SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-KSB
|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, 2002
|_| 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
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CORGENIX MEDICAL CORPORATION
(Name of Small Business Issuer in its charter)
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Nevada 93-1223466
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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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, $.001 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 |X| No |_|
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. |X|
The issuer's revenues for its most recent fiscal year were: $4,857,682 The
aggregate market value of the voting stock held by non-affiliates of the issuer
was $1,289,660 as of September 28, 2002.
The number of shares of Common Stock outstanding was 5,219,076 as of September
20, 2002.
Transitional Small Business Disclosure Format. Yes |_| No |X|
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference: Items 9, 10 and 11 of Part III are
incorporated by reference from the definitive proxy statement of Corgenix
Medical Corporation to be filed within 120 days after June 30, 2002.
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 engaged in
the research, development, manufacture, and marketing of in vitro (outside the
body) diagnostic products for use in disease detection and prevention (the
"Diagnostics Products Business"). We currently sell 142 Diagnostic Products (the
"Diagnostic Products") on a worldwide basis to hospitals, clinical laboratories,
commercial reference laboratories, and research institutions.
Our corporate headquarters is located in Westminster, Colorado. The
Company was established in May 1998 resulting from a merger (the "Merger")
between REAADS Medical Products, Inc., ("REAADS") a Delaware Corporation, and
Gray Wolf Technologies, Inc., ("Gray Wolf") a Nevada corporation. Prior to May
22, 1998, our business was conducted by and under the name of REAADS Medical
Products, Inc., which was founded in June 1990. We have two wholly-owned
operating subsidiaries:
o Corgenix, Inc., ("Corgenix, Inc.") (formerly REAADS), established in
1990 and located in Westminster, Colorado. Corgenix, Inc. is
responsible for sales and marketing activities for North America and
Japan, and also conducts product development, product support,
regulatory affairs and product manufacturing of the Diagnostic
Products.
o Corgenix (UK) Ltd., ("Corgenix UK"), formerly incorporated in the United
Kingdom in 1996 as REAADS Bio-Medical Products (UK) Limited, and is
located in Peterborough, England. Corgenix UK manages the Diagnostic
Business' international sales and marketing activities except for
distribution in North America and Japan which is under the
responsibility of Corgenix, Inc.
The Diagnostics Products Business
Introduction
Our Diagnostics Products Business is managed by Corgenix, Inc. and
Corgenix UK, and includes the research, development, manufacture, and marketing
of in vitro diagnostic products for use in disease detection and prevention. We
sell 142 Diagnostics Products on a worldwide basis to hospitals, clinical
laboratories, commercial reference laboratories, and research institutions. Some
of these are products which we have developed and which we manufacture at our
Colorado facility, and others are products which we purchase from other
healthcare manufacturers ("OEM Products"). All of these products are used in
clinical laboratories for the diagnosis and/or monitoring of five important
areas of health care:
o Autoimmune disease and Antiphospholipid antibody testing (diseases in
which an individual creates antibodies to one's self, for example
systemic lupus erythematosus ("SLE") and rheumatoid arthritis ("RA"));
o Vascular disease (diseases associated with certain types of thrombosis
or clot formation, for example antiphospholipid syndrome, deep vein
thrombosis, stroke and coronary occlusion);
o Infectious diseases (diseases caused by certain bacterial and other
microorganisms, for example gonorrhea, mononucleosis and herpes);
o Liver diseases (cirrhosis and transplanted organ rejection); and
o Miscellaneous testing (pregnancy, fecal occult blood and related
products).
In addition to our current Diagnostic Products, we are actively developing
new laboratory tests in other important diagnostic testing areas. See "-- Other
Strategic Relationships." We manufacture and market to clinical laboratories and
other testing sites worldwide. Our customers include large and emerging health
care companies such as Instrumentation Laboratories, Helena Laboratories,
Cambridge Life Sciences plc, and Chugai Diagnostics Science ("Chugai" or "CDS"),
a wholly owned subsidiary of Chugai Pharmaceuticals Co., Ltd. ("Chugai Pharma"),
which owns approximately 4.2% of the Common Stock of the Company. See "-- Chugai
Strategic Relationship."
Most of our products are based on our patented and proprietary application
of Enzyme Linked ImmunoSorbent Assay ("ELISA") technology, a clinical testing
methodology commonly used worldwide. All of our current products are based on
this platform technology in a delivery format convenient for clinical testing
laboratories. The delivery format ("Microplate") allows the testing of up to 96
samples per plate, and is one of the most commonly used formats, employing
conventional testing equipment found in virtually all clinical laboratories. The
availability and broad acceptance of ELISA Microplate products reduces entry
barriers worldwide for our new products that employ this technology and delivery
format. Our products are sold as "tests" 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. Our technology
specifies a process by which biological materials are attached to the fixed
surface of a diagnostic test platform. Products developed using this unique
attachment method typically demonstrate a more uniform and stable molecular
configuration, providing a longer average shelf life, increased accuracy and
superior specificity than the products of our competitors.
Some of the OEM products which we obtain from other manufacturers and sell
through our distribution network utilize technologies other than our patented
and proprietary ELISA technology.
Our 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, we are
developing additional products that are intended to broaden the range of
applications for our existing products and to result in the introduction of new
products.
Since 1990, our sales force and distribution partners have sold over 12
million tests worldwide under the REAADS and Corgenix labels, as well as OEM
products. An integral part of our strategy is to work with corporate partners to
develop market opportunities and access important resources. We believe that our
relationships with current and potential partners will enable us to enhance our
menu of diagnostic products and accelerate our ability to penetrate the
worldwide markets for new products.
We currently use the REAADS trademarks and tradenames in the sale of the
products which we manufacture. These products constitute the majority of our
product sales.
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 over-the-counter ("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. Our 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 our ELISA tests is
relatively simple, and typically is used by a laboratory for many different
products.
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, we believe 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
Our primary objective is to apply our proprietary ELISA technology to the
development and commercialization of products for use in a variety of markets.
Our strategies for achieving this objective include the following:
Apply our ELISA Technology to Additional Diagnostic Markets. We have
focused our resources on development of highly accurate tests in the
Microplate format for sale to clinical testing laboratories. We believe we
can expand our market focus with the addition of new tests complementary
to the current product line.
Leverage Sales and Marketing Resources. We maintain a small marketing and
sales organization, which is experienced in selling diagnostic tests into
the laboratory market. We plan to expand this sales organization, adding
distribution channels where appropriate. We will also seek to expand our
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. We
have developed, and will continue to pursue, strategic alliances to access
complementary resources (such as proprietary markers, funding, marketing
expertise and research and development assistance), to leverage our
technology, expand our product menu and maximize the use of our sales
force.
Pursue Synergistic Product and/or Technology Acquisitions. We intend to
proactively evaluate strategic acquisitions of companies, technologies and
product lines where we identify a strategic opportunity to expand our core
business while increasing revenues and earnings from these new
technologies.
Expand into Additional Market Segments for Existing Products. We intend to
investigate additional market opportunities for both clinical and research
applications of our existing products.
Products and Markets
We currently sell ELISA tests in major markets worldwide. To date, our
sales force and distribution partners have sold over 12 million tests since we
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. Many peer reviewed medical publications, abstracts and symposia have
been presented on the favorable technical differentiation of our tests over
competitive products.
To extend the product offering for current product lines, and to
complement our premium-priced, existing assays, we plan to add products from
strategic partners. Our current product menu, commercialized under the
trademarks "REAADS" and "Corgenix" includes the following:
Autoimmune Disease Products
Our ELISA Autoimmune Disease Product line consists of fifteen products,
including tests for: antinuclear antibodies (ANA) screening, dsDNA, Sm, SM/RNP,
SSA, SSB, Jo-1, Scl-70, Histones, Centromere, Mitochondria, MPO, PR3,
Thyroglobulin and thyroid peroxidase.
We manufacture one of these products; the remainder are manufactured for
us by other companies. 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.
These 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. These 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
We manufacture and market eleven products for antiphospholipid antibody
testing, which in the fiscal year ended June 30, 2002 represented approximately
51% of our total product sales. These include: aCL IgG, aCL IgA, aCL IgM;
anti-phosphatidylserine ("aPS") IgG, aPS IgA, aPS IgM; anti-(beta)2-Glycoprotein
I ("a(beta)2GPI") IgG, a(beta)2GPI IgA, and a(beta)2GPI IgM; and
anti-Prothrombin ("aPT") IgG and IgM.
These tests are used in the diagnosis of SLE, antiphospholipid syndrome
and thrombosis. 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).
We market seven tests for vascular diseases. We manufacture four products,
and three others are manufactured for us by other companies. Protein C Antigen
ELISA, Protein S Antigen ELISA, Monoclonal Free Protein S ELISA, von Willebrand
Factor Antigen ELISA, abp von Willebrand Factor Activity Test; GTI Platelet
Factor 4 Test and abp Ristocetin.
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 that we market.
Liver Disease Products
We manufacture a test to quantitate hyaluronic acid ("Hyaluronic Acid" or
"HA") in a Microplate format. The product has been distributed through the
Chugai distribution network in Japan under the Chugai Diagnostic Sciences label
since 1996, and through our United Kingdom subsidiary in the United Kingdom
since 1998. On June 30, 2001, we signed a license agreement with CDS whereby we
have the exclusive rights to manufacture and market the HA product worldwide
except for Japan. See "-- Chugai Strategic Relationship."
Hyaluronic Acid is a component of the matrix of connective tissues, found
in synovial fluid of the joints where it acts as a lubricant and for water
retention. It is produced in the synovial membrane and leaks 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.
Miscellaneous Products
We market products for the detection and diagnosis of certain infectious
disease organisms and other clinical laboratory tests. These products are mainly
sold by us in the United Kingdom, and all of the products are manufactured for
us by other companies. These products include test tests for: adenovirus,
helicobacter pylori (the bacteria suspected of causing ulcers), group A
streptococcus, herpes, gonorrhea, mycobacterium tuberculosis (the causative
agent of tuberculosis), syphilis, cryptococcal antigen, toxoplasma,
mononucleosis, cytomegalovirus, varicella zoster, Epstein Barr virus, mumps,
measles and Stat-Crit (for measurement of hemoglobin and hematocrit).
Technology
Our 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, our current 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.
Our 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). Our proprietary immunoassay technology is
useful in the manufacture of ELISA test tests for the detection of many analytes
for the diagnosis and management of immunological diseases.
Our technology results in products generally demonstrating performance
characteristics that exceed those of competitive testing procedures. Many
testing laboratories worldwide subscribe to external quality control systems 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 then provided by the third
party that tells the testing laboratory how it compares to other testing
laboratories in the program. Several of our products are included in a
third-party survey periodically conducted by an unaffiliated entity, and our
products routinely demonstrate the best performance and/or reproducibility when
compared to other manufacturers included in such survey.
Our products typically require less hands-on time by laboratory personnel
and provide an objective, quantitative or semi-quantitative interpretation to
improve and standardize the clinical significance of results. We believe that
our proprietary technology will continue to be the mainstay for future
diagnostic products. Most of the products in development will incorporate our
basic technology.
Additional technologies may be required for some of the newly identified
tests, particularly for the POC business. We believe 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
Most of our current 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.
Sales and Marketing
We currently market and sell our diagnostic products to the traditional
clinical laboratory market, both hospital based and free standing laboratories.
We utilize a diverse distribution program for our products. Our labeled products
are sold directly to testing laboratories in the United States through contract
sales representatives.
Internationally, our labeled products are sold through established
diagnostic companies in Argentina, Australia, Austria, Belgium, Brazil, Canada,
Chile, Denmark, Egypt, Finland, France, Germany, Greece, Guatemala, Hong Kong,
Hungary, India, Ireland, Israel, Italy, Japan, Korea, Kuwait, Lebanon, Malaysia,
Mexico, The Netherlands, Norway, Paraguay, Peru, Portugal, Saudi Arabia,
Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand,
Turkey, the United Kingdom, and Uruguay. Discussions are underway that are
expected to provide access to additional markets worldwide. Our agreements with
international distribution partners are on terms that are generally terminable
by us if the distributor fails to achieve certain sales targets. We have also
established private label product agreements with several United States and
European companies. We have international distribution headquarters in the
United Kingdom and will add direct commercialization and distribution in
selected additional countries as appropriate.
We have an active marketing and promotion program for our diagnostic
testing products. We publish technical and marketing promotional materials,
which we distribute to current and potential customers. We attend major industry
trade shows and conferences, and our scientific staff actively publishes
articles and technical abstracts in peer review journals.
Manufacturing
Our manufacturing process for our products utilizes a semi-automated
production line for the manufacturing, assembly and packaging of our ELISA
Microplate products. Our current production capacity is 20,000 tests per day
with a single eight-hour shift. Since 1990, we have successfully produced over
12 million tests in our Westminster, Colorado facility, and we expect that
current manufacturing facilities will be sufficient to meet expected customer
demand for the foreseeable future.
Our manufacturing operations are fully integrated and consist of raw
material purification, reagent and Microplate processing, filling, labeling,
packaging and distribution. We have considerable experience in manufacturing our
products using our proprietary technology. We expect increases in the demand for
our products and have prepared plans to increase our manufacturing capability
while remaining in compliance with regulatory requirements at acceptable costs
to meet that increased demand, and are in the process of implementation. We also
maintain an ongoing investigation of scale-up opportunities for manufacturing to
meet future requirements. We anticipate that production costs will decline as
more products are added to the product menu in the future, permitting us to
achieve greater economies of scale as higher volumes are attained. We have
registered our facility with the FDA and we operate in compliance with the FDA
Quality System Regulations ("QSR") requirements for our products.
In April 1999, we received ISO 9001: 1994 certification from TUV Product
Service GmbH, a world leader in medical device testing and certification. ISO
9001 represents the international standard for quality management systems
developed by the International Organization for Standardization (ISO) to
facilitate global commerce. To ensure continued compliance with the rigorous
standards of ISO 9001, companies must undergo regularly scheduled assessments
and re-certification every year. The ISO 9001 initiative is an important
component in our commitment to maintain excellence. We received re-certification
in November 1999 and 2000, and in July 2002 received EN ISO 9001:1996, and EN
ISO 13485:2000 certification.
Our 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 ability to meet pre-established specifications
by our quality control department. If required, adjustments in the bulk
solutions are made to provide optimal performance and lot-to-lot consistency.
The bulk solutions are then dispensed and packaged into planned component
configurations. The final packaging step in the manufacturing process includes
kit assembly, where all materials are packaged into finished product. The
finished kit undergoes one final performance test by our quality control
department. Before product release for sale, our Quality Assurance department
must verify 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
our products are readily available. We have established good working
relationships with primary vendors, particularly those that supply unique or
critical components for our products. We mitigate 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. We have also qualified
second vendors for all critical raw materials and believe that we can substitute
a new supplier with regard to any of these components in a timely manner.
However, there can be no assurances that we will be able to substitute a new
supplier in a timely manner, and failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
A significant percentage of our 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 our sales in Europe, we have obtained ISO
certification and expect to receive a "CE" mark certification, an international
symbol of quality and compliance with applicable European medical device
directives for certain of our products once the European directive for in vitro
diagnostic products has been finalized.
Since 1990, we have entered into several contract manufacturing agreements
with other companies whereby we manufacture specific products for the partner
company. We expect to continue investigating and evaluating opportunities for
additional agreements.
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. 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 at September 20, 2002, owned approximately 4.2 % 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. Said rights have never been exercised by Chugai.
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. It
expired August 26, 2001.
Joint Development of Corgenix Products. In 1993, Corgenix and Chugai
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
was granted 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 the
product launched in Japan by Chugai. The HA Manufacturing Agreement has been
amended several times.
Uncertainity as to Future Orders for HA from Chugai for Japan. Chugai has
unexpectedly not forecast any orders for HA for Japan after November 2002. Our
management has not determined Chugai's intent with respect to orders of HA after
November 2002 and we are trying to determine the status of these orders. As we
are unclear whether or not Chugai will place orders after November 2002, we are
internally not projecting any orders by Chugai of HA after November 2002.
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 was initially for a two-year period which expired November 17,
1999, with one-year extension rights. The UK Agreement was amended on January 3,
2000, and expired on June 30, 2001 with the execution of the HA License
Agreement (defined below).
HA License Agreement. On June 30, 2001, Corgenix and Chugai executed a
license agreement (the "HA License Agreement") whereby Corgenix was granted
exclusive worldwide rights to manufacture and market the HA product (except for
Japan). The HA License Agreement is initially for a five-year period with
certain extension rights. The HA License Agreement establishes certain
performance requirements for Corgenix, and provides early cancellation of
exclusivity if we do not meet those performance goals. The HA License Agreement
is the only international distribution right currently granted by Chugai to the
Company.
Other Strategic Relationships
In addition to the Chugai strategic relationship, an integral part of our
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 our corporate partnering strategy with
Chugai and other strategic affiliations include:
o Companies that are interested in co-developing diagnostic tests
that use our technology;
o Companies with complementary technologies;
o Companies with complementary products and novel disease markers;
and/or
o Companies with access to distribution channels that supplement our
existing distribution channels.
In furtherance of the foregoing strategies, we have 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, we entered into an agreement with
Cambridge by which we provide 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. We also distribute several
products manufactured by Cambridge through our distribution network.
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, we entered into a
development and manufacturing agreement with Helena pursuant to which we
developed a series of vascular disease products for joint distribution. Three of
these received FDA clearance in 1997 and one in 1999. We manufacture these
products for worldwide distribution through both the Helena network and our
network. Pursuant to the agreement, Helena has the right to incorporate several
of our current products and technology (both those jointly developed and also
other of our products) into a proprietary Helena instrumentation for sale to
hospitals and clinical laboratories.
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, we became a non-exclusive
distributor of abp's von Willebrand Factor Activity in the United States. We
distribute this product under our label through our distribution network,
primarily in the United States. This product complements our expanding line of
vascular disease products. The initial term of the distribution arrangement with
abp expired in June 2001 and has been automatically extended for an additional
one-year term. abp also sells this test under our label through its distribution
network. Under the terms of a separate distribution agreement, abp sells our von
Willebrand Factor Antigen, Protein C, Protein S and Monoclonal Free Protein S
products worldwide under the Corgenix label through their distribution network.
GTI, Inc. GTI is a privately held company located in Brookfield, Wisconsin
that manufactures ELISA diagnostic products. In April 1998, we signed an
agreement with GTI by which we became a non-exclusive distributor of GTI's
Platelet Factor 4 ELISA test kit in the United States. The initial term of the
agreement was one year and has been renewed at our option. This product is also
part of our vascular disease product strategy.
RhiGene, Inc. RhiGene is a Des Plaines, Illinois based company which is a
wholly owned subsidiary of Medical & Biological Laboratories Company, Ltd.,
("MBL") of Nagoya, Japan. In March 2002 we signed a distribution agreement with
RhiGene which will grant us exclusive rights to distribute RhiGene's complete
diagnostic line of autoimmune testing products in North and South America. The
arrangement will also provide us with rights to certain other international
markets. In July 2002, MBL made a $500,000 strategic investment in the Common
Stock of our company. As part of the investment agreement, MBL will have
warrants to purchase additional shares of our Common Stock for a total potential
investment of $1,000,000.
We have established OEM agreements with several international diagnostic
companies. Under these agreements, we manufacture selected products under the
partner's label for worldwide distribution.
Research and Development
We direct our research and development efforts towards development of new
products on our proprietary platform ELISA technology in the Microplate format,
as well as applying our technology to automated laboratory testing systems and
to a rapid test format to address operator ease-of-use and expand our market
opportunities. In that regard, we have organized our research and development
effort into three major areas: (i) new product development, (ii) technology
assessment, and (iii) technical and product support.
Our technical staff 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 our quality assurance department to satisfy
regulatory requirements and support regulatory clearance. They are responsible
for assessing the performance of new technologies along with determining the
technical feasibility of market introduction, and investigating the patent /
license issues associated with new technologies.
Our technical staff is responsible for supporting current products on the
market through scientific investigation, and are responsible for design transfer
to manufacturing of all new products developed. They assess the performance and
validate all externally-sourced products.
The technical staff includes individuals skilled in immunology, assay
development, protein biochemistry, biochemistry and basic sciences. We maintain
facilities to support our development efforts at the Westminster, Colorado
headquarters. 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."
During fiscal 2002 and 2001, we spent $566,000 and $322,000, respectively,
for research and development. We expect research and development spending to
increase significantly during 2002.
Products and Technology in Development
We intend to expand our product menu through internal development,
development in collaboration with strategic partners and acquisition or
licensing of new products and technologies. We are currently working with
partners to develop additional tests to supplement the existing product lines
and have fifteen contract research projects as of September 2002. The following
summarizes our current product and technology development programs:
Vascular Disease Testing Products
We are one of the market leaders in development of innovative tests in the
antiphospholipid market, and expect to continue developing products in this area
to ensure our ongoing strong market position. In the fiscal year ended June 30,
1999, we developed three new antiphospholipid products which are more specific
for thrombosis and the antiphospholipid syndrome when incorporated with the
conventional aCL and aPS tests, and are configured for sale to hospital based
and free-standing independent laboratories. Filing of the 510(k) applications
for the new tests was completed and one of the products, anti-phosphatidylserine
IgA, was cleared by the FDA in April 2000. Two additional products in this area,
IgG anti-Prothrombin and IgM anti-Prothrombin (aPT), were cleared by the FDA in
April 2001. Five additional products in this area and two products in the
coagulation area are in various stages of development, and we expect to file
applications with the FDA in 2002-2003. See "-- Regulation."
Automated Laboratory Testing Systems
We believe that the application of our proprietary ELISA technology to
automated laboratory-testing systems will significantly expand the hospital and
specialized laboratory market opportunity through OEM partnerships and direct
sales to high volume testing laboratories. We have several such development
programs pending with strategic partners.
Competition
Competition in the human medical diagnostics industry is significant. Our
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 we do. 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
continues to experience significant consolidation in which many of the large
domestic and international healthcare 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 or vascular diseases. There
can be no assurance that new, superior technologies will not be introduced that
could be directly competitive with or superior to our technologies.
Our competitors include Inova Diagnostics, Inc., DIASORIN, Diagnostica
Stago, American Bioproducts, Helena Laboratories Corporation (an existing
licensee of Corgenix technology), Organon Teknika, Helix Diagnostic Hemagen
Diagnostics, Sigma Diagnostics, The Binding Site and IVAX Diagnostics. We
compete against these companies on the basis of product performance and customer
service.
Patents, Trade Secrets and Trademarks
We have built a strong patent and intellectual property position around
our proprietary application of ELISA technology. We hold two United States
patents that expire in 2004 and 2010 respectively. We have no pending patent
applications. The Hyaluronic Acid product is protected by U.S., Japanese and
European patents held by Chugai. As part of the agreements with Chugai, we have
a license to use the Chugai patents to manufacture this product for worldwide
distribution, and marketing rights worldwide except Japan. See "-- Chugai
Strategic Relationship."
Patent applications in the United States are maintained in secrecy until
patents are issued. There can be no assurance that our patents, and any patents
that may be issued to us in the future, will afford protection against
competitors with similar technology. In addition, no assurances can be given
that patents issued to us will not be infringed upon or designed around by
others or that others will not obtain patents that we would need to license or
design around. If the courts uphold existing or future patents containing broad
claims over technology used by us, the holders of such patents could require us
to obtain licenses to use such technology. In fiscal 2002 the Company did not
incur any costs to defend our patents. 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."
We have registered our 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.
An allowance for the trademark "Corgenix" was received September 2000.
Where appropriate, we intend to obtain patent protection for our products
and processes. We also rely on trade secrets and proprietary know-how in our
manufacturing processes. We require each of our employees, consultants and
advisors to execute a confidentiality agreement upon the commencement of any
employment, consulting or advisory relationship with us. 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 be
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.
The majority of our product sales, approximately 81% for the fiscal year
end June 30, 2002 and 71% in fiscal 2001, were products that utilized our
proprietary technology.
Regulation
The testing, manufacturing and sale of our 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. We are 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 our 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,
pre-market 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 pre-market 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 our 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, we must obtain FDA
clearance or approval through either clearance of a 510(k) pre-market
notification or approval of a product marketing approval ("PMA") application,
which is a more extensive and costly application. All of our products have been
cleared using a 510(k) application, and we expect that most, if not all, future
products will also qualify for clearance using a 510(k) application.
It generally takes up to 90 days from submission to obtain 510(k)
pre-market 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 we will be able to obtain necessary regulatory approvals or clearances for
our 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 our 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."
Our 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." Our 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
"Centers for Medicare and Medicaid Services" ("CMS"), formerly 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 our future products.
We are 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 we 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 our business,
financial condition and results of operations.
Reimbursement
Currently our largest market segment is the hospital based and free
standing independent laboratory market in the United States. Payment for testing
in this segment is largely based on third party payor reimbursement. The
laboratory that 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 CMS. 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 CMS.
Employees (for Consolidated Entity)
As of September 20, 2002, we employed 43 employees, 39 full time and 4
part-time. Of these, 6 hold advanced scientific or medical degrees. None of
Corgenix's employees are covered by a collective bargaining agreement. We
believe that the Company maintains good relations with our employees.
Item 2. Description of Property.
We currently lease approximately 12,000 square feet of space in one
building in Westminster, Colorado, which is used for our administrative offices,
research and development facilities and manufacturing operations. The lease
expires August 31, 2006. We also lease approximately 1,400 square feet of office
space in Peterborough, Cambridgeshire, United Kingdom under a lease that expires
October 6, 2006 and is intended to be renewed. We believe that suitable
additional or alternative space will be available on commercially reasonable
terms as needed, and that our existing facilities will be sufficient for our
operational purposes through the end of the leases.
Item 3. Legal Proceedings
We are not a party to any material litigation or legal proceedings.
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted during the fourth quarter of the fiscal
year covered by this Report to a vote of stockholders, through the solicitation
of proxies, or otherwise.
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 or a
phospholipid-cofactor complex; 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.
antiphospholipid antibodies -- a family of autoantibodies with specificity
against negatively charged phospholipids, that are frequently associated with
recurrent venous or arterial thrombosis, thrombocytopenia, or spontaneous fetal
abortion in individuals with SLE or other autoimmune disease.
antiphospholipid syndrome -- a clinical condition characterized by venous
or arterial thrombosis, thrombocytopenia, or spontaneous fetal abortion, in
association with elevated levels of antiphospholipid antibodies and/or lupus
anticoagulant.
assay-- a laboratory test; to examine or subject to analysis.
autoantibody -- an antibody with specific reactivity against a component
substance of the body in which it is produced; a disease marker.
autoimmune diseases -- a group of diseases resulting from reaction of the
immune system against self components.
beta 2 glycoprotein I ((beta)2GPI) -- a serum protein (cofactor) that
participates in the binding of antiphospholipid antibodies.
coagulation-- the process by which blood clots.
cofactor -- a serum protein that participates in the binding of
antiphospholipid antibodies, for example (beta)2GPI.
delivery format -- the configuration of the product. Current Corgenix
products utilize a 96-well microplate system for its delivery format.
hemostasis -- mechanisms in the body to maintain the normal liquid state
of blood; a balance between clotting and bleeding.
hyaluronic acid (HA) -- a polysaccharide found in synovial fluid, serum
and other body fluids and tissues, elevated in certain rheumatological and
hepatic (liver) disorders.
HDL cholesterol -- high density lipoprotein associated with cholesterol.
immunoassay -- a technique for analyzing and measuring the concentration
of disease markers using antibodies; for example, ELISA.
immunoglobulin -- a globulin protein that participates in the immune
reaction as the antibody for a specific antigen.
immunology -- the branch of medicine dealing with (a) antigens and
antibodies, esp. immunity to disease, and (b) hypersensitive biological
reactions (such as allergies), the rejection of foreign tissues, etc.
in vitro -- isolated from the living organism and artificially maintained,
as in a test tube.
in vivo-- occurring within the living organism.
lipids -- a group of organic compounds consisting of the fats and other
substances of similar properties.
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 on the skin 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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our Common Stock is traded on the OTC Bulletin Board (R) under the symbol
"COGX". On September 20, 2002, the last bid price of our Common Stock on the OTC
Bulletin Board (R) as reported by the OTC Bulletin Board (R) was $0.31.
The following table sets forth, for the periods indicated, the high and
low bid prices of our Common Stock as reported on the OTC Bulletin Board (R).
The following quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions, and may not represent actual transactions.
Stock Price Dates Stock Price
Ranges
High Low
Fiscal Year 2002
Quarter Ended:
September 30, 2001 $0.31 $0.16
December 31, 2001 $0.25 $0.09
March 31, 2002 $0.16 $0.125
June 30, 2002 $0.35 $0.13
Fiscal Year 2001
Quarter Ended:
September 30, 2000 $1.55 $0.65
December 31, 2000 $1.25 $0.45
March 31, 2001 $3.60 $0.95
June 30, 2001 $2.50 $1.10
On September 20, 2002 there were approximately 173 holders of record of
our Common Stock.
To date, we have not paid any dividends on our Common Stock, and the Board
of Directors of the Company does not currently intend to declare cash dividends
on our Common Stock. We instead intend to retain earnings, if any, 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. We are restricted from
paying dividends on our Common Stock under the terms of a promissory note to
Vectra Bank ("Vectra") without the consent of Vectra.
Stock Issuance
From July 1, 2001 through June 30, 2002, we sold a total of 237,300
shares of Common Stock at $.8772 per share for a total of $208,159 to 12
accredited investors and one foreign investor. The sales were made in reliance
upon the exemption from the registration requirements of the Securities Act of
1933, as amended, provided by Section 4 (2) of the Securities Act. The shares
were not registered under federal or state securities laws, and, therefore, will
be "restricted securities" as such term is defined in Rule 144 promulgated under
the Securities Act. The Company intends to use the proceeds of the private
placement to assist in the market and regulatory development of the Company's HA
diagnostic test, acquire capital equipment, reduce short-term debt, accelerate
research and development of new products and for general working capital.
Issuance of Warrants
The Company issued in March 2002, for $200, warrants to purchase 200,000
shares of its common stock at prices ranging from $1.00 to $1.75 per share to a
consultant to the Company, pursuant to a services agreement. The warrants were
issued to the consultant in exchange for investor relations services to be
provided to the Company. The warrants were to vest in blocks of 50,000 warrants
at the various exercise prices if and when the Company's common stock trades at
prices ranging from $1.25 to $2.00 for ten continuous trading days each. The
Services Agreement and the Warrants were terminated in August 2002. No warrants
had vested at the time of the termination.
On April 12, 2001, we issued warrants to purchase 225,000 shares of common stock
of Corgenix to a consultant to the Company. The warrants were issued to the
consultant in exchange for financial advisory services to be provided to the
Company. Warrants to purchase 45,000 shares vested ratably over the first year.
The remaining 180,000 warrants were to vest only if defined future events occur.
The service agreement and the remainder of the warrants were terminated by the
Company in October 2001. None of the additional warrants had vested at the time
of the termination. The warrants were issued in the form of four separate three
year common stock purchase warrants to purchase an aggregate 180,000 shares of
Corgenix common stock at an exercise price of $1.25 per share with customary
anti-dilution and "cashless" exercise provisions and certain stock price
performance goals. The warrants were issued with a purchase price of $.001 per
warrant for aggregate consideration of $900. The warrants may be assigned to
third parties by the consultant with the prior consent of Corgenix.
All of the above warrants were issued in reliance upon the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4 (2) of the Securities Act.
Forward-Looking Statements
This Form 10-KSB includes statements that are not purely historical and
are "forward-looking statements" within the meaning of Section 21E of the
Securities Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
statements other than historical fact contained in this Form 10-KSB, including,
without limitation, statements regarding future product developments, statements
regarding our intent to develop the Consumer Products Business, 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 Form10-KSB are based on information available to us
on the date hereof, and we assume no obligation to update such forward-looking
statements. Although we believe that the assumptions and expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct or that we will take any
actions that may presently be planned.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere herein.
General
Since the Company's inception, we have been primarily involved in the
research, development, manufacturing and marketing/distribution of diagnostic
tests for sale to clinical laboratories. We currently market 142 products
covering autoimmune disorders, vascular diseases, infectious diseases and liver
disease. Our products are sold in the United States, the UK and other countries
of the world through our marketing and sales organization that includes contract
sales representatives, internationally through an extensive distributor network,
and to several significant OEM partners.
We manufacture products for inventory based upon expected sales demand,
shipping products to customers, usually within 24 hours of receipt of orders if
in stock. Accordingly, we do not operate with a customer order backlog.
Except for the fiscal year ending June 30, 1997, we have experienced
revenue growth since our 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, we began adding third-party OEM licensed
products to our diagnostic product line. Currently we sell 128 products licensed
from or manufactured by third party manufacturers. We expect to expand our
relationships with other companies in the future to gain access to additional
products.
Although we have experienced growth in revenues every year since 1990
except for 1997, there can be no assurance that, in the future, we will sustain
revenue growth, current revenue levels, or achieve or maintain profitability.
Our 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 we receive R&D
milestone payments and license fees from strategic partners, (v) changes in
reimbursement policies for the products that we sell, (vi) competitive pressures
on average selling prices for the products that we sell, and (vii) changes in
the mix of products that we sell.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") and
our significant accounting policies are summarized in Note 1 to the accompanying
consolidated financial statements. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect reported amounts of assets, liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual result could differ
significantly from those estimates.
The Company maintains an allowance for doubtful accounts based on its
historical experience and provides for any specific collection issues that are
identified. Such allowances have historically been adequate to provide for our
doubtful accounts but involve a significant degree of management judgment and
estimation. Worse than expected future economic conditions, unknown customer
credit problems and other factors may require additional allowances for doubtful
accounts to provided for in future periods. Equipment and software are recorded
at cost. Equipment under capital leases is recorded initially at the present
value of the minimum lease payments. Depreciation and amortization is calculated
primarily using the straight-line method over the estimated useful lives of the
respective assets which range from 3 to 7 years. The internal and external costs
of developing and enhancing software costs related to website development, other
than initial design and other costs incurred during the preliminary project
stage, are capitalized until the software has been completed. Such capitalized
amounts will be amortized commencing when the website is placed in service on a
straight-line basis over a three-year period. When assets are sold, retired or
otherwise disposed of, the cost and related accumulated depreciation are
eliminated from the accounts and a gain or loss is recognized. Repair and
maintenance costs are expensed as incurred. We evaluate the realizability of our
long-lived assets, including property and equipment, whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Revenue is recognized upon shipment of products. Provisions are
made for sales discounts and allowances at the time product sales are
recognized. Research and development and advertising costs are expensed when
incurred.
Inventories are recorded at the lower of cost or market, using the first-in,
first-out method.
Results of Operations
Year Ended June 30, 2002 compared to 2001
Net sales. Net sales for the year ended June 30, 2002 were approximately
$4,858,000, a 12.8% increase from approximately $4,308,000 in 2001 due to
continued expansion of our worldwide distribution network, overall product mix,
and revenue from new products. Product sales increased in most categories. Both
domestic sales and sales to international distributors increased from year to
year. Included in the sales increases were a 35.5% increase in sales to OEM
partners and a 36.4% increase in sales of Hyaluronic Acid Test Kits ("HA") to
Chugai for distribution in Japan. Chugai has been the Company's largest
customer, representing approximately 15.1% and 12.5% of sales in fiscal 2002 and
2001, respectively. Chugai has unexpectedly not forecasted any orders for HA
product after November 2002. Our management has not determined Chugai's intent
with respect to orders of HA product after November 2002 and we are trying to
determine the status of these orders. As we are unclear whether or not Chugai
will place orders after November 2002, we are internally not projecting any
orders by Chugai of HA after November 2002. The Company expects that the loss of
HA sales to Chugai after November 2002 will me made up via international sales
of HA in other areas of the world. The majority of the Company's sales increase
for the current fiscal year was due to higher unit volume (which increased
approximately 9.2%) as well as an increase in average price per unit sold of
approximately 5.3%. This was mainly attributable to increased direct domestic
sales relative to distributor/OEM sales (which generally are sold at lower unit
prices). Sales of products manufactured for us by other companies while still
relatively small, are expected to continue to increase during fiscal 2003.
Cost of sales. Cost of sales increased 7.9% to approximately $1,771,000 in
2002 from approximately $1,641,000 in 2001, due to the increase in net sales.
Gross profit, as a percentage of sales, increased to 63.5% in 2002 from 61.9% in
2001 primarily due to increased sales of newer, higher margin products.
Selling and marketing. Selling and marketing expenses increased 21.7% to
approximately $981,000 in 2002 from approximately $806,000 in 2001 due to
increases in commissions expense, increased advertising expense, increased
license fees, travel-related expenses associated with various conventions and
trade shows, outside services and payroll-related costs.
Research and development. Research and development expenses increased
75.8% to approximately $566,000 in 2002 from approximately $322,000 in 2001.
Most of this increase came as a result of increased labor-related costs and
purchases and development costs of new products, most notably a joint proof of
principle development project.
General and administrative. General and administrative expenses increased
3.4% to approximately $1,097,000 in 2002 from approximately $1,061,000 in 2001,
due to increases in occupancy costs, payroll-related costs and outside services
expense such as legal, accounting and consulting expenses. There was also an
increase in the provision for bad debts during the year.
Interest expense. Interest expense increased 11.6% to approximately
$144,000 in 2002 from approximately $129,000 in 2001 due to new capital lease
obligations and notes, the effects of which was partially offset by reductions
in over-all interest rates.
Expenses related to consumer healthcare business. In June 2002, the
Company determined that its consumer healthcare business and associated
operations via consumer websites were not strategic to the company's ongoing
objectives and core medical diagnostic kit business. Accordingly, the Company
decided to abandon and close its internet-based consumer business and all
related e-commerce sites managed and operated by its wholly owned subsidiary,
Health-outfitters.com, Inc. ("Ho.com"). The results of Ho.com's operations have
been included in continuing operations in the consolidated statements of
operations for the fiscal years ended June 30, 2002 and 2001. Since some of the
employees and office space of Ho.com have been redeployed into the Company's
core business, only those Ho.com expenses which are not expected to recur are
shown separately in the consolidated statements of operations. The operating
expenses of the consumer healthcare business not expected to recur increased
713.5% from $29,476 in fiscal 2001 to $210,311 in fiscal 2002. This increase was
primarily attributable to amortization of previously capitalized software costs,
increased labor-related costs, and costs associated with advertising and
promotion of the consumer healthcare products. The expense related to the
disposal of the consumer healthcare business assets amounted to $413,834 in
fiscal 2002 and was a result of the abandonment and write off of the unamortized
capitalized software costs. Amortization of $182,087 was recorded on such assets
during the year ended June 30, 2002. No comparable amortization was recorded
during the year ended June 30, 2001 because the website was not launched until
July 2001. Net sales related to the consumer healthcare business were $10,388
and $24 during the years ended June 30, 2002 and 2001, respectively.
Liquidity and Capital Resources
Cash used by operating activities was $197,983 for the current fiscal year
compared to cash provided by operating activities of $196,584 during the prior
fiscal year. The cash used in operations resulted primarily from the net loss
incurred during the current year, in addition to the Company's investment in
working capital resulting in an increase in accounts receivable, prepaid
expenses and other assets, offset by a substantial reduction of accounts
payable. The Company expects this trend to continue as its revenues increase.
The Company believes that uncollectible accounts receivable will not have a
significant effect on future liquidity, as a significant portion of its accounts
receivable are due from enterprises with substantial financial resources.
Net cash used by investing activities, the purchase of equipment, was
$125,911 in fiscal 2002 compared to $231,559 for fiscal 2001. The decrease was
mainly attributable to a reduction in the amount of computer equipment required
by the Company in addition to spending on internally developed software.
Net cash provided by financing activities amounted to $164,471 during
fiscal 2002 compared to $309,434 in the prior fiscal year. This decrease was due
to a smaller amount raised in the private sale of the Company's common stock,
which amount was $208,160 compared to $496,233 raised in the prior fiscal year.
Historically, we have financed our operations primarily through long-term
debt and by sales of common and preferred stock. In 2002, as mentioned above, we
raised $208,160 before offering expenses through a private sale of common stock.
We have also received financing for operations from sales of diagnostic
products and agreements with strategic partners. Accounts receivable increased
18.6% to $694,394 from $585,704 in 2001because of a general slow down in payment
by our customers brought about by global economic conditions. In 2002, our
accounts payable decreased 25.9% to $553,505 from $746,642 in 2001 due to a
concerted effort on our part to bring accounts payable more current
Our principal sources of liquidity have been cash provided from operating
and financing activities, cash raised from the private sale of common stock
mentioned above, and long- term debt financing. We believe that we will continue
investigating new debt agreements and may sell additional equity securities in
fiscal year 2003 to develop the markets and obtain the regulatory approvals for
the HA products (see above), and to pursue all of our strategic objectives. We
believe that our current availability of cash, working capital, proceeds from
the issuance of common stock and cash flow from operations are adequate to meet
our ongoing needs for at least the next twelve months. At June 30, 2002, cash on
hand amounted to $164,378 compared to $320,140 at June 30, 2001. At June 30,
2002, the Company's available borrowings under its $300,000 line of credit with
Vectra Bank amounted to approximately $200,000. The available borrowings at June
30, 2002 were limited to a maximum of $275,000 based upon the calculation of the
borrowing base. On July 1, 2002, the Company received a $500,000 common stock
investment from Medical & Biological Laboratories Company, Ltd., a strategic
partner headquartered in Nagoya, Japan.
On October 3, 2001, the Board issued FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. While Statement No. 144 supersedes FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions of
that Statement. Statement No. 144 also supersedes the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. The Company does not expect the
impact of adopting SFAS No. 144 to be significant.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement provides guidance on the classification of
gains and losses from the extinguishment of debt and on the accounting for
certain specified lease transactions. SFAS No. 145 is not expected to have a
material impact on the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Generally, SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized as incurred, whereas EITF Issue No. 94-3 required such a
liability to be recognized at the time that an entity committed to an exit play.
The Company is currently evaluating the provisions of the new rule, which is
effective for exit or disposal activities that are initiated after December 31,
2002.
Risk Factors
Certain factors that could cause actual results to differ materially from
those expected include the following:
Losses Incurred; Future Capital Needs; Risks Relating to the
Professional Products Business; Uncertainty of Additional Funding
We have incurred operating losses and negative cash flow from operations
for most of our history. Losses incurred since our inception have aggregated
over $4,259,707 and there can be no assurance that we will be able to generate
positive cash flows to fund our operations in the future or to pursue our
strategic objectives. We believe that we will have sufficient cash and borrowing
availability to satisfy our operating needs for at least the next year. If we
are not able to operate profitably and generate positive cash flows sufficient
for both the diagnostic business and the consumer products business, we may need
to raise additional capital to fund our operations. If we need additional
financing to meet our requirements, there can be no assurance that we will be
able to obtain such financing on terms satisfactory to us, if at all.
Alternatively, any additional equity financing may be dilutive to existing
stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, we might be required to limit
our research and development activities, our selling and marketing activities or
our plans to develop the Consumer Products Business, any of which could have a
material adverse effect on the future of the business.
Dependence on Collaborative Relationships and Third Parties for Product
Development and Commercialization
We have historically entered into licensing and research and development
agreements with collaborative partners, from which we derived a significant
percentage of our revenues in past years. Pursuant to these agreements, our
collaborative partners have specific responsibilities for the costs of
development, promotion, regulatory approval and/or sale of our products. We will
continue to rely on future collaborative partners for the development of
products and technologies. There can be no assurance that we will be able to
negotiate such collaborative arrangements on acceptable terms, if at all, or
that current or future collaborative arrangements will be successful. To the
extent that we are not able to establish such arrangements, we could experience
increased capital requirements or be forced to undertake such activities at our
own expense. The amount and timing of resources that any of these partners
devotes to these activities will generally be based on progress by us in our
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 our ability to deliver products on a timely basis.
Uncertainity as to Future Orders for Hyaluronic Acid Test Kits ("HA")
from Company's Largest Customer
Chugai has unexpectedly not forecast any orders for HA after November
2002. Our management has not determined Chugai's intent with respect to orders
of HA after November 2002 and we are trying to determine the status of these
orders. As we are unclear whether or not Chugai will place orders after November
2002, we are internally not projecting any orders by Chugai of HA after November
2002.
No Assurance of Successful or Timely Development of Additional Products
Our business strategy includes the development of additional diagnostic
products both for the diagnostic business and consumer products business. Our
success in developing new products will depend on our 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. We 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 we are 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, our results of operations 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. Our 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 ours. 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 our technologies.
Governmental Regulation of Diagnostics Products
The testing, manufacture and sale of our 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 there under, the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. We are not able to commence marketing or commercial sales in the United
States of new products under development until we receive 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 we will be able to obtain necessary
regulatory approvals or clearances for our 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 our business.
Dependence on Distribution Partners for Sales of Diagnostic Products in
International Markets
We have entered into distribution agreements with collaborative partners
in which we have granted distribution rights for certain of our products to
these partners within specific international geographic areas. Pursuant to these
agreements, our 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 our business, financial condition and
results of operations.
Governmental Regulation of Manufacturing and Other Activities
As a manufacturer of medical devices for marketing in the United States,
we are required to adhere to applicable regulations setting forth detailed good
manufacturing practice requirements, which include testing, control and
documentation requirements. We 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. We are 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. We may incur significant costs
to comply with laws and regulations in the future, which may have a material
adverse effect upon our 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. We may be required to incur significant costs in obtaining or
maintaining foreign regulatory approvals. In addition, the export of certain of
our products that have not yet been cleared for domestic commercial distribution
may be subject to FDA export restrictions. Failure to obtain necessary
regulatory approval or the failure to comply with regulatory requirements could
have a material adverse effect on our business, financial condition and results
of operations.
Uncertain Availability of Third Party Reimbursement for Diagnostic
Products
In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third party
payors, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. Third party
payors are increasingly scrutinizing and challenging the prices charged for
medical products and services and they can affect the pricing or the relative
attractiveness of the product. Decreases in reimbursement amounts for tests
performed using our 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 our ability to sell our diagnostic products
profitably. Market acceptance of our 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
Our success depends, in part, on our 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
our issued patents will afford meaningful protection against a competitor, or
that patents issued to us will not be infringed upon or designed around by
others, or that others will not obtain patents that we would need to license or
design around. We could incur substantial costs in defending the Company or our
licensees in litigation brought by others. Our business could be adversely
affected.
Risks Regarding Potential Future Acquisitions
Our growth strategy includes the desire to acquire complementary
companies, products or technologies. There is no assurance that we will be able
to identify appropriate companies or technologies to be acquired, to negotiate
satisfactory terms for such an acquisition, or to obtain sufficient capital to
make such acquisitions. Moreover, because of limited cash resources, we will be
unable to acquire any significant companies or technologies for cash and our
ability to effect acquisitions in exchange for our capital stock may depend upon
the market prices for our Common Stock. If we do complete one or more
acquisitions, a number of risks arise, such as short-term negative effects on
our 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 our business, financial condition
and results of operations.
Dependence on Suppliers
The components of our products include chemical and packaging supplies
that are generally available from several suppliers, except certain antibodies,
which we purchases from single suppliers. We mitigate the risk of a loss of
supply by maintaining a sufficient supply of such antibodies to ensure an
uninterrupted supply for at least three months. We have also qualified second
vendors for all critical raw materials and believe that we can substitute a new
supplier with respect to any of these components in a timely manner. However,
there can be no assurances that we will be able to substitute a new supplier in
a timely manner and failure to do so could have a material adverse effect on our
business, financial condition and results of operations.
Limited Manufacturing Experience with Certain Products
Although we have manufactured over twelve million diagnostic tests based
on our proprietary applications of ELISA technology, certain of our diagnostic
products in consideration for future development, incorporate technologies with
which we have little 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
Our revenue and operating results have historically been minimally subject
to quarterly fluctuations. There can be no assurance that such seasonality in
our results of operations will not have a material adverse effect on our
business.
Dependence on Key Personnel
Because of the specialized nature of our business, our success will be
highly dependent upon our ability to attract and retain qualified scientific and
executive personnel. In particular, we believe our 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 we 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 our 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, we have
experienced no product liability claims, but any such claims arising in the
future could have a material adverse effect on our business, financial condition
and results of operations. Our product liability insurance coverage is currently
limited to $2 million. Potential product liability claims may exceed the amount
of our insurance coverage or may be excluded from coverage under the terms of
our policy or limited by other claims under our umbrella insurance policy.
Additionally, there can be no assurance that our existing insurance can be
renewed by us at a cost and level of coverage comparable to that presently in
effect, if at all. In the event that we are held liable for a claim against
which we are not insured or for damages exceeding the limits of our insurance
coverage, such claim could have a material adverse effect on our business,
financial condition and results of operations.
Other Risks
Limited Public Market; Possible Volatility in Stock Prices; Penny Stock
Rules
There has, to date, been no active public market for our Common Stock, and
there can be no assurance that an active public market will develop or be
sustained. Although our Common Stock has been traded on the OTC Bulletin
Board(R) since February 1998, the trading has been sporadic with insignificant
volume.
Moreover, the over-the-counter markets for securities of very small
companies historically have experienced extreme price and volume fluctuations
during certain periods. These broad market fluctuations and other factors, such
as new product developments and trends in our industry and the investment
markets and economic conditions generally, as well as quarterly variation in our
results of operations, may adversely affect the market price of our Common
Stock. In addition, our 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 our Common Stock because of the added
disclosure requirements.
Risks Associated with Exchange Rates
Our financial statements are presented in US dollars. At the end of each
fiscal quarter and the fiscal year, we convert the financial statements of
Corgenix UK, which operates in pounds sterling, into US dollars, and consolidate
them with results from Corgenix, Inc. We may, from time to time, also need to
exchange currency from income generated by Corgenix UK. Foreign exchange rates
are volatile and can change in an unknown and unpredictable fashion. Should the
foreign exchange rates change to levels different than anticipated by us, our
business, financial condition and results of operations may be materially
adversely affected.
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.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the
Exchange Act.
There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in our proxy statement for our 2002 Annual
Meeting of Shareholders, which will be filed with the Securities and Exchange
Commission within 120 days after June 30, 2002.
Item 10. Executive Compensation.
There is hereby incorporated by reference the information to appear under
the caption "Compensation of Directors and Executive Officers" in our proxy
statement for our 2002 Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission within 120 days after June 30, 2001.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
There is hereby incorporated by reference the information to appear under
the caption "Principal Shareholders of the Company" in our proxy statement for
our 2002 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission within 120 days of June 30, 2002.
Item 12. Certain Relationships and Related Transactions.
On October 1, 2001, the Company entered into two notes payable with
one of its officers. The first note was for $67,460 and is payable by the
Company in monthly principal payments of $5,868 plus interest at 8% per annum
over a twelve month period. The second note was for 91,797 pounds sterling
(approximately $132,000) and is payable by the Company in monthly principal
payments of 4,004 pounds sterling (approximately $5,766 at June 30, 2002) plus
interest at 8% per annum over twenty-five months. There have not been any other
transactions, or series of similar transactions, since the beginning of the
Company's last fiscal year, or any currently proposed transaction, or series of
similar transactions, to which the Company or any of its subsidiaries was or is
to be a party, in which the amount involved exceeds $60,000 and in which any
director or executive officer of the Company, nominee for election as a
director, any five percent security holder or any member of the immediate family
of any of the foregoing persons had, or will have, a direct or indirect material
interest.
Item 13. Exhibits and Reports on Form 8-K.
a. Index to and Description of Exhibits
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger dated as of May 12, 1998 by
and among Gray Wolf Technologies, Inc., Gray Wolf
Acquisition Corp. and REAADS Medical Products, Inc. (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.
3.3 Articles of Incorporation of health-outfitters.com, Inc.
dated November 16, 1999 (filed as Exhibit 3.3 to the
Company's filing on Form 10-QSB for the fiscal quarter
ended December 31, 1999).
3.4 Bylaws of health-outfitters.com, Inc. dated November 16,
1999 (filed as Exhibit 3.4 to the Company's filing on Form
10-QSB for the fiscal quarter ended December 31, 1999).
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 to 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 License Agreement dated June 30, 2001 between Chugai
Diagnostic Science Co., Ltd. and Corgenix Medical
Corporation.
10.9 Office Lease dated May 5, 2001 between Crossroads West LLC/Decook
Metrotech LLC and Corgenix, Inc.
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 April 1, 2001 between Luis R.
Lopez and the Company.
10.12 Employment Agreement dated April 1, 2001 between Douglass
T. Simpson and the Company.
10.13 Employment Agreement dated April 1, 2001 between Ann L.
Steinbarger and the Company.
10.14 Employment Agreement dated April 1, 2001 between Taryn G.
Reynolds and the Company.
10.15 Employment Agreement dated April 1, 2001 between Catherine (O'Sullivan)
Fink and the Company.
10.16 Consulting Contract dated May 22, 1998 between Wm. George
Fleming, Bond Bio-Tech, Ltd. and the Company (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).
10.19 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).
10.24 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).
10.27 Warrant agreement dated June 1, 2000 between the Company
and Taryn G. Reynolds.
10.30 Employment Agreement dated March 1, 2001 between William H. Critchfield
and the Company (filed as Exhibit 10.30 to the Company's filing on Form
10-QSB for the fiscal quarter ended March 31, 2001).
10.31 Consulting Agreement dated April 10,2001 between Bathgate McColley
Capital Group, LLC and the Company.
10.32 Warrant Agreement dated April 10, 2001 between Bathgate McColley
Capital Group, LLC and the Company.
10.33 Sales Agent Agreement dated May 7, 2001 between Bathgate McColley
Capital Group, LLC and the Company.
10.34* Business Development and Consulting Agreement dated August
27, 2002 between Ascendiant Capital Group, Inc. and the
Company.
21.1 Amended Subsidiaries of the Registrant (filed as Exhibit 21.1 to the
Company's Registration Statement on Form 10-SB filed June 29, 1998).
21.2 Promissory note dated October 1, 2001 between W.C. Fleming
and the Corgenix UK, Ltd.
21.3 Promissory note dated October 1, 2001 between W.C. Fleming
and Corgenix UK, Ltd.
21.4 Warrant Agreement dated October 11,2001 between Phillips
V. Bradford and the Company.
21.5 Warrant Agreement dated October 11,2001 between Charles F.
Ferris and the Company.
21.6 Underlease Agreement dated October 3, 2001 between G.V.
Callen, A.G. Pirmohamed and Corgenix UK, Ltd.
21.7 Financial Public Relations Agreement dated March 15, 2002
between the Liolios Group, Inc. and the Company.
21.9 Warrant Agreement dated March 15, 2002 between the Liolios
Group, Inc. and the Company.
21.8 Distribution Agreement and OEM Agreement dated March 14,
2002 between RhiGene, Inc. and the Company.
23.1* Consent of SR Howell &Co.
23.2* Consent of KPMG LLP
23.3* Certification of Periodic Report
* Filed herewith.
----------------------------------------
(b) Reports on Form 8-K.
None
BUSINESS DEVELOPMENT & CONSULTING SERVICES AGREEMENT
This Business Development & Consulting Services Agreement (the "Agreement") is
entered into this 27th day of August, 2002 by and between Ascendiant Capital
Group, Inc., a Nevada corporation (hereinafter referred to as, "Consultant"),
and Corgenix Medical Corporation (CONX) (hereinafter referred to as, "Client"),
a Nevada corporation, (collectively referred to as the "Parties") with reference
to the following:
Preliminary Statement: The Client desires to be assured of the association and
services of the Consultant in order to avail itself of the Consultant's
experience, skills, abilities, knowledge, relationships, and background to
facilitate business development matters and is therefore willing to engage
Consultant upon the terms and conditions set forth herein. Consultant desires to
be assured, and Client desires to assure Consultant, that, if Consultant
associate with Client and allocates its resources necessary to provide Client
with its business development and consulting services, Consultant will be paid
the consideration described herein and said consideration will be nonrefundable,
regardless of the circumstances.
Consultant agrees to be engaged and retained by Client upon the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
hereinafter set forth and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows:
1. Engagement. Client hereby engages Consultant on a non-exclusive basis, and
Consultant hereby accepts the engagement to become a business development
Consultant to Client and to render such advice, consultation, information,
and services to the Directors and/or Officers of Client regarding general
business matters including, but not limited to the following:
1.1 International Business Development. Consultant will pursue international
business development initiatives in Asia and South America on behalf of
Client through Consultant's affiliates, Ascendiant - Asia, LLC and
Ascendiant - South America, LLC, which may involve sub-licensing and other
forms of distribution and/or joint venture agreements. The intended goal
of these efforts over the term of this agreement is to achieve, at a
minimum, a letter of intent with a strategic distribution partner in
Brazil and in the People's Republic of China, which will ultimately lead
to definitive distribution agreements for Client's product(s).
2.0 Compensation to Consultant. As express consideration for Consultant
entering into this Agreement, Client agrees to pay Consultant $30,000 (the
"Engagement Fee"), with one-half ($15,000) paid upon signing, and the
balance of $15,000 paid on October 10, 2002.
Note: Consultant shall have no obligation to perform any duties provided
for herein if full payment of the engagement fee is not received within
the time described herein this Section 2.
2.1 Expenses. Client shall reimburse Consultant for reasonable expenses
incurred in performing its duties pursuant to this Agreement (including
printing, postage, express mail, photo reproduction, domestic travel &
lodging, and long distance telephone and facsimile charges); provided,
however, that for any expenses over $500, Consultant must receive prior
written approval from Client. Such reimbursement shall be payable within
seven days of Consultant's invoice. Client will not be responsible for any
international travel by Consultant.
2.2 Additional Fees. Client and Consultant shall mutually agree upon any
additional fees that Client may pay in the future for services rendered by
Consultant under this Agreement. Such additional agreement(s) may,
although there is no requirement to do so, be attached hereto and made a
part hereof as Exhibits beginning with Exhibit A.
3. Indemnification. The Client agrees to indemnify and hold harmless
---------------
Consultant against any and all liability, loss and costs, expenses or
damages, including but not limited to, any and all expenses whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever or
howsoever caused by reason of any injury (whether to body, property,
personal or business character or reputation) sustained by any person or
to any person or property, arising out of any act, failure to act,
neglect, any untrue or alleged untrue statement of a material fact or
failure to state a material fact which thereby makes a statement false
or misleading, or any breach of any material representation, warranty or
covenant by Client or any of its agents, employees, or other
representatives. Nothing herein is intended to nor shall it relieve
Consultant from liability for its own willful act, omission or
negligence. All remedies provided by law, or in equity shall be
cumulative and not in the alternative.
4. Confidentiality.
---------------
4.1 Consultant and Client each agree to keep confidential and provide
reasonable security measures to keep confidential information where
release may be detrimental to their respective business interests.
Consultant and Client shall each require their employees, agents,
affiliates, other licensees, and others who will have access to the
information through Consultant and Client respectively, to first enter
appropriate non-disclosure Agreements requiring the confidentiality
contemplated by this Agreement in perpetuity.
4.2 Consultant will not, either during its engagement by the Client pursuant
to this Agreement or at any time thereafter, disclose, use or make known
for its or another's benefit any confidential information, knowledge, or
data of the Client or any of its affiliates in any way acquired or used by
Consultant during its engagement by the Client. Confidential information,
knowledge or data of the Client and its affiliates shall not include any
information that is, or becomes generally available to the public other
than as a result of a disclosure by Consultant or its representatives.
5. Miscellaneous Provisions.
------------------------
5.1 Amendment and Modification. This Agreement may be amended, modified and
--------------------------
supplemented only by written agreement of Consultant and Client.
5.2 Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. The obligations of either
party hereunder cannot be assigned without the express written consent of
the other party.
5.3 Governing Law; Venue. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the
laws of the State of California, without regard to its conflict of law
doctrine. Client and Consultant agree that if any action is instituted to
enforce or interpret any provision of this Agreement, the jurisdiction and
venue shall be the City of Irvine, Orange County, California.
5.4 Attorneys' Fees and Costs. If any action is necessary to enforce and
collect upon the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees and costs, in addition to any other
relief to which that party may be entitled. This provision shall be
construed as applicable to the entire Agreement.
5.5 Survivability. If any part of this Agreement is found, or deemed by a
court of competent jurisdiction, to be invalid or unenforceable, that part
shall be severable from the remainder of the Agreement.
5.6 Facsimile Signatures. The Parties hereto agree that this Agreement may be
executed by facsimile signatures and such signature shall be deemed
originals. The Parties further agree that within ten (10) days following
the execution of this Agreement, they shall exchange original signature
pages.
6. Arbitration. All disputes, controversies, or differences between client,
consultant, or any of their officers, directors, legal representatives,
attorneys, accountants, agents or employees, or any customer or other
person or entity, arising out of, in connection with or as a result of
this agreement, shall be resolved through arbitration rather than through
litigation. With respect to the arbitration of any dispute, the
undersigned hereby acknowledge and agree that:
A. Arbitration is final and binding on the parties;
B. The parties waive their right to seek remedy in court, including their
right to jury trial;
C. Pre-arbitration discovery is generally more limited and different from
court proceeding;
D. The arbitrator's award is not required to include factual findings or
legal reasoning and any party's right of appeal or to seek
modification of ruling by the arbitrators is strictly limited;
E. This arbitration provision is specifically intended to include any and
all statutory claims which might be asserted by any party;
F. Each party hereby agrees to submit the dispute for resolution to the
American Arbitration Association in Orange County, California
within five (5) days after receiving a written request to do so
from the other party;
G. If either party fails to submit the dispute to arbitration on request,
then the requesting party may commence an arbitration proceeding,
but is under no obligation to do so;
H. Any hearing scheduled after an arbitration is initialed shall take place
in the City of Irvine, Orange County, California;
I. If either party shall institute a court proceeding in an effort to
resist arbitration and be unsuccessful in resisting arbitration or
shall unsuccessfully contest the jurisdiction of any arbitration
forum located in the City of Irvine, Orange County, California,
over any matter which is the subject of this agreement, the
prevailing party shall be entitled to recover from the losing party
its legal fees and any out-of-pocket expenses incurred in
connection with the defense of such legal proceeding or its efforts
to enforce its rights to arbitration as provided for herein;
J. The parties shall accept the decision of any award as being final and
conclusive and agree to abide thereby;
K. Any decision may be filed with any court as a basis for judgment and
execution for collection.
7. Term/Termination. This Agreement is an agreement for the term of three (3)
months ending November 27, 2002 and is effective as of the date first
written above. Should Consultant achieve the intended goals of this
agreement as outlined in Section 1.1, Client agrees that, in good faith,
it will consider an extension of this agreement with Consultant.
8. Representations, Warrants and Covenants. The Client represents,
---------------------------------------
warrants and covenants to the Consultant as follows:
The Client has the full authority, right, power and legal capacity to
enter into this Agreement and to consummate the transactions which are
provided for herein. The execution of this Agreement by the Client and its
delivery to the Consultant, and the consummation by it of the transactions
which are contemplated herein have been duly approved and authorized by
all necessary action by the Client's Board of Directors and no further
authorization shall be necessary on the part of the Client for the
performance and consummation by the Client of the transactions which are
contemplated by this Agreement.
The business and operations of the Client have been and are being
conducted in all material respects in accordance with all applicable laws,
rules and regulations of all authorities which affect the Client or its
properties, assets, businesses or prospects. The performance of this
Agreement shall not result in any breach of, or constitute a default
under, or result in the imposition of any lien or encumbrance upon any
property of the Client or cause acceleration under any arrangement,
agreement or other instrument to which the Client is a party or by which
any of its assets are bound. The Client has performed in all respects all
of its obligations which are, as of the date of this Agreement, required
to be performed by it pursuant to the terms of any such agreement,
contract or commitment.
9. Non-Circumvention. In and for valuable consideration, Client hereby
-----------------
agrees that Consultant may introduce (whether by written, oral, data, or
other form of communication) Client to one or more opportunities,
including, without limitation, natural persons, corporations, limited
liability companies, partnerships, unincorporated businesses, sole
proprietorships and similar entities (hereinafter an "Opportunity" or
"Opportunities"). Client further acknowledges and agrees that the
identity of the subject Opportunities, and all other information
concerning an Opportunity (including without limitation, all mailing
information, phone and fax numbers, email addresses and other contact
information) introduced hereunder are the property of Consultant, and
shall be treated as confidential and proprietary information by Client,
it affiliates, officers, directors, shareholders, employees, agents,
representatives, successors and assigns. Client shall not use such
information, except in the context of any arrangement with Consultant in
which Consultant is directly and actively involved, and never without
Consultant' prior written approval. Client further agrees that neither
it nor its employees, affiliates or assigns, shall enter into, or
otherwise arrange (either for it/him/herself, or any other person or
entity) any business relationship, contact any person regarding such
Opportunity, either directly or indirectly, or any of its affiliates, or
accept any compensation or advantage in relation to such Opportunity
except as directly though Consultant, without the prior written approval
of Consultant. Consultant are relying on Client's assent to these terms
and their intent to be bound by the terms by evidence of their
signature. Without Client's signed assent to these terms, Consultant
would not introduce any Opportunity or disclose any confidential
information to Client as herein described.
10. Notices. Any notice or other communication required or permitted hereunder
must be in writing and sent by either (i) certified mail, postage prepaid,
return receipt requested and First Class mail; or (ii) overnight delivery
with confirmation of delivery; or (iii) facsimile transmission with an
original mailed by first class mail, postage prepaid, addressed as
follows:
To the Client: To the Consultant:
Attn: William H. Critchfield, Attn: Bradley J. Wilhite,
CFO Managing Director
Corgenix Medical Corporation Ascendiant Capital Group, Inc.
12061 Tejon Street 18881 Von Karman - Ste 1600
Westminster, CO 80234 Irvine, CA 92612
Facsimile No.: (303) 457-4519 Facsimile: (949) 756-1090
or in each case to such other address and facsimile number as shall have
last been furnished by like notice. If mailing is impossible due to an
absence of postal service, and other methods of sending notice are not
otherwise available, notice shall be hand-delivered to the aforesaid
addresses. Each notice or communication shall be deemed to have been given
as of the date so mailed or delivered, as the case may be; provided,
however, that any notice sent by facsimile shall be deemed to have been
given as of the date sent by facsimile if a copy of such notice is also
mailed by first class mail on the date sent by facsimile; if the date of
mailing is not the same as the date of sending by facsimile, then the date
of mailing by first class mail shall be deemed to be the date upon which
notice given.
11. Counterparts. This Agreement may be executed simultaneously in one or
------------
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
12. Preliminary Statement. The Preliminary Statement is incorporated herein
----------------------
by this reference and made a material part of this Agreement.
*** SIGNATURES FOLLOW ***
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed, all as of the day and year first above written.
CLIENT: CONSULTANT:
Corgenix Medical Corporation (CONX) Ascendiant Capital Group, Inc.
--------------------------------- ---------------------------------
Name Bradley J. Wilhite,
Its: _____________________________ Its Managing Director
Date: ___________________________ Date:
-----------------------------
Consent of Independent Auditors
The Board of Directors
Corgenix Medical Corporation
We consent to incorporation by reference in the registration statements on Form
S-8 of Corgenix Medical Corporation of our report dated August 15, 2002,
relating to the balance sheets of Corgenix UK Limited as of June 30, 2002 and
2001, and the related financial statements for each of the years in the two-year
period ended June 30, 2002, and all related schedules, which reports appears in
the June 30, 2002, annual report on Form 10-KSB of Corgenix Medical Corporation.
SR HOWELL & CO
Ramsey, UK
August 21, 2002
Consent of Independent Auditors
The Board of Directors
Corgenix Medical Corporation:
We consent to incorporation by reference in the registration statements (Nos.
333-55682 and 333-69775) on Form S-8 of Corgenix Medical Corporation of our
report dated August 23, 2002, with respect to the consolidated balance sheets of
Corgenix Medical Corporation and subsidiaries as of June 30, 2002 and 2001, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity (deficit) and cash flows for the years then ended, which
reports appears in the June 30, 2002, annual report on Form 10-KSB of Corgenix
Medical Corporation.
KPMG LLP
Denver, Colorado
September 19, 2002
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2002 and 2001
(With Independent Auditors' Report Thereon)
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 2002 and 2001 F-2
Consolidated Statements of Operations and Comprehensive
Income for the years ended June 30, 2002 and 2001 F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended June 30, 2002 and 2001 F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6
F-3
Independent Auditors' Report
The Board of Directors
Corgenix Medical Corporation:
We have audited the accompanying consolidated balance sheets of Corgenix Medical
Corporation and subsidiaries (Company) as of June 30, 2002 and 2001, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity (deficit) and cash flows for each of the years in the
two-year period ended June 30, 2002. 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
did not audit the financial statements of Corgenix UK Limited, a wholly-owned
subsidiary, as of and for the years ended June 30, 2002 and 2001, which
statements reflect total assets constituting 14 percent and 14 percent and net
sales constituting 25 percent and 24 percent, respectively, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Corgenix UK Limited, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Corgenix Medical Corporation and
subsidiaries as of June 30, 2002 and 2001, and the results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Denver, Colorado
August 23, 2002
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and 2001
Assets 2002 2001
----------- -----------
Current assets:
Cash and cash equivalents $ 164,378 320,140
Accounts receivable, less allowance for
doubtful accounts of $30,000 and
$14,000 694,394 585,704
Inventories 665,305 556,521
Prepaid expenses 88,916 13,612
----------- -----------
Total current assets 1,612,993 1,475,977
----------- -----------
Equipment:
Capitalized software costs 113,261 595,921
Machinery and laboratory equipment 513,698 353,549
Furniture, fixtures and office equipment 448,743 414,710
----------- -----------
1,075,702 1,364,180
Accumulated depreciation and amortization (642,285) (551,393)
----------- -----------
Net equipment 433,417 812,787
----------- -----------
Intangible assets:
Patents, net of accumulated amortization
of $870,482 and $795,986 247,062 321,558
Goodwill, net of accumulated amortization 13,677
----------
of $44,979 and $41,067 17,589
---------------------
260,739 339,147
----------- -----------
Due from officer 12,000 12,000
Other assets 9,686 65,179
----------- -----------
Total assets $ 2,328,835 2,705,090
=========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current portion of notes payable $ 357,672 188,998
Current portion of capital lease
obligations 92,554 31,186
Accounts payable 553,505 746,642
Accrued payroll and related liabilities 118,155 141,528
Accrued interest 98,764 82,689
Accrued liabilities 24,938 74,877
---------- -------
Total current liabilities 1,245,588 1,265,920
Notes payable, less current portion 502,611 618,370
Capital lease obligation, less current
portion 99,898 49,378
----------- -----------
Total liabilities 1,848,097 1,933,668
----------- -----------
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 40,000,000 and 20,000,000
shares in 2002 and 2001, respectively;
issued and outstanding 4,333,095
and 4,077,290 shares in 2002 and 2001,
respectively 4,333 4,077
Additional paid-in capital 4,695,392 4,475,563
Accumulated deficit (4,250,915) (3,736,486)
Accumulated other comprehensive income 31,928 28,267
----------- -----------
Total stockholders' equity (deficit) 480,738 771,421
----------- -----------
Commitments and contingencies
Total liabilities and stockholders'
equity (deficit) $2,328,835 2,705,089
=========== ===========
See accompanying notes to consolidated financial statements.
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
Years ended June 30, 2002 and 2001
2002 2001
----------- -----------
Net sales $ 4,857,682 4,307,578
Cost of sales 1,770,543 1,640,958
----------- -----------
Gross profit 3,087,139 2,666,620
Operating expenses:
Selling and marketing 1,061,615 756,560
Research and development 566,421 322,266
General and administrative 1,205,480 1,115,562
Amortization and abandonment of
consumer healthcare business
assets (note 10) 624,145 29,476
3,457,661 2,223,864
----------- -----------
Operating income (loss) ( 370,522) 442,756
----------- -----------
Other expense -
Interest expense (143,907) (128,906)
----------- -----------
(143,907) (128,906)
----------- -----------
Income (loss) before income taxes (514,429) 313,851
Income tax expense -- 17,689
----------- -----------
Net income (loss) $ (514,429) 296,162
=========== ===========
Net income (loss) per share basic and
diluted $ (0.12) 0.08
=========== ===========
Weighted average shares outstanding - basic $ 4,284,997 3,664,594
=========== ===========
Weighted average shares outstanding -
diluted $ 4,284,997 3,687,477
=========== ===========
Net income (loss) $ (514,429) 296,162
Other comprehensive income -
foreign currency translation gain 3,661 15,406
----------- -----------
Total comprehensive income $(510,768) 311,568
=========== ===========
See accompanying notes to consolidated financial statements.
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended June 30, 2002 and 2001
Common Accumulated Total
stock, Additional other stockholders'
$0.001 paid-in Accumulated comprehensive Equity
Par Capital deficit income (deficit)
------------------------------------------------------------
Balance at
June 30, 2000 $ 3,483 3,972,832 (4,032,648) 12,861 (43,472)
Issuance of common
stock in
connection with
private placement
(net of offering
costs of $20,863) 566 474,804 -- -- 475,370
Issuance of common
stock for services 28 18,255 -- -- 18,283
Issuance of warrants
for services -- 6,892 -- -- 6,892
Issuance of stock
options for services -- 2,780 -- -- 2,780
Foreign currency
translation -- -- -- 15,406 15,406
Net income -- -- 296,162 -- 296,162
------ ------ ---------- ------ --------
Balance at
June 30, 2001 $ 4,077 4,475,563 (3,736,486) 28,267 771,421
Issuance of common
stock in connection
with private placement
(net of offering costs
of $27,158) 237 180,765 -- -- 181,002
Issuance of common
stock for services 19 17,601 -- -- 17,620
Issuance of warrants
for services -- 21,463 -- -- 21,463
Foreign currency
translation -- -- -- 3,661 3,661
Net loss -- -- (514,429) -- (514,429)
--------- ------ ---------- -------- ----------
Balances at
June 30, 2002 $ 4,333 4,695,392 (4,250,915) 31,928 480,738
========= ========== ============ ======= ==========
See accompanying notes to consolidated financial statements.
F-5
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 2002 and 2001
2002 2001
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (514,429) 296,162
Adjustments to reconcile income (loss) to net
cash provided by (used in)
operating activities:
Depreciation and amortization 351,387 160,029
Equity instruments issued for services 39,083 27,955
Loss on disposal of assets related to
consumer healthcare business 413,834 --
Changes in operating assets and liabilities
of continuing operations:
Accounts receivable, net (108,690) 30,310
Inventories (108,784) (4,439)
Prepaid expenses and other assets (19,811) (59,562)
Accounts payable (193,137) (134,265)
Accrued payroll and related liabilities (23,373) 16,365
Accrued liabilities, including accrued
interest- (33,864) (135,071)
---------- --------
Net cash provided by (used in)
operating activities (197,784) 197,484
---------- ----------
Cash flows used in investing activities
Additions to equipment (125,910) (231,559)
Cash flows from financing activities:
Proceeds from issuance of common stock 208,160 496,233
Proceeds from issuance of notes payable 278,659 --
Payments on notes payable (225,744) (141,927)
Payments on capital lease obligations (69,646) (24,909)
Payment for costs of issuance of common stock (27,158) (20,863)
---------- ----------
Net cash provided by financing
ctivities 164,271 308,534
---------- ----------
Net increase (decrease) in cash and
cash equivalents (159,423) 274,459
Impact of foreign currency translation adjustment
on cash 3,661 (1,017)
Cash and cash equivalents at beginning of year 320,140 46,698
---------- ----------
Cash and cash equivalents at end of year $ 164,378 320,140
========== ==========
Supplemental cash flow disclosures:
Cash paid for interest $ 101,407 123,979
========== ==========
Cash paid for income taxes $ -- 8,000
========== ==========
Noncash investing and financing activity -
Equipment acquired under capital leases $ 181,534 29,617
========== ==========
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies
(a) Business and Basis of Presentation
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).
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 corporate office and manufacturing facility
are located in Westminster, Colorado.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Corgenix, Inc. and Corgenix
(UK) Limited ("Corgenix UK") and healthoutfitters.com, Inc. ("Ho.com").
Corgenix UK was established as a United Kingdom company during 1996 to
market the Company's products in Europe. Transactions are generally
denominated in US dollars. Ho.com managed an Internet-based healthcare
business. The e-commerce internet site, www.sports-n-fitness.com became
operational in the quarter ended June 30, 2001. The site was a
consumer-focused interactive site including healthcare-related products
available for convenient purchase and delivery and links to numerous
other healthcare information sites. In June 2002, the Company determined
that its consumer healthcare business and associated operations via
consumer websites were not strategic to the Company's ongoing objectives
therefore, the Company decided to discontinue capital and human resource
investment in this business. Concurrent with this decision, the Company
abandoned the assets related to said consumer healthcare business (see
note 10).
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of Corgenix Medical `Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
(d) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
(e) Inventories
Inventories are recorded at the lower of cost or market, using the
first-in, first-out method. A provision is recorded to reduce excess and
obsolete inventories to their estimated net realizable value, when
necessary. No such provision was recorded as of and for the two years
ended June 30, 2002. Components of inventories as of June 30, are as
follows:
2002 2001
---------- -----------
Raw materials $ 179,110 142,585
Work-in-process 223,112 216,345
Finished goods 263,083 201,071
---------- -----------
$ 665,305 556,521
========== ===========
(f) Equipment and Software
Equipment and software are recorded at cost. Equipment under capital
leases is recorded initially at the present value of the minimum lease
payments. Depreciation and amortization expense, which totaled $351,387
and $160,029 for the years ended June 30, 2002 and 2001, respectively,
is calculated primarily using the straight-line method over the
estimated useful lives of the respective assets which range from 3 to 7
years. In the fourth quarter of fiscal 2001, the Company established an
internet based consumer healthcare business which consisted primarily of
an e-commerce internet site for selling medical and health products
directly to consumers. Direct internal and external costs of developing
the software, other than initial design, were capitalized and began to
be amortized on the straight-line method over three years starting in
fiscal year 2002. Said amortization for the fiscal year 2002 amounted to
approximately $182,000. See note (10) below, for a discussion regarding
the abandonment and closure of the Company's internet-based consumer
healthcare business.
In the quarter ended December 31, 2001, the Company began development of
a business-to-business web site (Corgenix On Line) for its core business
reference laboratory and hospital customers and potential customers
worldwide. The website, when completed, will allow customers to place
orders for the Company's diagnostic products, pay for said orders, and
track the status of such orders. It will also give full specifications
and details on all of the Company's diagnostic test kits. As was the
case in the paragraph above, the direct internal and external costs of
developing the related software, other than initial design and other
costs incurred during the preliminary project stage, have been
capitalized and will continue to be capitalized until the software has
been completed. Such capitalized amounts, $113,261 as of June 30, 2002,
will be amortized commencing when the website is placed in service on a
straight line basis over a three-year period.
(g) Intangible Assets
Intangible assets consist of purchased patents and goodwill, which are
amortized using the straight-line method over the shorter of 15 years or
the remaining life of the patent.
The Company is required to adopt the provisions of FASB Statement No.
142, Goodwill and Other Intangible Assets (SFAS No. 142) on July 1,
2002. Goodwill and certain identifiable intangible assets with
indefinite lives will not be amortized under SFAS No. 142, but instead
will be reviewed for impairment at least annually in accordance with
the provisions of this
statement. Identifiable intangibles with finite lives will continue to
be amortized over their estimated useful lives.
(h) Advertising Costs
Advertising costs are expensed when incurred. Advertising costs included
in selling and marketing expenses totaled $39,779 and $17,600 in fiscal
2002 and 2001, respectively. Advertising costs included in operating
expenses of the consumer healthcare business totaled $14,808 and $5,285
in fiscal 2002 and 2001, respectively.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for net operating
loss and other credit carryforwards and 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 the
tax effect of transactions are expected to be realized. 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.
Deferred tax assets are reduced by a valuation allowance for the portion
of such assets for which it is more likely than not the amount will not
be realized. Deferred tax assets and liabilities are classified as
current or noncurrent based on the classification of the underlying
asset or liability giving rise to the temporary difference or the
expected date of utilization of the carryforwards.
(j) Revenue Recognition
Revenue is recognized upon shipment of products. Sales discounts and
allowances are recorded at the time product sales are recognized and are
offset against sales revenue.
(k) Research and Development
Research and development costs and any costs associated with internally
developed patents, formulas or other proprietary technology are expensed
as incurred. Research and development expense for the years ended June
30, 2002 and 2001 totaled $566,421 and $322,266, respectively.
(l) Long-Lived Assets
The Company reviews long-lived assets, including intangibles 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.
(m) Stock-Based Compensation
The Company accounts for its stock plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise
price. Statement of Financial Accounting Standards No. 123 (SFAS No.
123), Accounting for Stock-Based Compensation, permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income disclosures for
employee stock option grants as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
(n) Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average
number of common shares outstanding increased for potentially dilutive
common shares outstanding during the period. The dilutive effect of
stock options and their equivalents is calculated using the treasury
stock method. In fiscal 2002, options and warrants to purchase common
stock totaling 36,669 and 10,465 shares respectively, are not included
in the calculation of weighted average common shares-diluted below as
their effect is anti-dilutive.
2002 2001
----------- -----------
-----------
Net income (loss) $ (514,429) 296,162
----------- -----------
----------- -----------
Common and common equivalent shares outstanding:
Historical common shares
outstanding at beginning of
year 4,077,290 3,483,312
Weighted average common
equivalent shares issued
during year 207,707 181,282
----------- -----------
Weighted average common
shares - basic 4,284,997 3,664,594
Weighted average common
equivalent shares issued
during the year -- 22,883
----------- -----------
Weighted average common
shares - diluted 4,284,997 3,687,477
=========== ===========
Net income (loss) per share -
basic and diluted $ (.12) .08
=========== ===========
(o) The Company has recorded contingent stock purchase warrants in
accordance with Emerging Issues Task Force Bulletin 96-18: Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. At the
grant date, the minimum number of warrants which may eventually be
issued are recorded at their fair value, which is adjusted in subsequent
periods for revisions of the minimum number of warrants to be issued and
the then current fair value of the warrants.
(p) Reclassifications
Certain 2001 amounts have been reclassified to conform to the 2002
presentation.
(q) Foreign Currency Transactions
The accounts of the Company's foreign subsidiary are generally measured
using the local currency as the functional currency. For those
operations, assets and liabilities are translated
into U.S. dollars at period-end exchange rates. Income and expense
accounts are tanslated at average monthly exchange rates. Net exchange
gains or losses resulting from such translation are excluded from
results of operations and accumulated as a separate component of
stockholders' equity. Gains and losses from foreign currency
transactions are included in other income (expense).
(2) Notes Payable
Certain of the notes payable restrict the payment of dividends on the
Company's common stock. Notes payable consist of the following at June 30,
2002 and 2001:
2002 2001
---------- ----------
Note payable to a bank, with interest
at prime plus 2.75% (7.50% at June 30,
2002), due in monthly installments of
principal and interest of $14,415
through January $ 2007, collateralized
by commercial security agreements
and a key man life insurance policy. 615,324 718,750
Note payable to an officer, unsecured,
with interest at 8%, due in
monthly installments of principal
and interest of $5,868 through
September 2002. 17,373 --
Revolving credit agreement with a
bank whereby Corgenix can borrow up
to $300,000 based upon a borrowing
base of 70% of eligible accounts
receivable, collateralized by said
eligible accounts receivable, (limited to
approximately $275,000 at June 30, 2002)
with interest at prime
plus 2%, maturing in February 2003. 75,000 --
Note payable to an officer, unsecured,
with interest at 8%, due in monthly
installments of principal and interest
of 4,004 pound sterling (approximately
$6,100 at June 30, 2002)
through October 2003. 90,812 --
Notes payable, unsecured, to former
preferred stockholders, with
interest at 12%, due on demand. 61,774 80,618
Note payable, uncollateralized and
unsecured, with interest at prime
plus 3%, due on demand -- 8,000
---------- ----------
860,283 807,368
Less current portion (357,672) (188,998)
---------- ----------
Notes payable, excluding
current portion $ 502,611 618,370
========== ==========
Aggregate maturities of notes payable by year as of June 30, 2002, are as
follows:
Years ending June 30:
2003 $ 357,672
2004 124,579
2005 134,250
2006 144,672
2007 99,110
Thereafter --
-----------
$ 860,283
===========
The carrying values of notes payable approximate fair value based on their
terms and floating market based interest rates.
(3) Stock Compensation and Stock Purchase Plan
Effective January 1, 1999, the Company adopted an Employee Stock Purchase
Plan to provide eligible employees an opportunity to purchase shares of its
common stock through payroll deductions, up to 10% of eligible compensation.
The plan is registered under Section 423 of the Internal Revenue Code of
1986. Each quarter, participant account balances are used to purchase shares
of stock at the lesser of 85% of the fair value of shares on the first
business day (grant date) and last business day (exercise date) of each
quarter. No right to purchase shares shall be granted if, immediately after
the grant, the employee would own stock aggregating 5% or more of the total
combined voting power or value of all classes of stock. A total of 60,000
common shares were registered with the Securities and Exchange Commission
(SEC) for purchase under the plan. There were 16,744 and 24,616 shares
issued under the plan during fiscal years 2002 and 2001, respectively.
During September 2002, the Company determined that it had inadvertently
issued and registered more common stock under this plan than had heretofore
been authorized by shareholders of the Company. The Company intends to amend
this plan and rectify the situation through a shareholder vote at the
upcoming annual shareholders meeting to be held on December 11, 2002.
Compensation expense is recognized for the fair value of the employee's
purchase rights. Compensation expense recognized for the 15% discount on
shares purchased under this plan amounted to $2,646 and $2,129 in fiscal
2002 and 2001, respectively.
Effective January 1, 1999, the Company adopted a Stock Compensation Plan to
provide executive officers an opportunity to be awarded shares of its common
stock in lieu of cash compensation for services rendered. Each quarter
("award period"), the officers may be awarded shares of stock at the lesser
of the fair value of shares on the beginning or end of each quarter. The
Stock Compensation Plan expired on December 31, 2000. A total of 90,000
common shares were registered for distribution under the plan. No shares
were issued under the plan during fiscal 2002 and 2001. Thus, no
compensation expense was recognized for the fair value of the executive
officers' purchase rights in either of those two years.
In October 1999 and July 2000 the Company reserved a total of 200,000 shares
of its common stock for an incentive stock option plan (Plan) for employees,
directors and consultants. Options are granted at the discretion of the
board of directors with an exercise price equal to or greater than the
market value of the Company's common stock on the grant date. The Company
intends to adopt a new 2002 Incentive Stock Option Plan, subject to
shareholder vote, at the annual shareholders meeting to be held on December
11, 2002.
Detail of stock option activity for the two-year period ended June 30, 2002
is as follows:
Number of Range of Weighted average
exercise exercise
shares prices price
----------- ------------ -----------
Outstanding at June 30,2000 (1) 23,549 $ .682-3.28 $ 1.534
Granted-at market price 115,500 0.625-0.80 0.742
Granted-at greater than 6,400 1.375 1.375
market price
Canceled (1,200) 3.28 3.28
======
Outstanding at June 30, 144,249 0.625 - .80 0.878
2001 (1)
Exercised -- -- --
Canceled (38,400) .625 .625
====== ======
Outstanding at June 30, 105,849 0.625-3.28 .970
2002 (1)
Options exercisable at 5,869 0.68
June 30, 2000 =====
Options exercisable at 20,549 1.247
June 30, 2001 ======
Options exercisable at 53,182
June 30, 2002 ====== 1.00
(1) Includes 5,869 in warrants granted to an employee in June 2000
The following table summarizes information about stock options issued to
employees and directors that are outstanding at June 30, 2002:
Exercisable
Outstanding options options
-----------------------------------------------------------------
-----------------------------------------------------------------
Weighted
Range average Weighted Weighted
of remaining average average
exercise contractual exercise exercise
price Number life price Number price
--------- --------- --------- ------- --------- --------
--------- --------- --------- ------- --------- --------
$ 0.625 - 1.375 102,249 5.2 $0.842 50,582 $0.886
3.28 3,600 4.7 3.28 2,600 3.28
--------- --------- ------- --------- --------
105,849 5.2 0.925 53,182 $1.00
======= ======
Had the Company determined compensation cost based on the fair value at the
date of grant for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated as
follows:
2002 2001
----------- ---------
----------- ---------
Net income (loss) as reported $ (514,429) 296,162
Net income pro forma (543,175) 254,060
Net income (loss) per share as reported (0.12) 0.08
Net income per share pro forma (0.12) 0.07
Fair value was determined using the Black Scholes option - pricing model
with the following assumptions: no expected dividends, volatility of 186%,
risk-free interest rate of 3.29% and expected lives of seven years. The
weighted average fair value per option of options granted during the years
ended June 30, 2002 and 2001 was $0.80 and $2.85, respectively.
(4) Commitments and Contingencies
(a) Leases
The Company is obligated under various noncancelable operating and
capital 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 leases, with initial or remaining terms in
excess of one year, as of June 30, 2002, are as follows:
Capital Operating
leases leases
--------- --------
Years ending June 30:
2003 $ 109,780 153,077
2004 79,633 152,849
2005 29,399 156,453
2006 -- 162,086
2007 -- 29,014
--------- --------
Total future minimum capital 218,812 653,479
lease payments ======== ========
Less amounts representing interest 26,360
---------
Present value of minimum capital 192,452
lease payments
Less current portion 92,554
---------
Capital lease $ 99,898
obligations less current portion =========
Rent expense totaled $161,000 and $123,000 for the years ended June 30,
2002 and 2001, respectively.
(b) 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 by the Company
should the employees terminate their employment with or without cause.
(c) Warrants
On April 12, 2001, the Company issued warrants to purchase 225,000
shares of common stock of Corgenix to a consultant to the Company. The
warrants were issued in exchange for financial advisory and investment
banking services to be provided to the Company. Warrants to purchase
45,000 shares vested ratably over the first year. The remaining 135,000
warrants were to vest only if defined future events occur. The service
agreement and the remainder of the warrants were terminated by the
Company in October 2001. None of the additional warrants had vested at
the time of the termination. The warrants were issued in the form of
four separate three-year common stock purchase warrants to purchase an
aggregate 180,000 shares of Corgenix common stock at an exercise price
of $1.25 per share with customary anti-dilution and "cashless" exercise
provisions and certain stock price performance goals. The warrants were
issued with a purchase price of $.001 per warrant for aggregate
consideration of $900. The warrants may be assigned to third parties by
the consultant with the prior consent of Corgenix.
In March 2002, the Company issued warrants to purchase 200,000 shares of
its common stock for aggregate proceeds of $200 at exercise prices
ranging from $1.00 to $1.75 per share to a consultant to the Company.
The warrants vest in blocks of 50,000 warrants at the various exercise
prices if and when the Company's common stock trades at prices ranging
from $1.25 to $2.00 for ten continuous trading days each. The service
agreement and the warrants were terminated in August 2002. No warrants
had vested at the time of the termination.
All of the above warrants were issued in reliance upon the exemption
from the registration requirements of the Securities Act of 1933, as
amended, provided by Section 4 (2) of the Securities Act.
(5) Stockholders' Equity (Deficit)
On January 15, 2002, the Company effected a one-for-five reverse stock split
of the Company's common stock, effective for stockholders of record as
January 14, 2002. The reverse stock split reduced the number of shares
outstanding to 4,327,899 from 35,672,101 for stockholders of record as of
January 14, 2002. All share data included in this report has been
retroactively restated to reflect the reverse stock split.
(6) Income Taxes
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the
following:
2002 2001
----------- ----------
----------
Computed expected tax expense $ (180,050) 106,709
Reduction (increase) in income taxes
resulting from:
Permanent differences (13,751) (40,000)
Impact of foreign loss not
deductible in the United States -- 40,000
Change in valuation allowance 181,543 (89,020)
Other 12,258 --
----------- ----------
$ -- 17,689
=========== ==========
At June 30, 2002, the Company has a net operating loss carryforward for
income tax purposes of approximately $1,813,000 expiring during the period
from 2012 to 2022. Research and experimentation tax credit carryforwards
approximate $285,000. The future utilization of the operating loss
carryforwards or the time period in which the carryforwards may be utilized
could be limited if certain historical stockholders of REAADS sell their
shares within two years of the purchase of Gray Wolf. The utilization of net
operating losses may also be limited due to a change in ownership under
Internal Revenue Code Section 382.
As of June 30, 2002, the Company had a gross deferred tax asset of
approximately $1,056,000 relating primarily to the Company's net operating
losses and research and experimentation credit carryforwards. A valuation
allowance in the amount of the deferred tax asset has been recorded due to
management's determination that it is not more likely than not that the tax
assets will be utilized.
(7) Related Party Transactions
The Company has entered into product development, manufacturing and
distribution agreements with Chugai Diagnostic Science Company, Ltd.
(Chugai), which provide certain rights for Chugai to distribute the
Company's products in Japan. Chugai is a stockholder who formerly held
greater than 5% of the outstanding common stock of the Company and had
rights to a seat on the Company's Board of Directors. Accordingly, Chugai is
no longer considered a related party.
Amounts due from an officer are due upon demand, and do not bear interest.
Amounts due to an officer, pursuant to two notes payable, are due in monthly
installments through October 2003 and bear interest at 8% and prime plus 2%,
respectively, and are described in note 2 above.
(8) Concentration of Credit Risk
The Company's customers are principally located in the United States,
although there are a few significant 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 15% and
12% of sales in the years ended June 30, 2002 and 2001, respectively, and
approximately 8% and 10% of accounts receivable at June 30, 2002 and 2001,
respectively.
(9) Reportable Segments
The Company has two segments of business, domestic and international
operations. International operations primarily transacts sales with
customers in the United Kingdom and Europe, while domestic operations
transact all other sales. Sales to Chugai, emanating from the United States,
have historically been included in the domestic business segment. The
following table sets forth selected financial data for these segments for
the years ended June 30, 2002 and 2001.
Year ended June 30, 2002
----------------------------------
Domestic International Total
---------- ---------- ----------
Net sales - external $ 4,265,167 1,191,544 5,456,711
customers
Net sales - intercompany (599,029) -- (599,029)
---------- ---------- ----------
---------- ----------
Total net sales $ 3,666,138 1,191,544 4,857,682
Depreciation and 351,387
amortization $ 350,251 1,136
Interest expense $ 117,483 26,424 143,907
Net income (loss) $ (839,307) 324,878 (514,429)
Segment assets $ 2,000,426 328,409 2,328,835
Year ended June 30, 2001
----------------------------------
Domestic International Total
---------- ---------- ---------
Net sales - external 3,698,712 997,743 4,696,455
customers $
Net sales - internal (466,743)
customers (466,743) --
---------- ---------- ---------
Total net sales $ 3,231,969 997,743 4,229,712
Depreciation and 160,029
amortization $ 158,893 1,846
Interest expense $ 108,585 20,321 128,906
Net income (loss) $ 141,140 155,022 296,162
Segment assets $ 2,322,239 382,851 2,705,090
--------- ------- ---------
(10) Consumer Healthcare Business
At June 30, 2002, the Company decided to abandon and close its
internet-based consumer healthcare business and all related e-commerce sites
managed and operated by its wholly owned subsidiary, health-outfitters.com,
Inc. ("Ho.com"). The results of Ho.com's operations have been included in
continuing operations in the consolidated statements of operations for the
fiscal years ended June 30, 2002 and 2001. Subsequent to June 30, 2002, the
Company has redeployed the office space and employees formerly involved in
the consumer healthcare business into its core business. The costs of office
space, personnel and other recurring costs attributable to Ho.com totaled
$188,617 and $238,582 during the years ended June 30, 2002 and 2001,
respectively, and are included in operating expenses. As a consequence, the
operating expenses of the consumer healthcare business for the fiscal year
ended June 30, 2002 contain the following recurring and non-recurring
components.
Net sales related to the consumer healthcare business were $10,388 and $24
during the years ended June 30, 2002 and 2001, respectively. The operating
expenses of the consumer healthcare business that will not recur consist
primarily of the amortization of capitalized software costs, and direct
advertising and marketing-related costs.
At June 30, 2002 the company abandoned all assets related to Ho.com. Assets
abandoned totaled $413,834 and consisted of unamortized capitalized software
costs. In addition, amortization of $182,087 was recorded on such assets
during the year ended June 30, 2002. No comparable amortization was recorded
during the year ended June 30, 2001.
CERTIFICATION OF PERIODIC REPORT
I, Luis R. Lopez, Chief Executive Officer and William H. Critchfield, Chief
Financial Officer of Corgenix Medical Corporation, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-KSB of the Company for the fiscal year ended
June 30, 2002 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Dated: September 23, 2002
/S/Luis R. Lopez
------------------------
Luis R. Lopez
Chief Executive Officer
/S/William H. Critchfield
--------------------------
William H. Critchfield
Chief Financial Officer
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 20th day of September 2002.
CORGENIX MEDICAL CORPORATION
By: /s/ Luis R. Lopez, M.D.
------------------------
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.
Signatures Title Date
/s/ Luis R. Lopez, M.D. Chairman of the Board, Chief September 23, 2002
-----------------------
Luis R. Lopez, M.D. Executive Officer and Director
(principal executive officer)
/s/ Douglass T. Simpson President and Director September 23, 2002
-----------------------
Douglass T. Simpson
/s/ William H. Critchfield VP and CFO and Accounting Off. September 23, 2002
--------------------------
/s/ Jack W. Payne Director September 23, 2002
---------------------
Jack W. Payne
/s/ Wendell J. Gardner Director September 23, 2002
----------------------
Wendell J. Gardner
/s/ Jun Sasaki Director September 23, 2002
----------------------
Jun Sasaki