SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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)
(Former name, former address and former fiscal year, if changed since
last report)
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 X No _
The number of shares of Common Stock outstanding was 16,177,088, as of December
31, 1998.
Transitional Small Business Disclosure Format. Yes _ No X
<PAGE>
CORGENIX MEDICAL CORPORATION
December 31, 1998
TABLE OF CONTENTS
Page
Part I
Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II
Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
- ------------------------------------------------------------------------------
December 31, June 30,
1998 1998
-------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 77,934 216,314
Accounts receivable, less allowance
for doubtful accounts of $6,600 284,150 369,710
Note receivable 27,425 27,425
Inventories 538,684 511,408
Prepaid expenses 19,562 16,876
---------------- ------------
Total current assets $ 947,755 1,141,733
Equipment:
Machinery and laboratory equipment 315,461 304,744
Furniture, fixtures and office
equipment 245,415 238,761
---------------- ------------
560,876 543,505
Accumulated depreciation and
amortization (366,124) (328,421)
---------------- ------------
Net equipment $ 194,752 215,084
Intangible assets:
Patents, net of accumulated
amortization of $608,334 and $572,484
at December 31 and June 30, 1998,
respectively 509,210 545,060
Goodwill, net of accumulated
amortization of $30,067 and $32,523
at December 31 and June 30, 1998,
respectively 28,590 29,065
---------------- ------------
537,800 574,125
---------------- ------------
Due from officer 12,000 12,000
Other assets 11,343 22,652
================ ============
Total assets $ 1,703,650 1,965,594
================ ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of notes payable 255,775 287,765
Accounts payable 666,141 427,809
Accrued payroll and related liabilities 105,328 106,757
Other liabilities 143,218 116,054
----------------- -----------
Total current liabilities $ 1,170,462 938,385
Notes payable, excluding current portion 842,974 853,349
----------------- -----------
Total liabilities $ 2,013,436 1,791,734
Stockholders' equity (deficit):
Preferred stock, $0.001 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 16,177,088 in
December and 12,102,494 shares in June 16,177 12,102
Additional paid-in capital 3,609,799 3,610,798
Stock subscription receivable - (25,651)
Accumulated deficit (3,935,762) (3,423,389)
---------------- ------------
Total stockholders' equity (deficit) (309,786) 173,860
---------------- ------------
Total liabilities and stockholders'
equity (deficit) $ 1,703,650 1,965,594
================ ============
See accompanying notes to consolidated financial statements.
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Operations
- ------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------------------- -------------------------
(Unaudited) (Unaudited)
Net Sales $ 628,959 741,785 1,177,807 1,204,010
Cost of Sales 229,422 262,497 512,099 544,115
---------- ------------- ------------- ------------
Gross Profit $ 399,537 479,288 665,708 659,895
Operating expenses:
Selling and marketing 253,387 172,960 446,665 344,040
Research and development 96,294 97,658 194,009 184,562
General and administrative 212,666 228,798 490,947 447,797
---------- ------------ ------------- -------------
Total Expense 562,347 499,416 1,131,621 976,399
Operating loss $(162,810) (20,128) (465,913) (316,504)
Interest expense, net 22,139 17,888 46,460 36,044
---------- ----------- -------------- -------------
Net loss $(184,949) (38,016) (512,373) (352,548)
Net loss per share basic $ (0.01) (0.01) (0.04) (0.07)
and diluted
Weighted average shares 13,524,914 4,891,650 12,839,167 4,891,650
outstanding basic and
diluted
See accompanying notes to consolidated financial statements.
<PAGE>
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------
Six Months Ended
December 31, December 31,
1998 1997
------------- ------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (512,373) (352,548)
Adjustments to reconcile net
loss to net cash used by operating
activities:
Depreciation and amortization 77,113 94,054
Changes in operating assets and liabilities:
Accounts receivable 85,560 253,451
Inventories (27,276) (97,832)
Prepaid expensesand other assets 8,623 (19,386)
Accounts payable 238,323 (12,420)
Accrued payroll and related liabilities (1,429) (1,645)
Other liabilities 27,164 (25,525)
------------ ------------
Net cash used by operating activities $ (104,295) (161,851)
------------ ------------
Cash flows used by investing activities -
Sales (purchase) of equipment (17,371) 58,561
Cash flows from financing activities:
Borrowings (payments), net on notes payable (42,365) 56,576
Cash receipts on stock subscription 25,651 -
------------ ------------
Net cash provided by (used by) (16,714) 56,576
financing activities
------------ ------------
Net decreasein cash and cash (138,380) (46,714)
equivalents
Cash and cash equivalents at $ 216,314 141,086
beginning of period
------------ ------------
Cash and cash equivalents at $ 77,934 94,372
end of period
============ ============
Supplemental disclosure - $ 48,475 36,044
cash paid for interest
See accompanying notes to consolidated financial statements.
<PAGE>
CORGENIX MEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Corgenix Medical Corporation (Corgenix or the Company) develops,
manufactures and markets diagnostic products for the serologic diagnosis of
certain vascular diseases and autoimmune disorders using proprietary technology.
The Company markets its products to hospitals and free-standing laboratories
worldwide through a network of sales representatives, distributors, and private
label (OEM) agreements. The Company's offices and manufacturing facility are
located in Westminster, Colorado.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Corgenix (UK) Limited (Corgenix UK). Corgenix
UK was established as a United Kingdom company during 1996 to market the
Company's products in international markets. The operations of Corgenix UK were
not significant for the periods ended December 31, 1998 and 1997.
The accompanying consolidated financial statements have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
consolidated financial statements be read in connection with the financial
statements and notes thereto included in the Company's annual report on Form
10-KSB for the year ended June 30, 1998.
In the opinion of the Company, the accompanying consolidated financial
statements include all adjustments, consisting of normal recurring accruals and
adjustments, required to present fairly the Company's financial position at
December 31, 1998 and June 30, 1998, and the results of their operations for
each of the three and six month periods ended December, 1998 and 1997, and the
cash flows for the six month periods then ended.
The operating results for the three months and the six months ended
December 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended June 30, 1999.
2. LOSS PER SHARE
Basic and diluted loss per share is presented based on the weighted average
number of common shares outstanding during the period. The impact of warrants is
anti-dilutive due to losses and the exercise price of the warrants.
3. INCOME TAXES
The Company incurred losses in the three and six months ended December 31,
1998 and 1997. The Company has historically incurred losses and accordingly no
tax benefit is recognized as it is not more likely than not that tax losses will
result in a benefit to the Company.
<PAGE>
CORGENIX MEDICAL CORPORATION
Item 2. Management's Discussion and Analysis Of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes included elsewhere
herein.
General
Since the Company's inception, Corgenix has been primarily involved in the
research, development, manufacturing and marketing of diagnostic tests for sale
to hospitals and 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 12 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 significant backlog.
Except for the year to date fiscal 1999 and 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 Life Sciences plc ("Cambridge"). In 1998, the Company added four
additional products to its product line through OEM licenses from other third
party manufacturers. Corgenix expects to expand its relationship with other
companies in the future to gain access to additional products.
Although Corgenix has experienced growth in revenues every year since 1990
except for the year to date fiscal 1999 and fiscal 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. See "-- Forward-Looking Statements and Risk Factors".
Results of Operations
Three Months Ended December 31, 1998 and 1997
Net sales. Net sales for the three months ended December 31, 1998 were
$629,000, a 15.2% decrease from $742,000 in 1997. A component of net sales,
gross product sales, decreased 18.2% to $582,000 in 1998 from $712,000 in 1997,
due to timing of orders from several large international customers, particularly
from the Company's largest customer, Chugai Diagnostics Science, Co. Ltd.
("Chugai").
<PAGE>
Cost of sales. Cost of sales in dollars decreased to $229,000 in 1998 from
$263,000 in 1997 due to decreased sales for the quarter. As a percentage of
sales, cost of sales were relatively unchanged at 36.4% in 1998 and 35.4% in
1997. Gross profit decreased to $400,000 in 1998 from $479,000 in 1997.
Research and development. Research and development expenses increased 2.0%
to $96,000 in 1998 from $98,000 in 1997, due to costs related to expense timing
of new development programs.
Selling and marketing. Selling and marketing expenses increased 47.1% to
$253,000 in 1998 from $172,000 in 1997, primarily due to increased costs
associated with the Company's international sales effort. As a percentage of
sales, selling and marketing expenses increased to 40.3% from 23.3%. This
increase was primarily due to addition of headcount, increase of promotion and
advertising expense, and the reduction in sales volume for the quarter.
General and administrative. General and administrative expenses decreased
7.0% to $213,000 in 1998 from $229,000 in 1997, due primarily the Company
incurring additional expense associated with financing activities in 1997
partially offset by additional costs in 1998 of becoming publicly traded.
Net loss. Net loss for the second quarter increased to $185,000 in 1998
from $38,000 in 1997 as a result of lower sales, and increases in selling and
marketing, and general and administrative expenses
Six Months Ended December 31, 1998 and 1997
Net sales. Net sales for the six months ended December 31, 1998 were
$1,178,000, a 2.2% decrease from $1,204,000 in 1997. Gross product sales
increased 2.6% to $1,134,000 in 1998 from $1,105,000 in 1997, because of an
increase in the number of customers in the United States and expansion of the
international distribution network.
Cost of sales. Cost of sales decreased to $512,000 in 1998 from $544,000
in 1997. As a percentage of sales, cost of sales decreased to 43.5% in 1998 from
45.2% in 1997. This reduction was mainly reflective of product mix. Gross profit
increased to $666,000 in 1998 from $660,000 in 1997.
Research and development. Research and development expenses increased 4.9%
to $194,000 in 1998 from $185,000 in 1997, due to costs related to ongoing
expense of development programs.
Selling and marketing. Selling and marketing expenses increased 29.9% to
$447,000 in 1998 from $344,000 in 1997, primarily due to increased costs
associated with the Company's international sales effort.
General and administrative. General and administrative expenses increased
9.6% to $491,000 in 1998 from $448,000 in 1997. In this period in 1997, the
Company incurred additional expense associated with financing activities
partially offset by additional costs in 1998 of becoming publicly traded.
Net loss. Net loss for the first six months increased 45.0% to ($512,000)
in 1998 from $353,000 in 1997 primarily due to higher operating expenses and
lower net sales in 1998.
Liquidity and Capital Resources
Since inception, Corgenix has financed its operations primarily through
private placements of common and preferred stock, raising net proceeds of
approximately $3.7 million from sales of these securities. Corgenix has also
received financing for operations from sales of diagnostic products and
agreements with strategic partners. Through December 31, 1998, Corgenix has
invested $195,000, (net of accumulated depreciation) in leasehold
<PAGE>
improvements, laboratory and computer equipment and office furnishings and
equipment to support its development and administrative activities.
At December 31, 1998, the Company had cash of $78,000, a working capital
deficit of $223,000, and short and long-term notes payable of $1,099,000, with
$256,000 due in the following twelve months and the remainder due at varying
dates through February 2006.
Management expects that cash flows from operations will be insufficient to
fund operations. The Company is aggressively pursuing financing alternatives to
provide funds for its current operations and its acquisition plans, which
financing alternatives may involve accessing the public or private equity or
debt markets. There can be no assurance that the Company will be able to obtain
sufficient capital on acceptable terms from such financings to offset its
working capital deficit or to pursue its expansion plans.
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 approximately $1.0 million in cash and $1.2
million of restricted common stock. The closing of the transaction is dependent
upon the results of the Company's due diligence and upon the negotiation and
execution of a definitive agreement. The Company will be required to access
additional capital to fund the cash portion of this acquisition, and there can
be no assurance that this transaction will be successfully consummated. The
Company is continuing to investigate a variety of financing alternatives to fund
this transaction. The Company expects to complete the acquisition during the
third fiscal quarter of the current fiscal year.
Under the terms of the merger agreement executed in connection of the
merger of REAADS Medical Products, Inc. ("REAADS") with and into a subsidiary of
the Company, the former stockholders of REAADS were entitled to receive up to an
additional 4,000,000 shares of Common Stock (the "Contingent Shares") if certain
events did not occur by November 22, 1998. These events did not occur, and the
Company issued the Contingent Shares on November 30, 1998. These Contingent
Shares are restricted and will not be freely tradable until May 23, 1999.
On December 17, 1998, the Company enacted an employee stock purchase plan
(the "Stock Purchase Plan") in order to provide eligible employees of the
Company with an opportunity to acquire an equity interest in the Company through
their participation in a plan designed to qualify as an employee stock purchase
plan under Section 423 of the Internal revenue Service Code of 1986. Also on
December 17, 1998, the Company established a stock compensation plan (the "Stock
Compensation Plan") to provide officers of the Company with an opportunity to
receive shares of the Company's common stock in lieu of all or a portion of
their salaries. On December 17, 1998, the Company reserved 500,000 shares of the
Company's authorized but unissued common stock for the Stock Purchase Plan and
the Stock Compensation Plan. As of January 31, 1999, the Company had issued
184,706 shares of Common Stock pursuant to the Stock Purchase Plan and the Stock
Compensation Plan.
Year 2000 Effect
The Year 2000 will impact computer programs written using two digits
rather than four to define the applicable year. Any programs with time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operation, including a temporary inability to process
transactions, send invoices or engage in other ordinary activities. This problem
largely affects software programs written years ago, before the issue came to
prominence. Corgenix recently reviewed all of its software for exposure to Year
2000 issues, including network and workstation software, and does not believe
that such software poses significant risks associated with the Year 2000
problem. Corgenix primarily uses third-party software programs written and
updated by outside firms, each of whom has stated that its software is Year 2000
compliant. To assure that all software programs can successfully work in
conjunction with each other using the Company's computer hardware after the year
1999, Corgenix tested all of its software and hardware during the third quarter
of 1998, using a combination of past and future dates. Such testing revealed
that some of the Company's computer hardware could not correctly process dates
after December 31, 1999. The Company will be required to replace such equipment,
at a cost not expected to exceed $20,000, before December 31, 1999. The Company
expects to fund such costs from working capital.
<PAGE>
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 who 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. As of January
31, 1999, the Company has received Year 2000 compliance responses from a
significant number of the Company's material suppliers and believes that it will
meet the deadlines in the Company's Year 2000 compliance plan.
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 for 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. As of January
31, 1999, the Company has received Year 2000 compliance responses from a
significant number of the Company's customers and believes that it will meet the
deadlines in the Company's Year 2000 compliance plan.
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 report 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 report, 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 report 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 flows from
operations for the last three fiscal years and for the first two quarters of the
current fiscal year. Losses incurred by the Company since its inception have
aggregated over $3.9 million, and there can be no assurance that the Company
will be able to generate positive cash flows to fund its operations in the near
future. In addition, the Company's current acquisition plans will require the
investment of approximately $1.0 million of cash. The Company is aggressively
pursuing financing alternatives to provide funds for its current operations and
its acquisition plans, which financing alternatives may involve accessing the
public or private equity or debt markets. There can be no assurance that the
Company will be able to obtain sufficient capital from such financings to offset
its working capital deficits or to pursue its expansion plans, or that the terms
of available financing will be satisfactory to the Company. Alternatively, any
additional
<PAGE>
equity financing may be dilutive to existing stockholders, and debt financing,
if available, may include restrictive covenants or conversion features that are
dilutive to existing stockholders. If adequate funds are not available, the
Company might be required to limit its research and development or marketing
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 and 1998. 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 in the 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 "--
Dependence on Distribution Partners for Sales of Diagnostic Products in
International Markets."
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 has limited personnel and financial 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, financial
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.
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.
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 Food and
<PAGE>
Drug Administration (the "FDA") and certain foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices. The
Company will not be able to commence marketing or commercial sales in the United
States of new products under development until it receives clearance from the
FDA. The testing for, preparation of and subsequent FDA regulatory review of
required filings can be a lengthy, expensive and uncertain process.
Noncompliance with applicable requirements can result in, among other
consequences, fines, injunctions, civil penalties, recall or seizure of
products, repair, replacement or refund of the cost of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals, and criminal prosecution.
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
point-of-care ("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 could 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 quality system regulations ("QSR"), 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 approvals 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.
<PAGE>
Uncertain Availability of Third Party Reimbursement for Diagnostic
Products
In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third party
payors, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. Third party
payors are increasingly scrutinizing and challenging the prices charged for
medical products and services and they can affect the pricing or the relative
attractiveness of the decreases in reimbursement amounts for tests performed
using the Company's diagnostic products, failure by physicians and other users
to obtain reimbursement from third party payors, or changes in government and
private third party payors' policies regarding reimbursement of tests utilizing
diagnostic products, may affect the Company's ability to sell its diagnostic
products profitably. 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.
Risks Regarding Potential Future Acquisitions
The Company's growth strategy includes as a material element the desire to
acquire complementary companies, products or technologies. As discussed in "--
Liquidity and Capital Resources," the Company has executed a letter of intent to
acquire the assets of one diagnostic technology business. The Company has not
targeted any other 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 without accessing outside
financing, 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.
See "-- Losses Incurred; Future Capital Needs; Uncertainty of Additional
Funding." 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.
No Assurance of Market Acceptance of Point-of-Care Diagnostic Products
Another growth strategy of the Company is 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.
<PAGE>
Dependence on Suppliers
The components of the Company's products include chemical and packaging
supplies that are generally available from several suppliers, except certain
antibodies, which the Company purchases from single suppliers. The Company
mitigates the risk of a loss of supply by maintaining a sufficient supply of
such antibodies to ensure an uninterrupted supply for at least six months.
Although the Company believes that it can substitute a new supplier with respect
to any of these components in a timely manner, there can be no assurances that
the Company will be able to substitute a new supplier in a timely manner and
failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
Limited Manufacturing Experience with Certain Products
Although the Company has manufactured over ten million diagnostic tests
based on its proprietary applications of its 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.
<PAGE>
Limited Public Market; 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 and that of a predecessor
entity has been traded on the OTC Bulletin Board(R) since February 1998, the
trading has been sporadic with moderate volume.
Moreover, the over-the-counter markets for securities of very small
companies, such as the Company, historically have experienced extreme price and
volume fluctuations during certain periods, and the Company's stock price has
experienced significant price and volume fluctuations in the past. These broad
market fluctuations and other factors, such as new product developments and
trends in the Company's industry and the investment markets and economic
conditions generally, as well as quarterly variation in the Company's results of
operations, may adversely affect the market price of the Company's Common Stock.
In addition, the Company's Common Stock is subject to rules adopted by the
Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny stocks." As a result, many brokers are
unwilling to engage in transactions in the Company's Common Stock because of the
added disclosure requirements.
<PAGE>
CORGENIX MEDICAL CORPORATION
Part II
Other Information
Item 1. Legal Proceedings
Corgenix is not a party to any material litigation or legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
There were no sales of unregistered common stock during the second
quarter.
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 security holders of REAADS in exchange
for all of the outstanding securities of REAADS. Such shares were issued in
reliance upon exemptions from the registration requirements of Section 5 of the
Act provided by Rule 506 of Regulation D under the Act, complying with each of
the following requirements of Rule 506:
Limited Number of Purchasers. The Merger involved less than 35
purchasers.
Nature of Purchasers. Each of the shareholder purchasers was fully versed
in the business affairs and financial condition of REAADS, being either an
officer, director, long-time shareholder or long-time employee of REAADS.
Each such shareholder had received regular quarterly financial reports
from management regarding REAADS performance, and to management's
knowledge and belief based on reasonable inquiry, each was capable of
evaluating the merits and risks of the Merger based on his or her business
and financial experience. Because the Company had no significant business
activity prior to the Merger, an investment in the post-Merger Company was
essentially an investment in REAADS and its business. All shareholder
purchasers were given the opportunity to ask questions of management
regarding the terms of the Merger. Seven REAADS shareholders received
their shares of Common Stock as a compensatory stock bonus in cancellation
of outstanding vested and unvested REAADS incentive stock options, which
otherwise were without market value (due to their strike price being in
excess of the estimated per share value of the merger consideration). The
REAADS Board of Directors and shareholders, by unanimous vote, authorized
the stock grants in cancellation of outstanding options as consideration
for past service and commitment to REAADS and as incentive for each of the
recipients to remain with the post-Merger Company, each stock grant being
coupled with a one-year vesting provision.
General Conditions of Rule 506 Satisfied. Each of the general conditions
to the availability of Rule 506 was satisfied by the Merger. Request for
approval of the Merger was accompanied by a detailed information statement
describing the material terms and conditions of the Merger and containing
the information specified by Rule 502(b)(2)(i) of Regulation D to the
extent material to the an understanding of the issuer, its business and
the securities being offered. The Merger was not offered by any form of
general solicitation or general advertising. Finally, each of the shares
issued in the Merger to REAADS shareholders were made subject to strict
limitations on resale, including a mandatory one-year holding period,
written disclosure to each recipient that the shares to be received had
not been registered under the Securities Act and therefore could not be
resold absent registration or availability of an exemption from
registration under the Act, and placement of a restrictive legend setting
forth the foregoing restrictions on transfer.
Statutory Dissenter's Rights Provided. In addition to complying with
the strict provisions of Rule 506, pursuant to state law statutory
<PAGE>
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.
Under the terms of the merger agreement, the former stockholders of REAADS
were entitled to receive up to an additional 4,000,000 shares of Common Stock
(the "Contingent Shares") upon the non-occurrence of certain events by November
22, 1998. These events did not occur, and the Company issued the Contingent
Shares on November 30, 1998. These Contingent Shares are restricted and will not
be freely tradable until May 23, 1999.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the period covered by this report.
Item 5. Other Information
On February 1, 1999, the Company changed its transfer agent from
Pacific Stock Transfer Company to American Securities Transfer & Trust, Inc.,
938 Quail Street, Suite 101, Lakewood, Colorado 80215.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<PAGE>
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger dated as of May 12, 1998 by and among
Gray Wolf Technologies, Inc., Gray Wolf Acquisition Corp. and
REAADS Medical Products, Inc. (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). Certificate of Designations for Series A Preferred Stock
(filed as
4.1 Exhibit 4.1 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.1 Manufacturing Agreement dated September 1, 1994 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc. (filed
as Exhibit 10.1 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
10.2 Amendment to the Manufacturing Agreement dated as of January 17, 1995
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical Products,
Inc.(filed as Exhibit 10.2 to the Company's Registration Statement on
Form 10-SB filed June 29, 1998, and incorporated herein by reference).
10.3 Amendment Agreement dated November 17, 1997 between Chugai Diagnostic
Science, Co., Ltd. and REAADS Medical Products, Inc.(filed as Exhibit
10.3 to the Company's Registration Statement on Form 10-SB filed June
29, 1998, and incorporated herein by reference).
10.4 Distribution Agreement dated August 26, 1993 between Chugai
Pharmaceutical Co., Ltd. and REAADS Medical Products, Inc.(filed as
Exhibit 10.4 to the Company's Registration Statement on Form 10-SB
filed June 29, 1998, and incorporated herein by reference).
10.5 Amendment to the Distribution Agreement dated September 7, 1994
between Chugai Pharmaceutical Co., Ltd. and REAADS Medical
Products, Inc. (filed as Exhibit 10.5 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated
herein by reference).
10.6 Distribution Agreement dated November 14, 1997 between Chugai
Diagnostics Science Co, Ltd. and REAADS Bio-Medical Products (UK) Ltd.
(filed as Exhibit 10.6 to the Company's Registration Statement on Form
10-SB filed June 29, 1998, and incorporated herein by reference).
<PAGE>
10.7 Product Development and Manufacturing Agreement dated September 12,
1994 between REAADS Medical Products, Inc. and Helena Laboratories
Corporation (filed as Exhibit 10.7 to the Company's Registration
Statement on Form 10-SB filed June 29, 1998, and incorporated herein
by reference).
10.8 Amendment to Product Development and Manufacturing Agreement effective
December 15, 1997 between REAADS Medical Products, Inc. and Helena
Laboratories Corporation (filed as Exhibit 10.8 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.9 Office Lease dated February 6, 1996 between Stream Associates, Inc.
And REAADS Medical Products, Inc. (filed as Exhibit 10.9 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
10.10 Guarantee dated November 1, 1997 between William George Fleming,
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
<PAGE>
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
Financial Corporation and the Company (filed as Exhibit 10.21 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998,
and incorporated herein by reference).
10.22 Consulting Agreement dated May 22, 1998 between TransGlobal Financial
Corporation and the Company (filed as Exhibit 10.22 to the Company's
Registration Statement on Form 10-SB filed June 29, 1998, and
incorporated herein by reference).
10.23 Distributor Agreement dated as of August 3, 1998 by and between
American Biogenetic Sciences, Inc. and the Company (filed as Exhibit
10.23 to the Company's Registration Statement on Form 10-SB/A-1 filed
September 24, 1998, and incorporated herein by reference) (certain
portions of Exhibit 10.23 have been omitted based upon a request for
confidential treatment; the omitted portions have been filed with the
Commission).
10.24 Form of Indemnification Agreement between the Company and its
directors and officers (filed as Exhibit 10.24 to the Company's
Registration Statement on Form 10-SB/A-1 filed September 24, 1998, and
incorporated herein by reference)
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).
27* Financial Data Schedule
* Filed herewith.
- ----------------------------------------
(b) Reports on Form 8-K.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORGENIX MEDICAL CORPORATION
February 16, 1999 By: /s/ Luis R. Lopez
Luis R. Lopez, M.D.
Chairman and Chief Executive Officer
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