirements and other
applicable regulations. The FDA has recently implemented new QSR requirements,
including the addition of design controls that will likely increase the cost of
compliance. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain circumstances, by the Federal Trade Commission. The Company
may incur significant costs to comply with laws and regulations in the future,
which may have a material adverse effect upon the Company's business, financial
condition and results of operations.
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<PAGE>
REGULATION RELATED TO FOREIGN MARKETS
Distribution of diagnostic products outside the United States is subject to
extensive government regulation. These regulations, including the requirements
for approvals or clearance to market, the time required for regulatory review
and the sanctions imposed for violations, vary from country to country. The
Company may be required to incur significant costs in obtaining or maintaining
its foreign regulatory approvals. In addition, the export by the Company of
certain of its products that have not yet been cleared for domestic commercial
distribution may be subject to FDA export restrictions. Failure to obtain
necessary regulatory or the failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
UNCERTAIN AVAILABILITY OF THIRD PARTY REIMBURSEMENT FOR DIAGNOSTIC PRODUCTS
In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third party
payors, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. Third party
payors are increasingly scrutinizing and challenging the prices charged for
medical products and services and they can affect the pricing or the relative
attractiveness of the Decreases in reimbursement amounts for tests performed
using the Company's diagnostic products, failure by physicians and other users
to obtain reimbursement from third party payors, or changes in government and
private third party payors' policies regarding reimbursement of tests utilizing
diagnostic products, may affect the Company's ability to sell its diagnostic
products profitably. See "Part I. Item 1. Description of Business -- Regulation"
and "-- Reimbursement." Market acceptance of the Company's products in
international markets is also dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems.
UNCERTAINTY OF PROTECTION OF PATENTS, TRADE SECRETS AND TRADEMARKS
The Company's success depends, in part, on its ability to obtain patents
and license patent rights, to maintain trade secret protection and to operate
without infringing on the proprietary rights of others. There can be no
assurance that the Company's issued patents will afford meaningful protection
against a competitor, or that patents issued to the Company will not be
infringed upon or designed around by others, or that others will not obtain
patents that the Company would need to license or design around. The Company
could incur substantial costs in defending itself or its licensees in litigation
brought by others or prosecuting infringement claims against third parties. If
the outcome of any such litigation is unfavorable to the Company, the Company's
business could be adversely affected. See "Part I. Item 1. Description of
Business -- Patents, Trade Secrets and Trademarks."
RISKS REGARDING POTENTIAL FUTURE ACQUISITIONS
The Company's growth strategy includes as a material element the desire to
acquire complementary companies, products or technologies. Except as disclosed
in "Item 1. Description of Business -- Acquisitions," the Company has not
targeted any acquisition candidates and there is no assurance that the Company
will be able to identify appropriate companies or technologies to be acquired,
or to negotiate satisfactory terms for such an acquisition. Moreover, because of
limited cash resources, the Company will be unable to acquire any significant
companies or technologies for cash and the Company's ability to effect
acquisitions in exchange for the Company's capital stock may depend upon the
market prices for the Common Stock. If the Company does complete one or more
acquisitions, a number of risks arise, such as short-term negative effects on
the Company's reported operating results, diversion of management's attention,
unanticipated problems or legal liabilities, and difficulties in the integration
of potentially dissimilar operations. The occurrence of some or all of these
risks could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Part I. Item 1. Description of
Business -- Strategy."
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<PAGE>
NO ASSURANCE OF MARKET ACCEPTANCE OF POINT-OF-CARE DIAGNOSTIC PRODUCTS
Another growth strategy of the Company is to seek to develop, manufacture
and market POC diagnostic products. Presently, the Company has no products used
in the POC market and there is no assurance that it will be successful in
developing and penetrating the POC market for diagnostic testing. Approximately
75% of diagnostic testing is currently performed at large clinical laboratories
rather than POC sites, and there can be no assurance that caregivers,
laboratories or the medical community in general will accept and utilize the POC
testing system in general or products that may be developed in particular.
Market acceptance of any POC products of the Company will depend on the
Company's ability to develop such products and then demonstrate the accuracy and
value of its products and to persuade caregivers to perform the Company's tests
in the caregivers' own facilities rather than send those tests to clinical
laboratories. In addition, market acceptance of new POC products will depend on
all of the factors that affect other new products. See "Part I. Item 1.
Description of Business -- Industry Overview," "-- Strategy" and "-- Products
and Markets."
DEPENDENCE ON SUPPLIERS
The components of the Company's products include chemical and packaging
supplies that are generally available from several suppliers, except certain
antibodies, which the Company purchases from single suppliers. The Company
mitigates the risk of a loss of supply by maintaining a sufficient supply of
such antibodies to ensure an uninterrupted supply for at least six months.
Although the Company believes that it can substitute a new supplier with respect
to any of these components in a timely manner, there can be no assurances that
the Company will be able to substitute a new supplier in a timely manner and
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE WITH CERTAIN PRODUCTS
Although the Company has manufactured over ten million diagnostic tests
based on its proprietary applications of ELISA technology, certain of the
Company's diagnostic products in development, particularly POC tests,
incorporate technologies with which the Company has no manufacturing experience.
Assuming successful development and receipt of required regulatory approvals,
significant work may be required to scale up production for each new product
prior to such product's commercialization. There can be no assurance that such
work can be completed in a timely manner and that such new products can be
manufactured cost-effectively, to regulatory standards or in sufficient volume.
SEASONALITY OF PRODUCTS; QUARTERLY FLUCTUATIONS IN RESULTS OF OPERATIONS
The Company's revenue and operating results have historically been
minimally subject to quarterly fluctuations. Certain of the Company's diagnostic
products in development, particularly POC tests for infectious disease, may
demonstrate a higher degree of seasonality. There can be no assurance that such
seasonality in the Company's results of operations will not have a material
adverse effect on the Company's business.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized nature of the Company's business, the success of
the Company will be highly dependent upon its ability to attract and retain
qualified scientific and executive personnel. In particular, the Company
believes its success will depend to a significant extent on the efforts and
abilities of Dr. Luis R. Lopez and Douglass T. Simpson, who would be difficult
to replace. There can be no assurance that the Company will be successful in
attracting and retaining such skilled personnel, who are generally in high
demand by other companies. The loss of, inability to attract, or poor
performance by key scientific and executive personnel may have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE>
PRODUCT LIABILITY EXPOSURE AND LIMITED INSURANCE
The testing, manufacturing and marketing of medical diagnostic devices
entails an inherent risk of product liability claims. To date, the Company has
experienced no product liability claims, but any such claims arising in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's product liability insurance
coverage is currently limited to $2 million. Potential product liability claims
may exceed the amount of the Company's insurance coverage or may be excluded
from coverage under the terms of the Company's policy or limited by other claims
under the Company's umbrella insurance policy. Additionally, there can be no
assurance that the Company's existing insurance can be renewed by the Company at
a cost and level of coverage comparable to that presently in effect, if at all.
In the event that the Company is held liable for a claim against which it is not
insured or for damages exceeding the limits of its insurance coverage, such
claim could have a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY IN STOCK PRICES; PENNY STOCK
RULES
There has, to date, been no active public market for the Company's Common
Stock, and there can be no assurance that an active public market will develop
or be sustained. Although the Company's Common Stock has been traded on the OTC
Bulletin Board-Registered Trademark- since February 1998, the trading has been
sporadic with insignificant volume.
Moreover, the over-the-counter markets for securities of very small
companies such as the Company historically have experienced extreme price and
volume fluctuations during certain periods, and the Company's stock price has
experienced significant price and volume fluctuations in the past. These broad
market fluctuations and other factors, such as new product developments and
trends in the Company's industry and the investment markets and economic
conditions generally, as well as quarterly variation in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
In addition, the Company's Common Stock is subject to rules adopted by the
Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny stocks." As a result, many brokers are
unwilling to engage in transactions in the Company's Common Stock because of the
added disclosure requirements.
ITEM 3. DESCRIPTION OF PROPERTY
See description set forth in "Part I. Item 1. Description of Business --
Facilities."
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<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1998 for
(a) each person (or group of affiliated persons) is known by the Company to own
beneficially more than 5% of the Common Stock, (b) each of the Company's
directors, (c) each of the Named Executive Officers (as set forth in "Item 6.
Executive Compensation"), and (d) all directors and current executive officers
of the Company as a group. Except as otherwise noted, the Company believes that
the persons or entities in this table have sole voting and investing power with
respect to all the shares of Common Stock owned by them. The information
appearing below concerning persons other than officers and directors of the
Company is to the Company's best knowledge based on information obtained from
the Company's transfer agent.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
- --------------------------------------------- ---------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- --------------------------------------------- ----------------- --------------
<S> <C> <C>
Dr. Luis R. Lopez(1)(2)(3) ................. 1,460,310 12.14%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Raul Diez Canseco(2)(3) .................... 679,260 5.64%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Jana Hartinger Mazzini(2)(3) ............... 662,670 5.51%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Leland P. Snyder(2)(3) ..................... 631,350 5.25%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Brian E. Johnson(2)(3) ..................... 16,620 *
Mike M. Mustafoglu(3)(4) ................... 217,265 1.81%
Alev T. Lewis .............................. 0 *
Douglass T. Simpson(2)(3) .................. 155,340 1.29%
Ann L. Steinbarger(2)(3) ................... 55,380 *
All directors and current executive officers
as a group (8 persons)(1)(2)(3)(4) ....... 2,079,735 17.28%
</TABLE>
- ------------------
* Less than 1%
(1) Includes 153,000 shares held of record by Transition Partners Limited, as
to which Dr. Lopez has power to vote. Dr. Lopez disclaims beneficial
ownership of such shares.
(2) Excludes shares of contingent Common Stock that may be issued to such
holders under certain conditions. See "Part I. Item 7. Certain
Relationships and Related Transactions -- Contingent Common Stock."
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<PAGE>
(3) Except for 64,265 shares of Common Stock held by TGF (see Note 4), all of
such shares are restricted and cannot be transferred by the holder thereof
until May 23, 1999.
(4) Consists solely of shares held by TGF, of which Mr. Mustafoglu is the
president and controlling shareholder. Mr. Mustafoglu disclaims beneficial
ownership of such shares.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth certain information with respect to the
executive officers, certain other management, certain consultants to the Company
and members of the Board of Directors of the Company as of May 23, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Luis R. Lopez, M.D. (1) 50 Chief Executive Officer and Chairman of the Board
Douglass T. Simpson (1)(2) 50 President, Chief Operating Officer
W. George Fleming, Ph.D. (1)(3) 67 Vice President, International Operations
Ann L Steinbarger (1) 45 Vice President, Sales and Marketing
Taryn G. Reynolds (1) 38 Vice President, Operations
Catherine A. Fink, Ph.D. 33 Executive Scientific Director
Nanci B. Dexter 33 Director of Quality and Regulatory Affairs
Brian E. Johnson (2)(4) 48 Director
Mike M. Mustafoglu (2) (4) 48 Director
Alev T. Lewis 36 Director
Douglass A. Triplett, M.D.(3) 45 Chairman, Scientific Advisor Board
</TABLE>
- ------------------
(1) Executive Officer
(2) Member of the Audit Committee
(3) Consultant to the Company
(4) Member of the Compensation Committee
LUIS R. LOPEZ, M.D., has served as the Chief Executive Officer and Chairman
of the Board of Directors of the Company since May 1998 and of the Company's
operating subsidiary since it was founded in July 1990. From 1987 to 1990, Dr.
Lopez was Vice President of Clinical Affairs at BioStar Medical Products, Inc.,
a Boulder, Colorado diagnostic firm. From 1986 to 1987 he served as Research
Associate with the Rheumatology Division of the University of Colorado Health
Sciences Center, Denver, Colorado. From 1980 to 1986 he was Professor of
Immunology at Cayetano Heredia University School of Medicine in Lima, Peru,
during which time he also maintained a medical practice with the Allergy and
Clinical Immunology group at Clinica Ricardo Palma in Lima. From 1978 to 1980
Dr. Lopez held a fellowship in Clinical Immunology at the University of Colorado
Health Sciences Center. He received his M.D. degree in 1974 from Cayetano
Heredia University School of Medicine in Lima, Peru. He is a clinical member of
the American College of Rheumatology, and a corresponding member of the American
Academy of Allergy, Asthma and Immunology. Dr. Lopez is licensed to practice
medicine in Colorado, and is widely published in the areas of immunology and
autoimmune disease. He currently serves on the Board of Directors of DDx, Inc.,
a Denver, Colorado privately-held biotechnology firm.
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<PAGE>
DOUGLASS T. SIMPSON has been the President of the Company since May 1998.
Mr. Simpson joined the Company's operating subsidiary as Vice President of
Business Development in 1992, was promoted to Vice President, General Manager in
1995, to Executive Vice President in 1996 and then to President in February
1998. Prior to joining the Company's operating subsidiary, he was a Managing
Partner at Venture Marketing Group in Austin, Texas, a health care and
biotechnology marketing firm, and in that capacity, served as a consultant to
REAADS from 1990 until 1992. From 1984 to 1990 Mr. Simpson was employed by
Kallestad Diagnostics, Inc. (now Sanofi Diagnostics Pasteur), one of the largest
diagnostic companies in the world, where he served as Vice President of
Marketing, in charge of all marketing and business development for this $200
million medical diagnostics company. Mr. Simpson holds B.S. and M.S. degrees in
Biology and Chemistry from Lamar University in Beaumont, Texas.
W. GEORGE FLEMING, PH.D., has been the Vice President, International
Operations, of the Company pursuant to a consulting agreement since May 1998.
Dr. Fleming joined the Company's operating subsidiary as Director of European
Operations in 1992, after serving as a consultant in international distribution
to REAADS from 1990 to 1992. He was promoted to Managing Director, European
Operations, and in 1996 to Vice President, International. Prior to joining the
Company's operating subsidiary, Dr. Fleming was a director of Unilever's Medical
Products Group in the UK, a L41 million health care company. He joined Oxoid, a
subsidiary of Brooke Bond in 1968, serving in a number of management positions
leading to his appointment as Director of Marketing in 1976, managing their
growth up to L31 million in 1985, when it was acquired by Unilever. Dr. Fleming
received a B.Sc. degree from Queens University, Belfast, Northern Ireland, and a
Ph.D. in Business Administration from Fairfax University, Baton Rouge,
Louisiana.
ANN L. STEINBARGER has been the Vice President, Sales and Marketing, of the
Company since May 1998. Ms. Steinbarger joined the Company's operating
subsidiary in January 1996 as Vice President, Sales and Marketing with
responsibility for its worldwide marketing and distribution strategies. Prior to
joining REAADS, Ms. Steinbarger was with Boehringer Mannheim Corporation,
Indianapolis, Indiana, a $200 million IVD company. At Boehringer from 1976 to
1996, she served in a series of increasingly important sales management
positions. Ms. Steinbarger holds a B.S. degree in Microbiology from Purdue
University in West Lafayette, Indiana.
TARYN G. REYNOLDS has been the Vice President, Operations, of the Company
since May 1998. Mr. Reynolds joined the Company's operating subsidiary in 1992,
serving first as Director of Administration, then as Managing Director, U.S.
Operations, and then from October 1996 onward as Vice President, Operations with
overall management responsibility for the Company's headquarters facility,
including R&D, Quality, Administration and Manufacturing. Prior to joining
REAADS, Mr. Reynolds held executive positions at Brinker International, MJAR
Corporation and M&S Incorporated, all Colorado-based property, operational and
financial management firms.
CATHERINE A. FINK, PH.D., has been the Company's Executive Scientific
Director since May 1998. Dr. Fink joined the Company's operating subsidiary in
1996 as Director of Research and Development with responsibility for product
development, and in 1997 was promoted to Executive Scientific Director with
additional responsibilities for Quality Control. She chairs the Company's
technical committee. Prior to joining REAADS, Dr. Fink was with DDx, Inc., a
Denver, Colorado based privately-held biotechnology firm from 1994 until 1996,
and from 1993 to 1994 was Product Development Manager at Trinity Biotech plc.,
an Irish biotechnology company which develops and manufactures rapid saliva and
blood based diagnostic tests. From 1990 to 1993, she was with Biosyn Ltd.
(Belfast), a manufacturer of diagnostic tests for medical and veterinary
applications. Dr. Fink received a B.Sc. (with Honors) from University College
Dublin, and a Ph.D. in immunology from the National University at Ireland.
NANCI B. DEXTER has been the Company's Director of Quality and Regulatory
Affairs since May 1998. Ms. Dexter joined REAADS as Director of Quality and
Regulatory Affairs in 1997. From 1996 to 1997, she was Director of Regulatory
Affairs and Quality Assurance at In-X Corporation, a Denver based medical device
company, and from 1993 to 1996, was Manager of Quality Assurance and Quality
Control at Cortech, Inc., a Denver biopharmaceutical company. From 1987 to 1993,
Ms. Dexter was with Marquest Medical Products, Inc. (Englewood, Colorado) where
she
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held several positions, including Manager of Corporate Document Control. She
has a BS degree in Business Administration from Colorado State University (Ft.
Collins, Colorado), and is a member of numerous professional organizations
including the American Society for Quality Control, Regulatory Affairs
Professionals Society, Society of Quality Assurance and the Colorado Medical
Device Association. Ms. Dexter is a Certified Quality Auditor.
BRIAN E. JOHNSON was appointed as a Director of the Company in May 1998.
Mr. Johnson has served as a director of the Company's operating subsidiary since
1993. He served as Senior Vice President -- Field Service and Senior Vice
President -- Dealer Development and Acquisitions at ADT Security Systems, then
the world's largest provider of electronic security services, from 1996 to 1997.
From 1993 to 1995 he was Executive Vice President and Chief Financial Officer of
Alert Centre, Inc., a Denver-based, publicly traded electronic security services
company, which was acquired by ADT in December 1995. From 1990 through 1993 Mr.
Johnson was Managing Partner at Barnes Johnson & Associates, a small investment
banking and consulting firm specializing in corporate finance and acquisitions.
Previously, he served as chief financial officer and a director of two publicly
traded companies involved in oil and gas exploration and cable television. Mr.
Johnson began his career with Arthur Andersen & Company in Denver. He received a
B.A. in Economics from Muskingum College in Ohio, a J.D. from the University of
Colorado School of Law and an LL.M. in Taxation from the University of Denver
Graduate Program in Taxation. Mr. Johnson currently serves as the Executive Vice
President and Chief Operating Officer of UltimateCom, a Denver- based Internet
technology company.
MIKE M. MUSTAFOGLU has been a Director of the Company since September 1996.
Mr. Mustafoglu is the President and principal of TGF, a firm engaged in
providing consulting services to emerging small cap companies. Prior to
establishing TGF in 1991, Mr. Mustafoglu served in executive positions with the
Oxbow Group, which is ranked by Forbes as one of the top 400 privately held
companies in the United States. The Oxbow group of companies are engaged in
venture capital investing, commodities trading, electricity, oil and coal
production, petroleum refining and industrial manufacturing. Prior to joining
Oxbow in 1984, Mr. Mustafoglu was with Getty Oil, where he had executive
positions in corporate finance and Planning. Mr. Mustafoglu was a director of
Serv-Tech, Inc., a Nasdaq National Market System firm engaged in environmental
and maintenance services to the petro-chemical plants worldwide, until its
acquisition by Phillips Environmental in July 1997, and has been a director of
TransContinental Waste Industries, Inc. since July 1, 1997. Mr. Mustafoglu has a
bachelor's degree in engineering and a masters in business administration in
finance and quantitative science. Mr. Mustafoglu is the brother of Alev T.
Lewis, another director of the Company.
ALEV T. LEWIS has been a Director of the Company since May 1998. Ms. Lewis
has been a Tax Manager with Ernst & Young since 1996, consulting in the areas of
individual taxation, personal finance and estate planning. From 1991 to 1996,
Ms. Lewis was a corporate tax manager for Amwest Insurance, where she handled
all tax matters and compliance functions. Ms. Lewis is the sister of Mike M.
Mustafoglu, another director of the Company.
DOUGLAS A. TRIPLETT, M.D., has been an advisor to the Company's operating
subsidiary since 1991. He is Vice President and Director of Medical Education
and Director of Hematology for Ball Memorial Hospital in Muncie, Indiana. Since
1980 he has also been a Professor of Pathology, and since 1981 Assistant Dean,
of Indiana University School of Medicine. He previously served as the Director
of the Hematopathology Program at Ball Memorial Hospital, Associate Professor of
Pathology at Indiana University School of Medicine and Chief of Pathology at the
Raymond W. Bliss Army Hospital. A graduate of Indiana University School of
Medicine, Dr. Triplett is Chairman of the Coagulation Resource Committee of the
College of American Pathologists and Co-Chairman of the Scientific Subcommittee
of the International Committee on Thrombosis and Hemostasis: Lupus
Anticoagulants. He is certified by the American Board of Pathology in Anatomic
and Clinical Pathology, Hematology and Transfusion Medicine. Dr. Triplett
received the 1989 Medal of the American Society of Clinical Pathologists.
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TERM OF DIRECTORS
Each director serves for a term of one year or until the director's
successor is duly elected, appointed or seated.
TECHNICAL AND SCIENTIFIC ADVISORS
Corgenix periodically draws on the expertise of several advisors and
consultants in fields related to Corgenix's technology and markets. The Company
is establishing a Scientific Advisory Board ("SAB") whose members will be
available to the Company as needed on an individual basis to advise the Company
with respect to clinical medicine and other matters requiring scientific and
clinical expertise. Members of the Scientific Advisory Board who are not
employees of the Company will be compensated for their participation on this
board. The Scientific Advisory Board will b chaired by Dr. Triplett.
COMMITTEES
The Audit Committee consists of Messrs. Johnson, Mustafoglu and Simpson.
The Audit Committee makes recommendations to the Board regarding the selection
of independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's audit and control functions.
The Compensation Committee consists of Messrs. Johnson and Mustafoglu. The
Compensation Committee reviews and recommends for Board approval compensation
for executive officers and makes policy decisions concerning salaries and
incentive compensation for employees and consultants of the Company.
DIRECTORS COMPENSATION
Members of the Board of Directors currently do not receive any compensation
for service on the Board of Directors or any committee thereof. Directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into three-year employment agreements with each of
Dr. Luis R. Lopez, Douglass T. Simpson, Ann L. Steinbarger, Taryn G. Reynolds
and Catherine A. Fink, Ph.D., pursuant to which the Company pays annual salaries
of $160,000, $140,000, $100,000, $90,000 and $80,000, respectively, in 1998 and
1999. In addition, the Company has executed a three-year consulting contract
with Wm. George Fleming, Ph.D., who serves as the Company's Vice President,
International Operations in consideration for an annual fee of $60,000 in 1998
and 1999. These agreements provide for severance payments equal to the salary
due during the term of the agreement if the employment of the individual is
terminated without cause (as defined in the respective agreements).
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company's
operating subsidiary for the three fiscal years ended June 30, 1998, 1997 and
1996 to the Company's Chief Executive Officer and the two other executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the subsidiary during such fiscal years (collectively, the "Named
Executive Officers").
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EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------------ ----------------
SECURITIES
FISCAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS(1)
<S> <C> <C> <C>
Luis R. Lopez............................... 1998 $160,000 --
Chairman, Chief Executive Officer 1997 143,333 --
1996 133,333 --
Douglass T. Simpson......................... 1998 $140,000 --
President, Chief Operating Officer 1997 123,333 --
1996 113,333 38,766
Ann L. Steinbarger(2)...................... 1998 $100,000 --
Vice President 1997 100,000 --
1996 50,000 55,380
</TABLE>
- ------------------
(1) All awards have been adjusted to reflect the number of shares of
Common Stock of the Company received by the optionholder in
consideration of the cancellation of such options in connection with
the Merger.
(2) Ms. Steinbarger joined the Company in January 1996.
The Company has employment agreements with each of the Named Executive
Officers. See "Part I. Item 5. Directors, Executive Officers, Promoters and
Control Persons -- Employment Agreements." The Company currently does not have
any equity incentive or stock purchase plans in place.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has the following relationships with certain of its
stockholders, directors and affiliates.
TGF CONSULTING AGREEMENT
The Company is party to a Consulting Agreement dated May 22, 1998 with TGF.
The Consulting Agreement was entered into in connection with closing of the
Merger. The president and controlling shareholder of TGF is Mike M. Mustafoglu,
who also serves as a director of the Company.
Under the terms of the Consulting Agreement, TGF provides advice to the
Company regarding financial and business matters, including but not limited to,
identifying sources of capital to implement the Company's business plans, review
and assessment of capitalization, merger and acquisition prospects, and other
transactions, on an exclusive basis. The Consulting Agreement is effective for a
three-year term ending May 22, 2001. TGF's fee for its financial and business
advisory services is $180,000.00 (payable in 36 monthly installments of $5,000)
plus a transaction fee equal to (i) 5% of any funds committed and available to
the Company in an equity financing secured through TGF and (ii) 3% of any funds
committed and available to the Company in any debt financing secured through
TGF. In addition, in the event TGF represents the Company with respect to a
merger, acquisition or other transaction involving the disposition or exchange
of securities or assets of the Company, TGF is entitled to a transaction fee
equal to 5% of the total market value of the stock, cash, assets or other
property exchanged by the Company or any of its security holders in connection
with the transaction, such fee payable in the same form as the consideration
payable to the Company or its security
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holders in the transaction. Finally, in the event TGF introduces the Company
to a joint venture partner or customer and sales develop as a result of the
introduction, TGF is entitled to a fee equal to 5% of the before-tax income
generated from the introduction, such fee payable for the life of the venture
or relationship developed.
In addition to the foregoing fees, TGF is entitled to reimbursement of its
fees and disbursements incurred in providing its advisory services to the
Company, including without limitation, travel, hotels, food and associated
expenses. The Consulting Agreement includes a number of covenants for the
benefit of TGF. The Company agrees to promptly furnish TGF a copy of all
periodic reports filed by the Company with the Securities and Exchange
Commission, a copy of all press releases released by the Company, copies of
financial statements and other periodic or special reports as and when provided
from time to time to holders of any class of the Company's securities or to its
directors and officers. The Company also agrees to provide such additional
documents and information with respect to the Company as TGF my from time to
time reasonably request.
The Consulting Agreement requires the Company to cause two designees
selected by TGF to be nominated to the Company's Board of Directors during each
year of the term of the Agreement, and to notify TGF of each meeting of the
Board. In connection with this right, the Company agrees that the Board of
Directors shall number five members, which number will not be changed without
the prior written consent of TGF, and that the Company will schedule not less
than four regular meetings of the Board of Directors. The right to designate
members to the Company's Board of Directors under the Consulting Agreement
terminates upon the issuance by the Company of an aggregate of 250,000 or more
shares of the Company's Series A Preferred Stock and warrants to purchase in
aggregate of 250,000 or more shares of the Company's Common Stock. Thereafter,
TGF is entitled to have an observer designated by it present at all meetings of
the Board of Directors. The Company agrees to indemnify and hold TGF and its
Board representatives harmless against any claims, damages, costs and expenses
arising solely out of attendance and participation at any Board meeting, and to
include such representatives on any liability insurance policy providing
coverage for the acts of the Company's officers and directors.
During the term of the Consulting Agreement, the Company is required to
obtain the written consent of TGF (not to be unreasonably withheld) prior to
issuing more than 5% of any class of its Common Stock or preferred stock (or
warrants, options or rights to purchase Common Stock or preferred stock).
The Consulting Agreement requires the Company to indemnify and hold TGF
harmless from any and all liabilities, claims, lawsuits or other judgments or
awards which it may become subject to ( a "Claim") insofar as such Claim arises
out of or is in connection with services rendered by TGF under the Consulting
Agreement or any transactions in connection therewith. Such indemnity excludes,
however, indemnification for Claims arising out of the reckless acts or
omissions of TGF. In turn, TGF agrees to indemnify and hold the Company harmless
against any and all Claims which arise out of or are based upon any misstatement
or omission made by the Company in reliance upon information furnished in
writing to the Company by TGF for inclusion in any registration statement or
prospectus in connection with a transaction to which the Consulting Agreement
applies.
Pursuant to the Consulting Agreement, TGF has named Mike M. Mustafoglu and
Alev Lewis as its designees to be nominated as members of the Company's Board of
Directors. To date, TGF has provided general financial advisory services to the
Company pursuant to the Consulting Agreement. Such services have included
financial planning and review, business plan development, identification of
financing sources, identification of and due diligence on acquisition
opportunities, assistance in negotiating agreements, and evaluation of strategic
partner opportunities. TGF has informed the Company that it does not engage in
the business of buying and selling securities for others or for its own account
or advising others, for compensation, as to the value of securities or the
advisability of investing in, purchasing or selling, securities. TGF has further
informed the Company that it is not currently licensed as a broker-dealer or
investment advisor and that TGF is not required to be so licensed to perform the
activities called for under the Consulting Agreement. TGF has agreed with the
Company that if any such activities are required to be performed by
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a licensed broker-dealer or investment advisor, TGF will take the appropriate
steps to obtain such licenses or will inform the Company that it must retain a
licensed broker-dealer or investment company, as appropriate, to perform such
activities.
OPTION AGREEMENT
The Company also is party to an Option Agreement dated May 22, 1998 with
TGF. Under the Option Agreement, TGF has the option to purchase 1,000,000 units
(the "Units"), each unit comprised of one share of the Company's authorized but
unissued Series A 5% Convertible Preferred Stock and one warrant to purchase one
share of Common Stock at an exercise price of $2.00, for an aggregate purchase
price of $1,000,000. The option is exercisable by written notice to the Company
on or prior to the expiration of a period of 90 days after the date on which the
Securities and Exchange Commission declares effective a registration statement
covering the Units and the shares of Common Stock issuable upon conversion or
exercise thereof. The option is assignable, in whole or in part, by TGF; however
the option must be exercised collectively as to all of the Units subject
thereto. TGF may not, however, assign, sell, transfer, pledge or otherwise
dispose of any of the Units or any other securities of the Company without the
prior written consent of the Company.
CONTINGENT COMMON STOCK
Under the terms of the Merger Agreement, the former shareholders of REAADS
are entitled to receive up to an additional 4,000,000 shares of Common Stock
upon the occurrence (or non-occurrence) of certain events, as described below
(the "Contingent Shares").
The Contingent Shares are issuable from time to time on each of the
following events: (i) the conversion of one or more shares of the Company's
authorized but unissued Series A 5% Convertible Preferred Stock (the "Series A
Preferred Stock") to Common Stock or the exercise of one or more common stock
purchase warrants issued in connection with the Series A Preferred Stock
("Preferred Warrants") (the foregoing being referred to as a "Preferred Issue
Event"), in which case the maximum number of Contingent Shares issuable is
2,000,000 shares, (ii) November 23, 1998, if as of such date the Company has
sold less than $1,000,000 of Series A Preferred Stock (the "November 23, 1998
Issue Event"), in which case the maximum number of Contingent Shares issuable is
4,000,000 shares less (a) the number of shares of Common Stock issuable upon
conversion of all then outstanding Series A Preferred Stock and exercise of all
Preferred Warrants and less (b) four times the dollar amount of Series A
Preferred Stock sold by the Company as of such date.
The Contingent Shares are issuable to the former shareholders of REAADS
without payment of additional consideration. The former shareholders of REAADS
may not assign, sell, transfer, pledge or otherwise hypothecate or encumber
their right to receive Contingent Shares; they may, however, transfer their
right to receive Contingent Shares by will, gift and laws of descent and
intestacy.
The following table sets forth the number of shares of Common Stock that
would have been held by the persons indicated as of September 30, 1998, assuming
that all of the 4,000,000 shares of contingent Common Stock had been issued on
such date to the former REAADS stockholders.
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED AFTER
CONTINGENT STOCK ISSUANCE
- ---------------------------------------------- -------------------- ----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ---------------------------------------------- -------------------- ----------------
<S> <C> <C>
Dr. Luis R. Lopez(1)(2) .................... 2,414,761 23.86%
Raul Diez Canseco(2) ....................... 1,123,221 11.10%
Jana Hartinger Mazzini(2) .................. 1,095,788 10.83%
Leland P. Snyder(2) ........................ 1,043,997 10.32%
Brian E. Johnson(2) ........................ 27,483 *
Mike M. Mustafoglu(2)(3) ................... 217,265 2.15%
Alev T. Lewis .............................. 0 *
Douglass T. Simpson(2) ..................... 256,869 2.54%
Ann L. Steinbarger(2) ...................... 91,576 *
All directors and current executive officers
as a group (8 persons)(1)(2)(3) ........ 3,295,381 32.56%
</TABLE>
- ------------------
* Less than 1%
(1) Includes 153,000 shares held of record by and 100,000 contingent shares
issuable to Transition Partners Limited, as to which Dr. Lopez has power to
vote. Dr. Lopez disclaims beneficial ownership of such shares.
(2) Except for 64,265 shares of Common Stock held by TGF (see Note 3), all of
such shares are restricted and cannot be transferred by the holder thereof
until May 23, 1999.
(3) Consists solely of shares held by TGF, of which Mr. Mustafoglu is the
president and controlling shareholder. Mr. Mustafoglu disclaims beneficial
ownership of such shares.
CORPORATE RELATIONS AGREEMENT
The Company is a party to an agreement dated April 14, 1998 with Corporate
Relations Group, a Florida corporation ("CRG"). Pursuant to this agreement and a
related payment agreement, CRG provides corporate relations services to the
Company for a period of one year for a fee of $75,000. In connection with the
execution of this Agreement, Gulf Atlantic Publishing, Inc. purchased 950,000
shares of the Company's Common Stock for total consideration of $50,000. CRG and
Gulf Atlantic Publishing, Inc. are both corporations that are wholly owned by
Strattcom Media, Ltd., a publicly-held corporation.
To date, CRG has provided the Company with investor relations services,
including assistance with the preparation and dissemination of press releases
and the preparation of articles regarding the Company and its products. CRG has
also assisted the Company in placing such articles in various magazines and
brochures published by certain of CRG's affiliates. CRG has informed the Company
that CRG is not a licensed broker-dealer or investment advisor, and that it is
not required to be so licensed to perform the activities called for under the
corporate relations agreement described above.
ITEM 8. DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Articles of Incorporation, as amended (the "Articles"), Bylaws
and Certificate of Designation (the "Certificate of Designation") for
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the Series A Preferred Stock is a summary and is qualified in its entirety by
the provisions of the Articles, Bylaws and Certificate of Designation, which
have been filed as exhibits to this Registration Statement.
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, $0.001 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share, of which 1,000,000 shares have been
designated as Series A 5% Convertible Preferred Stock. No shares of Series A
Preferred Stock are currently outstanding. As of September 30, 1998 there were
approximately 52 record holders of the Company's Common Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of preferred
stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. However, the Company is restricted in its ability to declare dividends
on its Common Stock by several agreements. See "Part II. Item 1. Market Price of
and Dividends on the Registrant's Common Equity and Other Shareholder Matters."
In the event of a liquidation, dissolution or winding up of the Company,
holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of Common Stock have no preemptive
rights and no right to convert their Common Stock into any other securities.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock, $.001 par
value per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by stockholders. Pursuant to
such authority, the Board of Directors has designated the Series A Preferred
Stock, shares of which have not been issued. See "-- Series A Preferred Stock."
The issuance of preferred stock could, and, if and when issued, the terms of the
Series A Preferred Stock will, adversely affect the voting power of holders of
Common Stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation and could have the effect of delaying, deferring
or preventing a change in control of the Company.
SERIES A PREFERRED STOCK
The Company has designated 1,000,000 shares of its preferred stock as
Series A 5% Convertible Preferred Stock. None of the Series A Preferred Stock is
currently outstanding. If and when issued, the material terms of the Series A
Preferred Stock will be as follows:
RANKING
With respect to the payment of dividends and amounts upon liquidation, the
Series A Preferred Stock will rank senior to the Common Stock.
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DIVIDENDS
Dividends on the Series A Preferred Stock will be cumulative from the date
of original issue and, if and when declared, will be payable quarterly in
arrears on the fifteenth day of each February, May, August and November (or, if
such day is not a business day, the next business day), at the rate of $.05 per
share per annum. The dividend rate will be adjusted commencing twenty-four (24)
months after the original issue date, by increasing such rate to $.10 per share
per annum, and thereafter on each succeeding twelve (12) month anniversary of
the original issue date, the dividend rate will be increased by $.02 per share
per annum. Dividends on the Series A Preferred Stock will accrue whether or not
the company has earnings, whether or not there are funds legally available for
the payment of such dividends and whether or not such dividends are declared.
Accrued and unpaid dividends will bear interest from the dividend payment date
until the date such dividends are paid in full at an annual rate equal to ten
percent (10%).
CONVERSION
Each share of Series A Preferred Stock will be convertible at any time, and
from time to time, at the option of the holder, into such one fully paid and
nonassessable share of Common Stock. The rate at which a share of Series A
Preferred Stock will be convertible into shares of Common Stock is subject to
adjustment upon the happening of an Extraordinary Common Stock Event (as
defined), in the event of certain recapitalizations, reclassifications, mergers
and share exchanges, and upon the issuance by the Company of shares of Common
Stock for less than Fair Market Value (as defined).
LIQUIDATION
The liquidation preference for each share of Series A Preferred Stock will
be $1.10. The liquidation preference will be adjusted commencing twelve (12)
months after the original issue date, by increasing the liquidation preference
to $1.20 per share per annum, and thereafter on each succeeding twelve (12)
month anniversary of the original issue date, the liquidation preference will be
increased by an amount equal to seven percent (7%) of the liquidation preference
for the preceding twelve (12) month period. Upon liquidation, holders will be
entitled to be paid the liquidation preference plus an amount equal to accrued
and unpaid dividends thereon and accrued and unpaid interest, if any, on any
dividends in arrears, out of the assets available for such payment.
REDEMPTION
The Series A Preferred Stock is not redeemable prior to two years after the
original issue date. On and after such date and until the date that is four
years after the original issue date, the Series A Preferred Stock will be
redeemable at the option of the Company, in whole, at a redemption price equal
to the then applicable liquidation preference, if the average bid price of the
Common Stock exceeds $5.00 per share for the twenty (20) consecutive trading
days immediately preceding the date notice of redemption is given. On and after
the date that is four years after the original issue date, the Series A
Preferred Stock will be redeemable at the option of the Company, in whole, at a
redemption price equal to the then applicable liquidation preference.
VOTING
Holders of Series A Preferred Stock generally will have no voting rights
except as required by law. However, if dividends on the Series A Preferred Stock
are in arrears for two or more quarterly periods, or if the Company breaches any
provision of the Certificate of Designations and such breach continues for
forty-five (45) days after written notice of such breach, the holders of Series
A Preferred Stock will be entitled to vote for the election of a majority of the
Board of Directors of the Company until all such dividend arrearages are
eliminated or, in the case of a breach, such breach is remedied or less than
250,000 shares of Series A Preferred Stock remain outstanding. In addition, for
a period of twenty-
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four (24) months after the original issue date, the holders of the Series A
Preferred Stock, voting separately as one class, have the right to elect two
directors to the Board of Directors of the Company. Such directors will be
elected by the vote of the holders of a majority, and removed by the vote of
the holders of two-thirds (2/3) of the shares of Series A Preferred Stock
then outstanding.
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GLOSSARY
ANTIBODY -- a protein produced by the body in response to contact with an
antigen, and having the specific capacity of neutralizing, hence creating
immunity to, the antigen.
ANTI-CARDIOLIPIN ANTIBODIES (ACL) -- a class of antiphospholipid antibody
which reacts with a negatively-charged phospholipid called cardiolipin;
frequently found in patients with SLE and other autoimmune diseases; also
reported to be significantly associated with the presence of both arterial and
venous thrombosis, thrombocytopenia, and recurrent fetal loss.
ANTIGEN -- an enzyme, toxin, or other substance, usually of high molecular
weight, to which the body reacts by producing antibodies.
ANTI-PHOSPHATIDYLSERINE ANTIBODIES (APS) -- a class of antiphospholipid
antibody which reacts to phosphatidylserine; similar to aCL; believed to be more
specific for thrombosis.
ANTI-OXIDIZED LDL CHOLESTEROL ANTIBODIES -- antibodies to the oxidized form
of LDL cholesterol.
ANTIPHOSPHOLIPID ANTIBODIES -- a family of autoantibodies with specificity
against negatively charged phospholipids, that are frequently associated with
recurrent venous or arterial thrombosis, thrombocytopenia, or spontaneous fetal
abortion in individuals with SLE or other autoimmune disease.
ANTIPHOSPHOLIPID SYNDROME -- a clinical condition characterized by venous
or arterial thrombosis, thrombocytopenia, or spontaneous fetal abortion, in
association with elevated levels of antiphospholipid antibodies and/or lupus
anticoagulant.
ASSAY -- a laboratory test; to examine or subject to analysis.
AUTOANTIBODY -- an antibody with specific reactivity against a component
substance of the body in which it is produced; a disease marker.
AUTOIMMUNE DISEASES -- a group of diseases resulting from reaction of the
immune system against self components.
BETA 2 GLYCOPROTEIN I (BETA 2GPI) -- a serum protein (cofactor) that
participates in the binding of antiphospholipid antibodies.
COAGULATION -- the process by which blood clots.
COFACTOR -- a serum protein that participates in the binding of
antiphospholipid antibodies, for example Beta 2GPI.
DELIVERY FORMAT -- the configuration of the product. Current Corgenix
products utilize a 96-well microplate system for its delivery format.
HEMOSTASIS -- mechanisms in the body to maintain the normal liquid state of
blood; a balance between clotting and bleeding.
-40-
<PAGE>
HYALURONIC ACID (HA) -- a polysaccharide found in synovial fluid, serum and
other body fluids and tissues, elevated in certain rheumatological and hepatic
(liver) disorders.
HDL CHOLESTEROL -- high density lipoprotein associated with cholesterol.
IMMUNOASSAY -- a technique for analyzing and measuring the concentration of
disease markers using antibodies; for example, ELISA.
IMMUNOGLOBULIN -- a globulin protein that participates in the immune
reaction as the antibody for a specific antigen.
IMMUNOLOGY -- the branch of medicine dealing with (a) antigens and
antibodies, esp. immunity to disease, and (b) hypersensitive biological
reactions (such as allergies), the rejection of foreign tissues, etc.
IN VITRO -- isolated from the living organism and artificially maintained,
as in a test tube.
IN VIVO -- occurring within the living organism.
LDL CHOLESTEROL -- low density lipoprotein associated with cholesterol.
LIPIDS -- a group of organic compounds consisting of the fats and other
substances of similar properties.
LP(A) -- abnormal form of LDL cholesterol.
OXIDIZED LDL CHOLESTEROL -- chemical modification (oxidized form) of LDL
cholesterol; the most damaging form.
PLATELETS -- small cells in the blood which play an integral role in
coagulation (blood clotting).
PLATFORM TECHNOLOGY -- the basic technology in use for a majority of the
Company's products, in essence the "platform" for new products. In the case of
Corgenix, the platform technology is ELISA (enzyme linked immunosorbent assay).
PHOSPHOLIPIDS -- a group of fatty compounds found in animal and plant cells
which are complex triglyceride esters containing long chain fatty acids,
phosphoric acid and nitrogenous bases.
PROTEIN C -- normal blood protein that regulates hemostasis; decreased
levels lead to thrombosis.
PROTEIN S -- normal blood protein that regulates hemostasis; decreased
levels lead to thrombosis.
RHEUMATIC DISEASES -- a group of diseases of the connective tissue, of
uncertain cause and including rheumatoid arthritis (RA), rheumatic fever, etc.,
usually characterized by inflammation, pain and swelling of the joints and/or
muscles.
SERUM -- the clear yellowish fluid which separates from a blood clot after
coagulation and centrifugation.
SYSTEMIC LUPUS ERYTHEMATOSUS (SLE) -- a usually chronic disease of unknown
cause, characterized by red, scaly patches that tend to produce scars,
frequently affecting connective tissue and involving the kidneys, spleen, etc.
-41-
<PAGE>
THROMBIN -- the enzyme of the blood, formed from prothrombin, that causes
clotting by converting fibrinogen to fibrin.
THROMBOCYTOPENIA -- a condition in which there is an abnormally small
number of platelets in the circulating blood.
THROMBOEMBOLISM -- the obstruction or occlusion of a blood vessel by a
thrombus.
THROMBOSIS -- coagulation of the blood within a blood vessel of any
organ, forming a blood clot.
TUMOR MARKERS --- serum proteins or molecules found in high
concentrations in patients with selected cancers.
VASCULAR -- of or pertaining to blood vessels.
VON WILLEBRAND'S FACTOR (VWF) -- normal blood protein that regulates
hemostasis; decreased levels lead to abnormal bleeding and increased levels may
produce thrombosis.
-42-
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Common Stock is currently traded on the OTC Bulletin Board-Registered
Trademark-under the symbol "COGX". From February 27, 1998 until the Merger on
May 22, 1998, the Common Stock was quoted on the OTC Bulletin Board-Registered
Trademark- under the symbol "GRWT." On October 27, 1998, the last bid price of
the Common Stock on the OTC Bulletin Board-Registered Trademark- as reported by
the OTC Bulletin Board-Registered Trademark- was $0.22.
The following table sets forth, for the periods indicated, the high and low
bid prices of the Common Stock as reported on the OTC Bulletin Board-Registered
Trademark-. The following quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended June 30, 1998
First Quarter ........................... $ -- $ --
Second Quarter .......................... -- --
Third Quarter ........................... -- --
Fourth Quarter .......................... $ 1.55 $ 0.31
Year Ended June 30, 1999
First Quarter ........................... $ 1.75 $ 0.53
Second Quarter (through October 27, 1998) 0.50 0.19
</TABLE>
On September 30, 1998 there were approximately 52 holders of record of the
Common Stock.
To date, the Company has not paid any dividends on its Common Stock, and
the Board of Directors of the Company does not currently intend to declare cash
dividends on the Common Stock. The Company instead intends to retain its
earnings to support the growth of the Company's business. Any future cash
dividends would depend on future earnings, capital requirements and the
Company's financial condition and other factors deemed relevant by the Board of
Directors. The Company is restricted from paying dividends without the approval
of its financial advisor, pursuant to the terms of the Consulting Agreement with
TGF. See "Part I. Item 7. Certain Relationships and Related Transactions --
Consulting Agreement." In addition, under the terms of a promissory note in
favor of Eagle Bank, the Company is prohibited from paying dividends on the
Common Stock without the consent of Eagle Bank. The Series A Preferred Stock, if
and when issued, also would prohibit the Company from paying cash dividends on
the Company's Common Stock under certain circumstances.
ITEM 2. LEGAL PROCEEDINGS
Corgenix is not a party to any material litigation or legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
-43-
<PAGE>
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
MERGER TRANSACTION
In May 1998, the Company issued in a private transaction 6,120,000 shares
of Common Stock and 4,000,000 contingent shares of Common Stock in connection
with the merger of a wholly owned subsidiary of the Company with and into
REAADS. Such shares were issued to former securityholders of REAADS in exchange
for all of the outstanding securities of REAADS. Such shares were issued in
reliance upon exemptions from the registration requirements of Section 5 of the
Act provided by Rule 506 of Regulation D under the Act, complying with each of
the following requirements of Rule 506:
LIMITED NUMBER OF PURCHASERS. The Merger involved less than 35 purchasers.
NATURE OF PURCHASERS. Each of the shareholder purchasers was fully versed
in the business affairs and financial condition of REAADS, being either an
officer, director, long-time shareholder or long-time employee of REAADS. Each
such shareholder had received regular quarterly financial reports from
management regarding REAADS performance, and to management's knowledge and
belief based on reasonable inquiry, each was capable of evaluating the merits
and risks of the Merger based on his or her business and financial experience.
Because the Company had no significant business activity prior to the Merger, an
investment in the post-Merger Company was essentially an investment in REAADS
and its business. All shareholder purchasers were given the opportunity to ask
questions of management regarding the terms of the Merger.
Seven REAADS shareholders received their shares of Common Stock as a
compensatory stock bonus in cancellation of outstanding vested and unvested
REAADS incentive stock options, which otherwise were without market value (due
to their strike price being in excess of the estimated per share value of the
merger consideration). The REAADS Board of Directors and shareholders, by
unanimous vote, authorized the stock grants in cancellation of outstanding
options as consideration for past service and commitment to REAADS and as
incentive for each of the recipients to remain with the post-Merger Company,
each stock grant being coupled with a one-year vesting provision.
GENERAL CONDITIONS OF RULE 506 SATISFIED. Each of the general conditions to
the availability of Rule 506 was satisfied by the Merger. Request for approval
of the Merger was accompanied by a detailed information statement describing the
material terms and conditions of the Merger and containing the information
specified by Rule 502(b)(2)(i) of Regulation D to the extent material to the an
understanding of the issuer, its business and the securities being offered. The
Merger was not offered by any form of general solicitation or general
advertising. Finally, each of the shares issued in the Merger to REAADS
shareholders were made subject to strict limitations on resale, including a
mandatory one-year holding period, written disclosure to each recipient that the
shares to be received had not been registered under the Securities Act and
therefore could not be resold absent registration or availability of an
exemption from registration under the Act, and placement of a restrictive legend
setting forth the foregoing restrictions on transfer.
STATUTORY DISSENTER'S RIGHTS PROVIDED. In addition to complying with the
strict provisions of Rule 506, pursuant to state law statutory requirement, each
REAADS shareholder was provided with the opportunity to dissent from the Merger
and receive the fair value of his or her REAADS common stock. The information
statement included a detailed description of the statutory procedure for
exercising one's dissenter's rights. No REAADS shareholder exercised dissenter's
rights.
RULE 504 PRIVATE PLACEMENT
Also in May 1998, the Company sold in a private placement transaction a
total of 3,950,000 shares of Common Stock at a weighted average price of $.2532
per share to 28 investors, the majority of which were U.S. persons. These
-44-
<PAGE>
sales were made in reliance upon exemptions from the registration requirements
of Section 5 of the Act provided by Rule 504 of Regulation D under the Act.
The issuance of the shares of Common Stock in the Offering met the
requirements of Rule 504 of Regulation D under the Act. At the time of the
Offering, the Company was not a reporting company under either the Act or the
Securities and Exchange Act of 1934, as amended. In addition, the Company is not
an "investment company" or "development company," as evidenced by the active
business and over five year operating results of the Company's wholly owned
operating subsidiary Corgenix, Inc. Finally, the amount of securities offered
and sold was within the regulatory maximum permitted by Rule 504.
ADDITIONAL PRIVATE PLACEMENTS
Also in May 1998, the Company issued 153,000 shares of Common Stock to TGF,
a financial advisor to the Company, in partial consideration of services
rendered to the Company. This sale was made in reliance upon an exemption from
the registration requirements of Section 5 of the Act provided by Rule 506 of
Regulation D under the Act. Based on information provided by TGF to the Company,
TGF is an "accredited investor" as defined at Rule 501(a)(8) of Regulation D
under the Act.
In October 1995, the Company sold in a private placement transaction
4,000,000 shares of Common Stock at a price of $.001 per share for total gross
proceeds of approximately $4,000. This sale was made to an affiliate of the
Company in reliance upon exemptions from the registration requirements of
Section 5 of the Act provided by Section 4(2) of the Act. The Company
repurchased such shares in January 1998 for a purchase price of $8,000, which
was paid for by the issuance of a note in the amount of the purchase price.
In April 1996, REAADS sold in a private placement transaction a total of
113.2 shares of its preferred stock and 29,300 warrants to purchase shares of
REAADS common stock at an exercise price of $30.00 per share. These securities
were sold to six individuals for total gross proceeds of approximately $340,000.
Based upon information provided by each of the investors, the Company believes
that each was either an "accredited investor" or was sophisticated in
transactions of this nature. At the time of the purchase, each of the investors
was either a founder, a senior management employee or a director of the Company,
each was involved in the day-to-day operations of the Company and each had
access to all relevant financial information regarding the business and affairs
of the Company. These sales were made in reliance upon exemptions from the
registration requirements of Section 5 of the Act provided by Section 4(2) of
the Act.
In February 1998, REAADS sold 250 shares of its common stock to a
consultant to REAADS in consideration for services valued at $7,500. Based upon
information provided by the investor, the Company believes that the investor was
an "accredited investor." At the time of the purchase, the investor was a member
of the Company's scientific advisory board and had access to all relevant
financial information regarding the business and affairs of the Company. This
sale was made in reliance upon exemptions from the registration requirements of
Section 5 of the Act provided by Section 4(2) of the Act.
In November 1997, REAADS issued 6,660 warrants to purchase shares of REAADS
common stock at an exercise price of $30.00 per share in connection with the
making of a loan to REAADS. The investor is a founder of the Company and, based
upon information provided to the Company by the investor, the Company believes
that the investor was an "accredited investor." The investor also served as a
consultant to the Company and had access to all relevant financial information
regarding the business and affairs of the Company. This sale was made in
reliance upon exemptions from the registration requirements of Section 5 of the
Act provided by Section 4(2) of the Act.
-45-
<PAGE>
Between May 23, 1995 and May 22, 1998, REAADS granted options and warrants
to purchase its common stock to a total of four of its employees, which options
were exercisable at a price of $30.00 per share. During such period, one REAADS
employee exercised options previously granted to her and purchased two shares of
REAADS common stock for $15 per share. The option grants were made to employees
of REAADS in reliance upon exemptions from the registration requirements of
Section 5 of the Act provided by Rule 701 under the Act.
As part of the Merger, all of REAADS options and warrants then outstanding
were exchanged for shares of REAADS common stock at a ratio of .3692 shares of
REAADS common stock per share of REAADS common stock underlying such option or
warrant.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and
agents to the fullest extent not prohibited by Nevada law. The Company has also
entered into indemnification agreements with each of its directors and officers.
The Company is also empowered under its Bylaws to purchase insurance on behalf
of any person it is required or permitted to indemnify.
In addition, the Company's Articles provide that the Company's directors
will not be personally liable to the Company or any of its stockholders for
damages for breach of the director's fiduciary duty as a director or officer
involving any act or omission of any such director or officer. Each director
will continue to be subject to liability for breach of the director's fiduciary
duties to the Company for acts or omissions that involve intentional misconduct,
fraud or a knowing violation of law, or the payment of dividends in violation of
Nevada corporate law. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
-46-
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE NUMBER
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2
Consolidated Statement of Operations for
Years Ended June 30, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended June 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Corgenix Medical Corporation:
We have audited the accompanying consolidated balance sheets of Corgenix
Medical Corporation and subsidiary (Company) as of June 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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 Corgenix
Medical Corporation and subsidiary as of June 30, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado
October 23, 1998
F-1
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 216,314 141,086
Accounts receivable, less allowance for doubtful accounts of $6,600 and $3,400
in 1998 and 1997, respectively 369,710 601,939
Note receivable 27,425 -
Inventories 511,408 234,761
Prepaid expenses 16,876 12,492
--------- ---------
Total current assets 1,141,733 990,278
--------- ---------
Equipment:
Machinery and laboratory equipment 304,744 368,660
Furniture, fixtures and office equipment 238,761 224,521
--------- ---------
543,505 593,181
Accumulated depreciation and amortization (328,421) (243,754)
--------- ---------
Net equipment 215,084 349,427
--------- ---------
Intangible assets:
Patents, net of accumulated amortization of $572,484 and $498,682
in 1998 and 1997, respectively 545,060 618,862
Goodwill, net of accumulated amortization of $32,523 and $28,969
in 1998 and 1997, respectively 29,065 32,619
--------- ---------
574,125 651,481
--------- ---------
Due from officer 12,000 12,000
Other assets 22,652 98,209
--------- ---------
Total assets $ 1,965,594 2,101,395
--------- ---------
--------- ---------
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable $ 287,765 124,703
Accounts payable 427,809 529,546
Accrued payroll and related liabilities 106,757 109,038
Other liabilities 116,054 116,754
--------- ---------
Total current liabilities 938,385 880,041
Notes payable, excluding current portion 853,349 915,641
--------- ---------
Total liabilities 1,791,734 1,795,682
--------- ---------
Mandatorily redeemable 12%, Class A Preferred stock, 2,000 shares authorized and
113.2 shares issued and outstanding in 1997, liquidation preference of $388,431 - 388,431
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 5,000,000 shares, none issued
or outstanding - -
Common stock, $0.001 par value. Authorized 20,000,000 shares; issued
and outstanding 12,102,494 shares in 1998 12,102 -
Common stock, $0.01 par value. Authorized 500,000 shares; issued and
outstanding 164,000 shares in 1997 - 1,640
Additional paid-in capital 3,610,798 2,337,313
Stock subscription receivable (25,651) -
Accumulated deficit (3,423,389) (2,421,671)
--------- ---------
Total stockholders' equity (deficit) 173,860 (82,718)
--------- ---------
Commitments and contingencies (notes 5, 7, 9 and 11)
Total liabilities and stockholders' equity (deficit) $ 1,965,594 2,101,395
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2 (cont)
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 2,592,175 2,435,965
Cost of sales 901,699 1,318,256
--------- ---------
Gross profit 1,690,476 1,117,709
Operating expenses:
Selling and marketing 751,244 742,200
Research and development 387,260 379,518
General and administrative 1,321,990 723,805
--------- ---------
2,460,494 1,845,523
--------- ---------
Operating loss (770,018) (727,814)
Other expenses:
Interest expense, net (150,148) (49,922)
Factoring expense (2,132) (44,977)
--------- ---------
(152,280) (94,899)
--------- ---------
Net loss $ (922,298) (822,713)
--------- ---------
--------- ---------
Net loss per share basic and diluted $(.15) (.17)
--- ---
Weighted average shares outstanding basic and diluted 6,343,133 4,920,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Common Total
stock, stock, Additional Stock stockholders'
$.01 $.001 paid-in subscription Accumulated equity
par par capital receivable deficit (deficit)
--- --- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1996 $ 1,640 - 2,337,313 - (1,555,152) 783,801
Preferred stock dividend - - - - (43,806) (43,806)
requirement
Net loss - - - - (822,713) (822,713)
----- ------ --------- ----- --------- -------
BALANCES AT JUNE 30, 1997 1,640 - 2,337,313 - (2,421,671) (82,718)
Preferred stock dividend
requirement - - - - (36,330) (36,330)
Issuance of common stock 54 153 165,423 - - 165,630
Issuance of warrants to purchase
common stock - - 10,000 - - 10,000
Conversion of preferred stock
to common stock 56 - 169,744 - - 169,800
Conversion of options and
warrants to common stock 290 - 28,735 - - 29,025
Conversion of REAADS common
stock to Corgenix common (2,040) 6,120 (4,080) - - -
stock
Issuance of common stock in
connection with merger - 1,957 - - (43,090) (41,133)
Issuance of common stock in
private placement offering - 3,872 878,012 - - 881,884
Common stock subscription - - 25,651 (25,651) - -
Net loss - - - - (922,298) (922,298)
----- ------ --------- ----- --------- -------
BALANCES AT JUNE 30, 1998 $ - 12,102 3,610,798 (25,651) (3,423,389) 173,860
----- ------ --------- ----- --------- -------
----- ------ --------- ----- --------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (922,298) (822,713)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 162,023 132,576
Common stock issued for services 194,625 -
Accretion of interest 7,375 -
Provision (credit) for doubtful accounts 3,147 (28,216)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 229,082 (104,302)
Inventories (276,647) 109,885
Prepaid expenses and other assets 71,173 (33,911)
Accounts payable (132,295) 226,437
Accrued payroll and related liabilities (2,281) 76,774
Other liabilities (700) (9,055)
-------- --------
Net cash used by operating activities (666,796) (452,525)
-------- --------
Cash flows from investing activities:
Purchases of equipment (14,240) (283,905)
Proceeds from return of equipment 63,916 -
-------- --------
Net cash provided (used) by investing activities (49,676) (283,905)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 881,914 -
Proceeds from issuance of notes payable 293,995 1,110,891
Payments on notes payable (483,561) (120,305)
Factor payables - (128,985)
-------- --------
Net cash provided by financing activities 692,348 861,601
-------- --------
Net increase in cash and cash equivalents 75,228 125,171
Cash and cash equivalents at beginning of year 141,086 15,915
-------- --------
Cash and cash equivalents at end of year $ 216,314 141,086
-------- --------
-------- --------
Supplemental disclosures:
Cash paid for interest $ 156,940 49,922
-------- --------
-------- --------
Acquisition:
Assets acquired $ 27,425 -
Accumulated deficit 43,090 -
Liabilities assumed (68,558) -
Common stock issued (1,957) -
-------- --------
Net cash paid for acquisition $ - -
-------- --------
-------- --------
Noncash financing activities:
Common stock warrants issued with note payable $ 10,000 -
-------- --------
-------- --------
Conversion of preferred stock to notes payable $ 254,961 -
-------- --------
-------- --------
Common stock subscription $ 25,651 -
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, BASIS OF PRESENTATION AND MERGER
On May 22, 1998, REAADS Medical Products (REAADS) completed a merger with a
subsidiary of Gray Wolf Technologies, Inc., an inactive corporation with no
significant assets or operations. The resulting merged corporation was
named Corgenix, Inc. The parent corporation was renamed Corgenix Medical
Corporation (Corgenix or the Company). Effective with the merger, all
previously outstanding common stock, preferred stock, options and warrants
of REAADS were exchanged for common stock of Corgenix in an exchange ratio
of 1 share of REAADS in exchange for 30 shares of Corgenix, resulting in
the previous stockholders of REAADS owning approximately 76% of the common
stock of Corgenix.
Corgenix develops, manufactures and markets diagnostic products for the
serologic diagnosis of certain vascular diseases and autoimmune disorders
using proprietary technology. The Company markets its products to
hospitals and free-standing laboratories worldwide through a network of
sales representatives, distributors and private label (OEM) agreements.
The Company's offices and manufacturing facility are located in
Westminster, Colorado.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, REAADS Bio-medical Products (UK) Limited
(REAADS UK). REAADS UK was established as a United Kingdom company during
1996 to market the Company's products in Europe. The operations of REAADS
UK were not significant for the years ended June 30, 1998 and 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenue and expenses
during the reporting period. Actual results could differ significantly
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, purchased with
maturities of three months or less to be cash equivalents.
F-6
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are recorded at the lower of cost or market, using the
first-in, first-out method. Components of inventories as of June 30, are
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 131,709 59,851
Work-in-process 210,307 138,080
Finished goods 169,392 36,830
------- -------
$ 511,408 234,761
------- -------
------- -------
</TABLE>
EQUIPMENT
Equipment is recorded at cost. Depreciation, which totaled $84,667 and
$57,984 for the years ended June 30, 1998 and 1997, respectively, is
calculated primarily using the straight-line method over the estimated
useful lives of the assets which range from 3 to 7 years.
INTANGIBLE ASSETS
Intangible assets consist of purchased patents and goodwill, which are
amortized using the straight-line method over 15 years.
INCOME TAXES
Under the asset and liability method of recording income taxes, deferred
tax assets and liabilities are recognized for the 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 recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statements of operations in the period that includes
the enactment date.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products.
RESEARCH AND DEVELOPMENT
Research and development costs and any costs associated with internally
developed patents, formulas or other proprietary technology are expensed as
incurred.
F-7
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results
over an extended period. The Company evaluates the recoverability of
long-lived assets based upon forecasted undiscounted cash flows. Should an
impairment in value be indicated, the carrying value of intangible assets
will be adjusted, based on estimates of future discounted cash flows
resulting from the use and ultimate disposition of the asset.
STOCK-BASED COMPENSATION
In accounting for its stock purchase and option plan, the Company records
compensation expense on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. Pro forma net income
(loss) disclosures for employee stock option grants as if the fair value
based method had been applied are also provided.
(2) BUSINESS COMBINATION
On May 22, 1998, REAADS purchased, in an exchange of common stock, a
subsidiary of Gray Wolf Technologies, Inc. (Gray Wolf) in a transaction
accounted for using the purchase method of accounting. The total purchase
price and carrying value of net assets acquired of Gray Wolf was $1,957.
Net assets acquired are as follows:
<TABLE>
<S> <C>
Net current assets $ 27,425
Accumulated deficit 43,090
Net current liabilities (68,558)
-------
$ 1,957
-------
-------
</TABLE>
As Gray Wolf was an inactive corporation with no significant operations,
the Company recorded the carryover historical basis of net tangible assets
acquired. The results of operations subsequent to the date of acquisition
are included in the Company's consolidated operations.
F-8
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(3) NOTES PAYABLE
Notes payable consist of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to Eagle Bank, with interest at prime
plus 2.75% (11.25% at June 30, 1998), due in
monthly installments of $14,000 through
January 2007, collateralized by the Company's
common stock, commercial security agreements
and a key man life insurance policy $ 918,603 976,532
Note payable to Eagle Bank, with interest at the
bank's base lending rate plus 2% (11.25% at
June 30, 1998) due in monthly installments of
$2,000 and a balloon payment due December 30,
1998, collateralized by accounts receivable 40,000 50,000
Notes payable to former preferred stockholders,
with interest at 12%, due November 8, 1998 144,511 -
Note payable, with interest at prime plus 3%
(11.50% at June 30, 1998), due on demand 38,000 -
Notes payable to officers of the Company with
interest rates ranging from 8% to 22%, repaid
in 1998 - 13,812
--------- ---------
1,141,114 1,040,344
Less current portion (287,765) (124,703)
--------- ---------
Notes payable, excluding current portion $ 853,349 915,641
--------- ---------
--------- ---------
</TABLE>
Aggregate maturities of notes payable by year as of June 30, 1998, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Years ending June 30:
1999 $ 287,765
2000 72,986
2001 81,634
2002 91,303
2003 102,125
Thereafter 505,301
---------
$1,141,114
---------
---------
</TABLE>
The carrying values of notes payable approximate fair value based on their
terms and floating market based interest rates.
F-9
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(4) COST OF SALES
During the year ended June 30, 1997, the Company included a charge of
$479,000 in cost of sales due to a product design flaw of a raw material
component used in one of the Company's products. A sole source
manufacturer in Japan provided the raw material component. The Company was
contractually obligated to purchase the raw material from this manufacturer
through a contract with the Company's largest customer, Chugai
Pharmaceutical Co., Ltd. The product design flaw has been resolved to the
satisfaction of the customer.
(5) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company previously issued 113.2 shares of mandatorily redeemable Class
A voting preferred stock, which was recorded at liquidation value which
approximated fair market value at the date of issuance. Pursuant to the
purchase of Gray Wolf, one-half of the shares of preferred stock were
converted into common stock and one-half of the shares of preferred stock
plus all unpaid dividends were converted into notes payable.
COMMON STOCK
In connection with the merger, the Company may have an obligation to issue
4,000,000 shares of contingent common stock to former REAADS stockholders.
The contingent shares are issuable upon the occurrence of the following
events: (i) the conversion of one or more shares of the Company's
authorized but unissued Series A 5% convertible preferred stock to common
stock or the exercise of one or more common stock purchase warrants issued
in connection with the Series A Preferred Stock, in which case the maximum
number of contingent shares issuable is 2,000,000 shares, (ii) November 23,
1998, if as of such date the Company has sold less than $1,000,000 of
Series A Preferred Stock, in which case the maximum number of contingent
shares issuable is 4,000,000 shares less (a) the number of shares of common
stock issuable upon conversion of all then outstanding Series A preferred
stock and exercise of all preferred stock less (b) four times the dollar
amount of Series A preferred stock sold by the Company as of such date.
The contingent shares are issuable to the former stockholders of REAADS
without payment of additional consideration.
Effective with the purchase of Gray Wolf, 3,872,235 shares of Corgenix
common stock were issued at a weighted average price of $.2532 per share.
Proceeds of $881,884 were recorded net of commissions and expenses. An
additional 77,765 shares of Corgenix common stock were subscribed, and a
subscription receivable was recorded of $25,651.
(6) STOCK PURCHASE AND OPTION PLAN
Prior to the purchase of Gray Wolf, the Company had a stock purchase and
option plan, whereby, the Company sold shares of its stock, and/or granted
options to purchase shares of its common stock to key employees, officers,
directors and consultants, as determined by
F-10
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(6) STOCK PURCHASE AND OPTION PLAN (CONTINUED)
the Company's Board of Directors. Options under this plan were granted at
not less than exercisable over 5 to 10 year periods. All such options
were converted to shares of common stock pursuant to the merger agreement
entered into with the purchase of Gray Wolf with no monetary consideration
received by the Company. Accordingly, no options are outstanding at June
30, 1998.
As the Company granted options at fair value, no compensation cost has been
recognized for its stock options in the consolidated financial statements.
Had compensation cost for the Company's stock-based compensation plan been
determined as fair value at the grant dates for awards under the plan, the
Company's net loss would have been increased to the proforma amount
indicated below:
<TABLE>
<CAPTION>
June 30, 1997
-------------
<S> <C>
Net loss:
As reported $ 822,713
Pro forma 840,637
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended June 30,
1997; no dividend yield, no volatility, risk-free interest rate of 5.6
percent, and expected life of 4 years.
A summary of the status of the Company's fixed stock options plan for the
year ended June 30, 1997, is presented below:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
------ --------------
<S> <C> <C>
Outstanding at beginning of year 44,500 $ 22
Granted 4,300 30
Exercised - -
Forfeited (1,300) 30
------ --
Outstanding at June 30, 1997 47,500 23
------ --
------ --
Options exercisable at June 30, 1997 32,550
Weighted-average fair value of options granted
during the year $ 30
</TABLE>
F-11
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
The Company has a royalty agreement with BioStar Medical Products, Inc.
(BioStar) whereby the Company pays 5% of certain product sales, up to an
aggregate of $600,000, in royalties. As of June 30, 1998, $538,962 of
cumulative royalties have been paid to BioStar. Royalty expense under this
agreement totaled $91,574 and $99,521 for the years ended June 30, 1998 and
1997, respectively.
LEASES
The Company is obligated under various noncancelable operating leases
primarily for its operating facility and certain office equipment. The
leases generally require the Company to pay related insurance costs,
maintenance costs and taxes. Future minimum lease payments under
noncancelable operating leases with initial or remaining terms in excess of
one year as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending June 30:
<S> <C>
1999 $ 135,000
2000 133,000
2001 135,000
2002 11,000
-------
Total future minimum lease payments $ 414,000
-------
-------
</TABLE>
Rent expense totaled $115,311 and $121,235 for the years ended June 30,
1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key employees, certain
of whom are also stockholders. In addition to salary and benefit
provisions, these agreements include defined commitments should the
employees terminate their employment with or without cause.
(8) INCOME TAXES
At June 30, 1998, the Company has a net operating loss carryforward for
income tax purposes of approximately $3,068,000 expiring during the period
from 2006 to 2013. Research and development tax credit carryforwards
approximate $135,220. The future utilization of the operating loss
carryforwards or the time period in which the carryforwards could be
utilized could be limited if certain historical stockholders of REAADS sell
their shares within two years of the purchase of Gray Wolf.
F-12
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
As of June 30, 1998, the Company had a gross deferred tax asset of
approximately $338,400 relating primarily to the Company's net operating
losses and research and development credit carryforwards. A valuation
allowance in the amount of the deferred tax asset has been recorded due to
management's determination that it's not more likely than not that the tax
assets will be utilized.
(9) RELATED PARTY TRANSACTIONS
The Company has a consulting agreement with TransGlobal Financial
Corporation (TGF), a company whose president also serves as a director of
Corgenix. TGF is to provide business and financial advice in return for a
monthly fee of $5,000 through May 22, 2001, plus a percentage of funds
committed and available to the Company through debt or equity financing.
TGF is also entitled to a transaction fee for any business combination or
joint venture it represents for Corgenix. Two of Corgenix's directors will
be nominated by TGF for the term of the agreement unless the Company issues
an aggregate of 250,000 or more shares of Series A preferred stock and
warrants to purchase an aggregate of 250,000 or more shares of common
stock. Thereafter, TGF is entitled to have a designated observer present
at all board meetings. During the term of the agreement, the Company is
required to obtain TGF's written consent prior to issuing more than 5% of
any class of common or preferred stock.
The Company has issued options to TGF for the purchase of 1,000,000 units
of Series A 5% convertible preferred stock and warrants to purchase one
share of common stock at an exercise price of $2.00, for an aggregate
purchase price of $1,000,000.
The Company has entered into product development, manufacturing and
distribution agreements with Chugai, which provide certain rights for
Chugai to distribute the Company's products in Japan.
In November 1997, the Company borrowed $100,000 under a note payable from a
stockholder. The note and related interest was repaid in May 1998.
Amounts due from an officer are due on June 6, 1999, and do not bear
interest.
(10) CONCENTRATION OF CREDIT RISK
The Company's customers are principally located in the United States,
although it has some foreign customers. The Company has a distribution
agreement with Cambridge Life Sciences plc to distribute the Company's
products in Europe. The Company performs periodic credit evaluations of
its customers' financial condition but generally does not require
collateral for receivables.
Chugai is the Company's largest customer, representing approximately 30%
and 40% of sales in the years ended June 30, 1998 and 1997, respectively,
and approximately 21% and 37% of accounts receivable at June 30, 1998 and
1997, respectively.
F-13
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(11) SUBSEQUENT EVENT
In July 1998, the Company received proceeds of $25,651 under its common
stock subscription and the related common shares were issued.
F-14
<PAGE>
PART III
ITEMS 1. AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
2.1 Agreement and Plan of Merger dated as of May 12, 1998 by and among
Gray Wolf Technologies, Inc., Gray Wolf Acquisition Corp. And REAADS
Medical Products, Inc. (filed as Exhibit 2.1 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
2.2 First Amendment to Agreement and Plan of Merger dated as of May 22,
1998 by and among Gray Wolf Technologies, Inc., Gray Wolf Acquisition
Corp. And REAADS Medical Products, Inc. (filed as Exhibit 2.2 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
2.3 Second Amendment to Agreement and Plan of Merger dated as of June 17,
1998 by and among the Company and TransGlobal Financial Corporation
(filed as Exhibit 2.3 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Registration Statement
on Form 10-SB filed June 29, 1998, and incorporated herein by
reference).
4.1 Certificate of Designations for Series A Preferred Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.1 Manufacturing Agreement dated September 1, 1994 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.(filed as
Exhibit 10.1 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.2 Amendment to the Manufacturing Agreement dated as of January 17, 1995
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical Products,
Inc.(filed as Exhibit 10.2 to the Company's Registration Statement on
Form 10-SB filed June 29, 1998, and incorporated herein by reference).
10.3 Amendment Agreement dated November 17, 1997 between Chugai Diagnostic
Science, Co., Ltd. and REAADS Medical Products, Inc.(filed as Exhibit
10.3 to the Company's Registration Statement on Form 10-SB filed June
29, 1998, and incorporated herein by reference).
10.4 Distribution Agreement dated August 26, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.(filed as
Exhibit 10.4 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.5 Amendment to the Distribution Agreement dated September 7, 1994
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical Products,
Inc. (filed as Exhibit 10.5 to the Company's Registration Statement on
Form 10-SB filed June 29, 1998, and incorporated herein by reference).
10.6 Distribution Agreement dated November 14, 1997 between Chugai
Diagnostics Science Co, Ltd. and REAADS Bio-Medical Products (UK)
Ltd. (filed as Exhibit 10.6 to the Company's Registration Statement on
Form 10-SB filed June 29, 1998, and incorporated herein by reference).
III-1
<PAGE>
10.7 Product Development and Manufacturing Agreement dated September 12,
1994 between REAADS Medical Products, Inc. and Helena Laboratories
Corporation (filed as Exhibit 10.7 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.8 Amendment to Product Development and Manufacturing Agreement effective
December 15, 1997 between REAADS Medical Products, Inc. and Helena
Laboratories Corporation (filed as Exhibit 10.8 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.9 Office Lease dated February 6, 1996 between Stream Associates, Inc.
And REAADS Medical Products, Inc. (filed as Exhibit 10.9 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
10.10 Guarantee dated November 1, 1997 between William George Flemming,
Douglass Simpson and Geoffrey Vernon Callen (filed as Exhibit 10.10 to
the Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
10.11 Employment Agreement dated May 22, 1998 between Luis R. Lopez and the
Company (filed as Exhibit 10.11 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.12 Employment Agreement dated May 22, 1998 between Douglass T. Simpson
and the Company (filed as Exhibit 10.12 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.13 Employment Agreement dated May 22, 1998 between Ann L. Steinbarger and
the Company (filed as Exhibit 10.13 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.14 Employment Agreement dated May 22, 1998 between Taryn G. Reynolds and
the Company (filed as Exhibit 10.14 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.15 Employment Agreement dated May 22, 1998 between Catherine (O'Sullivan)
Fink and the Company (filed as Exhibit 10.15 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.16 Consulting Contract dated May 22, 1998 between Wm. George Fleming,
Bond Bio-Tech, Ltd. and the Company (filed as Exhibit 10.16 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
10.17 Stock Purchase Agreement dated September 1, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc. (filed as
Exhibit 10.17 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.18 Lead Generation/Corporate Relations Agreement dated April 14, 1998
between the Company and Corporate Relations Group, Inc. (filed as
Exhibit 10.18 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.19 Note dated January 6, 1997 between REAADS Medical Products, Inc. and
Eagle Bank (filed as Exhibit 10.19 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.20 Deed of Guarantee Sterling and Currency dated May 14, 1997 by REAADS
Bio-Medical Products (UK) Limited (filed as Exhibit 10.20 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
III-2
<PAGE>
10.21 Option Agreement dated as of May 22, 1998 between TransGlobal
Financial Corporation and the Company (filed as Exhibit 10.21 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
10.22 Consulting Agreement dated May 22, 1998 between TransGlobal Financial
Corporation and the Company (filed as Exhibit 10.22 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.23 Distributor Agreement dated as of August 3, 1998 by and between
American Biogenetic Sciences, Inc. and the Company (filed as Exhibit
10.23 to the Company's Registration Statement on Form 10-SB/A-1 filed
September 24, 1998, and incorporated herein by reference) (certain
portions of Exhibit 10.23 have been omitted based upon a request for
confidential treatment; the omitted portions have been filed with the
Commission).
10.24 Form of Indemnification Agreement between the Company and its
directors and officers (filed as Exhibit 10.24 to the Company's
Registration Statement on Form 10-SB/A-1 filed September 24, 1998, and
incorporated herein by reference).
11.1 Statement Regarding Computation of Net Income per Share (filed as
Exhibit 11.1 to the Company's Annual Report on Form 10-KSB filed
September 28, 1998, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
23.1 Consent of Certified Public Accountants
</TABLE>
(b) Financial Statement Schedules
None
III-3
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORGENIX MEDICAL CORPORATION
By: /s/Douglas T. Simpson
Name: Douglass T. Simpson
Title: President
III-4
