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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 000-24541
CORGENIX MEDICAL CORPORATION
(Name of Small Business Issuer in its charter)
NEVADA 93-1223466
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12061 TEJON STREET, WESTMINSTER, COLORADO 80234
(Address of principal executive offices, including zip code)
(303) 457-4345
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes / / No /X/
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were: $2,592,175
The aggregate market value of the voting stock held by non-affiliates of the
issuer was $5,272,187 as of September 30, 1998.
The number of shares of Common Stock outstanding was 12,027,259 as of
September 30, 1998.
Transitional Small Business Disclosure Format. Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
None
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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 III. Item 12. Certain
Relationships and Related Transactions -- Contingent Common Stock."
The Company was incorporated under the name Benjun Chemicals Inc. on
April 22, 1994 as a wholly owned subsidiary of Superior Equities Limited
(the "Predecessor"). The Predecessor was incorporated on April 9, 1985 under
the laws of the Province of British Columbia, Canada. In 1987 and 1991, the
Predecessor issued a total of 1,957,259 shares of its common stock in two
private placements to sophisticated investors in the Province of British
Columbia, Canada. On April 27, 1994, the shareholders of the Predecessor
exchanged all of the outstanding shares of common stock of the Predecessor on
a one-for-one basis for shares of common stock in the Company, and on March
5, 1996, the Company changed its name to Gray Wolf Technologies, Inc. ("Gray
Wolf"). During the three fiscal years prior to the Merger, Mike M.
Mustafoglu, a current director of the Company, was a director and the
president and treasurer of Gray Wolf. However, from the time of the
Predecessor's incorporation until the Merger, neither the Predecessor nor the
Company engaged in any significant business activity other than the search
for acquisition opportunities, and in the three fiscal years prior to the
Merger, the Company did not have any significant assets or liabilities.
In connection with the Merger, the Company offered and sold in a private
transaction (the "Offering") 3,950,000 shares of Common Stock for gross
proceeds of $1,000,000. The net proceeds of such sale, which were
approximately $720,000, were used by the Company to redeem certain preferred
stock of REAADS in connection with the Merger, to repay debt, to reduce
accounts payable and for working capital.
Immediately following the Merger and the Offering, the Common Stock was
held by the following groups of persons in the approximate percentages
indicated:
<TABLE>
<CAPTION>
STOCKHOLDERS(1) NUMBER OF SHARES PERCENTAGE OWNERSHIP(1)
<S> <C> <C>
Former REAADS Stockholders(2) 6,120,000 50.3%
Former Gray Wolf Stockholders 1,957,259 16.1%
Offering Stockholders 3,950,000 32.4%
</TABLE>
(1) Excludes 153,000 shares held by TransGlobal Financial Corporation ("TGF"),
a consultant to the Company, which were received by TGF in consideration of
financial advisory services provided to Gray Wolf in connection with the
Merger.
(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 "Part III. Item 12. Certain
Relationships and Related Transactions -- Contingent Common Stock." If
all of such contingent Common Stock had been issued to the former REAADS
stockholders
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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 "Part III. Item 12. 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 "Part III. Item 12. 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 "Part
III. Item 12. Certain Relationships and Related Transactions -- Option
Agreement."
BUSINESS OVERVIEW
The Company's research program has resulted in the successful
development of 23 products currently used in clinical laboratories for the
diagnosis and/or monitoring of four important areas of health care:
- Autoimmune disorders (diseases in which an individual creates
antibodies to one's self, for example systemic lupus erythematosus
("SLE") and rheumatoid arthritis ("RA"));
- Vascular diseases (diseases associated with certain types of
thrombosis or clot formation, for example antiphospholipid syndrome,
deep vein thrombosis, stroke and coronary occlusion);
- Bone and joint diseases (such as osteoporosis and osteoarthritis); and
- Liver diseases (cirrhosis and transplanted organ rejection).
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,
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employing conventional testing equipment found in virtually all clinical
laboratories. The availability and broad acceptance of ELISA Microplate
products reduces entry barriers worldwide for the Company's new products that
employ this technology and delivery format. Corgenix's products are sold as
"kits" that include all of the materials required to perform the test except
for routine laboratory chemicals and instrumentation. A test using ELISA
technology involves a series of reagent additions into the Microplate
triggering a complex immunological reaction in which a resulting color
occurs. The amount of color developed in the final step of the test is
directly proportional to the amount of the specific marker being tested for
in the patient or unknown sample. The amount of color is measured and the
results calculated using laboratory instrumentation. The Corgenix technology
specifies a process by which biological materials are attached to the fixed
surface of a diagnostic test platform.
Corgenix's diagnostic tests are intended to aid in the identification of
the causes of illness and disease, enabling a physician to select appropriate
patient therapy. Internally and through collaborative arrangements, the
Company is developing additional products that are intended to broaden the
range of applications for its existing products and to result in the
introduction of new products. Corgenix is specifically engaged in the
development of a line of diagnostic products that applies the ELISA
technology into a different testing format. This format involves the addition
of a single patient sample into a test system in which color is developed in
a very short period of time with a minimal number of reagents. This format,
unlike the Microplate format, does not require instrumentation and is better
suited for testing outside of a typical testing laboratory. Testing can be
performed by medical personnel such as physicians and nurses, but also can be
designed so that testing can by performed directly by the patient. This
format is referred to as rapid testing ("Rapid Test") as the results are
available in only a few minutes.
Products developed in a Rapid Test format allow the prompt detection of
a variety of medical conditions. Development of this product line will enable
the Company to expand its product base beyond the conventional testing
laboratory into point of care ("POC") market segments, which include
physician's office laboratories ("POL"), and also directly to the medical
consumer through retail distribution, referred to as over-the counter
("OTC").
Since 1990, Corgenix's sales force and distribution partners have sold
over 10 million tests worldwide under the REAADS label, as well as labels of
other companies under private label, or original equipment manufacture
("OEM"), agreements. An integral part of Corgenix's strategy is to work with
corporate partners to develop market opportunities and access important
resources. In this regard, Corgenix has established strategic relationships
with a number of companies, including Chugai, Cambridge Life Sciences
("Cambridge"), a division of Byk Gulden located in Cambridge, UK, and Helena
Laboratories Corporation ("Helena"), a privately held company located in
Beaumont, Texas. Corgenix believes that its relationships with these and
other potential partners will enable Corgenix to enhance its menu of
diagnostic products and accelerate its ability to penetrate the worldwide
markets for new products
The Company currently uses the REAADS trademarks and tradenames in the
sale of its products.
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
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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, 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
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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 completed the development and
clinical testing of three additional test kits that detect human antibodies
to B2-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
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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.
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 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
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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 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
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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 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
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of Chugai. See "-- Regulation."
HA PRODUCT DISTRIBUTION. In 1997, Corgenix and Chugai executed a
distribution agreement (the "UK Agreement") whereby Corgenix was granted
exclusive distribution rights for the Chugai HA product in the United
Kingdom. The UK Agreement is initially for a two-year period expiring on
November 17, 1999, with one-year extension rights. The UK Agreement
establishes certain minimum sales target requirements for Corgenix, and
provides early cancellation rights to Chugai if Corgenix does not meet annual
sales targets. The UK Agreement is the only international distribution rights
granted by Chugai.
OTHER STRATEGIC RELATIONSHIPS
In addition to the Chugai strategic relationship, an integral part of
Corgenix's strategy has been and will continue to be entering into other
strategic alliances as a means of accessing unique technologies or resources
or developing specific markets. The primary aspects of Corgenix's corporate
partnering strategy with Chugai and other strategic affiliations include:
- Companies that are interested in co-developing diagnostic tests that
use the Corgenix technology;
- Companies with complementary technologies;
- Companies with complementary products and novel disease markers;
and/or
- Companies with access to distribution channels that supplement
Corgenix's existing distribution channels.
In furtherance of the foregoing strategies, Corgenix has established
strategic relationships with the following companies in addition to Chugai:
CAMBRIDGE LIFE SCIENCES. Cambridge, a division of Byk Gulden and located
in Cambridge, United Kingdom, is a leading manufacturer of immunology and
microbiology diagnostic tests. In 1993, Corgenix and Cambridge entered into
an agreement by which the Company provides to Cambridge certain products that
are sold worldwide under the 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.
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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 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- B2 Glycoprotein I - IgG,
anti- B2
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Glycoprotein I - IgM and anti- 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 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
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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 II. Item 6. 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 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 II. Item 6. 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 II. Item 6. Management's
Discussion and Analysis -- Forward-Looking Statements and Risk Factors --
Uncertainty of Protection of Patents, Trade Secrets and Trademarks."
Corgenix has registered its trademark "REAADS" on the principal federal
trademark register and with the trademark registries in many countries of the
world. This trademark is eligible for renewal in 2006 and will expire in
2007. The Company has a federal trademark registration pending for the name
"Corgenix."
The Company intends to obtain patent protection for its products and
processes, to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties. Corgenix also relies on trade secrets and
proprietary know-how in its manufacturing processes. The Company requires each
of its employees, consultants and advisors to
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execute a confidentiality agreement upon the commencement of any employment,
consulting or advisory relationship with the Company. Each agreement
provides that all confidential information developed or made known to the
individual during the course of the relationship will be kept confidential
and not disclosed to third parties except in specified circumstances. In the
case of employees, the agreements provide that all inventions conceived of by
an employee shall be the exclusive property of the Company.
REGULATION
The testing, manufacturing and sale of Corgenix's products are subject
to regulation by numerous governmental authorities, principally the FDA and
foreign regulatory agencies. The FDA regulates the clinical testing,
manufacture, labeling, distribution and promotion of medical devices, which
includes diagnostic products. Corgenix is restricted from marketing or
selling diagnostic products in the United States until clearance is received
from the FDA. In addition, various foreign countries in which Corgenix's
products are or may be sold impose local regulatory requirements. The
preparation and filing of documentation for FDA and foreign regulatory review
can be a lengthy, expensive and uncertain process.
In the United States, medical devices are classified by the FDA into one
of three classes (Class I, II or III) on the basis of the controls deemed
necessary by the FDA to ensure their safety and effectiveness in a reasonable
manner. Class I devices are subject to general controls (e.g., labeling,
premarket notification and adherence to QSR requirements). Class II devices
are subject to general and special controls (e.g., performance standards,
post-market surveillance, patient registries and FDA guidelines). Generally,
Class III devices are those that must receive premarket approval by the FDA
to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices or new devices that have been found
not to be substantially equivalent to legally marketed devices). All of
Corgenix's current products and products under development are or are
expected to be classified as Class I or Class II devices.
Before a new device can be introduced in the market, the Company must
obtain FDA clearance or approval through either clearance of a 510(k)
premarket notification or approval of a product marketing approval ("PMA")
application, which is a more extensive and costly application. All of the
Company's products have been cleared using a 510(k) application, and the
Company expects that most, if not all, future products will also qualify for
clearance using a 510(k) application.
It generally takes from four to 12 months from submission to obtain
510(k) premarket clearance but may take longer. The FDA may determine that a
proposed device is not substantially equivalent to a legally marketed device
or that additional information is needed before a substantial equivalence
determination can be made. A "not substantially equivalent" determination,
or a request for additional information, could prevent or delay the market
introduction of new products that fall into this category. For any devices
that are cleared through the 510(k) process, modifications or enhancements
that could significantly affect safety or effectiveness, or constitute a
major change in the intended use of the device, will require new 510(k)
submissions. There can be no assurance that Corgenix will be able to obtain
necessary regulatory approvals or clearances for its products on a timely
basis, if at all, and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such
approvals or clearances, or failure to comply with existing or future
regulatory requirements could have a material adverse effect on Corgenix's
business, financial condition and results of operations. See "Part II. Item
6. 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 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
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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.
ITEM 2. DESCRIPTION OF PROPERTY.
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.
ITEM 3. LEGAL PROCEEDINGS
Corgenix is not a party to any material litigation or legal proceedings.
ITEM 4. SUBMISSION OR MATTERS TO A VOTE OF SECURITY HOLDERS.
In April 1998, an information statement (the "Gray Wolf Information
Statement") and a Statement of Majority Consent of Shareholders of Gray Wolf
(the "Statement of Consent") was mailed to all stockholders of record of Gray
Wolf. The purpose of the Statement of Consent was to obtain the former Gray
Wolf stockholders' authorization and to adopt resolutions pertaining to the
Merger. Of the 1,957,259 shares of Gray Wolf common stock outstanding,
consents were returned representing 1,167,125 shares. Of these shares,
1,167, 125 shares, or 59.6% of the total shares outstanding, voted for the
Merger, 0 shares voted against the Merger, and 790,134, or 40.4%, abstained
from voting.
On April 8, 1998, an information statement (the "REAADS Information
Statement") was mailed to all stockholders of record of REAADS. The REAADS
Information Statement provided information regarding the Merger and related to a
special meeting of the REAADS stockholders held on April 28, 1998. On April 23,
1998, a supplement to the REAADS Information Statement (the "First Supplement")
was mailed to stockholders of record providing additional information regarding
the Merger. On April 28, 1998, a special meeting of the stockholders of REAADS
was held to vote on the Merger. At the meeting, votes were recorded of two
classes of REAADS stockholders: (i) holders of shares of Preferred A Convertible
Redeemable Stock ("Series A Preferred Stock"), voting as a class, and (ii)
holders of shares of REAADS common stock voting as a class together with the
Series A Preferred Stock, as if converted to shares of
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common stock. Of the 113.2 shares of Series A Preferred Stock then
outstanding, 113.2 shares voted for the Merger, 0 shares voted against the
Merger, and 0 shares abstained from voting. Of the shares of REAADS common
stock then outstanding and the Series A Preferred Stock as converted to
common stock, voting together as a class for total of 175,535 shares,
139,700, or 79.6%, voted for the Merger, 0 shares voted against the Merger,
and 35,835 shares abstained from voting.
On May 7, 1998, a second supplement to the REAADS Information Statement
(the "Second Supplement"), together with a written consent, was mailed to
REAADS stockholders of record providing additional information regarding the
merger. Written consents were received and recorded for the holders of shares
of Series A Preferred Stock, voting as a class, and the holders of shares of
REAADS common stock voting as a class together with the Series A Preferred
Stock on an as-converted basis. Of the 113.2 shares of Series A Preferred
Stock then outstanding, 113.2 shares voted for the Merger, 0 shares voted
against the Merger, and 0 shares abstained from voting. Of the shares of
REAADS common stock then outstanding and the Series A Preferred Stock as
converted to common stock, voting together as a class for total of 175,535
shares, 156,753, or 89.3%, voted for the Merger, 0 shares voted against the
Merger, and 18,782 shares abstained from voting.
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GLOSSARY
ANTIBODY -- a protein produced by the body in response to contact with
an antigen, and having the specific capacity of neutralizing, hence creating
immunity to, the antigen.
ANTI-CARDIOLIPIN ANTIBODIES (aCL) -- a class of antiphospholipid
antibody which reacts with a negatively-charged phospholipid called
cardiolipin; frequently found in patients with SLE and other autoimmune
diseases; also reported to be significantly associated with the presence of
both arterial and venous thrombosis, thrombocytopenia, and recurrent fetal
loss.
ANTIGEN -- an enzyme, toxin, or other substance, usually of high
molecular weight, to which the body reacts by producing antibodies.
ANTI-PHOSPHATIDYLSERINE ANTIBODIES (aPS) -- a class of antiphospholipid
antibody which reacts to phosphatidylserine; similar to aCL; believed to be
more specific for thrombosis.
ANTI-OXIDIZED LDL CHOLESTEROL ANTIBODIES -- antibodies to the oxidized
form of LDL cholesterol.
ANTIPHOSPHOLIPID ANTIBODIES -- a family of autoantibodies with
specificity against negatively charged phospholipids, that are frequently
associated with recurrent venous or arterial thrombosis, thrombocytopenia, or
spontaneous fetal abortion in individuals with SLE or other autoimmune
disease.
ANTIPHOSPHOLIPID SYNDROME -- a clinical condition characterized by
venous or arterial thrombosis, thrombocytopenia, or spontaneous fetal
abortion, in association with elevated levels of antiphospholipid antibodies
and/or lupus anticoagulant.
ASSAY -- a laboratory test; to examine or subject to analysis.
AUTOANTIBODY -- an antibody with specific reactivity against a component
substance of the body in which it is produced; a disease marker.
AUTOIMMUNE DISEASES -- a group of diseases resulting from reaction of
the immune system against self components.
BETA 2 GLYCOPROTEIN I (Beta2GPI) -- 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 Beta2GPI.
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.
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.
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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.
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.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is currently traded on the OTC Bulletin
Board-Registered Trademark-under the symbol "COGX". From February 27, 1998
until the Merger on May 22, 1998, the Common Stock was quoted on the OTC
Bulletin Board-Registered Trademark- under the symbol "GRWT." On October 27,
1998, the last bid price of the Common Stock on the OTC Bulletin
Board-Registered Trademark- as reported by the OTC Bulletin Board-Registered
Trademark- was $0.22.
The following table sets forth, for the periods indicated, the high and
low bid prices of the Common Stock as reported on the OTC Bulletin
Board-Registered Trademark-. The following quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended June 30, 1998
First Quarter . . . . . . . . . . . . . . . . . $-- $--
Second Quarter . . . . . . . . . . . . . . . . . -- --
Third Quarter . . . . . . . . . . . . . . . . . -- --
Fourth Quarter . . . . . . . . . . . . . . . . . $1.55 $0.31
Year Ended June 30, 1999
First Quarter . . . . . . . . . . . . . . . . . $1.75 $0.53
Second Quarter (through October 27, 1998) . . . 0.50 0.19
</TABLE>
On September 30, 1998 there were approximately 52 holders of record of
the Common Stock.
To date, the Company has not paid any dividends on its Common Stock, and
the Board of Directors of the Company does not currently intend to declare
cash dividends on the Common Stock. The Company instead intends to retain
its earnings to support the growth of the Company's business. Any future
cash dividends would depend on future earnings, capital requirements and the
Company's financial condition and other factors deemed relevant by the Board
of Directors. The Company is restricted from paying dividends without the
approval of its financial advisor, pursuant to the terms of the Consulting
Agreement with TGF. See "Part III. Item 12. 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.
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.
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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 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.
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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.
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In October 1995, the Company sold in a private placement transaction
4,000,000 shares of Common Stock at a price of $.001 per share for total
gross proceeds of approximately $4,000. This sale was made to an affiliate
of the Company in reliance upon exemptions from the registration requirements
of Section 5 of the Act provided by Section 4(2) of the Act. The Company
repurchased such shares in January 1998 for a purchase price of $8,000, which
was paid for by the issuance of a note in the amount of the purchase price.
In April 1996, REAADS sold in a private placement transaction a total of
113.2 shares of its preferred stock and 29,300 warrants to purchase shares of
REAADS common stock at an exercise price of $30.00 per share. These
securities were sold to six individuals for total gross proceeds of
approximately $340,000. Based upon information provided by each of the
investors, the Company believes that each was either an "accredited investor"
or was sophisticated in transactions of this nature. At the time of the
purchase, each of the investors was either a founder, a senior management
employee or a director of the Company, each was involved in the day-to-day
operations of the Company and each had access to all relevant financial
information regarding the business and affairs of the Company. These sales
were made in reliance upon exemptions from the registration requirements of
Section 5 of the Act provided by Section 4(2) of the Act.
In February 1998, REAADS sold 250 shares of its common stock to a
consultant to REAADS in consideration for services valued at $7,500. Based
upon information provided by the investor, the Company believes that the
investor was an "accredited investor." At the time of the purchase, the
investor was a member of the Company's scientific advisory board and had
access to all relevant financial information regarding the business and
affairs of the Company. This sale was made in reliance upon exemptions from
the registration requirements of Section 5 of the Act provided by Section
4(2) of the Act.
In November 1997, REAADS issued 6,660 warrants to purchase shares of
REAADS common stock at an exercise price of $30.00 per share in connection
with the making of a loan to REAADS. The investor is a founder of the Company
and, based upon information provided to the Company by the investor, the
Company believes that the investor was an "accredited investor." The
investor also served as a consultant to the Company and had access to all
relevant financial information regarding the business and affairs of the
Company. This sale was made in reliance upon exemptions from the
registration requirements of Section 5 of the Act provided by Section 4(2) of
the Act.
Between May 23, 1995 and May 22, 1998, REAADS granted options and
warrants to purchase its common stock to a total of four of its employees,
which options were exercisable at a price of $30.00 per share. During such
period, one REAADS employee exercised options previously granted to her and
purchased two shares of REAADS common stock for $15 per share. The option
grants were made to employees of REAADS in reliance upon exemptions from the
registration requirements of Section 5 of the Act provided by Rule 701 under
the Act.
As part of the Merger, all of REAADS options and warrants then
outstanding were exchanged for shares of REAADS common stock at a ratio of
.3692 shares of REAADS common stock per share of REAADS common stock
underlying such option or warrant.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
financial statements and accompanying notes included elsewhere in this
Registration Statement.
GENERAL
Since the Company's inception, Corgenix has been primarily involved in
the research, development, manufacturing and marketing of diagnostic tests
for sale to clinical laboratories. Corgenix currently markets 23 products
covering autoimmune disorders, vascular diseases, bone and joint diseases and
liver disease. Corgenix's products are sold in the United States through the
Company's marketing and sales organization that includes 14 sales
representatives, internationally through an extensive distributor network,
and to several significant OEM partners.
Corgenix manufactures products for inventory based upon expected sales
demand, shipping products to customers, usually within 24 hours of receipt of
orders. Accordingly, Corgenix does not operate with a backlog, and the
Company anticipates that its inventory will increase significantly in the
future.
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Except for the fiscal year ending June 30, 1997, the Company has
experienced revenue growth since its inception, primarily from sales of
products and contract revenues from strategic partners. Contract revenues
consist of licensing fees, milestone payments, and royalty payments from
research and development agreements with strategic partners.
Beginning in fiscal year 1996, Corgenix added third-party OEM licensed
products to its diagnostic product line, licensing six diagnostic products
from Cambridge. In 1998, the Company added four additional products to its
product line through OEM licenses from other third party manufacturers.
Corgenix expects to expand its relationships with other companies in the
future to gain access to additional products.
Although Corgenix has experienced growth in revenues every year since
1990 except for 1997, there can be no assurance that, in the future, Corgenix
will sustain revenue growth or achieve profitability. Corgenix's results of
operations may fluctuate significantly from period-to-period as the result of
several factors, including: (i) whether and when new products are
successfully developed and introduced, (ii) market acceptance of current or
new products, (iii) seasonal customer demand, (iv) whether and when Corgenix
receives R&D milestone payments and license fees from strategic partners, (v)
changes in reimbursement policies for the products that Corgenix sells;,(vi)
competitive pressures on average selling prices for the products that
Corgenix sells, and (vii) changes in the mix of products that Corgenix sells.
RESULTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
NET SALES. From its inception in 1990, the Company has achieved average
annual net sales growth of 30.9%. Net sales for the year ended June 30, 1998
was $2.59 million, a 6.4% increase from $2.44 million in 1997. A component of
net sales, product sales, increased 13.7% to $2.58 million in 1998 from $2.27
million in 1997. Sales of Hyaluronic Acid product (HA) to Chugai for
distribution in Japan increased 14.3% from $671,000 in 1997 to $767,000 in
1998, due to an increased marketing effort by Chugai following resolution of
a component design flaw in 1997.
Also included in net sales are partnership payments from strategic
alliances that decreased from $200,000 in 1997 to $46,000 in 1998 due to
timing of ongoing development projects.
COST OF SALES. Cost of sales decreased 31.6% to $902,000 in 1998 from
$1,318,000 in 1997, due primarily to resolution of the design flaw in a
critical raw material component used in the HA product. In 1997, an
additional $479,000 was charged to cost of sales because of this problem. The
gross profit increased from 45.9% in 1997 to 65.2% in 1998 due to this
resolution. Excluding $479,000 in expense to correct the design flaw, gross
profit would have been approximately 65.5% in 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses were flat,
increasing only 2.0% to $387,000 in 1998 from $380,000 in 1997. During 1998,
several ongoing projects remained in development but no new projects were
added during this period.
SELLING AND MARKETING. Selling and marketing expenses were also flat,
$751,000 in 1998 versus $742,000 in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 82.6% to $1,322,000 in 1998 from $724,000 in 1997, due in part to
legal, accounting and other costs relating to strategic partnering
activities, financing activities and the costs of transforming into a public
company. Transaction costs of $342,000 for merger expenses and success fees
are included in general and administrative expenses in 1998. These costs are
expensed due to the assets of both entities being reflected in the financial
statements at their historical carrying amounts, due to the merger
transaction with a "shell" company.
OTHER EXPENSES. Other expenses increased 60.5% to $152,000 in 1998 from
$95,000 in 1997 due primarily to higher interest expense resulting from
higher debt levels throughout the year. Interest expense increased to
$150,000 in 1998 from $50,000 in 1997, while factoring expenses decreased to
$2,000 in 1998 from $45,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through
sales of common and preferred stock, raising
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<PAGE>
net proceeds of approximately $2.7 million from sales of these securities. In
1998, the Company raised $1,000,000 before offering expenses through a Reg.
504 offering related to the Merger Transaction.
Corgenix has also received financing for operations from sales of
diagnostic products and agreements with strategic partners. At June 30, 1998
and June 30, 1997, Corgenix had invested $215,084 and $349,427, respectively,
(net of accumulated depreciation) in leasehold improvements, laboratory and
computer equipment and office furnishings and equipment to support its
development and administrative activities.
Corgenix's principal sources of liquidity are short and long term debt
financing, of which $1,141,114 remained outstanding as of June 30, 1998.
Management believes that the Company needs to enter into new debt agreements
and/or sell additional equity securities in fiscal year 1999 to maintain
appropriate liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards, No. 130, REPORTING
COMPREHENSIVE INCOME ("Statement No. 130"), effective for years beginning
after December 15, 1997. Statement No. 130 establishes standards for
reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. The Company is not required and
therefore has not yet adopted Statement No. 130. The Company will comply
with the reporting and display requirements under this statement when
required.
In June 1997, the FASB issued Statement of Financial Accounting
Standards, No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("Statement No. 131"), effective for years beginning after
December 15, 1997. Statement No. 131 establishes standards for reporting
information about operating segments and the methods by which such segments
were determined. The Company is not required and therefore has not yet
adopted Statement No. 131. The Company will comply with the reporting
requirements under this statement when required.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS ("Statement No. 132"), effective for fiscal years
beginning after December 15, 1997. Statement No. 132 revises disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Statement No. 132 standardizes
the disclosure requirements and suggests combined formats for presentations
of such disclosures. The Company is not required and therefore has not yet
adopted Statement No. 132. The Company will comply with the reporting
requirements under this statement when required.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (the "SOP") REPORTING ON THE COSTS OF
START-UP ACTIVITIES, effective for fiscal years beginning after December 15,
1998 and encouraging earlier adoption. The SOP broadly defines start-up
activities as those one time activities related to, among other things,
opening a new facility. In general, the SOP requires the Company to expense
as incurred those costs. Currently, the Company expenses such costs.
In June 1998, FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement No. 133), effective for fiscal years beginning after June 15,
1999. Statement No. 133 establishes accounting and reporting standards for
derivative instruments and requires companies to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The Company has not yet adopted
Statement No. 133. The Company believes the accounting and reporting
standards required by this statement will not be significant. The Company
will comply with the accounting and reporting requirements under this
statement when required.
YEAR 2000 EFFECT
The Year 2000 will impact computer programs written using two digits rather
than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence. Corgenix recently reviewed all of its software
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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 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
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<PAGE>
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
submission of products for regulatory approval or impair the Company's
ability to deliver products on a timely basis. See "--Dependance on
Distribution Partners for Sales of Diagnostic Products in International
Markets," "Part I. Item 1. Description of Business -- Chugai Strategic
Relationship" and "-- Other Strategic Relationships."
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF ADDITIONAL PRODUCTS
The Company's business strategy includes the development of additional
diagnostic products. The Company's success in developing new products will
depend on its ability to achieve scientific and technological advances and to
translate these advances into commercially competitive products on a timely
basis. Development of new products requires significant research,
development and testing efforts. The Company will have limited resources to
devote to the development of products and, consequently, a delay in the
development of one product or the use of resources for product development
efforts that prove unsuccessful may delay or jeopardize the development of
other products. Any delay in the development, introduction and marketing of
future products could result in such products being marketed at a time when
their cost and performance characteristics would not enable them to compete
effectively in their respective markets. If the Company is unable, for
technological or other reasons, to complete the development and introduction
of any new product or if any new product is not approved or cleared for
marketing or does not achieve a significant level of market acceptance, the
Company's results of operation could be materially and adversely affected.
See "Part I. Item 1. Description of Business -- Products and Markets" and
"-- Regulation."
COMPETITION IN THE DIAGNOSTICS INDUSTRY
Competition in the human medical diagnostics industry is, and is
expected to remain, significant. The Company's competitors range from
development stage diagnostics companies to major domestic and international
pharmaceutical companies. Many of these companies have financial, technical,
marketing, sales, manufacturing, distribution and other resources
significantly greater than those of the Company. In addition, many of these
companies have name recognition, established positions in the market and long
standing relationships with customers and distributors. Moreover, the
diagnostics industry has recently experienced a period of consolidation,
during which many of the large domestic and international pharmaceutical
companies have been acquiring mid-sized diagnostics companies, further
increasing the concentration of resources. There can be no assurance that
technologies will not be introduced that could be directly competitive with
or superior to the Company's technologies. See "Part I. Item 1. Description
of Business -- Competition."
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,
25
<PAGE>
manufacture, labeling, distribution and promotion of medical devices. The
Company will not be able to commence marketing or commercial sales in the
United States of new products under development until it receives clearance
from the FDA. The testing for, preparation of and subsequent FDA regulatory
review of required filings can be a lengthy, expensive and uncertain process.
Noncompliance with applicable requirements can result in, among other
consequences, fines, injunctions, civil penalties, recall or seizure of
products, repair, replacement or refund of the cost of products, total or
partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of
marketing clearances or approvals, and criminal prosecution. See "Part I.
Item 1. Description of Business -- Regulation."
There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances for its products on a timely
basis, if at all, and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such
approvals or clearances or failure to comply with existing or future
regulatory requirements could have a material adverse effect on the Company's
business.
DEPENDENCE ON DISTRIBUTION PARTNERS FOR SALES OF DIAGNOSTIC PRODUCTS IN
INTERNATIONAL MARKETS
The Company has entered into distribution agreements with collaborative
partners in which Corgenix has granted distribution rights for certain
Corgenix products to these partners within specific international geographic
areas. Pursuant to these agreements, the Company's collaborative partners
have certain responsibilities for market development, promotion, and sales of
the products. If any of these partners fails to perform its contractual
obligations or terminates its agreement, this could have a material adverse
effect on the Company's business, financial condition and results of
operation.
Additionally, the Company intends to expand its distribution network
into additional countries and into different market segments including the
POC market. There can be no assurance that Corgenix will be successful in the
expansion of the distribution network, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operation.
GOVERNMENTAL REGULATION OF MANUFACTURING AND OTHER ACTIVITIES
As a manufacturer of medical devices for marketing in the United States,
the Company is required to adhere to applicable regulations setting forth
detailed good manufacturing practice requirements, which include testing,
control and documentation requirements. The Company must also comply with
Medical Device Report ("MDR") requirements, which require that a manufacturer
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to
cause or contribute to a death or serious injury. The Company is also
subject to routine inspection by the FDA for compliance with QSR
requirements, MDR requirements and other applicable regulations. The FDA has
recently implemented new QSR requirements, including the addition of design
controls that will likely increase the cost of compliance. Labeling and
promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. The Company may incur
significant costs to comply with laws and regulations in the future, which
may have a material adverse effect upon the Company's business, financial
condition and results of operations.
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
26
<PAGE>
In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third party
payors, principally private health insurance plans, federal Medicare and
state Medicaid, to reimburse all or part of the cost of the procedure. Third
party payors are increasingly scrutinizing and challenging the prices charged
for medical products and services and they can affect the pricing or the
relative attractiveness of the Decreases in reimbursement amounts for tests
performed using the Company's diagnostic products, failure by physicians and
other users to obtain reimbursement from third party payors, or changes in
government and private third party payors' policies regarding reimbursement
of tests utilizing diagnostic products, may affect the Company's ability to
sell its diagnostic products profitably. See "Part I. Item 1. Description
of Business -- Regulation" and "-- Reimbursement." Market acceptance of the
Company's products in international markets is also dependent, in part, upon
the availability of reimbursement within prevailing health care payment
systems.
UNCERTAINTY OF PROTECTION OF PATENTS, TRADE SECRETS AND TRADEMARKS
The Company's success depends, in part, on its ability to obtain patents
and license patent rights, to maintain trade secret protection and to operate
without infringing on the proprietary rights of others. There can be no
assurance that the Company's issued patents will afford meaningful protection
against a competitor, or that patents issued to the Company will not be
infringed upon or designed around by others, or that others will not obtain
patents that the Company would need to license or design around. The Company
could incur substantial costs in defending itself or its licensees in
litigation brought by others or prosecuting infringement claims against third
parties. If the outcome of any such litigation is unfavorable to the
Company, the Company's business could be adversely affected. See "Part I.
Item 1. Description of Business -- Patents, Trade Secrets and Trademarks."
RISKS REGARDING POTENTIAL FUTURE ACQUISITIONS
The Company's growth strategy includes as a material element the desire
to acquire complementary companies, products or technologies. Except as
disclosed in "Item 1. Description of Business -- Acquisitions," the Company
has not targeted any acquisition candidates and there is no assurance that
the Company will be able to identify appropriate companies or technologies to
be acquired, or to negotiate satisfactory terms for such an acquisition.
Moreover, because of limited cash resources, the Company will be unable to
acquire any significant companies or technologies for cash and the Company's
ability to effect acquisitions in exchange for the Company's capital stock
may depend upon the market prices for the Common Stock. If the Company does
complete one or more acquisitions, a number of risks arise, such as
short-term negative effects on the Company's reported operating results,
diversion of management's attention, unanticipated problems or legal
liabilities, and difficulties in the integration of potentially dissimilar
operations. The occurrence of some or all of these risks could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Part I. Item 1. Description of Business --
Strategy."
NO ASSURANCE OF MARKET ACCEPTANCE OF POINT-OF-CARE DIAGNOSTIC PRODUCTS
Another growth strategy of the Company is to seek to develop,
manufacture and market POC diagnostic products. Presently, the Company has
no products used in the POC market and there is no assurance that it will be
successful in developing and penetrating the POC market for diagnostic
testing. Approximately 75% of diagnostic testing is currently performed at
large clinical laboratories rather than POC sites, and there can be no
assurance that caregivers, laboratories or the medical community in general
will accept and utilize the POC testing system in general or products that
may be developed in particular. Market acceptance of any POC products of the
Company will depend on the Company's ability to develop such products and
then demonstrate the accuracy and value of its products and to persuade
caregivers to perform the Company's tests in the caregivers' own facilities
rather than send those tests to clinical laboratories. In addition, market
acceptance of new POC products will depend on all of the factors that affect
other new products. See "Part I. Item 1. Description of Business -- Industry
Overview," "-- Strategy" and "-- Products and Markets."
DEPENDENCE ON SUPPLIERS
The components of the Company's products include chemical and packaging
supplies that are generally available from several suppliers, except certain
antibodies, which the Company purchases from single suppliers. The Company
mitigates the risk of a loss of supply by maintaining a sufficient supply of
such antibodies to ensure an uninterrupted supply for at least six months.
Although the Company believes that it can substitute a new supplier with respect
to any of these components in a timely manner, there can be no assurances that
the Company will be able to substitute a new
27
<PAGE>
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.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY IN STOCK PRICES; PENNY STOCK
RULES
There has, to date, been no active public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained. Although the Company's Common Stock has been
traded on the OTC Bulletin Board-Registered Trademark- since February 1998,
the trading has been sporadic with insignificant volume.
Moreover, the over-the-counter markets for securities of very small
companies such as the Company historically have experienced extreme price and
volume fluctuations during certain periods, and the Company's stock price has
experienced significant price and volume fluctuations in the past. These
broad market fluctuations and other factors, such as new product developments
and trends in the Company's industry and the investment markets and economic
conditions generally, as well as quarterly variation in the Company's results
of operations, may adversely affect the market price of the Company's Common
Stock. In addition, the Company's Common Stock is subject to rules adopted by
the Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny
28
<PAGE>
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 7. FINANCIAL STATEMENTS.
The financial statements listed in the accompanying index to the
consolidated financial statements are filed as part of this Annual Report on
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
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 September
30, 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 ("REAADS") 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, 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
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<PAGE>
of the largest diagnostic companies in the world, where he served as Vice
President of Marketing, in charge of all marketing and business development
for this $200 million medical diagnostics company. Mr. Simpson holds B.S.
and M.S. degrees in Biology and Chemistry from Lamar University in Beaumont,
Texas.
W. GEORGE FLEMING, Ph.D., has been the Vice President, International
Operations, of the Company pursuant to a consulting agreement since May 1998.
Dr. Fleming joined the Company's operating subsidiary as Director of European
Operations in 1992, after serving as a consultant in international
distribution to REAADS from 1990 to 1992. He was promoted to Managing
Director, European Operations, and in 1996 to Vice President, International.
Prior to joining the Company's operating subsidiary, Dr. Fleming was a
director of Unilever's Medical Products Group in the UK, a L41 million health
care company. He joined Oxoid, a subsidiary of Brooke Bond in 1968, serving
in a number of management positions leading to his appointment as Director of
Marketing in 1976, managing their growth up to L31 million in 1985, when it
was acquired by Unilever. Dr. Fleming received a B.Sc. degree from Queens
University, Belfast, Northern Ireland, and a Ph.D. in Business Administration
from Fairfax University, Baton Rouge, Louisiana.
ANN L. STEINBARGER has been the Vice President, Sales and Marketing, of
the Company since May 1998. Ms. Steinbarger joined the Company's operating
subsidiary in January 1996 as Vice President, Sales and Marketing with
responsibility for its worldwide marketing and distribution strategies.
Prior to joining REAADS, Ms. Steinbarger was with Boehringer Mannheim
Corporation, Indianapolis, Indiana, a $200 million IVD company. At
Boehringer from 1976 to 1996, she served in a series of increasingly
important sales management positions. Ms. Steinbarger holds a B.S. degree in
Microbiology from Purdue University in West Lafayette, Indiana.
TARYN G. REYNOLDS has been the Vice President, Operations, of the
Company since May 1998. Mr. Reynolds joined the Company's operating
subsidiary in 1992, serving first as Director of Administration, then as
Managing Director, U.S. Operations, and then from October 1996 onward as Vice
President, Operations with overall management responsibility for the
Company's headquarters facility, including R&D, Quality, Administration and
Manufacturing. Prior to joining REAADS, Mr. Reynolds held executive
positions at Brinker International, MJAR Corporation and M&S Incorporated,
all Colorado-based property, operational and financial management firms.
CATHERINE A. FINK, Ph.D., has been the Company's Executive Scientific
Director since May 1998. Dr. Fink joined the Company's operating subsidiary
in 1996 as Director of Research and Development with responsibility for
product development, and in 1997 was promoted to Executive Scientific
Director with additional responsibilities for Quality Control. She chairs
the Company's technical committee. Prior to joining REAADS, Dr. Fink was
with DDx, Inc., a Denver, Colorado based privately-held biotechnology firm
from 1994 until 1996, and from 1993 to 1994 was Product Development Manager
at Trinity Biotech plc., an Irish biotechnology company which develops and
manufactures rapid saliva and blood based diagnostic tests. From 1990 to
1993, she was with Biosyn Ltd. (Belfast), a manufacturer of diagnostic tests
for medical and veterinary applications. Dr. Fink received a B.Sc. (with
Honors) from University College Dublin, and a Ph.D. in immunology from the
National University at Ireland.
NANCI B. DEXTER has been the Company's Director of Quality and
Regulatory Affairs since May 1998. Ms. Dexter joined REAADS as Director of
Quality and Regulatory Affairs in 1997. From 1996 to 1997, she was Director
of Regulatory Affairs and Quality Assurance at In-X Corporation, a Denver
based medical device company, and from 1993 to 1996, was Manager of Quality
Assurance and Quality Control at Cortech, Inc., a Denver biopharmaceutical
company. From 1987 to 1993, Ms. Dexter was with Marquest Medical Products,
Inc. (Englewood, Colorado) where she held several positions, including
Manager of Corporate Document Control. She has a BS degree in Business
Administration from Colorado State University (Ft. Collins, Colorado), and is
a member of numerous professional organizations including the American
Society for Quality Control, Regulatory Affairs Professionals Society,
Society of Quality Assurance and the Colorado Medical Device Association.
Ms. Dexter is a Certified Quality Auditor.
BRIAN E. JOHNSON was appointed as a Director of the Company in May 1998.
Mr. Johnson has served as a director of the Company's operating subsidiary
since 1993. He served as Senior Vice President -- Field Service and Senior
Vice President -- Dealer Development and Acquisitions at ADT Security
Systems, then the world's largest provider of electronic security services,
from 1996 to 1997. From 1993 to 1995 he was Executive Vice President and
Chief Financial Officer of Alert Centre, Inc., a Denver-based, publicly
traded electronic security services company, which was acquired by ADT in
December 1995. From 1990 through 1993 Mr. Johnson was Managing Partner at
Barnes Johnson & Associates, a small investment banking and consulting firm
specializing in corporate finance and acquisitions.
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<PAGE>
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 100 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.
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 be 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
32
<PAGE>
reviews and recommends for Board approval compensation for executive officers
and makes policy decisions concerning salaries and incentive compensation for
employees and consultants of the Company.
DIRECTORS COMPENSATION
Members of the Board of Directors currently do not receive any
compensation for service on the Board of Directors or any committee thereof.
Directors may be reimbursed for certain expenses in connection with
attendance at Board and committee meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into three-year employment agreements with each
of Dr. Luis R. Lopez, Douglass T. Simpson, Ann L. Steinbarger, Taryn G.
Reynolds and Catherine A. Fink, Ph.D., pursuant to which the Company pays
annual salaries of $160,000, $140,000, $100,000, $90,000 and $80,000,
respectively, in 1998 and 1999. In addition, the Company has executed a
three-year consulting contract with Wm. George Fleming, Ph.D., who serves as
the Company's Vice President, International Operations in consideration for
an annual fee of $60,000 in 1998 and 1999. These agreements provide for
severance payments equal to the salary due during the term of the agreement
if the employment of the individual is terminated without cause (as defined
in the respective agreements).
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934
The Company's directors and executive officers and persons who are
beneficial owners of more than 10% of the Common Stock ("10% beneficial
owners") are required to file reports of the holdings and transactions in
Common Stock with the Securities and Exchange Commission (the "Commission")
and to furnish the Company with such reports. Based solely upon its review of
the copies of such reports the Company has received or upon written
representations it has obtained from certain of these persons, the Company
believes that each of the Company's directors and executive officers were 10
days late in filing their Initial Statement of Beneficial Ownership of
Securities on Form 3. Except for these late filings, as of September 10, 1998,
the Company believes that all of the executive officers and 10% beneficial
owners had complied with all applicable Section 16(a) filing requirements.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by the Company's
operating subsidiary for the three fiscal years ended June 30, 1998, 1997 and
1996 to the Company's Chief Executive Officer and the two other executive
officers whose total annual salary and bonus exceeded $100,000 for services
rendered to the subsidiary during such fiscal years (collectively, the "Named
Executive Officers").
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------- --------------
SECURITIES
FISCAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS(1)
<S> <C> <C> <C>
Luis R. Lopez . . . . . . . . . . . . . . . . . . 1998 $160,000 --
Chairman, Chief Executive Officer 1997 143,333 --
1996 133,333 --
Douglass T. Simpson . . . . . . . . . . . . . . . 1998 $140,000 --
President, Chief Operating Officer 1997 123,333 --
1996 113,333 38,766
Ann L. Steinbarger(2) . . . . . . . . . . . . . . 1998 $100,000 --
Vice President 1997 100,000 --
1996 50,000 55,380
</TABLE>
------------------
(1) All awards have been adjusted to reflect the number of shares of
Common Stock of the Company received by the optionholder in
consideration of the cancellation of such options in connection
with the merger of REAADS with and into a wholly-owned subsidiary
of the Company (the "Merger").
(2) Ms. Steinbarger joined the Company in January 1996.
The Company has employment agreements with each of the Named Executive
Officers. See "Part III. Item 9. 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 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
33
<PAGE>
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1998
for (a) each person (or group of affiliated persons) is known by the Company
to own beneficially more than 5% of the Common Stock, (b) each of the
Company's directors, (c) each of the Named Executive Officers (as set forth
in "Part III. Item 10. Executive Compensation"), and (d) all directors and
current executive officers of the Company as a group. Except as otherwise
noted, the Company believes that the persons or entities in this table have
sole voting and investing power with respect to all the shares of Common
Stock owned by them. The information appearing below concerning persons
other than officers and directors of the Company is to the Company's best
knowledge based on information obtained from the Company's transfer agent.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
- ------------------------------------------------------------ ---------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------------ ------------------- ---------------
<S> <C> <C>
Dr. Luis R. Lopez(1)(2)(3) . . . . . . . . . . . . . . . 1,460,310 12.14%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Raul Diez Canseco(2)(3) . . . . . . . . . . . . . . . . . 679,260 5.64%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Jana Hartinger Mazzini(2)(3) . . . . . . . . . . . . . . 662,670 5.51%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Leland P. Snyder(2)(3) . . . . . . . . . . . . . . . . . 631,350 5.25%
Corgenix Medical Corporation
12061 Tejon Street
Westminster, Colorado 80234
Brian E. Johnson(2)(3) . . . . . . . . . . . . . . . . . 16,620 *
Mike M. Mustafoglu(3)(4) . . . . . . . . . . . . . . . . 217,265 1.81%
Alev T. Lewis . . . . . . . . . . . . . . . . . . . . . . 0 *
Douglass T. Simpson(2)(3) . . . . . . . . . . . . . . . . 155,340 1.29%
Ann L. Steinbarger(2)(3) . . . . . . . . . . . . . . . . 55,380 *
All Directors and current executive officers
as a group (8 persons)(1)(2)(3)(4) . . . . . . . . . 2,079,735 17.28%
</TABLE>
- ----------------
* Less than 1%
(1) Includes 153,000 shares held of record by Transition Partners Limited, as
to which Dr. Lopez has power to vote. Dr. Lopez disclaims beneficial
ownership of such shares.
(2) Excludes shares of contingent Common Stock that may be issued to such
holders under certain conditions. See "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.
(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.
34
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has the following relationships with certain of its
stockholders, directors and affiliates.
TGF CONSULTING AGREEMENT
The Company is party to a Consulting Agreement dated May 22, 1998 with
TGF. The Consulting Agreement was entered into in connection with closing of
the Merger. The president and controlling shareholder of TGF is Mike M.
Mustafoglu, who also serves as a director of the Company.
Under the terms of the Consulting Agreement, TGF provides advice to the
Company regarding financial and business matters, including but not limited
to, identifying sources of capital to implement the Company's business plans,
review and assessment of capitalization, merger and acquisition prospects,
and other transactions, on an exclusive basis. The Consulting Agreement is
effective for a three-year term ending May 22, 2001. TGF's fee for its
financial and business advisory services is $180,000.00 (payable in 36
monthly installments of $5,000) plus a transaction fee equal to (i) 5% of any
funds committed and available to the Company in an equity financing secured
through TGF and (ii) 3% of any funds committed and available to the Company
in any debt financing secured through TGF. In addition, in the event TGF
represents the Company with respect to a merger, acquisition or other
transaction involving the disposition or exchange of securities or assets of
the Company, TGF is entitled to a transaction fee equal to 5% of the total
market value of the stock, cash, assets or other property exchanged by the
Company or any of its security holders in connection with the transaction,
such fee payable in the same form as the consideration payable to the Company
or its security 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
35
<PAGE>
arise out of or are based upon any misstatement or omission made by the
Company in reliance upon information furnished in writing to the Company by
TGF for inclusion in any registration statement or prospectus in connection
with a transaction to which the Consulting Agreement applies.
Pursuant to the Consulting Agreement, TGF has named Mike M. Mustafoglu
and Alev Lewis as its designees to be nominated as members of the Company's
Board of Directors. To date, TGF has provided general financial advisory
services to the Company pursuant to the Consulting Agreement. Such services
have included financial planning and review, business plan development,
identification of financing sources, identification of and due diligence on
acquisition opportunities, assistance in negotiating agreements, and
evaluation of strategic partner opportunities. TGF has informed the Company
that it does not engage in the business of buying and selling securities for
others or for its own account or advising others, for compensation, as to the
value of securities or the advisability of investing in, purchasing or
selling, securities. TGF has further informed the Company that it is not
currently licensed as a broker-dealer or investment advisor and that TGF is
not required to be so licensed to perform the activities called for under the
Consulting Agreement. TGF has agreed with the Company that if any such
activities are required to be performed by a licensed broker-dealer or
investment advisor, TGF will take the appropriate steps to obtain such
licenses or will inform the Company that it must retain a licensed
broker-dealer or investment company, as appropriate, to perform such
activities.
OPTION AGREEMENT
The Company also is party to an Option Agreement dated May 22, 1998 with
TGF. Under the Option Agreement, TGF has the option to purchase 1,000,000
units (the "Units"), each unit comprised of one share of the Company's
authorized but unissued Series A 5% Convertible Preferred Stock and one
warrant to purchase one share of Common Stock at an exercise price of $2.00,
for an aggregate purchase price of $1,000,000. The option is exercisable by
written notice to the Company on or prior to the expiration of a period of 90
days after the date on which the Securities and Exchange Commission declares
effective a registration statement covering the Units and the shares of
Common Stock issuable upon conversion or exercise thereof. The option is
assignable, in whole or in part, by TGF; however the option must be exercised
collectively as to all of the Units subject thereto. TGF may not, however,
assign, sell, transfer, pledge or otherwise dispose of any of the Units or
any other securities of the Company without the prior written consent of the
Company.
CONTINGENT COMMON STOCK
Under the terms of the Merger Agreement, the former shareholders of
REAADS are entitled to receive up to an additional 4,000,000 shares of Common
Stock upon the occurrence (or non-occurrence) of certain events, as described
below (the "Contingent Shares").
The Contingent Shares are issuable from time to time on each of the
following events: (i) the conversion of one or more shares of the Company's
authorized but unissued Series A 5% Convertible Preferred Stock (the "Series
A Preferred Stock") to Common Stock or the exercise of one or more common
stock purchase warrants issued in connection with the Series A Preferred
Stock ("Preferred Warrants") (the foregoing being referred to as a "Preferred
Issue Event"), in which case the maximum number of Contingent Shares issuable
is 2,000,000 shares, (ii) November 23, 1998, if as of such date the Company
has sold less than $1,000,000 of Series A Preferred Stock (the "November 23,
1998 Issue Event"), in which case the maximum number of Contingent Shares
issuable is 4,000,000 shares less (a) the number of shares of Common Stock
issuable upon conversion of all then outstanding Series A Preferred Stock and
exercise of all Preferred Warrants and less (b) four times the dollar amount
of Series A Preferred Stock sold by the Company as of such date.
The Contingent Shares are issuable to the former shareholders of REAADS
without payment of additional consideration. The former shareholders of
REAADS may not assign, sell, transfer, pledge or otherwise hypothecate or
encumber their right to receive Contingent Shares; they may, however,
transfer their right to receive Contingent Shares by will, gift and laws of
descent and intestacy.
The following table sets forth the number of shares of Common Stock that
would have been held by the persons indicated as of September 30, 1998,
assuming that all of the 4,000,000 shares of contingent Common Stock had been
issued on such date to the former REAADS stockholders.
36
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER CONTINGENT STOCK ISSUANCE
- ------------------------------------------------------------ ---------------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------------------------------ ------------------- ---------------
<S> <C> <C>
Dr. Luis R. Lopez(1)(2). . . . . . . . . . . . . . . . . . 2,414,761 23.86%
Raul Diez Canseco(2) . . . . . . . . . . . . . . . . . . . 1,123,221 11.10%
Jana Hartinger Mazzini(2). . . . . . . . . . . . . . . . . 1,095,788 10.83%
Leland P. Snyder(2). . . . . . . . . . . . . . . . . . . . 1,043,997 10.32%
Brian E. Johnson(2). . . . . . . . . . . . . . . . . . . . 27,483 *
Mike M. Mustafoglu(2)(3) . . . . . . . . . . . . . . . . . 217,265 2.15%
Alev T. Lewis. . . . . . . . . . . . . . . . . . . . . . . 0 *
Douglass T. Simpson(2) . . . . . . . . . . . . . . . . . . 256,869 2.54%
Ann L. Steinbarger(2). . . . . . . . . . . . . . . . . . . 91,576 *
All directors and current executive officers
as a group (8 persons)(1)(2)(3). . . . . . . . . . . . . 3,295,381 32.56%
</TABLE>
- -----------------
* Less than 1%
(1) Includes 153,000 shares held of record by and 100,000 contingent shares
issuable to Transition Partners Limited, as to which Dr. Lopez has power to
vote. Dr. Lopez disclaims beneficial ownership of such shares.
(2) Except for 64,265 shares of Common Stock held by TGF (see Note 3), all of
such shares are restricted and cannot be transferred by the holder thereof
until May 23, 1999.
(3) Consists solely of shares held by TGF, of which Mr. Mustafoglu is the
president and controlling shareholder. Mr. Mustafoglu disclaims beneficial
ownership of such shares.
CORPORATE RELATIONS AGREEMENT
The Company is a party to an agreement dated April 14, 1998 with
Corporate Relations Group, a Florida corporation ("CRG"). Pursuant to this
agreement and a related payment agreement, CRG provides corporate relations
services to the Company for a period of one year for a fee of $75,000. In
connection with the execution of this Agreement, Gulf Atlantic Publishing,
Inc. purchased 950,000 shares of the Company's Common Stock for total
consideration of $50,000. CRG and Gulf Atlantic Publishing, Inc. are both
corporations that are wholly owned by Strattcom Media, Ltd, a publicly-held
corporation.
To date, CRG has provided the Company with investor relations services,
including assistance with the preparation and dissemination of press releases
and the preparation of articles regarding the Company and its products. CRG
has also assisted the Company in placing such articles in various magazines
and brochures published by certain of CRG's affiliates. CRG has informed the
Company that CRG is not a licensed broker-dealer or investment advisor, and
that it is not required to be so licensed to perform the activities called
for under the corporate relations agreement described above.
37
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of May 12, 1998 by and among
Gray Wolf Technologies, Inc., Gray Wolf Acquisition Corp. And
REAADS Medical Products, Inc. (filed as Exhibit 2.1 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
2.2 First Amendment to Agreement and Plan of Merger dated as of May
22, 1998 by and among Gray Wolf Technologies, Inc., Gray Wolf
Acquisition Corp. And REAADS Medical Products, Inc. (filed as
Exhibit 2.2 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
2.3 Second Amendment to Agreement and Plan of Merger dated as of June
17, 1998 by and among the Company and TransGlobal Financial
Corporation (filed as Exhibit 2.3 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated
herein by reference).
3.1 Articles of Incorporation, as amended (filed as Exhibit 3.1 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
3.2 Bylaws (filed as Exhibit 3.2 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated
herein by reference).
4.1 Certificate of Designations for Series A Preferred Stock (filed as
Exhibit 4.1 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.1 Manufacturing Agreement dated September 1, 1994 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.(filed
as Exhibit 10.1 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
10.2 Amendment to the Manufacturing Agreement dated as of January 17,
1995 between Chugai Pharmaceutical Co., Ltd. and REAADS Medical
Products, Inc.(filed as Exhibit 10.2 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated
herein by reference).
10.3 Amendment Agreement dated November 17, 1997 between Chugai
Diagnostic Science, Co., Ltd. and REAADS Medical Products,
Inc.(filed as Exhibit 10.3 to the Company's Registration Statement
on Form 10-SB filed June 29, 1998, and incorporated herein by
reference).
10.4 Distribution Agreement dated August 26, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.(filed
as Exhibit 10.4 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
10.5 Amendment to the Distribution Agreement dated September 7, 1994
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical
Products, Inc. (filed as Exhibit 10.5 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.6 Distribution Agreement dated November 14, 1997 between Chugai
Diagnostics Science Co, Ltd. and REAADS Bio-Medical Products (UK)
Ltd. (filed as Exhibit 10.6 to the Company's Registration Statement
10.7 Product Development and Manufacturing Agreement dated September
12, 1994 between REAADS Medical Products, Inc. and Helena
Laboratories Corporation (filed as Exhibit 10.7 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.8 Amendment to Product Development and Manufacturing Agreement
effective December 15, 1997 between REAADS Medical Products, Inc.
and Helena Laboratories Corporation (filed as Exhibit 10.8 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
</TABLE>
38
<PAGE>
<TABLE>
<C> <S>
10.9 Office Lease dated February 6, 1996 between Stream Associates,
Inc. And REAADS Medical Products, Inc. (filed as Exhibit 10.9 to
the Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
10.10 Guarantee dated November 1, 1997 between William George Flemming,
Douglass Simpson and Geoffrey Vernon Callen (filed as Exhibit
10.10 to the Company's Registration Statement on Form 10-SB filed
June 29, 1998, and incorporated herein by reference).
10.11 Employment Agreement dated May 22, 1998 between Luis R. Lopez and
the Company (filed as Exhibit 10.11 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated
herein by reference).
10.12 Employment Agreement dated May 22, 1998 between Douglass T.
Simpson and the Company (filed as Exhibit 10.12 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.13 Employment Agreement dated May 22, 1998 between Ann L. Steinbarger
and the Company (filed as Exhibit 10.13 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.14 Employment Agreement dated May 22, 1998 between Taryn G. Reynolds
and the Company (filed as Exhibit 10.14 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.15 Employment Agreement dated May 22, 1998 between Catherine
(O'Sullivan) Fink and the Company (filed as Exhibit 10.15 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
10.16 Consulting Contract dated May 22, 1998 between Wm. George Fleming,
Bond Bio-Tech, Ltd. and the Company (filed as Exhibit 10.16 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
10.17 Stock Purchase Agreement dated September 1, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc. (filed
as Exhibit 10.17 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
10.18 Lead Generation/Corporate Relations Agreement dated April 14, 1998
between the Company and Corporate Relations Group, Inc. (filed as
Exhibit 10.18 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
10.19 Note dated January 6, 1997 between REAADS Medical Products, Inc.
and Eagle Bank (filed as Exhibit 10.19 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.20 Deed of Guarantee Sterling and Currency dated May 14, 1997 by
REAADS Bio-Medical Products (UK) Limited (filed as Exhibit 10.20
to the Company's Registration Statement on Form 10-SB filed June
29, 1998, and incorporated herein by reference).
10.21 Option Agreement dated as of May 22, 1998 between TransGlobal
10.22 Consulting Agreement dated May 22, 1998 between TransGlobal
Financial Corporation and the Company (filed as Exhibit 10.22 to
the Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
10.23 Distributor Agreement dated as of August 3, 1998 by and between
American Biogenetic Sciences, Inc. and the Company (filed as
Exhibit 10.23 to the Company's Registration Statement on Form
10-SB/A-1 filed September 24, 1998, and incorporated herein by
reference) (certain portions of Exhibit 10.23 have been omitted
based upon a request for confidential treatment; the omitted
portions have been filed with the Commission).
10.24 Form of Indemnification Agreement between the Company and its
directors and officers (filed as Exhibit 10.24 to the Company's
Registration Statement on Form 10-SB/A-1 filed September 24, 1998,
and incorporated herein by reference).
11.1 Statement Regarding Computation of Net Income per Share (filed as
Exhibit 11.1 to the Company's Annual Report on Form 10-KSB filed
September 28, 1998, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant (filed as Exhibit 21.1 to the
Company's Registration Statement on Form 10-SB filed June 29,
1998, and incorporated herein by reference).
</TABLE>
39
<PAGE>
<TABLE>
<C> <S>
27* Financial Data Schedule
</TABLE>
- --------------------------------
* Filed herewith.
(b) Financial Statement Schedules
None
40
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
CORGENIX MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE NUMBER
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1998 and 1997 F-2
Consolidated Statement of Operations for Years Ended
June 30, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended June 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Corgenix Medical Corporation:
We have audited the accompanying consolidated balance sheets of Corgenix
Medical Corporation and subsidiary (Company) as of June 30, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corgenix
Medical Corporation and subsidiary as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado
October 23, 1998
F-1
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 216,314 141,086
Accounts receivable, less allowance for doubtful accounts of $6,600 and $3,400
in 1998 and 1997, respectively 369,710 601,939
Note receivable 27,425 -
Inventories 511,408 234,761
Prepaid expenses 16,876 12,492
--------- ---------
Total current assets 1,141,733 990,278
--------- ---------
Equipment:
Machinery and laboratory equipment 304,744 368,660
Furniture, fixtures and office equipment 238,761 224,521
--------- ---------
543,505 593,181
Accumulated depreciation and amortization (328,421) (243,754)
--------- ---------
Net equipment 215,084 349,427
--------- ---------
Intangible assets:
Patents, net of accumulated amortization of $572,484 and $498,682
in 1998 and 1997, respectively 545,060 618,862
Goodwill, net of accumulated amortization of $32,523 and $28,969
in 1998 and 1997, respectively 29,065 32,619
--------- ---------
574,125 651,481
--------- ---------
Due from officer 12,000 12,000
Other assets 22,652 98,209
--------- ---------
Total assets $ 1,965,594 2,101,395
--------- ---------
--------- ---------
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable $ 287,765 124,703
Accounts payable 427,809 529,546
Accrued payroll and related liabilities 106,757 109,038
Other liabilities 116,054 116,754
--------- ---------
Total current liabilities 938,385 880,041
Notes payable, excluding current portion 853,349 915,641
--------- ---------
Total liabilities 1,791,734 1,795,682
--------- ---------
Mandatorily redeemable 12%, Class A Preferred stock, 2,000 shares authorized and
113.2 shares issued and outstanding in 1997, liquidation preference of $388,431 - 388,431
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 5,000,000 shares, none issued
or outstanding - -
Common stock, $0.001 par value. Authorized 20,000,000 shares; issued
and outstanding 12,102,494 shares in 1998 12,102 -
Common stock, $0.01 par value. Authorized 500,000 shares; issued and
outstanding 164,000 shares in 1997 - 1,640
Additional paid-in capital 3,610,798 2,337,313
Stock subscription receivable (25,651) -
Accumulated deficit (3,423,389) (2,421,671)
--------- ---------
Total stockholders' equity (deficit) 173,860 (82,718)
--------- ---------
Commitments and contingencies (notes 5, 7, 9 and 11)
Total liabilities and stockholders' equity (deficit) $ 1,965,594 2,101,395
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2 (cont)
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 2,592,175 2,435,965
Cost of sales 901,699 1,318,256
--------- ---------
Gross profit 1,690,476 1,117,709
Operating expenses:
Selling and marketing 751,244 742,200
Research and development 387,260 379,518
General and administrative 1,321,990 723,805
--------- ---------
2,460,494 1,845,523
--------- ---------
Operating loss (770,018) (727,814)
Other expenses:
Interest expense, net (150,148) (49,922)
Factoring expense (2,132) (44,977)
--------- ---------
(152,280) (94,899)
--------- ---------
Net loss $ (922,298) (822,713)
--------- ---------
--------- ---------
Net loss per share basic and diluted $(.15) (.17)
--- ---
Weighted average shares outstanding basic and diluted 6,343,133 4,920,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Common Total
stock, stock, Additional Stock stockholders'
$.01 $.001 paid-in subscription Accumulated equity
par par capital receivable deficit (deficit)
--- --- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JUNE 30, 1996 $ 1,640 - 2,337,313 - (1,555,152) 783,801
Preferred stock dividend - - - - (43,806) (43,806)
requirement
Net loss - - - - (822,713) (822,713)
----- ------ --------- ----- --------- -------
BALANCES AT JUNE 30, 1997 1,640 - 2,337,313 - (2,421,671) (82,718)
Preferred stock dividend
requirement - - - - (36,330) (36,330)
Issuance of common stock 54 153 165,423 - - 165,630
Issuance of warrants to purchase
common stock - - 10,000 - - 10,000
Conversion of preferred stock
to common stock 56 - 169,744 - - 169,800
Conversion of options and
warrants to common stock 290 - 28,735 - - 29,025
Conversion of REAADS common
stock to Corgenix common (2,040) 6,120 (4,080) - - -
stock
Issuance of common stock in
connection with merger - 1,957 - - (43,090) (41,133)
Issuance of common stock in
private placement offering - 3,872 878,012 - - 881,884
Common stock subscription - - 25,651 (25,651) - -
Net loss - - - - (922,298) (922,298)
----- ------ --------- ----- --------- -------
BALANCES AT JUNE 30, 1998 $ - 12,102 3,610,798 (25,651) (3,423,389) 173,860
----- ------ --------- ----- --------- -------
----- ------ --------- ----- --------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (922,298) (822,713)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 162,023 132,576
Common stock issued for services 194,625 -
Accretion of interest 7,375 -
Provision (credit) for doubtful accounts 3,147 (28,216)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 229,082 (104,302)
Inventories (276,647) 109,885
Prepaid expenses and other assets 71,173 (33,911)
Accounts payable (132,295) 226,437
Accrued payroll and related liabilities (2,281) 76,774
Other liabilities (700) (9,055)
-------- --------
Net cash used by operating activities (666,796) (452,525)
-------- --------
Cash flows from investing activities:
Purchases of equipment (14,240) (283,905)
Proceeds from return of equipment 63,916 -
-------- --------
Net cash provided (used) by investing activities (49,676) (283,905)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 881,914 -
Proceeds from issuance of notes payable 293,995 1,110,891
Payments on notes payable (483,561) (120,305)
Factor payables - (128,985)
-------- --------
Net cash provided by financing activities 692,348 861,601
-------- --------
Net increase in cash and cash equivalents 75,228 125,171
Cash and cash equivalents at beginning of year 141,086 15,915
-------- --------
Cash and cash equivalents at end of year $ 216,314 141,086
-------- --------
-------- --------
Supplemental disclosures:
Cash paid for interest $ 156,940 49,922
-------- --------
-------- --------
Acquisition:
Assets acquired $ 27,425 -
Accumulated deficit 43,090 -
Liabilities assumed (68,558) -
Common stock issued (1,957) -
-------- --------
Net cash paid for acquisition $ - -
-------- --------
-------- --------
Noncash financing activities:
Common stock warrants issued with note payable $ 10,000 -
-------- --------
-------- --------
Conversion of preferred stock to notes payable $ 254,961 -
-------- --------
-------- --------
Common stock subscription $ 25,651 -
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS, BASIS OF PRESENTATION AND MERGER
On May 22, 1998, REAADS Medical Products (REAADS) completed a merger with a
subsidiary of Gray Wolf Technologies, Inc., an inactive corporation with no
significant assets or operations. The resulting merged corporation was
named Corgenix, Inc. The parent corporation was renamed Corgenix Medical
Corporation (Corgenix or the Company). Effective with the merger, all
previously outstanding common stock, preferred stock, options and warrants
of REAADS were exchanged for common stock of Corgenix in an exchange ratio
of 1 share of REAADS in exchange for 30 shares of Corgenix, resulting in
the previous stockholders of REAADS owning approximately 76% of the common
stock of Corgenix.
Corgenix develops, manufactures and markets diagnostic products for the
serologic diagnosis of certain vascular diseases and autoimmune disorders
using proprietary technology. The Company markets its products to
hospitals and free-standing laboratories worldwide through a network of
sales representatives, distributors and private label (OEM) agreements.
The Company's offices and manufacturing facility are located in
Westminster, Colorado.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, REAADS Bio-medical Products (UK) Limited
(REAADS UK). REAADS UK was established as a United Kingdom company during
1996 to market the Company's products in Europe. The operations of REAADS
UK were not significant for the years ended June 30, 1998 and 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ significantly
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, purchased with
maturities of three months or less to be cash equivalents.
F-6
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are recorded at the lower of cost or market, using the
first-in, first-out method. Components of inventories as of June 30, are
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 131,709 59,851
Work-in-process 210,307 138,080
Finished goods 169,392 36,830
------- -------
$ 511,408 234,761
------- -------
------- -------
</TABLE>
EQUIPMENT
Equipment is recorded at cost. Depreciation, which totaled $84,667 and
$57,984 for the years ended June 30, 1998 and 1997, respectively, is
calculated primarily using the straight-line method over the estimated
useful lives of the assets which range from 3 to 7 years.
INTANGIBLE ASSETS
Intangible assets consist of purchased patents and goodwill, which are
amortized using the straight-line method over 15 years.
INCOME TAXES
Under the asset and liability method of recording income taxes, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in the consolidated statements of operations in the period that includes
the enactment date.
REVENUE RECOGNITION
Revenue is recognized upon shipment of products.
RESEARCH AND DEVELOPMENT
Research and development costs and any costs associated with internally
developed patents, formulas or other proprietary technology are expensed as
incurred.
F-7
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
LONG-LIVED ASSETS
The Company's long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results
over an extended period. The Company evaluates the recoverability of
long-lived assets based upon forecasted undiscounted cash flows. Should an
impairment in value be indicated, the carrying value of intangible assets
will be adjusted, based on estimates of future discounted cash flows
resulting from the use and ultimate disposition of the asset.
STOCK-BASED COMPENSATION
In accounting for its stock purchase and option plan, the Company records
compensation expense on the date of grant only if the current market price
of the underlying stock exceeds the exercise price. Pro forma net income
(loss) disclosures for employee stock option grants as if the fair value
based method had been applied are also provided.
(2) BUSINESS COMBINATION
On May 22, 1998, REAADS purchased, in an exchange of common stock, a
subsidiary of Gray Wolf Technologies, Inc. (Gray Wolf) in a transaction
accounted for using the purchase method of accounting. The total purchase
price and carrying value of net assets acquired of Gray Wolf was $1,957.
Net assets acquired are as follows:
<TABLE>
<S> <C>
Net current assets $ 27,425
Accumulated deficit 43,090
Net current liabilities (68,558)
-------
$ 1,957
-------
-------
</TABLE>
As Gray Wolf was an inactive corporation with no significant operations,
the Company recorded the carryover historical basis of net tangible assets
acquired. The results of operations subsequent to the date of acquisition
are included in the Company's consolidated operations.
F-8
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(3) NOTES PAYABLE
Notes payable consist of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Note payable to Eagle Bank, with interest at prime
plus 2.75% (11.25% at June 30, 1998), due in
monthly installments of $14,000 through
January 2007, collateralized by the Company's
common stock, commercial security agreements
and a key man life insurance policy $ 918,603 976,532
Note payable to Eagle Bank, with interest at the
bank's base lending rate plus 2% (11.25% at
June 30, 1998) due in monthly installments of
$2,000 and a balloon payment due December 30,
1998, collateralized by accounts receivable 40,000 50,000
Notes payable to former preferred stockholders,
with interest at 12%, due November 8, 1998 144,511 -
Note payable, with interest at prime plus 3%
(11.50% at June 30, 1998), due on demand 38,000 -
Notes payable to officers of the Company with
interest rates ranging from 8% to 22%, repaid
in 1998 - 13,812
--------- ---------
1,141,114 1,040,344
Less current portion (287,765) (124,703)
--------- ---------
Notes payable, excluding current portion $ 853,349 915,641
--------- ---------
--------- ---------
</TABLE>
Aggregate maturities of notes payable by year as of June 30, 1998, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Years ending June 30:
1999 $ 287,765
2000 72,986
2001 81,634
2002 91,303
2003 102,125
Thereafter 505,301
---------
$1,141,114
---------
---------
</TABLE>
The carrying values of notes payable approximate fair value based on their
terms and floating market based interest rates.
F-9
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(4) COST OF SALES
During the year ended June 30, 1997, the Company included a charge of
$479,000 in cost of sales due to a product design flaw of a raw material
component used in one of the Company's products. A sole source
manufacturer in Japan provided the raw material component. The Company was
contractually obligated to purchase the raw material from this manufacturer
through a contract with the Company's largest customer, Chugai
Pharmaceutical Co., Ltd. The product design flaw has been resolved to the
satisfaction of the customer.
(5) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company previously issued 113.2 shares of mandatorily redeemable Class
A voting preferred stock, which was recorded at liquidation value which
approximated fair market value at the date of issuance. Pursuant to the
purchase of Gray Wolf, one-half of the shares of preferred stock were
converted into common stock and one-half of the shares of preferred stock
plus all unpaid dividends were converted into notes payable.
COMMON STOCK
In connection with the merger, the Company may have an obligation to issue
4,000,000 shares of contingent common stock to former REAADS stockholders.
The contingent shares are issuable upon the occurrence of the following
events: (i) the conversion of one or more shares of the Company's
authorized but unissued Series A 5% convertible preferred stock to common
stock or the exercise of one or more common stock purchase warrants issued
in connection with the Series A Preferred Stock, in which case the maximum
number of contingent shares issuable is 2,000,000 shares, (ii) November 23,
1998, if as of such date the Company has sold less than $1,000,000 of
Series A Preferred Stock, in which case the maximum number of contingent
shares issuable is 4,000,000 shares less (a) the number of shares of common
stock issuable upon conversion of all then outstanding Series A preferred
stock and exercise of all preferred stock less (b) four times the dollar
amount of Series A preferred stock sold by the Company as of such date.
The contingent shares are issuable to the former stockholders of REAADS
without payment of additional consideration.
Effective with the purchase of Gray Wolf, 3,872,235 shares of Corgenix
common stock were issued at a weighted average price of $.2532 per share.
Proceeds of $881,884 were recorded net of commissions and expenses. An
additional 77,765 shares of Corgenix common stock were subscribed, and a
subscription receivable was recorded of $25,651.
(6) STOCK PURCHASE AND OPTION PLAN
Prior to the purchase of Gray Wolf, the Company had a stock purchase and
option plan, whereby, the Company sold shares of its stock, and/or granted
options to purchase shares of its common stock to key employees, officers,
directors and consultants, as determined by
F-10
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(6) STOCK PURCHASE AND OPTION PLAN (CONTINUED)
the Company's Board of Directors. Options under this plan were granted at
not less than exercisable over 5 to 10 year periods. All such options
were converted to shares of common stock pursuant to the merger agreement
entered into with the purchase of Gray Wolf with no monetary consideration
received by the Company. Accordingly, no options are outstanding at June
30, 1998.
As the Company granted options at fair value, no compensation cost has been
recognized for its stock options in the consolidated financial statements.
Had compensation cost for the Company's stock-based compensation plan been
determined as fair value at the grant dates for awards under the plan, the
Company's net loss would have been increased to the proforma amount
indicated below:
<TABLE>
<CAPTION>
June 30, 1997
-------------
<S> <C>
Net loss:
As reported $ 822,713
Pro forma 840,637
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended June 30,
1997; no dividend yield, no volatility, risk-free interest rate of 5.6
percent, and expected life of 4 years.
A summary of the status of the Company's fixed stock options plan for the
year ended June 30, 1997, is presented below:
<TABLE>
<CAPTION>
Weighted
average
Shares exercise price
------ --------------
<S> <C> <C>
Outstanding at beginning of year 44,500 $ 22
Granted 4,300 30
Exercised - -
Forfeited (1,300) 30
------ --
Outstanding at June 30, 1997 47,500 23
------ --
------ --
Options exercisable at June 30, 1997 32,550
Weighted-average fair value of options granted
during the year $ 30
</TABLE>
F-11
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(7) COMMITMENTS AND CONTINGENCIES
ROYALTY AGREEMENT
The Company has a royalty agreement with BioStar Medical Products, Inc.
(BioStar) whereby the Company pays 5% of certain product sales, up to an
aggregate of $600,000, in royalties. As of June 30, 1998, $538,962 of
cumulative royalties have been paid to BioStar. Royalty expense under this
agreement totaled $91,574 and $99,521 for the years ended June 30, 1998 and
1997, respectively.
LEASES
The Company is obligated under various noncancelable operating leases
primarily for its operating facility and certain office equipment. The
leases generally require the Company to pay related insurance costs,
maintenance costs and taxes. Future minimum lease payments under
noncancelable operating leases with initial or remaining terms in excess of
one year as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending June 30:
<S> <C>
1999 $ 135,000
2000 133,000
2001 135,000
2002 11,000
-------
Total future minimum lease payments $ 414,000
-------
-------
</TABLE>
Rent expense totaled $115,311 and $121,235 for the years ended June 30,
1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key employees, certain
of whom are also stockholders. In addition to salary and benefit
provisions, these agreements include defined commitments should the
employees terminate their employment with or without cause.
(8) INCOME TAXES
At June 30, 1998, the Company has a net operating loss carryforward for
income tax purposes of approximately $3,068,000 expiring during the period
from 2006 to 2013. Research and development tax credit carryforwards
approximate $135,220. The future utilization of the operating loss
carryforwards or the time period in which the carryforwards could be
utilized could be limited if certain historical stockholders of REAADS sell
their shares within two years of the purchase of Gray Wolf.
F-12
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
As of June 30, 1998, the Company had a gross deferred tax asset of
approximately $338,400 relating primarily to the Company's net operating
losses and research and development credit carryforwards. A valuation
allowance in the amount of the deferred tax asset has been recorded due to
management's determination that it's not more likely than not that the tax
assets will be utilized.
(9) RELATED PARTY TRANSACTIONS
The Company has a consulting agreement with TransGlobal Financial
Corporation (TGF), a company whose president also serves as a director of
Corgenix. TGF is to provide business and financial advice in return for a
monthly fee of $5,000 through May 22, 2001, plus a percentage of funds
committed and available to the Company through debt or equity financing.
TGF is also entitled to a transaction fee for any business combination or
joint venture it represents for Corgenix. Two of Corgenix's directors will
be nominated by TGF for the term of the agreement unless the Company issues
an aggregate of 250,000 or more shares of Series A preferred stock and
warrants to purchase an aggregate of 250,000 or more shares of common
stock. Thereafter, TGF is entitled to have a designated observer present
at all board meetings. During the term of the agreement, the Company is
required to obtain TGF's written consent prior to issuing more than 5% of
any class of common or preferred stock.
The Company has issued options to TGF for the purchase of 1,000,000 units
of Series A 5% convertible preferred stock and warrants to purchase one
share of common stock at an exercise price of $2.00, for an aggregate
purchase price of $1,000,000.
The Company has entered into product development, manufacturing and
distribution agreements with Chugai, which provide certain rights for
Chugai to distribute the Company's products in Japan.
In November 1997, the Company borrowed $100,000 under a note payable from a
stockholder. The note and related interest was repaid in May 1998.
Amounts due from an officer are due on June 6, 1999, and do not bear
interest.
(10) CONCENTRATION OF CREDIT RISK
The Company's customers are principally located in the United States,
although it has some foreign customers. The Company has a distribution
agreement with Cambridge Life Sciences plc to distribute the Company's
products in Europe. The Company performs periodic credit evaluations of
its customers' financial condition but generally does not require
collateral for receivables.
Chugai is the Company's largest customer, representing approximately 30%
and 40% of sales in the years ended June 30, 1998 and 1997, respectively,
and approximately 21% and 37% of accounts receivable at June 30, 1998 and
1997, respectively.
F-13
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- -------------------------------------------------------------------------------
(11) SUBSEQUENT EVENT
In July 1998, the Company received proceeds of $25,651 under its common
stock subscription and the related common shares were issued.
F-14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 28th day of October, 1998.
CORGENIX MEDICAL CORPORATION
By: /s/ Luis R. Lopez
--------------------------------
Luis R. Lopez, M.D.
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Luis R. Lopez Chairman of the Board, Chief October 28, 1998
----------------------- Executive Officer and Director
Luis R. Lopez, M.D. (principal executive officer)
/s/ Douglass T. Simpson President (principal financial and October 28, 1998
----------------------- accounting officer) and Director
Douglass T. Simpson
/s/ Brian E. Johnson Director October 28, 1998
-----------------------
Brian E. Johnson
/s/ Mike M. Mustafoglu Director October 28, 1998
-----------------------
Mike M. Mustafoglu
/s/ Alev Lewis Director October 28, 1998
-----------------------
Alev Lewis
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 216
<SECURITIES> 0
<RECEIVABLES> 376
<ALLOWANCES> 7
<INVENTORY> 511
<CURRENT-ASSETS> 1,142
<PP&E> 544
<DEPRECIATION> 328
<TOTAL-ASSETS> 1,966
<CURRENT-LIABILITIES> 938
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 3,585
<TOTAL-LIABILITY-AND-EQUITY> 1,966
<SALES> 2,546
<TOTAL-REVENUES> 2,592
<CGS> 902
<TOTAL-COSTS> 902
<OTHER-EXPENSES> 2,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> (922)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (922)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
