U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-SB/A-1
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:
STOCKHOLDERS/1/ NUMBER OF SHARES PERCENTAGE OWNERSHIP/1/
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%
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:
o Autoimmune disorders (diseases in which an individual creates
antibodies to one's self, for example systemic lupus erythematosus
("SLE") and rheumatoid arthritis ("RA"));
o Vascular diseases (diseases associated with certain types of
thrombosis or clot formation, for example antiphospholipid syndrome,
deep vein thrombosis, stroke and coronary occlusion);
o Bone and joint diseases (such as osteoporosis and osteoarthritis);
and
o 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.
Products developed using this unique attachment method typically demonstrate a
more uniform and stable molecular configuration, providing a longer average
shelf life, increased accuracy and superior specificity than the products of the
Company's competitors.
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, anti-phosphatidylserine ("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 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 enzyme-conjugated 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, anti-SM/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:
o Companies that are interested in co-developing diagnostic tests
that use the Corgenix technology;
o Companies with complementary technologies;
o Companies with complementary products and novel disease markers;
and/or
o 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 Meditech-BioPool ( 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-(beta)2 Glycoprotein I - IgG,
anti-(beta)2 Glycoprotein I - IgM and anti-(beta)2 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 execute a confidentiality
agreement upon the commencement of any employment, consulting or advisory
relationship
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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 testing, patient test management, quality control, quality assurance
and inspections. The regulations have established
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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
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in this Registration
Statement.
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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 from 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 relationship 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, 1997 and 1996
Net Sales. From its inception in 1990, the Company has achieved average
annual net sales growth of 36%. Net sales for the year ended June 30, 1997 were
$2.44 million, a 0.9% decline from $2.46 million in 1996. A component of net
sales, product sales, decreased 3.6% to $2.27 million in 1997 from $2.35 million
in 1996. The lack of product sales growth in fiscal 1997 resulted primarily
from: (i) an unforecasted drop in sales of the Hyaluronic Acid product to Chugai
for distribution in Japan, (ii) loss of the Company's largest United States
customer, which was acquired by another laboratory (a loss of $163,000 in
product sales in 1997 from 1996), and (iii) the reduction in purchases from
another United States customer in the amount of $94,000 from 1996 to 1997. Sales
of HA declined 10.2% from $747,000 in 1996 to $671,000 in 1997, due primarily to
a design flaw in a critical raw material component discussed below.
Also included in net sales are partnership payments from strategic
alliances that increased from $51,000 in 1996 to $200,000 in 1997. Additionally,
royalty income to Corgenix decreased from $60,000 in 1996 to $0 in 1997 as a
licensing agreement was converted to a paid up license.
Cost of sales. Cost of sales increased 57.6% to $1.32 million in 1997 from
$836,000 in 1996, due primarily to a design flaw in a critical raw material
component used in the HA product. In 1997, an additional $479,000 was
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charged to cost of sales because of this problem. The critical component design
flaw resulted from substandard blank microtiter plates. These plates are
purchased from an external single source vendor, Sumitomo Bakelite (Japan).
Chugai requires the Company to incorporate this specific vendor's plates into
the HA product that Corgenix manufactures exclusively for Chugai. This problem
has never occurred before and is not expected to reoccur as Corgenix has made
technical changes to the HA product line that compensate for the shipment of any
future poor quality plates. In addition, the Company is actively seeking
alternate vendors with the concurrence of Chugai. The gross profit declined from
66% in 1996 to 46% in 1997 due to this component design flaw. Excluding $479,000
in expense to correct the design flaw, gross profit would have been relatively
unchanged at 65% in 1997.
Research and development. Research and development expenses increased
14.5% to $380,000 in 1997 from $332,000 in 1996, primarily due to hiring
additional scientific staff, consulting fees and other costs related to ongoing
development programs.
Selling and marketing. Selling and marketing expenses increased 24.3% from
$597,000 in 1996 to $742,000 in 1997, primarily due to increased costs
associated with expansion of the Company's sales organization in Europe.
General and administrative. General and administrative expenses increased
25.2% to $724,000 in 1997 from $578,000 in 1996, due in part to legal,
accounting and other costs relating to strategic partnering activities,
financing activities and the relocation to the Company's current facility.
Other expenses. Other expenses increased 14.6% to $95,000 in 1997 from
$83,000 in 1996 due primarily to higher interest expense resulting from higher
debt levels throughout 1997. Interest expense increased 59.3% to $50,000 in 1997
from $31,000 in 1996, while factoring expenses decreased 12.6% to $45,000 in
1997 from $51,000 in 1996 due to the Company discontinuing factoring accounts
receivable in 1997.
Nine Months Ended March 31, 1998 and 1997
Net sales. Net sales for the nine months ended March 31, 1998 were $1.83
million, a 15.1% increase from $1.59 million in the same period in 1997. This
increase was primarily due to an increase in product sales, which increased
17.8% to $1.79 million in 1998 from $1.52 million in 1997. Sales of the HA
product to Chugai for distribution in Japan increased 35.1% to $519,000 in 1998
from $384,000 in 1997 due to increased marketing focus by Chugai following
resolution of the design flaw in 1997. Product sales in the United States
increased 19.2% to $878,000 in 1998 from $736,000 in 1997. OEM sales (excluding
Chugai) increased 20.3% to $218,000 in 1998 from $181,000 in 1997. Other income
decreased 58.6% to $42,000 in 1998 from $101,000 in 1997 due to timing of
payments from strategic partners.
Cost of sales. Cost of sales decreased 6.4% to $820,000 in 1998 from
$876,000 in 1997, due primarily to lower production costs resulting from the
resolution of the HA design flaw in 1997. This was offset by higher costs
associated with the transfer of three new Corgenix products into production, and
the conversion of labels and outer boxes for the Chugai HA product. The Chugai
packaging change was required due to the restructuring of Chugai from a division
within Chugai Pharmaceuticals to a wholly owned subsidiary. The gross profit
percentage increased to 55.2% in 1998 from 46.9% in 1997.
Research and development. Research and development expenses increased 3.7%
to $289,000 in 1998 from $279,000 in 1997 primarily due to hiring additional
scientific staff, consulting fees and other costs related to ongoing development
programs.
Selling and marketing. Selling and marketing expenses increased 12.6% to
$538,000 in 1997 from $478,000 in 1997, primarily due to increased costs
associated with the continued expansion of the Company's sales organization in
Europe.
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<PAGE>
General and administrative. General and administrative expenses increased
29.4% to $689,000 in 1998 from $533,000 in 1997, due in part to legal,
accounting and other costs relating to strategic partnering activities and
financing activities.
Other expenses. Other expenses increased 78.3% to $121,000 in 1998 from
$68,000 in 1997 due primarily to higher interest expense resulting from higher
debt levels throughout 1997. Interest expense increased to $119,000 in 1998 from
$23,000 in 1997 while factoring expenses decreased to $1,800 in 1998 from
$45,000 in 1997 due to the Company discontinuing factoring accounts receivable
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Corgenix has financed its operations primarily through
private placements of common and preferred stock, raising net proceeds of
approximately $2.7 million from sales of these securities. Corgenix has also
received financing for operations from sales of diagnostic products and
agreements with strategic partners. Through June 30, 1997 and March 31, 1998,
Corgenix had invested $349,000 and $230,000, respectively, (net of accumulated
depreciation) in leasehold improvements, laboratory and computer equipment and
office furnishings and equipment to support its development and administrative
activities.
At March 31, 1998, the Company had cash of $19,085, a working capital
deficit of $318,577, and short and long-term notes payable of $1,110,681, with
$240,327 due in the following twelve months and the remainder due at varying
dates through February 2006. Subsequent to march 31, 1998 the Company issued
3,950,000 shares of Common Stock in a private placement with gross proceeds of
$1 million.
Management expects that cash on hand and proceeds from equity financings
will be sufficient to fund operations for the following twelve months.
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.
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.
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<PAGE>
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, 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
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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 two fiscal years and the first nine months of the
current fiscal year. 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.
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
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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," "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."
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
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<PAGE>
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.
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
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<PAGE>
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."
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
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<PAGE>
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.
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.
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<PAGE>
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(R) 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. 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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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 17, 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 "Part I.
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.
SHARES BENEFICIALLY OWNED
- ------------------------------------ --------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ------------------ --------------
Dr. Luis R. Lopez(1)(2)(3).......... 1,460,310 11.99%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Raul Diez Canseco(2)(3)............. 679,260 5.58%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Jana Hartinger Mazzini(2)(3)........ 662,670 5.44%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Leland P. Snyder(2)(3).............. 631,350 5.18%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Brian E. Johnson(2)(3).............. 16,620 *
Mike M. Mustafoglu(3)(4)............ 217,265 1.89%
Alev T. Lewis....................... 0 *
Douglass T. Simpson(2)(3)........... 155,340 1.28%
Ann L. Steinbarger(2)(3)............ 55,380 *
All directors and current executive officers
as a group (8 persons)(1)(2)(3)(4) 2,092,235 17.18%
- ------------
* 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 "Item 7. Certain Relationships and
Related Transactions -- Contingent Common Stock."
(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.
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<PAGE>
(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.
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,
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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 (pound)41 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 (pound)31 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 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
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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.
TERM OF DIRECTORS
Each director serves for a term of one year or until the director's
successor is duly elected, appointed or seated.
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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. 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. 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, 1997, 1996 and
1995 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............................... 1997 $143,333 --
Chairman, Chief Executive Officer
1996 133,333 --
1995 120,000 --
Douglass T. Simpson......................... 1997 $123,333 --
President, Chief Operating Officer
1996 113,333 38,766
1995 100,000 --
Ann L. Steinbarger(2)....................... 1997 $100,000 --
Vice President
1996 50,000 55,380
1995 -- --
</TABLE>
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(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 commenced employment with the Company in 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
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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
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
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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 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 17, 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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SHARES BENEFICIALLY OWNED AFTER
CONTINGENT STOCK ISSUANCE
- ----------------------------------- --------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ------------------ -------------
Dr. Luis R. Lopez(1)(2)............. 2,161,761 13.36%
Raul Diez Canseco(2)................ 1,123,221 6.94%
Jana Hartinger Mazzini(2)........... 1,095,788 6.77%
Leland P. Snyder(2)................. 1,043,997 6.45%
Brian E. Johnson(2)................. 27,483 *
Mike M. Mustafoglu(2)(3)............ 217,265 1.43%
Alev T. Lewis....................... 0 *
Douglass T. Simpson(2).............. 256,869 1.59%
Ann L. Steinbarger(2)............... 91,576 *
All directors and current
executive officers as a
group (8 persons)(1)(2)(3)........ 3,055,881 18.89%
- ------------
* 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) 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 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.
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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 May 23, 1998 there were
approximately 350 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
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<PAGE>
twenty-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.
-39-
<PAGE>
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 ( 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 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.
hyaluronic acid (HA) -- a polysaccharide found in synovial fluid, serum
and other body fluids and tissues, elevated in certain rheumatological and
hepatic (liver) disorders.
-40-
<PAGE>
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.
thrombin -- the enzyme of the blood, formed from prothrombin, that causes
clotting by converting fibrinogen to fibrin.
-41-
<PAGE>
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 (R) 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 (R) under the symbol "GRWT."
On September 22, 1998, the last bid price of the Common Stock on the OTC
Bulletin Board (R) as reported by the OTC Bulletin Board (R) was $0.54.
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(R). The
following quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions, and may not represent actual transactions.
HIGH LOW
YEAR ENDED JUNE 30, 1998
First Quarter..................................... $-- $--
Second Quarter.................................... -- --
Third Quarter..................................... -- --
Fourth Quarter ................................... $1.55 $0.31
YEAR ENDED JUNE 30, 1999
First Quarter (through September 22, 1998) $1.75 $0.28
On September 17, 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
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<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 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.
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. 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. 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.
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.
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<PAGE>
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
ITEM PAGE NUMBER
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 and 1996 F-2
Consolidated Statement of Operations for the Nine
Months Ended March 31, 1998 and the Years Ended
June 30, 1997 and 1996 F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Nine Months Ended March 31, 1998
and the Years Ended June 30, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and the Years
Ended June 30, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
REAADS MEDICAL PRODUCTS, INC.:
We have audited the accompanying consolidated balance sheets of REAADS Medical
Products, Inc. and subsidiary (Company) as of March 31, 1998 and June 30, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the nine months ended March 31, 1998 and for
the years ended June 30, 1997 and 1996. 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 REAADS Medical
Products, Inc. and subsidiary as of March 31, 1998 and June 30, 1997 and 1996,
and the results of their operations and their cash flows for the nine months
ended March 31, 1998 and for the years ended June 30, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boulder, Colorado
June 3, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1998 1997 1996
- ------ ---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 19,095 141,086 15,915
Accounts receivable, less allowance for doubtful accounts of
$3,432, $3,432 and $31,648 in 1998, 1997 and 1996,
respectively 298,934 601,939 469,421
Inventories 317,118 234,761 344,646
Prepaid expenses 15,748 12,492 4,220
--------- --------- ---------
Total current assets 650,895 990,278 834,202
--------- --------- ---------
Equipment:
Machinery and laboratory equipment 304,744 368,660 198,843
Furniture, fixtures and office equipment 230,806 224,521 110,433
--------- --------- ---------
535,550 593,181 309,276
Less accumulated depreciation and amortization (305,057) (243,754) (185,770)
--------- --------- ---------
Net equipment 230,493 349,427 123,506
--------- --------- ---------
Intangible assets:
Patents, net of accumulated amortization of $554,559, $498,682
and $426,983 in 1998, 1997 and 1996, respectively 562,985 618,862 690,561
Goodwill, net of accumulated amortization of $28,969, $26,037
and $23,144 in 1998, 1997 and 1996, respectively 29,687 32,619 35,512
--------- --------- ---------
592,672 651,481 726,073
--------- --------- ---------
Due from officer 12,000 12,000 12,000
Other assets 50,849 98,209 72,570
--------- --------- ---------
Total assets $ 1,536,909 2,101,395 1,768,351
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable $ 240,327 124,703 49,758
Accounts payable 546,765 529,546 303,109
Accrued payroll and related liabilities 102,672 109,038 32,264
Other liabilities 79,708 116,754 125,809
Factor payables - - 128,985
---------- ---------- ---------
Total current liabilities 969,472 880,041 639,925
Notes payable, excluding current portion 870,354 915,641 -
--------- --------- -----
Total liabilities 1,839,826 1,795,682 639,925
--------- --------- ---------
Mandatorily redeemable 12%, Class A Preferred stock, 2,000
shares authorized and 113.2 shares issued and outstanding,
liquidation preference of $424,761 in 1998 424,761 388,431 344,625
Stockholders' equity (deficit):
Common stock, $0.01 par value. Authorized 500,000 shares;
issued and outstanding 164,252 shares in 1998 and 164,000
in 1997 and 1996 1,643 1,640 1,640
Additional paid-in capital 2,354,840 2,337,313 2,337,313
Accumulated deficit (3,084,161) (2,421,671) (1,555,152)
--------- --------- ---------
Total stockholders' equity (deficit) (727,678) (82,718) 783,801
--------- --------- ---------
Commitments and contingencies (notes 1, 4, 5 and 7)
Total liabilities and stockholders' equity (deficit) $ 1,536,909 2,101,395 1,768,351
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine months
ended Years ended June 30,
March 31, --------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 1,830,338 2,435,965 2,456,610
Cost of sales 819,505 1,318,256 836,496
--------- --------- ---------
Gross profit 1,010,833 1,117,709 1,620,114
Operating expenses:
Selling and marketing 538,057 742,200 597,157
Research and development 289,369 379,518 331,513
General and administrative 689,013 723,805 577,940
--------- --------- ---------
1,516,439 1,845,523 1,506,610
--------- --------- ---------
Operating income (loss) (505,606) (727,814) 113,504
Other expenses:
Interest expense, net (118,728) (49,922) (31,333)
Factoring expense (1,826) (44,977) (51,490)
--------- --------- ---------
(120,554) (94,899) (82,823)
--------- --------- ---------
Net income (loss) $ (626,160) (822,713) 30,681
========= ========= =========
Net income (loss) per share basic $ (3.82) (5.02) .19
==== ==== ===
and diluted
Weighted average shares outstanding 164,043 164,000 164,000
basic and diluted
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED MARCH 31, 1998 AND
YEARS ENDED JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
Total
Additional stockholders'
Common paid-in Accumulated equity
stock capital deficit (deficit)
------ ---------- ------- -------
<S> <C> <C> <C> <C>
BALANCES AT JULY 1, 1995 $ 1,640 2,337,313 (1,580,808) 758,145
Preferred stock dividend
requirement - - (5,025) (5,025)
Net income - - 30,681 30,681
------ ---------- --------- -------
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 - - (36,330) (36,330)
requirement
Issuance of common stock 3 7,527 - 7,530
Issuance of common
stock warrants - 10,000 - 10,000
Net loss - - (626,160) (626,160)
------ ---------- --------- -------
BALANCES AT MARCH 31, 1998 $ 1,643 2,354,840 (3,084,161) (727,678)
===== ========= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Nine months Years ended June 30,
ended March 31, --------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(626,160) (822,713) 30,681
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization 120,112 132,576 127,119
Common stock issued for services 7,500 - -
Accretion of interest discount 7,375 - -
Provision (credit) for uncollectible accounts receivable - (28,216) 24,167
Changes in operating assets and liabilities:
Accounts receivable 303,005 (104,302) (186,641)
Inventories (82,357) 109,885 (190,637)
Prepaid expenses and other assets 44,104 (33,911) (66,535)
Accounts payable 17,219 226,437 96,870
Accrued payroll and related liabilities (6,366) 76,774 64,552
Other liabilities (37,046) (9,055) 78,640
------- --------- -------
Net cash used by operating activities (252,614) (452,525) (21,784)
------- --------- -------
Cash flows from investing activities:
Purchases of equipment (6,285) (283,905) (65,225)
Proceeds from return of equipment 63,916 - -
------- --------- -------
Net cash provided (used) by investing activities 57,631 (283,905) (65,225)
------- --------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 30 - -
Proceeds from issuance of notes payable 250,000 1,110,891 70,000
Payments on notes payable (177,038) (120,305) (121,986)
Factor payables - (128,985) 12,504
Decrease in due from officer - - (12,000)
Issuance of preferred stock for cash - - 19,200
-------- ---------- -------
Net cash provided (used) by financing activities 72,992 861,601 (32,282)
-------- ---------- -------
Net increase (decrease) in cash and cash
equivalents (121,991) 125,171 (119,291)
Cash and cash equivalents at beginning of period 141,086 15,915 135,206
------- --------- -------
Cash and cash equivalents at end of period $ 19,095 141,086 15,915
======= ========= =======
Supplemental disclosures:
Cash paid for interest $ 111,353 49,922 31,333
======= ========= =======
Noncash operating and financing activities:
Repayment of accrued payroll and other liabilities
through issuance of preferred stock $ - - 209,705
======== ========== =======
Repayment of notes payable through issuance of
preferred stock $ - - 110,695
======== ========== =======
Common stock warrants issued with note payable $ 10,000 - -
======== ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND JUNE 30, 1997 AND 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, BASIS OF PRESENTATION AND MERGER
REAADS Medical Products, Inc. (Company) 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
are located in Westminster, Colorado.
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 revenues and expenses
during the reporting period. Actual results could differ significantly
from those estimates.
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 nine months ended
March 31, 1998 or the years ended June 30, 1997 and 1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, purchased with
maturities of three months to be cash equivalents.
INVENTORIES
Inventories are recorded at the lower of cost or market, using the
first-in, first-out method. The components of inventories as of March
31, 1998 and June 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Raw materials $ 100,836 59,851 103,503
Work-in-process 166,368 138,080 214,922
Finished goods 49,914 36,830 26,221
------- ------- -------
$ 317,118 234,761 344,646
======= ======= =======
</TABLE>
F-6
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT
Equipment is recorded at cost. Depreciation, which totaled $61,303,
$57,984 and $48,705 for the nine months ended March 31, 1998 and the
years ended June 30, 1997 and 1996, 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
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS No. 109).
Under the asset and liability method of SFAS No. 109, 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.
Under SFAS No. 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in the consolidated statement of
operations in the period that includes the enactment date.
FACTOR PAYABLES
The Company factored accounts receivable during fiscal 1996, but
discontinued these factoring arrangements during fiscal 1997. The
Company's factored accounts receivable were $161,232 at June 30, 1996,
and the Company recorded an offsetting factor payable, equal to the
original accounts receivable, less accrued factoring fees.
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
in the year incurred.
F-7
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
EARNINGS PER SHARE
The Company has adopted the requirements for Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128) for all
periods presented. SFAS 128 requires that disclosure of "basic" earnings
per share and "diluted" earnings per share. Basic earnings per share is
computed by dividing income (loss) available to common stockholders by
the weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted average number of common shares
outstanding increased for potentially dilutive common shares outstanding
during the period. The dilutive effect of stock options, warrants, and
their equivalents is calculated using the treasury stock method. The
dilutive effect of the exercise of options and warrants has not been
included in the calculation of diluted earnings per share because the
effect in loss years in antidilutive.
LONG-LIVED ASSETS
The Company accounts for its long-lived assets under the provisions of
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (SFAS No. 121).
SFAS No. 121 requires that the Company's long-lived assets be 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
The Company accounts for its stock purchase and option plan in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock
exceeds the exercise price. On January 1, 1996, the Company adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income disclosures for employee stock option grants as if the fair value
based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosures required by SFAS No. 123.
F-8
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(2) NOTES PAYABLE
On January 7, 1997, the Company obtained a $1 million, 10-year Small
Business Administration (SBA) term loan from Eagle Bank. The loan bears
interest at New York Prime (8.5% at March 31, 1998) plus 2.75%, adjusted
quarterly. Interest and principal payments are due monthly. The loan is
collateralized by: (a) 51% of the Company's voting common stock, which
has been assigned and pledged by certain officers and other
stockholders; (b) senior security in all patent rights, other
intangibles, equipment and inventories; (c) a second position security
interest in all accounts receivable; and (d) a $1 million key man life
insurance policy on the President of the Company.
Additionally, on January 7, 1997, the Company obtained a $50,000 line of
credit from Eagle Bank. The term of the line of credit was one year,
with interest due monthly at the bank's base lending rate (9.0% at March
31, 1998) plus 2%, with principal due at maturity. During January 1998,
this line of credit was converted to a note with interest adjustable to
Eagle Bank's base rate plus 2.75%, due in monthly installments of $2,000
plus accrued interest beginning January 30, 1998 and a balloon payment
of $40,000 plus accrued interest on June 30, 1998. This note is
collateralized by the Company's accounts receivable.
During September and October 1997, the Company borrowed a total of
$150,000 under a note payable from Novadx International, Inc. This note
is due on demand with interest at 11% per annum.
On November 19, 1997, the Company borrowed $100,000 under a note payable
from a stockholder. This note is due on May 19, 1998 with interest at
12%. The Company also issued 6,660 detachable common stock warrants as
additional interest for this note. These warrants expire eight years
from date of issue and are each exercisable into one share of the
Company's common stock at an exercise price of $30 per share. On
November 19, 1997, the Company recorded $10,000 of interest discount to
record the value of the warrants, and amortized the interest discount,
on the interest method over the life of the note.
Notes payable consist of the following at March 31, 1998, June 30, 1997
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Note payable to Eagle Bank due in
monthly installments of $14,000 through
February 2006 $ 933,806 976,532 -
Note payable to Eagle Bank due June 30, 1998 44,000 50,000 -
Note payable to Novax International Inc. 35,500 - -
Note payable to stockholder 97,375 - -
Notes payable to officers of the Company with
interest rates ranging from 8% to 22%,
due on demand - 13,812 49,758
---------- --------- ------
1,110,681 1,040,344 49,758
Less current portion (240,327) (124,703) (49,758)
---------- --------- ------
Notes payable, excluding current portion $ 870,354 915,641 -
========= ========= =======
</TABLE>
F-9
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Aggregate maturities of notes payable as of March 31, 1998, are as
follows:
Years ending March 31:
1999 $ 240,327
2000 70,970
2001 79,380
2002 88,785
2003 99,305
Subsequent to 2003 531,914
---------
$ 1,110,681
=========
The carrying values of notes payable approximate fair market value based
on their terms and interest rates.
(3) COST OF SALES
During the year ended June 30, 1997, the Company charged cost of sales
for $479,000 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 end customer, and the Company's management does not anticipate
further adverse results from this situation.
(4) CLASS A PREFERRED STOCK
On April 30, 1996, the Company issued 113.2 shares of mandatorily
redeemable Class A voting preferred stock, primarily to officers and
employees, at $3,000 per share, totaling $339,600. The Company received
$19,200 in cash and issued the remaining $320,400 as payment for
$170,026 of accrued payroll, $39,679 of accrued interest and $110,695 of
notes payable. The preferred stock was recorded at liquidation value
which approximated fair market value at date of issuance.
The preferred stockholders are entitled to 12% cumulative annual
dividends, compounded and due quarterly beginning June 15, 1996. As of
March 31, 1998, preferred stock dividends in arrears totaled $85,161 or
$752 per share.
The preferred stock has a liquidation preference of $3,000 per share,
plus all dividends in arrears.
To the extent funds are lawfully available, the preferred stock is
mandatorily redeemable by the Company, on a pro rata basis, beginning
June 15, 1996 and ending March 15, 1999. Upon redemption, the preferred
stockholders also receive a common stock purchase warrant
F-10
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
entitling the stockholder to purchase 14 shares of the Company's common
stock, at $30 per common share, for each share of preferred stock
redeemed. These common stock warrants expire on March 15, 2001. As of
March 31, 1998, no preferred shares had been redeemed. As of March 31,
1998, 4,528 common stock warrants would be due upon redemptions.
The preferred stock is convertible at anytime by the preferred
stockholders into the Company's common stock at an initial conversion
price of $30 per common share, and is subject to antidilution
provisions, as provided in the preferred stock agreement.
All preferred stock outstanding shall be automatically converted into
the Company's common stock at a price of not less than $60 per common
share in the event of an initial public offering, generating proceeds of
not less than $5,000,000.
(5) COMMON STOCK AND SIGNIFICANT CUSTOMER
At March 31, 1997, Chugai Pharmaceutical Co., Ltd. (Chugai) owned 18,519
shares (11.3%) of the Company's outstanding common stock. Additionally,
the Company has entered into a stock purchase agreement with Chugai
which provides Chugai the right to participate in future sales of the
Company's common stock, and to maintain ownership of at least 10% of the
Company's common stock.
(6) STOCK PURCHASE AND OPTION PLAN
The Company has a stock purchase and option plan, whereby, the Company
may sell shares of its stock, and/or grant options to purchase shares of
its common stock, to key employees, officers, directors and consultants
as determined by the Company's Board of Directors. Options under this
plan are granted at not less than fair market value as of the date of
grant as determined by the Board of Directors, and are exercisable over
5 to 10 year periods.
The Company applies APB Opinion No. 25 in accounting for its options
and, accordingly, because the Company grants options at fair value no
compensation cost has been recognized for its stock options in the
financial statements. Had compensation cost for the Company's
stock-based compensation plan been determined on the fair value at the
grant dates for awards under the plan consistent with the method of SFAS
No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997 June 30, 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported $(626,160) (822,713) 30,681
Pro forma (630,049) (840,637) 20,104
</TABLE>
F-11
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(6) STOCK PURCHASE AND OPTION PLAN (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the nine months ended
March 31, 1998 and fiscal 1997 and 1996, respectively; no dividend
yield, no volatility, risk-free interest rates of 5.6, 5.6 and 5.6
percent, and expected lives of 1 year, 4 and 4 years for the nine months
ended March 31, 1998 and fiscal 1997 and 1996, respectively.
F-12
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------
(6) STOCK PURCHASE AND OPTION PLAN (CONTINUED)
A summary of the status of the Company's fixed stock options plan for
the nine months ended March 31, 1998, and the years ended June 30, 1997
and 1996, is presented below:
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997 June 30, 1996
----------------- ------------------ -----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Fixed Options Shares price Shares price Shares price
------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 47,500 $ 23 44,500 $ 22 35,000 $ 20
Granted 2,425 30 4,300 30 9,800 30
Exercised (2) 15 - - - -
Forfeited (5,598) 23 (1,300) 30 (300) 27
------ -- ------ -- ------ --
Outstanding at end of period 44,325 23 47,500 23 44,500 22
====== ====== ======
Options exercisable at period end 35,825 32,550 27,450
Weighted-average fair value of options
granted during the period $30
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options exercisable
------------------------------------------------------------------------------------------------------
Weighted-
Range of Number average Weighted- Number Weighted-
exercise Outstanding at remaining average exercisable at average exercise
prices March 31, 1998 contractual life exercise price March 31, 1998 price
------ -------------- ---------------- -------------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 15 17,500 1.3 $ 15 17,500 $ 15
27 12,900 3.8 27 12,900 27
30 13,925 6.3 30 5,425 30
-- ------ --- --- ------- --
$ 15 to 30 44,325 3.6 $ 23 35,825 $ 22
====== ======
</TABLE>
F-13
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
The Company pays royalties to BioStar Medical Products, Inc. (BioStar)
equal to 5% of certain product sales, up to an aggregate of $600,000 in
royalties. As of March 31, 1998, $467,246 of cumulative royalties have
been paid to BioStar. Royalty expense under this agreement totaled
$65,785 for the nine months ended March 31, 1998.
LEASES
The Company is obligated under various noncancelable operating leases
primarily for its operating facilities 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 March 31, 1998 are as follows:
Years ending March 31:
1999 $ 133,964
2000 133,900
2001 133,956
2002 45,052
-------
Total future minimum lease payments $ 446,872
=======
Rent expense totaled $84,060, $121,235 and $75,070 for the period ended
March 31, 1998 and the years ended June 30, 1997 and 1996, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with key employees,
certain of whom are also stockholders. In addition to salary and benefit
provisions, these agreements include certain commitments should the
employees/stockholders terminate their employment with or without cause.
(8) INCOME TAXES
At March 31, 1998, the Company has a net operating loss carryforward for
income tax purposes of approximately $2,776,000 expiring during the
period from 2006 to 2013. Research and development tax credit
carryforwards approximate $102,000.
As of March 31, 1998, the Company had a gross deferred tax asset of
approximately $1,046,000 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 the uncertainty of realization of the carryforwards.
F-14
<PAGE>
REAADS MEDICAL PRODUCTS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(9) RELATED PARTY TRANSACTIONS
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.
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, accounting for approximately
28% of sales in the nine month period ended March 31, 1998,
approximately 40% of sales in 1997 and 34% in 1996 and approximately
14%, 37% and 45% of accounts receivable at March 31, 1998, June 30,
1997 and 1996, respectively.
(11) SUBSEQUENT EVENT
On May 22, 1998, the Company completed a merger with a subsidiary of
Gray Wolf Technologies, Inc., a shell corporation with no significant
assets or operations, and the resulting merged corporation was renamed
Corgenix, Inc. and the parent corporation was renamed Corgenix Medical
Corporation (Corgenix). Effective with the merger, all previously
outstanding common stock, preferred stock, options and warrants of the
Company were exchanged for common stock of Corgenix, resulting in the
previous securityholders of the Company owning approximately 51% of the
voting stock of Corgenix. Also effective with the merger, 3,000,000
shares of Corgenix common stock were issued or subscribed at a weighted
average price of $.33 per share. Proceeds from this offering are
expected to be approximately $892,300, after deducting commissions and
expenses of approximately $107,700.
Corgenix has also retained investment banking counsel to sell
additional equity securities as well as to introduce and assist in the
evaluation of potential acquisitions and partnering opportunities.
Management expects that these efforts will result in the introduction
of other parties with interests and resources which may be compatible
with that of Corgenix. However, no assurances can be given that
Corgenix will be successful in raising additional capital or entering
into a business alliance.
F-15
<PAGE>
PART III
ITEMS 1. AND 2. INDEX TO AND DESCRIPTION OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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.
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.
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.
3.1* Articles of Incorporation, as amended
3.2* Bylaws
4.1* Certificate of Designations for Series A Preferred Stock
10.1* Manufacturing Agreement dated September 1, 1994 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.
10.2* Amendment to the Manufacturing Agreement dated as of January 17, 1995
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.
10.3* Amendment Agreement dated November 17, 1997 between Chugai Diagnostic
Science, Co., Ltd. and REAADS Medical Products, Inc.
10.4* Distribution Agreement dated August 26, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.
10.5* Amendment to the Distribution Agreement dated September 7, 1994 between
Chugai Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.
10.6* Distribution Agreement dated November 14, 1997 between Chugai Diagnostics
Science Co, Ltd. and REAADS Bio-Medical Products (UK) Ltd.
10.7* Product Development and Manufacturing Agreement dated September 12, 1994
between REAADS(R) Medical Products, Inc. and Helena Laboratories
Corporation
10.8* Amendment to Product Development and Manufacturing Agreement effective
December 15, 1997 between REAADS Medical Products, Inc. and Helena
Laboratories Corporation
10.9* Office Lease dated February 6, 1996 between Stream Associates, Inc. And
REAADS Medical Products, Inc.
10.10* Guarantee dated November 1, 1997 between William George Flemming,
Douglass Simpson and Geoffrey Vernon Callen
10.11* Employment Agreement dated May 22, 1998 between Luis R. Lopez and the
Company
III-1
<PAGE>
10.12* Employment Agreement dated May 22, 1998 between Douglass T. Simpson and
the Company
10.13* Employment Agreement dated May 22, 1998 between Ann L. Steinbarger and
the Company
10.14* Employment Agreement dated May 22, 1998 between Taryn G. Reynolds and the
Company
10.15* Employment Agreement dated May 22, 1998 between Catherine (O'Sullivan)
Fink and the Company
10.16* Consulting Contract dated May 22, 1998 between Wm. George Fleming, Bond
Bio-Tech, Ltd. and the Company
10.17* Stock Purchase Agreement dated September 1, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.
10.18* Lead Generation/Corporate Relations Agreement dated April 14, 1998
between the Company and Corporate Relations Group, Inc.
10.19* Note dated January 6, 1997 between REAADS Medical Products, Inc. and
Eagle Bank
10.20* Deed of Guarantee Sterling and Currency dated May 14, 1997 by REAADS
Bio-Medical Products (UK) Limited
10.21* Option Agreement dated as of May 22, 1998 between TransGlobal Financial
Corporation and the Company
10.22* Consulting Agreement dated May 22, 1998 between TransGlobal Financial
Corporation and the Company
10.23** Distributor Agreement dated as of August 3, 1998 by and between American
Biogenetic Sciences, Inc. and the Company.
10.24** Form of Indemnification Agreement between the Company and its directors
and officers
21.1* Subsidiaries of the Registrant
23.1** Consent of Certified Public Accountants
27* Financial Data Schedule
- -------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form 10-SB
filed on June 29, 1998.
** Filed herewith.
(b) Financial Statement Schedules
None
III-2
<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/Douglass T. Simpson
-----------------------------------------
Name: Douglass T. Simpson
Title: President
III-3
DISTRIBUTOR AGREEMENT
This agreement (the "Agreement") is made as of this 3rd day of August,
1998 by and between American Biogenetic Sciences, Inc., having a business
address at 1375 Akron Street, Copiague, New York 11726 (the "Company") and
Corgenix Medical Corporation having a business address at 12061 Tejon Street,
Westminster, CO 80234 (the "Distributor").
IT IS MUTUALLY AGREED THAT:
1. DEFINITIONS.
(A) PRODUCTS. The terms "Product" and "Products", as used in this
Agreement, means TpPJ Kits in a microtiter plate format.
(B) MARKET. The term "Market" as used in this Agreement shall be
defined as North America and other such territories as the Parties shall
mutually agree to add.
2. APPOINTMENT. Subject to the terms and conditions of this Agreement,
Company hereby appoints the Distributor on a non-exclusive basis to promote and
sell the Products in the Market, and Distributor accepts such appointment upon
the terms and conditions herein stated. Such appointment does not carry with it
any right to appoint any sub-distributors.
3. SALES PROMOTION. Sales Promotion shall mean the efforts of Distributor
to promote the sale of the Products in the Market as more specifically set forth
in Exhibit A and Section 7 hereof.
4. PRODUCT PURCHASE.
(A) PRODUCT PRICES. The price of the Products to the Distributor
shall be the Company's current Distributor Price List, as modified by the
Company from time to time. Initially, the distribution price shall be as set
forth in Exhibit B.
(B) POINT OF SHIPMENT. The distribution price for Product sold to
the Distributor is F.O.B. the Company warehouse Boston, MA, U.S.A.
(C) COSTS OF SHIPMENT, ETC. All costs of transport, insurance and
handling, all duties and the risk of loss in transit, after the Products have
been placed on board any appropriate means of transportation at the Company's
warehouse, will be borne by the Distributor. Title to the Products passes to the
Distributor at the time loading of the Products on any appropriate carrier at
Company's warehouse is completed. The Distributor shall be responsible for the
payment of all import arrangements including taxes, duties, import licenses and
appropriate import documents. Standard method of shipment is cold pak via
Federal Express or any overnight service.
(D) PAYMENT. Invoices are due and payable on or before the 30th day
following the date Company invoices the Distributor.
<PAGE>
(E) PURCHASE ORDER ACCEPTANCE. Purchase contracts between the
Distributor and Company are binding when Company mails its notice of acceptance
of Distributor's purchase order. Any provision in a purchase order contrary to
the terms of this Agreement is invalid and inoperative unless specifically
accepted in writing in Company's notice of acceptance. Mere notice of acceptance
shall not be deemed to be acceptance of terms contrary to those of the Agreement
or a modification of this Agreement.
(F) ORDER FULFILLMENT. Company agrees that it will endeavor to fill
the accepted orders as promptly as practicable, subject, however, to delays
caused by force majeure such as, transportation conditions, labor or material
shortages, strikes, fires, or any other cause beyond Company's control.
5. MARKETING INFORMATION. Company agrees to provide to Distributor
information necessary to prepare literature, price sheets and any other items
that Company deems necessary to properly sell the Products. Distributor agrees
that upon termination of this Agreement, they will return all remaining
literature, price sheets, etc. still remaining in their possession or under
their control. The Product has been cleared by the U.S. FDA for sale.
Distributor agrees that the promotional material will not be misleading and will
conform to U.S. FDA regulations and regulations or laws of its distribution
Market Specifically, the Distributor agrees to advertise only according to the
clinical / medical use claims provided in the package insert and not to mislabel
or adviterate any label applied to Product by Company.
6. DISTRIBUTOR'S, RELATIONSHIPS AND CONDUCT OF BUSINESS.
(A) It is agreed and understood that the Distributor is an
independent contractor of Company. The Distributor is not and shall not be an
employee, partner or agent of Company for any purpose, and is not granted any
right or authority to assume or create any obligation or responsibility, express
or implied, on behalf of or in the name of Company or to bind Company in any
matter or transaction.
(B) Any expenses or costs which the Distributor personally incurs
under this Agreement, and any other expenses incurred by the Distributor to
operate pursuant to this Agreement shall be paid and borne by Distributor
without reimbursement from Company. Company shall not be responsible for any
costs except as specifically provided in Exhibit A and with respect to materials
described in Section 5.
(C) The Distributor agrees to be fully and exclusively liable to
agents, employees, and servants, that Distributor may employ for any and all
consideration or compensation due to such person, and Distributor shall also be
fully and exclusively liable for any and all acts or commissions of its agents,
employees and servants.
Page 2
<PAGE>
7. PROMOTION OF PRODUCTS.
(A) Distributor agrees to aggressively promote the Product by
advertising, direct sales and/or other means of promotion suitable to stimulate
sales of Product.
(B) The Distributor shall solicit customers for and sell Product in
the Market and shall not solicit customers for and sell any goods or material of
any kind which are or may be competitive with the Product during the term of
this Agreement. The Company may terminate immediately the Agreement if
Distributor continues to promote or to distribute competing products when
notified by the Company. The Distributor agrees not to sell the Product outside
of the Market or to sell it to any customer which Distributor knows or has
reason to know will resell Product outside the Market.
8. TERM AND TERMINATION.
(A) The term of this Agreement shall be twelve (12) months from the
date hereof, automatically renewable for two additional twelve month periods
provided that for the first renewal period Distributor orders a minimum of
[Confidential Portion Omitted and Filed Separately with the Commission] kits
in year two and for the second renewal period [Confidential Portion Omitted and
Filed Separately with the Commission] kits in year three. Either party has the
right to terminate the Agreement by providing written notice at least 60 days
prior to the term of the agreement.
(B) If either party breaches a term of this Agreement the other
party shall be allowed to terminate this Agreement if an adequate remedy has not
been implemented within thirty (30) days after written notice.
(C) In the event the Distributor becomes insolvent, or seeks
protection, voluntarily or involuntarily, through bankruptcy, or ceases
conducting business, or Company has terminated the trademark license the Company
shall have the immediate right to terminate this Agreement.
(D) Upon termination of this Agreement, the Company (i) shall have
the right to cancel all unfilled orders submitted by the Distributor, and (ii)
shall have the right to repurchase, paying no more than the net price originally
paid by the Distributor, such of its Products in Distributor's inventory as it
shall elect to repurchase, and (iii) shall not be liable for any damages due to
breach of contracts entered into between the Distributor and its customers, and
(iv) Distributor shall provide Company with a current copy of its customers'
list for Product, after Company repurchases all of Distributor's existing
inventory (WITH REMAINING UNEXPIRED SHELF LIFE) no later than the date the
termination becomes effective.
(E) Upon termination of this Agreement, Distributor will offer to
assign to the Company or its appointed successor distributor at no cost to
Distributor without further compensation all then-existing contracts not then
fully performed for the sale of the Products.
(F) Upon termination of this Agreement, payment shall be immediately
due on all amounts owed by Distributor to the Company.
Page 3
<PAGE>
9. WARRANTY. The Company warrants that the Products it manufactures or
sells are free from defects in material and workmanship for a period coinciding
with the Expiration Date contained on the Product. The Products are only
warranted if stored and handled in accordance with instructions and if used
within the limitations of the Company's specifications, and the Products are
returned in accordance with the Company's return authorization instructions. The
Distributor understands that biological products are perishable, proper shipment
and storage condition are extremely important. The Distributor warrants that it
has proper handling and storage facility for the Product.
The Distributor's and end users (the "Buyer's") exclusive and sole
remedy on account of any defective Products furnished by the Company, and the
Company's liability with respect thereto is limited to replacement thereof or
the invoice cost thereof, as shall be determined by the Company in its sole
discretion. Handling or service charges in question with return of such
Products, if approved by the Company shall be charged as determined by the
Company. The Company shall not be liable in any event for any general, special,
incidental, direct, nondirect, or consequential damages to the Distributor or
Buyer or anyone on account of any Products sold by the Company or Distributor.
This warranty is void if the Product is altered in any fashion by anyone other
than the Company. The foregoing shall constitute the Distributor's and Buyer's
sole right and remedy.
10. PATENTS. The Company agrees to defend and hold harmless Distributor
with respect to any patent infringement suite brought within the Market relating
to the Product, property sold by Distributor provided that Distributor provides
Company with immediate notice of any such suit or threatened suit and give
Company full authority and cooperation in the defense of any such threat or
action.
11. NOTICES. Any notices, demands, or other communications required
hereunder shall be in writing and shall be (i) sent by telecopy (and confirmed
by one of the following three methods), (ii) hand delivered, (iii) sent by
Federal Express, Express Mail or similar overnight delivery service for priority
next business day delivery, or (iv) sent by certified or registered mail, return
receipt requested, in any case addressed as follows (or to such other address as
a party shall have designated by notice given to the other party pursuant
hereto), and shall be deemed given (i) when received at the recipient's telecopy
number if received before 5:00 p.m. or otherwise at 9:00 a.m. on the next
business day, (ii) when delivered if hand delivered, (iii) the next business day
after being sent if given by Federal Express, Express Mail or other overnight
delivery service or (iv) the date received if sent by certified or registered
mail, return receipt requested:
Page 4
<PAGE>
(A) if to Company: (B) if to Distributor:
American Biogenetic Sciences, Inc. Corgenix Inc.
1375 Akron Street 12061 Tejon Street
Copiague, New York 11726 Westminster, CO 80234
Attn: Chairman of the Board Attn:
fax: 516-789-1661
12. NO ASSIGNMENT. This Agreement is not assignable by the Distributor
without the written consent of Company. Company shall have the right to assign
this Agreement.
13. AMENDMENT, MODIFICATION, OR WAIVER. No amendment, modification or
waiver of any condition, provision or terms of this Agreement shall be valid or
of any effect unless made in writing and signed by both parties. Any waiver by
any party of any default of another party shall not affect or impair any rights
arising from any subsequent default. Nothing herein shall limit the remedies and
rights of the parties hereto under and pursuant to this Agreement.
14. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties hereto with respect to the transactions contemplated hereby and
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
15. CAPTIONS, HEADINGS, OR TITLES. All captions, headings or titles in the
sections of the Agreement are inserted for convenience of reference only and
shall not constitute a part of this Agreement or a limitation of scope of the
particular sections to which they apply.
16. COUNTERPARTS. This Agreement may be signed in counterparts and shall
become effective as if executed in a single, complete document as of the date
hereof upon its execution by both Parties. Facsimile signatures of the
undersigned Parties will have the same force and effect as original signatures.
17. GOVERNING LAW. This Agreement and any modifications and additions
thereto shall be governed in accordance with the laws of the State of New York.
Distributor agrees to submit to and accept the jurisdiction of the courts of the
State of New York in connection with enforcement of any judgement arising out of
an arbitration proceeding.
18. DISPUTES AND ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement shall be settled solely by binding arbitration in
Nassau County, New York pursuant to the Commercial Arbitration Rules then in
effect of the American Arbitration Association ("AAA"). There shall be three (3)
arbitrators, one of whom shall be selected by the party seeking to initiate the
arbitration, one by the other party and the third by the selected arbitrator(s).
If a party fails to select an arbiter within 30 days after receiving a notice of
arbitration, it shall forfeit its right to do so. The arbitration award shall be
given in writing and shall be final and binding on the parties with respect to
the subject matter in controversy. The parties shall keep confidential the
arbitration proceedings and terms of any arbitration award, except as may
otherwise be required by law or
Page 5
<PAGE>
regulation. Each party shall bear its own legal fees and other costs related to
the arbitration, except that the arbitrators shall determine who shall bear the
costs of the AAA and arbitrators. The arbitrators may determine arbitrability
but may not award punitive damages or limit, expand or otherwise modify the
terms of this Agreement.
19. TRADEMARKS.
(A) TRADEMARK OWNERSHIP. The Distributor recognizes the exclusive
ownership and right of Company to all trademarks used by them in connection with
the Products, and the Distributor agrees to sell and advertise these Products
only under the trademarks regularly applied to them by Company.
(B) TRADEMARK USAGE. The Distributor agrees that in selling Products
with such trademarks, Distributor acquires no right in Company's trademarks, and
Distributor will comply with all directives of Company with regard to its
trademarks and trade names.
(C) Company grants Distributor a nonexclusive right to use the TpP
trademark solely in connection with Sales Promotion provided that at all times
Distributor shall use the trademark in accordance with standards set by and
acceptable to the Company. If Distributor should fail to meet such standards and
to remedy such failure within 15 days after receiving notice thereof, Company
shall have the immediate right to terminate the license grant provided in
Section 7(c).
(D) DISCONTINUANCE OF USE OF COMPANY'S TRADEMARKS. Upon termination
of this Agreement, the license grant to Distributor shall terminate and
Distributor will discontinue the use of trademarks and trade names belonging to
the Company and refrain from using words, names, signs, expressions of designs
or combinations of words similar to Company's trademarks and trade names.
IN WITNESS WHEREOF, Company and the Distributor have duly signed and
executed this Agreement effective as of the date first written above.
AMERICAN BIOGENETIC SCIENCES, INC. DISTRIBUTOR
By: By:
---------------------------------- ---------------------------------
Name: Name:
Title: Title:
Page 6
<PAGE>
EXHIBIT A
SALES PROMOTION
Distributor (Corgenix) and Company (ABS) will cooperatively work together to
co-promote the Product and to create awareness in the research and medical
communities.
Distributor will select key sites to evaluate the Product and collect clinical
data. Distributor will provide Company with the name of a contact person at the
key sites and Distributor shall provide to Company all data generated and
conclusions made regarding same.
Distributor agrees to advertise and distribute promotional material and
technical literature and to use every other effort necessary to promote the
Product. To support the promotional campaign, Company will, for the first 6
months, provide a promotional allowance of [Confidential Portion Omitted and
Filed Separately with the Commission] for every [Confidential Portion Omitted
and Filed Separately with the Commission] Product kits purchased at a minimum
purchase price of [Confidential Portion Omitted and Filed Separately with the
Commission] per kit.
The Company and Distributor will review the effect and performance of such
promotional activities after 6 months and will negotiate in good faith the
amount of future promotional allowances and the nature of such future
activities.
<PAGE>
EXHIBIT B
PRODUCT PRICE
The distributor price for the TpP kits in a microtiter plate format is
[Confidential Portion Omitted and Filed Separately with the Commission]
INDEMNITY AGREEMENT
This Indemnify Agreement is by and between Corgenix Medical Corporation,
a Nevada corporation (the "Company"), and (the "Indemnitee"), who
-------------
agree as follows:
1. INTRODUCTION. The Company and the Indemnitee desire that the
Indemnitee serve as a director, officer, employee and/or agent of the Company or
otherwise at the request of' the Company. In this regard, the Company desires
and intends hereby to provide to the Indemnitee indemnification (including
advancement of expenses) against any and all liabilities asserted against the
Indemnitee to the fullest extent permitted by the (the
---------------------
"Act"), as it presently exists and as it may from time to time be expanded.
2. INDEMNIFICATION. The Company shall indemnify the Indemnitee as
follows:
(a) The Company shall indemnify the Indemnitee when the
Indemnitee was, is, or is threatened to be made a named defendant or respondent
in a proceeding (as defined in Section 8 hereof) because the Indemnitee is or
was a director, officer, employee or agent of (he Company or, whether or not the
Indemnitee is an officer, director, employee or agent of' the Company, when such
Indemnitee is, or was, serving at the request of' the Company (as defined in
Section 8 hereof); but only if it is determined in accordance with Section 5
hereof' that the Indemnitee:
(i) conducted himself in good faith;
(ii) reasonably believed:
(A) in the case of conduct in his official capacity
as a director of the Company, that his conduct was in the
Company's best interests;
(B) in all other cases, that his conduct was at
least not opposed to the Company's best interests and
(iii) in the case of any criminal proceeding, had no
reasonable close to believe the Indemnitee's conduct was unlawful.
(b) The Company shall indemnify the Indemnitee against reasonable
expenses incurred by the Indemnitee in connection with a proceeding in which the
Indemnitee is a named defendant or respondent because the Indemnitee is or was i
director, officer, employee or agent of the Company if the Indemnitee has been
wholly successful, on the merits or otherwise, in the defense of the proceeding.
(c) Any determination of indemnification under paragraph (a) of
this Section 2 (unless ordered by a court) shall be made by the Company only as
authorized in the specific case upon a determination (in accordance with Section
5 hereof) that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
paragraph (a) of this Section 2. Such determination shall be made:
<PAGE>
(i) by the board of directors (the "Board") by a majority
vote of a quorum consisting of directors who at the time of such vote
were not named defendants or respondents in (lie proceeding;
(ii) if such a quorum cannot be obtained, by a majority
vote of a committee of the Board, designated to act in the matter by a
majority vote of all directors, consisting solely of two or more
directors who, at the time of the vote, are not named defendants or
respondents in the proceeding;
(iii) by special legal counsel selected by the Board or a
committee of' the Board by vote as set forth in subsection (i) or (ii)
of (his paragraph (e) or, if such a quorum cannot be obtained and such a
committee cannot be established, by a majority vote of all directors; or
(iv) by the shareholders in a vote that excludes the
shares held by directors who are named defendants or respondents in the
proceeding.
(d) Authorization of indemnification and determination as to
reasonableness of expenses must he made in the same manner as the determination
that indemnification is permissible, except that if the determination that
indemnification is permissible is made by special legal counsel, authorization
of indemnification and determination as to reasonableness of expenses must be
made in the manner specified by subsection (iii) of Section 2(c) hereof for the
selection of special legal counsel.
3. EXTENT OF INDEMNIFICATION. The right of indemnification under
paragraph (a) of Section 2 hereof shall be indemnification against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the Indemnitee in connection with the
proceeding; but if the Indemnitee is found liable to the Company or is found
liable on the basis that personal benefit was improperly received by the
Indemnitee, the indemnification:
(i) is limited to reasonable expenses actually incurred
by the Indemnitee in connection with the proceeding; and
(ii) shall not be made in respect of any proceeding in
which the Indemnitee shall have been found liable for willful or
intentional misconduct in the performance of the Indemnitee's duty to
the Company.
4. REASONABLE EXPENSES. Reasonable expenses incurred by an Indemnitee
who was, is, or is threatened to be made a named defendant or respondent in a
proceeding may be paid or reimbursed by the Company, in advance of the final
disposition of the proceeding and prior to the determination of indemnification
under paragraph (a) of Section 2 hereof or authorization of indemnification and
the determination as to reasonableness of' expenses under paragraph (d) of'
Section 2 hereof, after the Company receives a written affirmation substantially
in the form of' hereto (the "Undertaking").
-2-
<PAGE>
5. PROCEDURE FOR DETERMINATION OF RIGHT TO INDEMNIFICATION. For purposes
of making the determination in a specific case under paragraph (a) of' Section 2
hereof whether to make indemnification, the Board, independent legal counsel or
shareholders, as the case may be, shall make such determination in accordance
with the following procedures:
(a) The Indemnitee may submit to the Board a sworn statement of
request for indemnification substantially in the form of EXHIBIT B hereto (the
"Indemnification Statement") asserting that the Indemnitee has met applicable
standard of conduct set forth in paragraph (a) of Section 2 hereof; and
(b) Submission of the Indemnification Statement to the Board
shall create a rebuttable presumption that the Indemnitee is entitled to
indemnification under this Agreement, and the Board, independent legal counsel
or shareholders, as the case may be, shall within 30 days after submission of
the Indemnification Statement specifically determine that the Indemnitee is so
entitled, unless it or they shall possess clear and convincing evidence to rebut
the presumption that the Indemnitee has met the applicable standard of conduct
set forth in paragraph (b) or (c) of Section 2 hereof, which evidence shall be
disclosed to the Indemnitee with particularity in it sworn written statement
signed by all persons who participated in the determination and voted to deny
indemnification.
6. PROCEDURE FOR AUTHORIZATION OF ADVANCEMENT OF REASONABLE EXPENSES.
For purposes of determining whether to authorize advancement of expenses in a
specific case pursuant to paragraph (a) of Section 2 hereof, the Board shall
make such determination in accordance with the following procedure:
(a) The Indemnitee may submit to the Board a sworn statement of
request for advancement of expenses substantially in the form of hereto
asserting that (i) the Indemnitee believes, in good faith, that the Indemnitee
has met the standard of conduct set forth in paragraph (a) of Section 2 hereof,
(ii) the Indemnitee has reasonably incurred or will reasonably incur actual
reasonable expenses in defending a civil or criminal action, suit or proceeding;
and (iii) the Indemnitee undertakes to repay such amount unless it shall
ultimately be determined that the Indemnitee is entitled to be indemnified by
the Company under this Agreement or otherwise.
(b) The Board shall, within 14 days from the date of its receipt
of the Undertaking, authorize immediate payment of the expenses stated in the
Undertaking to the extent that the Board determines that such expenses are
reasonable.
7. MERGER, CONSOLIDATION OR CHANGE IN Control. In the event that the
Company shall be a constituent corporation in a consolidation or merger, whether
the Company is the resulting or surviving corporation or ceases its separate
existence, or if there is a change in control of the Company (as defined in
Section 8 hereof), the Indemnitee shall stand in the same position under this
Agreement with respect to the resulting, surviving or changed corporation as he
would have with
-3-
<PAGE>
respect to the Company if its separate existence had continued or if there had
been no change in the control of the Company.
8. CERTAIN DEFINITIONS. For purposes of this Agreement, the following
definitions apply herein:
to serve and serving "at the request of the Company" shall include any
service at the request of the Company as director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan or any other enterprise (including any civic, nonprofit or
charitable organizations, whether or not incorporated), or other service that
imposes duties on, or involves services by, the Indemnitee with respect to any
employee benefit plan or its participants or beneficiaries;
"change in control" shall include any change in the ownership of a
majority of the capital stock of the Company or in the composition of a
majority of the members of the Board; and
"proceeding" means any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, any appeal in such an action, suit or proceeding, and any
inquiry or investigation that could lead to such all action, suit or
proceeding;
9. ATTORNEYS' FEES. In the event that the Indemnitee institutes any
legal action to enforce the Indemnitee's rights under, or to recover damages for
breach of this Agreement, the Indemnitee, if the Indemnitee prevails in whole or
in part, shall be entitled to recover from the Company all reasonable attorneys'
fees and disbursements incurred by the Indemnitee.
10. AMENDMENTS TO THE ACT. This Agreement is intended to provide
indemnity to the Indemnitee to the fullest extent permitted under Texas law.
Accordingly, to the extent permitted by law, in the event that the Act permits
greater indemnity than the indemnity set forth herein, or if any amendment is
made to the Act expanding the indemnity permissible under law, the indemnity
obligation of' the Company contained herein shall automatically be expanded,
without the necessity of action on the part of any party, to the extent
necessary to provide to the Indemnitee the fullest indemnity permissible under
law.
11. NOTICES. Any notice required or permitted under this Indemnity
Agreement shall be in writing and shall be deemed to be delivered (i) upon
physical delivery (if hand delivered) or (ii) three business days after deposit
in the United States mail (if [nailed), postage prepaid, certified or registered
mail, return receipt requested, addressed to the Company, it 5200 Cedar Crest
Blvd., Houston, Texas 77087, Attn: President, and addressed to the Indemnitee at
the address on the signature page hereof. Notice given in any other manner shall
be effective when received by the addressee. The address I-or notice may be
changed by notice given in accordance with this provision.
-4-
<PAGE>
12. AMENDMENTS. This Agreement and any attachments incorporated by
reference constitute the entire agreement between the parties and may not be
amended, supplemented, waived, or terminated except by a written instrument
executed by the parties hereto.
13. ASSIGNMENTS. Neither the Company nor the Indemnitee may transfer or
assign its rights under this Agreement without the prior written consent of the
other.
14. EFFECT OF AGREEMENT. This Agreement shall be binding upon the
Company and the Indemnitee and their respective successors and permitted
assigns.
15. WAIVER OF BREACH. The waiver of' a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
16. GOVERNING LAW. The validity, construction, and enforcement of' this
Agreement shall be governed by the laws of the State of Colorado. In the event
of a dispute concerning this Agreement, the parties agree that venue lies in a
court of competent jurisdiction in Adams County, Colorado.
17. SEVERABILITY. If any provision of this Agreement is declared
unenforceable by a court of last resort, such declaration shall not effect the
validity of any other provision of this Agreement.
18. CONSTRUCTION. The headings contained in this Agreement are for
reference purposes only and shall not affect this Agreement in any manner
whatsoever. Wherever required by the context, any gender shall include any other
gender, the singular shall include the plural, and file plural shall include the
singular.
19. TIME FOR PERFORMANCE. If the time for performance of any obligation
set forth in this Agreement falls on a Saturday, Sunday, or legal holiday,
compliance with such obligation oil the next business day following such
Saturday, Sunday, or legal holiday shall be deemed acceptable.
20. EXECUTION. This Agreement may be executed in multiple counterparts,
each of which shall be deemed all original but all of which shall be deemed one
instrument.
-5-
<PAGE>
EXECUTED as of , 1995
---------------
THE COMPANY:
By:
---------------------------------------
THE INDEMNITEE:
Address for Notice ------------------------------------------
- ---------------------------
- ---------------------------
-6-
<PAGE>
EXHIBIT A
Form of Undertaking to Repay Expenses
In connection with my request for indemnification pursuant to that certain
Indemnity Agreement, as of , 1994, by and between Corgenix Medical
--------------
Corporation, a Nevada corporation (the "Company"), and myself, (i) I believe, in
good faith, that I have met the applicable standard of conduct set forth in
paragraph (a) of Section 2 of' the Indemnity Agreement and (ii) I hereby swear
that (a) I have reasonably incurred or will reasonably incur actual expenses ill
defending a civil or criminal action, suit or proceeding, and (b) I will repay
such expenses Unless it is ultimately determined that I am entitled to be
indemnified by the Company under such Indemnity Agreement or otherwise.
SWORN to before me on this day of ,199 .
--- --------------- --
------------------------------------------
Notary Public in and for
the State of
---------------
Name:
-------------------------------------
My Commission Expires:
-----------
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<PAGE>
EXHIBIT B
Form of Indemnification Statement
In connection with my request for indemnification pursuant to that certain
Indemnity Agreement, as of , 1994, by and between , a
--------- --------------
corporation, and myself, I hereby swear that I have met the
- ------------
applicable standard of conduct set forth in paragraph (a) of Section 2 of such
Indemnity Agreement.
SWORN to before me on this day of , 199 .
------ ------------- --
------------------------------------------
Notary Public in and for
the State of
---------------
Name:
-------------------------------------
My Commission Expires:
-----------
-8-
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
REAADS MEDICAL PRODUCTS, INC.:
We consent to the inclusion of our report dated June 3, 1998, with respect to
the consolidated balance sheets of REAADS Medical Products, Inc. and Subsidiary
as of March 31, 1998, June 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
nine months ended March 31, 1998 and the years ended June 30, 1997 and 1996,
which report appears in the Form 10-SB/A-1 of Corgenix Medical Corporation dated
September 23, 1998.
/S/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Boulder, Colorado
September 23, 1998
