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TABLE OF CONTENTS
CORGENIX MEDICAL CORPORATION AND SUBSIDIARIES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended June 30, 2013 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
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Commission File Number 000-24541
CORGENIX MEDICAL CORPORATION
(Name of small business issuer as specified in its charter)
| Nevada (State or other jurisdiction of incorporation or organization) |
93-1223466 (I.R.S. Employer Identification No.) |
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11575 Main Street, Broomfield, Colorado 80020 (Address of principal executive offices) |
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(303) 457-4345
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
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 ý No o
Check if no disclosure of delinquent filers in response to Item 405 of Regulation S-K 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-K or any amendment to this Form 10-K. ý
Check whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No ý
The issuer's revenues for its most recent fiscal year were: $10,187,805
The aggregate market value of the voting stock and non-voting common equity held by non-affiliates of the issuer was $2,687,371 as of June 30, 2013, based on the closing price of $0.10 as reported on the OTCBB on June 30, 2013.
The number of shares of Common Stock outstanding was 50,521,319 as of September 24, 2013.
Transitional Small Business Disclosure Format. Yes o No ý
Forward looking Statements
This Form 10-K 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-K, including, without limitation, statements regarding future product developments, acquisition strategies, strategic partnership expectations, technological developments, the availability of necessary components, research and development programs and distribution plans, are forward looking statements. All forward looking statements included in this Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements, except as required by law. 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.
If our assumptions prove incorrect or should unanticipated circumstances arise, the Company's actual results could differ materially from those anticipated. These differences could be caused by a number of factors or combination of factors including, but not limited to, those factors described in the "Risk Factors" section of this report. Readers are strongly urged to consider such factors when evaluating any forward-looking statement.
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CORGENIX MEDICAL CORPORATION
June 30, 2013
Form 10-K
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Item 1. Description of Business.
Certain terms used in this annual report are defined in the Glossary that follows at the end of Part I.
Company Overview
We are organized as a C corporation, were established in 1990, and our business includes research, development, manufacture, and marketing of in vitro diagnostic ("IVD") products (tested outside the human body) for use in disease detection and diagnosis.
Our revenues are generated from the following:
Most of our products are used in clinical laboratories for the diagnosis and/or the monitoring of three important sectors of health care:
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We are actively developing new laboratory tests in these and other important diagnostic testing areas. See "—Other Strategic Relationships."
We develop and manufacture products in several commonly utilized testing formats:
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 including expanding our Contract Manufacturing and Contract R&D programs. 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 and Corgenix trademarks and trade names in the sale of the products which we manufacture. These products constitute the majority of our product sales.
Recent Developments
The Bank of the West Line of Credit
On August 28, 2013, the Company entered into a Business Loan Agreement (the "Loan Agreement") effective August 15, 2013 between the Company and Bank of the West (the "Bank").
Pursuant to the terms of the Loan Agreement, the Bank is providing a revolving line of credit (the "Line") to the Company not to exceed $1,500,000. Interest accrues at a variable one month LIBOR (currently 0.18%) plus 4.00% per annum. Interest payments are due monthly.
Unless terminated by the Company or accelerated by the Bank in accordance with the terms of the Loan Agreement, the Line will terminate and all loans thereunder must be repaid on November 5, 2014.
The Loan Agreement contains certain representations, warranties, covenants and events of default typical in financings of this type, including, for example, limitations on assuming additional debt, making investments, or the sale of Company assets or other changes in the ownership of the Company.
In addition, pursuant to the terms of the Loan Agreement, the Company will grant to the Bank a security interest in all of the Company's assets to secure the repayment of the loans under the Line and to secure all other obligations of the Company to the Bank.
The Company will use the money it receives under the Loan Agreement for general short term working capital purposes.
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The Loan Agreement and the accompanying Promissory Note were filed as Exhibits 10.1 and 10.2, respectively, to the Current Report on Form 8-K filed on September 4, 2013, and the description of material terms of such documents herein are qualified in their entirety by reference to such exhibits.
The Line will be activated when the notice period to LSQ described below has elapsed and the Bank is able to secure a first lien on the Company's assets.
On August 28, 2013, the Company provided written notice to LSQ, that the Company desires to terminate the Revolving Credit and Security Agreement (the "LSQ Agreement") dated July 14, 2011 between the Company and LSQ. The LSQ Agreement requires 60 days' notice by the Company to LSQ to terminate, and thus the termination will be effective October 27, 2013. Any ancillary agreements and documents entered into in connection with the LSQ Agreement will terminate in connection with the termination of the LSQ Agreement.
Under the LSQ Agreement, LSQ, the lender, provides a line of credit to the Company under which LSQ agreed to make loans to the Company in the maximum principal amount outstanding at any time of $1,500,000. The proceeds of the loans under the line of credit have been used to repay certain loans and other amounts payable by the Company. The LSQ Agreement was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 20, 2011, and the description of material terms of the LSQ Agreement is qualified in its entirety by reference to that exhibit.
The notice states that the Company is not dissatisfied with its relationship with LSQ but desires to pursue other borrowing opportunities.
The Company does not expect to incur any termination penalties as a result of the termination.
The New AtherOx™ Agreement
On July 5, 2013, we filed a Current Report on Form 8-K disclosing that Corgenix Medical Corporation (the "Company") received written notice from legal counsel for Eiji Matsuura, Ph.D. ("Dr. Matsuura") that Dr. Matsuura desired to terminate the Amended and Restated License Agreement dated April 14, 2010 between the Company and Dr. Matsuura (the "Prior License Agreement") because Dr. Matsuura believed the Company breached certain obligations under the Prior License Agreement. We stated that the Company disputed that Dr. Matsuura had sufficient cause for terminating the Prior License Agreement and intended to contest the proposed termination.
Since the Company's receipt of Dr. Matsuura's notice, the Company and Dr. Matsuura have, through discussions, resolved any and all disputes regarding the Prior License Agreement, and Dr. Matsuura retracted his notice of termination and demand for arbitration of disputes. To evidence the terms of the Company's and Dr. Matsuura's joint resolutions and revised arrangement going forward, the parties entered into a new License and Cooperation Agreement (the "New License and Cooperation Agreement"), effective September 4, 2013, which replaces the Prior License Agreement, and the Prior License Agreement is thereby terminated.
As described above, effective September 4, 2013, the Company entered into the New License and Cooperation Agreement with Dr. Matsuura, which amends and restates the Prior License Agreement between the parties. On September 10, 2013, the Company issued a press release announcing its entry into the New License and Cooperation Agreement, a copy of which is filed herewith as Exhibit 99.1. Under the New License and Cooperation Agreement, Dr. Matsuura grants the Company access to certain technology owned by Dr. Matsuura for the determination of oxidized lipoproteins and related analytes, antibodies and antigens to develop human in-vitro diagnostic products to be manufactured and sold by the Company. In consideration for the license, the Company will pay Dr. Matsuura consulting fees and royalty payments in accordance with the terms of the New License and Cooperation Agreement. The New License and Cooperation Agreement will continue in effect until September 29,
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2022, unless terminated earlier in accordance with the terms of the New License and Cooperation Agreement, and may be renewed upon the mutual agreement of the parties.
Industry Overview
In vitro diagnostic, or 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 other point of care sites, and the emerging over-the-counter 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. Most of our products are configured in a Microplate format 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 is continuing to undergo 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. Even given the industry consolidation mentioned above, there continues to be 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:
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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 FDA for the first anti-cardiolipin antibody 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 continue to plan to add products from strategic partners. Our current product menu, commercialized under the trademarks "REAADS" and "Corgenix," includes the following:
Vascular Disease; Antiphospholipid Antibody Testing Products
We manufacture and market eleven products for antiphospholipid antibody testing, which in the fiscal year ended June 30, 2013 represented approximately 49.8% of our total product sales (exclusive of contract manufacturing). These include: aCL IgG, IgA, and IgM; anti-phosphatidylserine ("aPS") IgG, aPS IgA, aPS IgM; anti-ß2-Glycoprotein I ("aß2GPI") IgG, aß2GPI IgA, and aß2GPI IgM; and anti-Prothrombin ("aPT") IgG and IgM.
ELISA technology is typically used to measure the antibodies directed against membrane anionic phospholipids (i.e., negatively charged molecules such as cardiolipin and phosphatidylserine) or their associated plasma proteins, predominantly beta-2 glycoprotein 1). Antiphospholipid antibodies are associated with the presence of both venous and arterial thrombosis (clotting), thrombocytopenia (low platelet count that can result in bleeding), and recurrent miscarriage. These auto antibodies are frequently found in patients with systemic lupus erythematosis (SLE), and other autoimmune diseases, as well as in some individuals with no apparent previous underlying disease.
These antibodies are also found in patients with antiphospholipid syndrome, an important medical condition with serious clinical manifestations such as chronic and recurrent venous (deep vein) thrombosis, as well as arterial thromboembolic disease, including heart attacks, strokes and pulmonary embolism. Thrombocytopenia has been attributed to the temporary removal of platelets from circulation during a thrombotic episode (clot formation).
Vascular Disease: Bleeding/Clotting Risk Factors
We market twenty tests for bleeding and clotting risk factors, which in the fiscal year ended June 30, 2013, represented approximately 20.4% of our total product sales (exclusive of contract manufacturing). We manufacture five products, and market others which are manufactured for us by other companies. Specialized tests include: Protein C Antigen ELISA, Protein S Antigen ELISA, Monoclonal Free Protein S ELISA, von Willebrand Factor Antigen ELISA, von Willebrand Factor Activity Test; abp Ristocetin, and Collagen Binding Assay.
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,
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coagulation cells such as platelets, coagulation factors, lipids (cholesterol) and antibodies (auto antibodies). 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 products that we market.
AspirinWorks
The AspirinWorks® Test Kit is a simple urine test that measures an individual's response to aspirin dosage and allows physicians to adjust the dosage or recommend alternative therapy. AspirinWorks® sales represented approximately 15.0% of our total product sales (exclusive of contract manufacturing) in fiscal 2013. Recent reports indicate that up to 25% of individuals may be non-responsive to aspirin's benefits, and are more than three times more likely to die from heart disease.
Liver Disease Products
We manufacture a test to quantitate hyaluronic acid ("Hyaluronic Acid" or "HA") in a Microplate format which in the fiscal year ended June 30, 2013 represented approximately 13.7% of our total product sales (exclusive of contract manufacturing). 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, particularly Hepatitis C and non alcoholic fatty 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.
Instrumentation
We purchase laboratory ELISA instrumentation from other companies which we then commercialize to our U.S. customers, primarily using reagent rental agreements in which the instrument is bundled together with our diagnostic kits. In order to qualify for these systems, the customers must contractually commit to purchase a minimum number of our products over a set period of time, generally three years. In some cases we sell the instruments outright without encumbering with reagent purchase. For the fiscal year ended June 30, 2013, instrument-related revenues amounted to $386,892.
Technology
Our ELISA application technology was developed to provide the clinical laboratory with a highly 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 auto antibodies 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
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commercial purposes). Our proprietary immunoassay technology is useful in the manufacture of ELISA tests for the detection of many analytes (target molecules) 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 laboratory surveys periodically conducted by unaffiliated entities, and our products routinely demonstrate good performance and/or reproducibility when compared to other manufacturers included in such survey.
Our products typically require less hands-on time by laboratory personnel as compared to most other ELISA assays 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 our 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. We believe that, in addition to internal expertise, most technology and delivery system requirements would be 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.
We also have implemented immunoturbidimetry ("IT") and lateral flow immunoassay platforms ("LFI"). IT is a commonly used laboratory platform which employs antibody coated latex particles. Products configured with this technology are typically performed on automated chemistry analyzers, resulting in more automated capability which is useful when patient testing volumes are relatively high. IT products must be performed in a laboratory setting by trained personnel, and the results obtained are typically quantitative. LFI is a laboratory testing methodology designed for testing of a single patient sample at a time. The LFI platform consists of biological reagents built into a dipstick type configuration to which a patient sample (blood, urine, etc) is applied with qualitative results obtained a matter of a few minutes. While many products using LFI technology are run by trained personnel in laboratory settings, they can also used outside of the laboratory in home or field use by untrained personnel. Most commercial home pregnancy tests use this technology.
Sales and Marketing
We primarily market and sell our diagnostic products to the 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 North America through sales representatives (both employees and independent contractors) and through several small independent distributors. Internationally, our labeled products are sold through our Master Distributor, ELITech, who distributes our products to established diagnostic companies throughout the world We have also established private label product agreements with several U.S. and European companies. For the fiscal year ended June 30, 2013, international core product sales represented approximately 17.4% of the Company's total core product sales.
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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
The manufacturing process for our products utilizes a semi-automated production line for the manufacturing, assembly and packaging of our ELISA Microplate products, our most important platform. Our current production capacity is 28,800 tests per day with a single eight-hour shift. Since 1990, we have successfully produced over 12 million tests in our Colorado facility, and we expect that current manufacturing capability will be sufficient to meet expected customer demand for the foreseeable future.
Our ELISA 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 continue to see increases in the demand for our products and have increased our manufacturing capability to meet this increased demand. 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.
As a result of the Contract R&D collaborations, we are expanding our production operation to manufacture products in other delivery platforms. These include production of products in a Lateral Flow Immunoassay format, and products in an Immunoturbidimetry format. For the fiscal year ended June 30, 2013, sales of products utilizing these additional formats were immaterial.
We have registered our facility with the FDA.
Quality System Regulations 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, or 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 its commitment to maintain excellence. Corgenix received re-certification in November 1999 and 2000, and in July 2002, received EN ISO 9001:1996, and EN ISO 13485:2000 certification through TUV Rhineland of North America. We have been re-certified annually since 2002. In the fiscal year ended June 30, 2013, we certified to ISO 13485:2003.
Corgenix's Manufacturing Process Begins With the Qualification of Raw Materials
Our manufacturing process begins with the qualification of raw materials. The microplates are then coated and bulk solutions prepared. The components and the microplates are checked for their 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.
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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. The components of our products include chemical, biological and packaging supplies that are generally available from several suppliers, except certain antibodies and other critical components, which we purchase 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 most of our components in a timely manner. As noted above, international core product sales represented approximately 17.4% of the Company's total core product sales. International regulatory bodies often establish varying regulations governing product standards, packaging and labeling requirements, import restrictions, tariff regulations, duties and tax requirements. To demonstrate our commitment to quality in the international marketplace, we obtained ISO certification and have "CE" marked all of our products as required by the European In Vitro Diagnostic Directive 98/79/EC.
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.
Strategic Relationships
An integral part of our strategy has been, and will continue to be, entering into strategic alliances as a means of accessing unique technologies or resources or developing specific markets. The primary aspects of our corporate partnering strategy with regards to strategic affiliations include:
The Master Distribution Agreement with ELITech restricts us from entering into new probate level OEM agreements without ELITech's prior written consent. Furthermore, it grants exclusive distribution rights to ELITech for our products outside of North America.
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. 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, manufactures pilot lots of new products, establishes validated methods that can be manufactured consistently, creates documentation required for manufacturing and testing of new products, and collaborates with our quality assurance department to satisfy regulatory requirements and support regulatory clearance. They are responsible for assessing the performance of new technologies
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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 is responsible for design transfer to manufacturing of all new products developed. They assess the performance and validate all externally sourced products in order to confirm that these products meet our performance and quality standards.
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 Broomfield, Colorado headquarters. Group leaders are also skilled in planning and project management under FDA-mandated design control. See "—Regulation."
Research & Development expenses consists primarily of the labor related costs, the cost of clinical studies and travel expenses, laboratory supplies and product testing expenses related to the research and development of new and existing diagnostic products. Since contract R & D and Grant related revenue has now become a more significant aspect of our business, those R & D expenses which are directly related to the generation of specific contract R & D and Grant revenue, have been reclassified out of R & D expense to cost of sales. As a result of this reclassification, only those R & D expenses, not involved in the fulfillment of specific contract R & D and Grant related contracts, are included as R & D expense in the Statement of Operations operating expense section.
Products and Technology in Development
We intend to expand our product menu through internal development, development in collaboration with strategic partners and acquisition and/or licensing of new products and technologies. We are currently working with partners to develop additional tests to supplement the existing product lines. 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. We have been developing products in the area of Oxidized LDL, a technology that assesses arterial thrombosis and atherosclerosis. Our technology, which we have trademarked "AtherOx," has the potential to significantly alter the standard of lipoprotein testing and cardiovascular risk assessment. In the fiscal year ended June 30, 2013, we further advanced the development of the AtherOx technology, focusing on enhanced stability, manufacturing processes and generation of additional clinical data.
Immunoturbidimetry
As part of our Joint Product Development program with ELITech, we are developing a line of immunoturbidimetry products for use with the ELITech clinical chemistry systems. This program includes modification of some of our current products into the new format, as well as development of new innovative tests.
Viruses and Emerging Pathogens
We have established a strategic collaboration with Tulane and other industry and academic partners, to develop a group of products to detect certain viruses identified as potential bio-terrorism agents. The work is primarily being done under various US Government grants and contracts. We are continuing to seek additional opportunities to expand this program to include other infectious agents in various delivery formats.
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Competition
Competition in the human medical diagnostics industry is significant. Our competitors range from development stage diagnostics companies to major domestic and international pharmaceutical and biotechnology 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 remains 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 primary competitors include the Werfin Group, DIASORIN, Diagnostica Stago, Helena Laboratories Corporation (an existing licensee of Corgenix technology), Hemagen Diagnostics, and IVAX Diagnostics (Diamedix). We compete against these companies and others on the basis of product performance, customer service, and price.
Patents, Trade Secrets and Trademarks
The AtherOx Technology Patents. Through a Japanese collaboration, we have exclusive worldwide rights (except Japan) to develop and manufacture, and co-exclusive rights to sell diagnostic products using the unique AtherOx™ technology. In Japan, we have exclusive rights to develop, manufacture and use, but not sell the related products. To date, we have four U.S. patents issued and one European patent issued for the AtherOx technology.
Aspirin Effectiveness Technology Patents. Our Aspirin Works product is covered by three worldwide patents (two in the United States and one in Europe) owned by McMaster University which has granted Corgenix exclusive worldwide rights. The Company and Cayman Chemical Company ("Cayman") have been issued an additional U.S. patent covering this technology.
Patent applications in the U.S. 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 the 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 the fiscal year ended June 30, 2012, 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 and it will expire September 28, 2017, unless renewed. The trademark "Corgenix" was approved in September 2000, has been extended and, if not renewed, will expire in 2021. We have registered the trademark "AtherOx", and it will expire January 8, 2018, unless an affidavit of continuing use is filed at that time. Finally, the Company has filed new applications for registration of the trademarks "ReLASV, ReMARB, ReEBOV, and ReDENV for use in connection with its immunodiagnostic assay medical kits for detecting the presence of immune complexes in body fluids.
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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 60% for the fiscal year ended June 30, 2013 and 60% for the fiscal year ended June 30, 2012, were products that utilized our proprietary technology and were marketed under our REAADS trademark.
Regulation
The testing, manufacturing and sale of our products are subject to regulation by numerous governmental authorities, and 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 limited in our ability to commence marketing or selling any new diagnostic products in the U.S. 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 U.S., medical devices are classified by the FDA into one of three classes (Class I, II or III) on the basis of the controls deemed reasonably necessary by the FDA to ensure their safety and effectiveness. Class I devices are subject to general controls such as labeling, pre-market notification and adherence to Quality System Regulations, or 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 such as 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 II or Class III devices.
Before a new device can be introduced in the market, we must obtain either FDA clearance or approval, depending on FDA guidelines, through either clearance of a 510(k) pre-market notification or approval of a pre market approval application, which is a more extensive and costly application when compared to a pre-market notification, due to the requirements for more extensive clinical trials, etc. All of our products have been cleared using a 510(k) application, and we expect that most future products will also qualify for clearance using a 510(k) application (as described in Section 510(k) of the Medical Device Amendments to the F D & C Act of 1938).
Historically, we have been able to obtain 510(k) pre-market clearance in as little as 90 days from submission, but the process has taken longer in recent years and we anticipate that it will continue to take much longer in the future. 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
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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 U.S. are also regulated under the Clinical Laboratory Information Act of 1988, ("CLIA"). CLIA is intended to ensure the quality and reliability of all medical testing in laboratories in the U.S. 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 U.S. Under CLIA, 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 U.S. Health Care Financing Administration. The application of CLIA to our operations and facilities and future administrative interpretations of CLIA could have an adverse impact on the potential market for our future products by increasing the cost and regulatory burden on our operations and facilities.
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. We may incur significant costs to comply with these laws and regulations in the future.
Reimbursement
Currently, our largest market segments are hospital laboratories and commercial reference laboratories in the U.S. Payment for testing in these segments is largely based on third-party payer reimbursement. The laboratory that performs the test will submit an invoice to the patient's insurance provider or to the patient if he is not covered by an insurance 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 payers typically establish a specific fee to be paid for each code submitted. Third party payer 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
As of June 30, 2013, we employed 46 employees worldwide (from 48 employees as of June 30, 2012). Of the current 46 employees, 45 are full-time, and one is part time. Five of our current employees 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.
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.
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anti-cardiolipin antibody (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 auto antibodies with specificity against negatively charged phospholipids, which 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.
auto antibody—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 (ß2GPI)—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 ß2GPI.
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.
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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.
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An investment in Corgenix entails certain risks that should be carefully considered. In addition, these risk factors could cause actual results to differ materially from those expected including the following:
We depend upon collaborative relationships and third parties for product development and commercialization.
We have historically entered into research and development agreements with collaborative partners, from which we derived 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 be forced to undertake such activities entirely at our own expense. The amount and timing of resources that any of these partners devotes to these activities may be based on progress by us in our product development efforts. 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. Because of the significance of some of these relationships, any such agreement termination or failure to perform on their part could have an adverse effect on our results of operations.
There can be no assurance of successful or timely development of additional products.
Our business strategy includes the development of additional diagnostic products for the diagnostic 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 ability to remain competitive in our product niches would be impaired.
We have incurred losses for most of our history and may in the future require additional financing.
We have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of dividends on redeemable common and redeemable preferred stock, have aggregated $13,926,676 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. Historically, we have financed our operations primarily through long-term debt, short term lines of credit, and the sales of common stock, redeemable common stock, and preferred stock. We have also financed operations through sales of diagnostic products and agreements with strategic partners. We have developed and are continuing to modify an operating plan intended to eventually achieve
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sustainable profitability, positive cash flow from operations, and an adequate level of financial liquidity. Key components of this plan include consistent revenue growth and the cash to be derived from such growth, as well as the expansion of our strategic alliances with other biotechnology and diagnostic companies, securing diagnostic-related government contracts and grants, improving operating efficiencies to reduce our cost of sales as a percentage of sales, thereby improving gross margins, and lowering our overall operating expenses. If our sales were to decline, are flat, or achieve very slow growth, we would undoubtedly incur operating losses and a decreasing level of liquidity for that period of time. We believe that our current working capital in addition to the LSQ $1,500,000 July 14, 2011 revolving credit facility, when considered in conjunction with our current forecasts, should provide adequate resources to continue operations for longer than 12 months.
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 and biotechnology 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 also greater than ours. Moreover, the diagnostics industry continues to demonstrate a degree consolidation, whereby some 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.
Our products and activities are subject to regulation by various governments and government agencies.
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 limited in our ability to commence marketing or commercial sales in the U.S. of new products under development until we receive clearance or approval 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 pre-market clearance or pre-market 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 negatively impact our sales and thus have a material adverse effect on our business.
As a manufacturer of medical devices for marketing in the U.S., 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 reports 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
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requirements, MDR requirements and other applicable regulations. 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 would decrease our net income or increase our net loss and thus have a potentially material adverse effect upon our business, financial conditions and results of operations.
Distribution of diagnostic products outside the U.S. is subject to extensive foreign 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 U.S. commercial distribution may be subject to FDA export restrictions. Failure to obtain necessary regulatory approval or the failure to comply with regulatory requirements could reduce our product sales and thus have a potentially material adverse effect on our business, financial condition and results of operations.
We depend upon distribution partners for sales of diagnostic products in international markets.
We have entered into a master distribution agreement with ELITech, in which we have granted distribution rights for certain of our products to them within specific international geographic areas. Pursuant to this agreement, they have certain responsibilities for market development, promotion, and sales of the products. If they fail to perform their contractual obligations or terminate the agreement, this could have the effect of reducing our sales and cash flow and thus have a potentially material adverse effect on our business, financial condition and results of operations.
Third party reimbursement for purchases of our diagnostic products is uncertain.
In the U.S., health care providers that purchase diagnostic products, such as hospitals and physicians, generally rely on third party payers, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the purchase. Third party payers 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 payers, or changes in government and private third party payers' 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.
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.
Most of our products are based on our patented and proprietary application of Enzyme Linked ImmunoSorbent Assay, or ELISA, technology, a clinical testing methodology commonly used worldwide. Most of our current products are based on this platform technology in a delivery format convenient for clinical testing laboratories. The delivery format, which is referred to as "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. There can be no assurance that our issued patents will afford meaningful protection against a competitor, or that patents issued or licensed 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. The potential for reduced sales and increased legal
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expenses would have a negative impact on our cash flow and thus our overall business could be adversely affected, or, in an extreme case, our ability to remain in business could be jeopardized.
We may not be able to successfully implement our plans to acquire other companies or technologies.
Our growth strategy includes the acquisition of complementary products or technologies. There is no assurance that we will be able to identify appropriate products 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 may be unable to acquire any significant products 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, which could result in significant dilution to its existing stockholders. If we do complete one or more acquisitions, a number of risks arise, such as diversion of management's attention, unanticipated problems or legal liabilities. Any of these factors could materially harm Corgenix's business or its operating results.
We depend on suppliers for our products' components.
The components of our products include chemical, biological and packaging supplies that are generally available from several suppliers, except certain antibodies and other critical components, which we purchase from single suppliers. If, for some reason, we lose our main supplier for a given material, 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 impair the manufacturing of certain of our products and thus have a material adverse effect on our business, financial condition and results of operations. We mitigate the risk of a loss of supply by maintaining a sufficient supply of such antibodies to help ensure an uninterrupted supply for at least three months. We have also qualified second vendors for most critical raw materials and believe that we can substitute a new supplier with respect to most of these components in a timely manner.
We depend on significant customers
In the fiscal year ended June 30, 2013, our largest customers, the ELITech Group, DiaDexus, Inc., and BG Medicine, Inc., accounted for 16.1%, 10.8%, and 10.2%, of our total revenues, respectively. BG Medicine, Inc. and DiaDexus, Inc. are contract manufacturing customers, and there can be no assurance that their respective contracts will be continuously renewed. In addition, our contracts are generally cancelable by the customer at any time on short notice, and customers may unilaterally reduce their orders under such contracts without significant penalty. If said contract cancellations or reductions of orders takes place, it could have an adverse effect on our results of operations.
In addition, because of the amount of outstanding receivables that we may have with our larger customers at any one time, if a customer files for bankruptcy protection, it could prevent us from collecting on the receivables and have an adverse effect on our results of operations.
We have only 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 limited 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.
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Due to the specialized nature of our business, our success will be highly dependent upon our ability to attract and retain qualified scientific and executive personnel.
We believe that our success will depend to a significant extent on the efforts and abilities of our management team and other key employees. Loss of any of them would be disruptive to our business. 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.
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. 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 cash flow and thus potentially a materially adverse effect on our business, financial condition and results of operations.
There has, to date, been no consistently active public market for our common stock, and there can be no assurance that a consistently active public market will develop or be sustained.
Although our common stock has been traded on the OTC Bulletin Board® since February 1998, the trading has been inconsistent with less than continuously significant volume.
Moreover, the over-the-counter markets for securities of very small companies historically have experienced extreme price and volume fluctuations. These broad market fluctuations and other factors, such as new product developments, trends in our industry, the investment markets, economic conditions generally, and 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." Such rules require the delivery prior to any penny stock transaction of a disclosure schedule explaining the penny stock market and all associated risks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. For these types of transactions the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The additional burdens imposed upon broker- dealers by such requirements may discourage broker-dealers from effecting transactions in securities subject to the penny stock rules.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Description of Properties.
On February 8, 2006, we entered into a Lease Agreement (the "Lease") with York County, LLC, a California limited liability company ("York") pursuant to which we leased approximately 32,000 rentable square feet (the "Property") of York's approximately 102,400 square foot building, commonly known as Broomfield One and located at 11575 Main Street, Broomfield, Colorado 80020. In 2008, the Property was sold to The Krausz Companies, Inc. a California corporation, aka KE Denver One, LLC
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(the "Landlord"), and is part of Landlord's multi-tenant real property development known as the Broomfield Corporate Center. We use the Property for our headquarters, laboratory research and development facilities and production facilities. The Lease was amended on several occasions, as previously reported.
On April 11, 2011, we entered into Lease Amendment No. 5 (the "Fifth Lease Amendment") with the Landlord. The Fifth Lease Amendment extends the term of the Lease to April 30, 2019 and removes any option to further extend the Lease.
The Fifth Lease Amendment also adjusts the base rent ("Base Rent") payable under the Lease.
The Fifth Lease Amendment also establishes an amount to be paid to Landlord by us in the event of a default by us under the Lease. The payment due upon default by us will be $180,000 multiplied by a fraction, the numerator of which is equal to the number of months remaining in the term of the Lease, and the denominator of which is 96.
We have not invested in any real estate or real estate mortgages.
None.
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock is traded on the OTC Bulletin Board® under the symbol "CONX." On June 30, 2013, the closing price of our common stock on the OTC Bulletin Board® as reported by the
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OTC Bulletin Board® was $0.18. 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®.
| |
Price Ranges | ||||||
|---|---|---|---|---|---|---|---|
Stock Price Dates
|
High | Low | |||||
Fiscal Year 2013 |
|||||||
Quarter Ended: |
|||||||
September 30, 2012 |
$ | 0.15 | $ | 0.10 | |||
December 31, 2012 |
$ | 0.24 | $ | 0.12 | |||
March 31, 2013 |
$ | 0.20 | $ | 0.15 | |||
June 30, 2013 |
$ | 0.25 | $ | 0.18 | |||
Fiscal Year 2012 |
|||||||
Quarter Ended: |
|||||||
September 30, 2011 |
$ | 0.10 | $ | 0.08 | |||
December 31, 2011 |
$ | 0.18 | $ | 0.10 | |||
March 31, 2012 |
$ | 0.17 | $ | 0.11 | |||
June 30, 2012 |
$ | 0.14 | $ | 0.10 | |||
On June 30, 2013, there were 79 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. In addition to any restrictions imposed by the articles of incorporation with respect to the payment of dividends, any future cash dividends would also depend on future earnings, capital requirements and the Company's financial condition and other factors deemed relevant by the Board of Directors.
Stock Issuance
On September 16, 2011 we received $500,000 from Wescor, pursuant to the Third Tranche under a Common Stock Purchase Agreement. Pursuant to the Common Stock Purchase Agreement, Wescor invested an additional $500,000 and is in turn was issued 3,333,333 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 1,666,667 shares at $0.15 per share. As a condition to the closing of the Third Tranche, the Executive Committee established under the Joint Product Development Agreement had determined the feasibility of creating not less than two (2) new Corgenix assays as further described in the Joint Product Development Agreement. The proceeds have been used for general working capital purposes.
On July 28, 2011, we entered into a First Amended Joint Product Development Agreement (the "2011 Development Agreement") with ELITech and Wescor. Pursuant to this agreement, each month we will notify Wescor of the amount of their stock purchase commitment, which is equal to sixty-six and 7/10 percent (66.7%) of the amount of each monthly R & D invoice at a per share price of $0.15. Wescor must purchase such shares within thirty (30) days of each notification. For the fiscal years ended June 30, 2013 and June 30, 2012, we issued 2,800,510 and 2,813,182 shares, respectively under this arrangement. The proceeds have been used for general working capital purposes.
The shares and warrants offered under the Common Stock Purchase Agreement and the 2011 Development Agreement have not been registered under the Securities Act of 1933, as amended ("Securities Act"). The offer of such securities is exempt from the registration requirements of the Securities Act, pursuant to Section 4(2) of the Securities Act for transactions not involving a public offering and Rule 506 promulgated by the United States Securities and Exchange Commission under the Securities Act. A Form D was filed by the Company reporting additional information regarding the sale of the securities.
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Corgenix Purchase of Equity Securities*
Period
|
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plans or programs |
Maximum number of shares that may yet be purchased under the plans or programs |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
August 2012 |
27,515 | $ | 0.568 | — | — | ||||||||
Total |
27,515 | $ | 0.568 | — | — | ||||||||
Item 6. Selected Financial Data.
Not required.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and accompanying notes included elsewhere herein.
General
Since our 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 products covering autoimmune disorders, vascular diseases and liver disease. Our products are sold in the U.S. through our marketing and sales organization, internationally through ELITech and their extensive distributor network, and to several significant OEM partners.
We manufacture products for inventory based upon expected sales demand, usually shipping products to customers within 24 hours of receipt of orders if in stock. Accordingly, we do not operate with a customer order backlog.
Beginning in fiscal year 1996, we began adding third-party OM licensed products to our diagnostic product line. We expect to expand our relationships with other companies in the future to gain access to additional products. This category comprises approximately 30-40 products, with an annual growth rate in excess of 10% annually. All of the third-party OM licensed products support our own manufactured products, adding to our competitive capabilities, especially in many international markets.
We have generated revenues over the past 23 years primarily from sales of products and contract revenues from strategic partners. Contract revenues consist of service fees from research and development agreements with strategic partners. 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 research and development payments 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.
Recently Issued Accounting Pronouncements
There are no newly issued standards expected to have a material effect on the Company.
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Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. ("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 results could differ significantly from those estimates.
Revenue is only recognized when it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, and when, in the case of products sold, the transfer of title of the respective goods has been accomplished, or, in the case of services, when the service has been rendered.
We maintain an allowance for doubtful accounts based on our historical experience and provide 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 be 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 began to be amortized commencing when the website was 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 ability to realize the value 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 from sale of products is recognized upon shipment of products.
The Company serves as a sub-contractor to Tulane University for several NIH funded grants and contracts related to development of diagnostics, vaccines and therapeutics for hemorrhagic fever viruses. Under the terms of the subcontracts, the Company invoices Tulane monthly for all allocable expenses incurred in support of the grants and contracts. This includes fully burdened salaries, supplies, production kits, travel and equipment. The Company serves as the principal investigator for an NIH funded two-year contract to develop recombinant diagnostic tests for the filoviruses (Ebola and Marburg), and has engaged three subcontractors (Tulane University, Autoimmune Technologies and the Scripps Research Institute) to assist in the development. Each month the subcontractors invoice the Company for allocable monthly expenses including fully burdened salaries, supplies and travel; the Company consolidates these expenses with its own allocable expense and invoices the NIH. The Ebola/Marburg project was completed in the fiscal year ended June 30, 2013.
R & D expense consists primarily of the labor related costs, the cost of clinical studies and travel expenses, laboratory supplies and product testing expenses related to the research and development of
27
new and existing diagnostic products. During the current fiscal year, since contract R & D and Grant related revenue has become a more meaningful aspect of our business, the R & D expenses which are directly related to the generation of specific contract R & D and Grant revenue, have been reclassified out of R & D expense to cost of sales. Research and development costs and any costs associated with internally developed patents, formulas or other proprietary technology are expensed as incurred. Revenue from research and development contracts, as noted above, represents amounts earned pursuant to agreements to perform research and development activities for third parties and is recognized as earned under the respective agreement. Revenue is recognized as work is performed and expenditures are made over the contract period. Research and development agreements in effect in 2013 and 2012 provided for fees to the Company based on time and materials in exchange for performing specified research and development functions. Research and development contracts are generally short and intermediate term with options to extend, and can be cancelled under specific circumstances.
Inventories are recorded at the lower of cost or market, using the first-in, first-out method.
Results of Operations
Year Ended June 30, 2013 compared to 2012
Net sales. The following two tables provide the reader with further insight as to the changes of the various components of our sales for the comparable fiscal years ended June 30, 2013 and June 30, 2012.
| |
Fiscal Year Ended June 30, | |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
% Incr. (Decr.) |
|||||||||
| |
2013 | 2012 | ||||||||
Sales: |
||||||||||
Geographical Breakdown |
||||||||||
North America |
$ | 8,897,977 | $ | 8,113,535 | 9.7 | % | ||||
International |
$ | 1,289,828 | $ | 1,175,823 | 9.7 | % | ||||
Total Sales |
$ | 10,187,805 | $ | 9,289,358 | 9.7 | % | ||||
| |
Fiscal Year Ended June 30, | |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
% Incr. (Decr.) |
|||||||||
| |
2013 | 2012 | ||||||||
Sales: |
||||||||||
By Category |
||||||||||
Phospholipid Sales* |
$ | 3,193,695 | $ | 3,279,274 | (2.6 | )% | ||||
Coagulation Sales* |
$ | 1,308,954 | $ | 1,334,404 | (1.9 | )% | ||||
Aspirin Works Sales |
$ | 960,048 | $ | 905,221 | 6.1 | % | ||||
Hyaluronic Acid Sales |
$ | 882,002 | $ | 834,342 | 5.7 | % | ||||
Autoimmune Sales |
$ | 68,890 | $ | 93,675 | (26.5 | )% | ||||
Contract Manufacturing |
$ | 2,140,989 | $ | 1,011,640 | 111.6 | % | ||||
R & D Contract |
$ | 946,689 | $ | 1,380,311 | (31.4 | )% | ||||
Instruments |
$ | 386,892 | $ | — | N/A | |||||
Shipping and Other |
$ | 299,646 | $ | 450,491 | (33.5 | )% | ||||
Total Sales |
$ | 10,187,805 | $ | 9,289,358 | 9.7 | % | ||||
| * Includes OEM Sales | $ | 812,030 | $ | 844,440 | (3.8 | )% | ||||
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Cost of revenues. Total cost of revenues, as a percentage of sales, were 55.2% for the fiscal year ended June 30, 2013 versus 57.7% for the prior fiscal year. The primary reason for the decrease was as a result of continuing efficiencies in our manufacturing processes. The following table shows, for the fiscal year ended June 30, 2013, the composition of the cost of revenues, between the cost of revenues related to our core business and that related to our contract research and development and grant revenues, and their relative percentage of related revenues.
Fiscal Year Ended June 30, 2013
| |
CORE BUSINESS |
R & D AND GRANT |
TOTAL | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
SALES/REVENUES |
$ | 9,241,116 | $ | 946,689 | $ | 10,187,805 | ||||
DIRECTLY RELATED COST OF REVENUES |
$ | 4,910,946 | $ | 713,326 | $ | 5,624,272 | ||||
COST OF REVENUES AS % OF REVENUES |
53.1 | % | 75.4 | % | 55.2 | % | ||||
Fiscal Year Ended June 30, 2012
| |
CORE BUSINESS |
R & D AND GRANT |
TOTAL | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
SALES/REVENUES |
$ | 7,909,047 | $ | 1,380,311 | $ | 9,289,358 | ||||
DIRECTLY RELATED COST OF REVENUES |
$ | 4,310,071 | $ | 1,044,924 | $ | 5,354,995 | ||||
COST OF REVENUES AS % OF REVENUES |
54.5 | % | 75.7 | % | 57.7 | % | ||||
Selling and marketing expenses. For the fiscal year ended June 30, 2013, selling and marketing expenses decreased $295,411 or 14.8% to $1,701,578 from $1,996,989 in fiscal 2012. The $295,411 decrease versus the prior year resulted primarily from decreases of $276,255 in labor-related expenses, $46,032 in travel and trade show-related expenses, and $19,706 in advertising expense, partially offset by increases of $46,582 in other selling and marketing expenses.
Research and development expenses. Gross research and development expenses, prior to the reclassification of a portion of said expenses to cost of sales, decreased $97,990 or 7.0% to $1,294,818 for the fiscal year ended June 30, 2013, from $1,392,808 for the fiscal year ended June 30, 2012. The $97,990 decrease versus the prior year resulted primarily from decreases of $77,015 in laboratory supplies, $54,384 in consulting and outside service expenses, and $37,350 in travel-related expenses, partially offset by increases of $70,759 in other research and development expenses.
General and administrative expenses. For the fiscal year ended June 30, 2013, general and administrative expenses increased $93,457 or 5.0% to $1,982,775 from $1,889,318 in fiscal 2012. The $93,457 increase versus the prior year resulted primarily from increases of $188,493 in labor-related expenses, the vast majority of which being due to the Company no longer charging a portion of said labor-related expenses to manufacturing overhead, partially offset by a net decrease of $95,036 in other general and administrative expenses.
Interest expense. Interest expense decreased $101,360 or 82.9%, from $122,263 in fiscal 2012 to $20,903 for the fiscal year ended June 30, 2013. This substantial reduction in interest expense was primarily due to the considerably lower borrowings for the current fiscal year.
ADJUSTED EBITDA
The Company's earnings before interest, taxes, depreciation, amortization, costs associated with exit or disposal activities, and non cash expense associated with stock-based compensation ("Adjusted
29
EBITDA") increased $788,341 or 889.0% to $700,651 for the fiscal year ended June 30, 2013 compared with negative Adjusted EBITDA of $87,690 for the prior fiscal year ended June 30, 2012. The primary reason for the substantial increase in Adjusted EBITDA for the current fiscal year was the net income earned for the current period. Although adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company's ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider these measures in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net income (loss) as shown on the accompanying Statement of Operations can be made by eliminating depreciation and amortization expense, corporate stock-based compensation expense, interest expense, and income tax expense, if any, from the net loss and further eliminating any interest income from said net loss as in the following table:
| |
Fiscal Year Ended June 30, |
||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
RECONCILIATION OF ADJUSTED EBITDA: |
|||||||
Net income (loss) |
$ | 278,536 | $ | (603,702 | ) | ||
Add back: |
|||||||
Depreciation and Amortization |
302,260 | 292,610 | |||||
Stock-based compensation expense |
99,422 | 84,611 | |||||
Interest income |
(470 | ) | (674 | ) | |||
Interest expense |
20,903 | 122,263 | |||||
Costs associated with exit or disposal activities |
— | 17,202 | |||||
Adjusted EBITDA |
$ | 700,651 | $ | (87,690 | ) | ||
Financing Agreements
On July 14, 2011, we entered into a Revolving Credit and Security Agreement (the "Loan Agreement") with LSQ Funding Group, L.C., a Florida limited liability company ("LSQ").
Pursuant to the terms of the Loan Agreement, LSQ is providing a line of credit (the "Line") to us under which LSQ agrees to make loans to us in the maximum principal amount outstanding at any time of $1,500,000. The maximum amount of the loans under the Line shall also be governed by a borrowing base equal to 85% of Eligible Accounts Receivable plus 50% of Eligible Inventory, with certain limits and exclusions more fully set forth in the Loan Agreement.
Interest accrues on the average outstanding principal amount of the loans under the Line at a rate equal to 0.043% per day.
Loans under the Line may be repaid and such repaid amounts re-borrowed until the maturity date. Unless terminated by us or accelerated by LSQ in accordance with the terms of the Loan Agreement, the Line will terminate and all loans there under must be repaid on July 14, 2013. Although the Line did mature on July 14, 2013,, the Line has continued to function in the same manner as it had over the prior two years.
The Loan Agreement contains certain representations, warranties, covenants and events of default typical in financings of this type, including, for example, limitations on additional debt and investments and limitations on the sale of additional equity by us or other changes in our ownership. Please refer to the Loan Agreement for all such representations, warranties, covenants and events of default.
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In addition, pursuant to the terms of the Loan Agreement, we granted to LSQ a security interest in all of our personal property to secure the repayment of the loans under the Line and all other of our obligations to LSQ, whether under the Loan Agreement or otherwise.
We have used the money we received under the Loan Agreement and the Line to pay off our outstanding debt obligations to Summit Financial Resources, L.P. ("Summit"), which totaled $732,894 as of July 14, 2011, which was the date of payment. Such payment resulted in our indebtedness and obligations owing to Summit being terminated and satisfied in full.
In accordance with the July 10, 2010 Common Stock Purchase Agreement with ELITech and Wescor, Wescor purchased $2,000,000 of the Company's common stock in three installments or tranches, and received warrants to purchase additional shares. Pursuant to the First Tranche of the Common Stock Purchase Agreement, on July 16, 2010, Wescor invested $1,250,000 to purchase 8,333,334 shares of the Company's common stock valued at $0.15 per share. For no additional consideration the Company issued a warrant to Wescor to purchase 4,166,667 shares at $0.15 per share. Pursuant to the Second Tranche of the Common Stock Purchase Agreement, Wescor invested $250,000 to purchase 1,666,667 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 833,333 shares at $0.15 per share. Pursuant to the Third Tranche of the Common Stock Purchase Agreement, In July 2011, Wescor invested $500,000 to purchase 3,333,334 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 1,666,667 shares at $0.15 per share.
In connection with the Common Stock Purchase Agreement, at the initial closing, which occurred on July 16, 2010, we entered into the Master Distribution Agreement with ELITech UK, and we entered into the Joint Product Development Agreement with ELITech. Under the terms and conditions of the Master Distribution Agreement, and as a condition precedent to the closing of the Second Tranche, ELITech UK became the exclusive distributor of the Company's Products (as that term is defined therein) outside of North America. Accordingly, we along with Corgenix UK assigned and/or transferred the economic benefit to ELITech UK, and ELITech UK assumed all of the obligations of the Company or Corgenix UK under all distribution agreements executed by us or Corgenix UK, as the case may be, related to any distributor whose territory is outside of North America.
Liquidity and Capital Resources
At June 30, 2013, our working capital increased by $909,079 to $4,553,717 from $3,644,638 at June 30, 2012, and concurrently, our current ratio (current assets divided by current liabilities) increased from 4.16 to 1 at June 30, 2012 to 5.77 to 1 at June 30, 2013. This increase in working capital is primarily attributable to the $2,000,000 strategic investments by ELITech in 2010 and 2011 in addition to their ongoing additional R & D funding.
At June 30, 2013, trade and other receivables were $1,500,461 versus $1,414,575 at June 30, 2012. Accounts payable, accrued payroll and other accrued expenses were $846,109 as of June 30, 2013, versus $1,005,306 as of June 30, 2012. At June 30, 2013, inventories were $2,032,545 versus $2,118,669 at June 30, 2012. This decrease in inventories occurred as a result of a continuing effort to better manage the company's purchasing practices in addition to the streamlining of the manufacturing process related to our products.
For the fiscal year ended June 30, 2013, cash provided by operating activities amounted to $710,398, versus $604,536 for the fiscal year ended June 30, 2012. The $710,398 cash provided by operating activities was primarily attributable to the net income for the current year, supplemented by a reduction in inventories and accounts receivable during the current fiscal year. The $710,398 cash provided by operating activities less the $62,778 of cash used by investing activities (primarily due to the purchase of equipment), plus the $60,467 net cash provided by financing activities, resulted in a net increase of $708,087 in our cash balance as of June 30, 2013.
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Although we generated a profit in the current fiscal year, we have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of dividends on redeemable common and redeemable preferred stock, have aggregated $13,926,676, 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. Historically, we have financed our operations primarily through long-term debt, short term lines of credit, and the sales of common stock, redeemable common stock, and preferred stock. We have also financed operations through sales of diagnostic products and agreements with strategic partners. We have developed and are continuing to modify an operating plan intended to eventually achieve sustainable profitability, positive cash flow from operations, and an adequate level of financial liquidity. Key components of this plan include consistent revenue growth and the cash to be derived from such growth, as well as the expansion of our strategic alliances with other biotechnology and diagnostic companies, securing diagnostic-related government contracts and grants, improving operating efficiencies to reduce our cost of sales as a percentage of sales, thereby improving gross margins, and lowering our overall operating expenses. If our sales were to decline, are flat, or achieve very slow growth, we would undoubtedly incur operating losses and a decreasing level of liquidity for that period of time. In view of this, and in order to further improve our liquidity and operating results, we entered into the ELITech collaboration and investment, described above.
We believe that our current working capital, in conjunction with our current forecasts indicating profitability for the fiscal year ending June 30, 2014, should provide adequate resources to continue operations for longer than 12 months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than the lease agreement described below.
Contractual Obligations and Commitments
We have the following contractual obligations and commitments as of June 30, 2013:
| |
Payments Due by Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
|
Total | Within 1 year | 2 - 3 years | 4 - 5 years | More than 5 years |
|||||||||||
Secured notes payable |
$ | 22,239 | $ | 22,239 | $ | — | $ | — | $ | — | ||||||
Capital lease obligations |
$ | 102,027 | $ | 85,403 | $ | 16,624 | — | — | ||||||||
Interest on secured debt |
$ | 727 | $ | 727 | — | — | — | |||||||||
Interest on capital lease obligations |
$ | 5,747 | $ | 5,325 | $ | 422 | — | — | ||||||||
Operating leases |
$ | 2,413,464 | $ | 404,013 | $ | 830,081 | $ | 1,179,370 | — | |||||||
Total contractual cash obligations |
$ | 2,544,204 | $ | 517,707 | $ | 847,127 | $ | 1,179,370 | $ | — | ||||||
On February 8, 2006, we entered into a Lease Agreement (the "Lease") with York County, LLC, a California limited liability company ("York") pursuant to which we leased approximately 32,000 rentable square feet (the "Property") of York's approximately 102,400 square foot building, commonly known as Broomfield One and located at 11575 Main Street, Broomfield, Colorado 80020. In 2008, the Property was sold to The Krausz Companies, Inc. a California corporation, aka KE Denver One, LLC (the "Landlord"), and is part of Landlord's multi-tenant real property development known as the Broomfield Corporate Center. We use the Property for our headquarters, laboratory research and development facilities and production facilities. The Lease was amended on several occasions, as previously reported.
On April 11, 2011, we entered into Lease Amendment No. 5 (the "Fifth Lease Amendment") with the Landlord. The Fifth Lease Amendment extends the term of the Lease to April 30, 2019 and removes any option to further extend the Lease.
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The Fifth Lease Amendment also adjusts the base rent ("Base Rent") payable under the Lease.
The Fifth Lease Amendment also establishes an amount to be paid to Landlord by us in the event of a default by us under the Lease. The payment due upon default by us will be $180,000 multiplied by a fraction, the numerator of which is equal to the number of months remaining in the term of the Lease, and the denominator of which is 96.
We have not invested in any real estate or real estate mortgages.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not required.
Item 8. Financial Statements and Supplementary Data.
The financial statements listed in the accompanying index to the consolidated financial statements are filed as part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14c and 15d-15(f) under the Securities Exchange Act of 1934 (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective for the purposes of recording, processing, summarizing and timely reporting information required to be disclosed by us in the reports that we file under the Exchange Act and that
33
such information is accumulated and communicated to our management in order to allow timely decisions regarding required disclosure.
Changes in internal controls
There have been no significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that materially affected or are reasonably likely to materially affect our internal controls and procedures over financial reporting during the fiscal year ended June 30, 2013.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
To evaluate the effectiveness of internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management conducted an assessment, including testing, using the criteria in InternalControl—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their assessment, management concluded that we maintained effective internal control over financial reporting as of June 30, 2013.
This annual report does not include an attestation report from our independent registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to Sarbanes-Oxley Rule 404(c).
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
Directors and Executive Officers
The following table sets forth certain information with respect to the directors and executive officers of Corgenix as of June 30, 2013:
Name
|
Age | Position | Director/ Officer Since |
||||||
|---|---|---|---|---|---|---|---|---|---|
Douglass T. Simpson |
65 | President and Chief Executive Officer, Director | 1998 | ||||||
Ann L. Steinbarger |
60 | Senior Vice President Sales and Marketing | 1998 | ||||||
William H. Critchfield |
67 | Senior Vice President Operations and Finance and Chief Financial Officer | 2000 | ||||||
Robert Tutag |
71 | Director | 2005 | ||||||
Dennis Walczewski |
65 | Director | 2006 | ||||||
Stephen P. Gouze |
61 | Chairman of the Board | 2008 | ||||||
David Ludvigson |
62 | Director | 2010 | ||||||
Bruce A. Huebner |
62 | Director | 2011 | ||||||
Dennis Fusco |
61 | Director | 2012 | ||||||
Biographical information regarding each of our directors and executive officers is as follows. The following paragraphs also include specific information regarding each director's experience, qualifications, attributes or skills that led the Board of Directors to the conclusion that the individual should serve on the Board of Directors as of the date of this filing, in light of our business and structure.
Douglass T. Simpson has been the President of Corgenix since May 1998 and was elected a director in May 1998. Mr. Simpson joined Corgenix's operating subsidiary as Vice President of Business Development in 1992, was promoted to Vice President, General Manager in 1995, to Executive Vice President in 1996, to President in February 1998 and then to Chief Executive Officer in April 2006. Prior to joining Corgenix's operating subsidiary, he was a Managing Partner at Venture Marketing Group in Austin, Texas, a health care and biotechnology marketing firm, and in that capacity, served as a consultant to REAADS from 1990 until 1992. From 1984 to 1990 Mr. Simpson was employed by Kallestad Diagnostics, Inc. (now part of BioRad Laboratories, Inc.), one of the largest diagnostic companies in the world, where he served as Vice President of Marketing, in charge of all marketing and business development. Mr. Simpson holds B.S. and M.S. degrees in Biology and Chemistry from Lamar University in Beaumont, Texas.
William H. Critchfield has been Senior Vice President Operations and Finance and Chief Financial officer since April 2011, was the Senior Vice President Finance and Administration and Chief Financial Officer of the Company since April 2006, and was Vice President and Chief Financial Officer from December 2000 to April 2006. Prior to joining Corgenix, Mr. Critchfield was Executive Vice President and Chief Financial Officer of U.S. Medical, Inc., a Denver, Colorado based privately held distributor of new and used capital medical equipment. From May of 1994 through July of 1999, he served as President and Chief Financial Officer of W.L.C. Enterprises, Inc., a retail business holding company. From November 1991 to May 1994, Mr. Critchfield served as Executive Vice President and Chief Financial Officer of Air Methods Corporation, a publicly traded company which is the leading U.S. company in the air medical transportation industry and is the successor company to Cell Technology, Inc., a publicly traded biotechnology company, where he served in a similar capacity from 1987-1991. From 1986 through September 1987 he served as Vice President of Finance and Administration for Biostar Medical Products, Inc., a developer and manufacturer of diagnostic
35
immunoassays. In the past, Mr. Critchfield also served as Vice President of Finance for Nuclear Pharmacy, Inc., formerly a publicly traded company and the world's largest chain of centralized radiopharmacies. Mr. Critchfield is a certified public accountant in Colorado. He graduated magna cum laude from California State University-Northridge with a Bachelor of Science degree in Business Administration and Accounting.
Ann L. Steinbarger has been the Senior Vice President of Sales & Marketing since April 2011, was the Senior Vice President of Operations from April 2006 to April 2011 and was the Vice President of Sales and Marketing from May 1998 to April 2006. Ms. Steinbarger joined Corgenix's operating subsidiary in January 1996 as Vice President, Sales and Marketing with responsibility for its worldwide marketing and distribution strategies. Prior to joining Corgenix, Ms. Steinbarger was with Boehringer Mannheim Corporation, Indianapolis, Indiana, a $200 million IVD company. At Boehringer from 1976 to 1996, she served in a series of increasingly important sales management positions. Ms. Steinbarger holds a B.S. degree in Microbiology from Purdue University in West Lafayette, Indiana.
Robert Tutag was appointed to the Company's Board of Directors in September 2005. Mr. Tutag is currently and since 1990, has been President of Unisource, Inc., a privately held Boulder, Colorado company which identifies and develops niche pharmaceutical products for generic and brand name pharmaceutical companies. From 1964 through 1982, Mr. Tutag was President and Chief Operating Officer of Tutag Corporation. In that capacity, he developed and managed operations of Cord Laboratories, one of the original generic pharmaceutical manufacturing companies, in addition to founding and overseeing Geneva Generics, a generic sales and distribution company, which developed into one of the country's premier companies in its industry. Both Cord Laboratories and Geneva Generics were acquired by Ciba-Geigy Corporation. During that time period, Mr. Tutag also served as a Director of Geneva Generics and as Vice President of Sales and a Director of Tutag Pharmaceuticals, a branded distribution company. From 1983 through 1989, Mr. Tutag was President and Chief Executive Officer of NBR Financial, Inc., a multi-bank holding company in Boulder, Colorado. Since 1977 until the present, Mr. Tutag has also been editor of GMP Trends, Inc., Boulder, Colorado, an informational newsletter that reviews FDA and GMP inspection reports (483's) for the pharmaceutical and medical device industries. Mr. Tutag also served as interim president from 1999-2000 and was a director from 1997-2001 of the Bank of Cherry Creek in Boulder, Colorado. He received a BBA and an MBA from the University of Michigan.
Dennis Walczewski was appointed to the Company's Board of Directors in January, 2006. Mr. Walczewski's background consists of over 30 years experience in the Diagnostic and Biotechnology industries. Mr. Walczewski has held either management or executive positions in Promega, T-Cell Diagnostics, Endogen and Boehringer Manheim (now Roche). He had been employed by MBL international or MBLI for the previous ten years and through September 21, 2012, was their Chief Executive Officer. Mr. Walczewski holds a B.S. in Chemistry from Suffolk University and an MBA from Indiana Wesleyan University. Mr. Walczewski, for the past three years, has served as a Trustee of Suffolk University and is involved with the Boy Scouts of America, Cape Cod and Islands Council as Treasurer.
Stephen P. Gouze was appointed to the Company's Board of Directors in February, 2008, and in July 2009, was elected Chairman of the Board of Directors. From 1998 through 2008, Mr. Gouze was President of DiaSorin, Inc., the U.S. subsidiary of a $250 million international diagnostic company, DiaSorin, S.p.A., a company focusing on hepatitis, endocrinology and instrumentation. From 1997 to 1998, Mr. Gouze was Vice President, Sales and Marketing of IncSTAR Corporation, the predecessor company of DiaSorin. From 1994 to 1997, Mr. Gouze was Vice President, Sales and Marketing for PathCor, Inc. (Medical Arts Laboratory), an Oklahoma City clinical testing laboratory. From 1989 to 1994, Mr. Gouze was the Director of Marketing of Sanofi Diagnostics Pasteur, a major international diagnostic company focusing on blood viruses, autoimmunity and allergies, and from 1987 to 1989, he was the Marketing Manager of Kallestad Diagnostics, Inc. (now part of BioRad Laboratories, Inc.), a
36
predecessor division of Sanofi Diagnostics Pasteur. Mr. Gouze received a Bachelor of Science Degree in Medical Technology from the University of Wisconsin.
David Ludvigson was appointed to the Company's Board of Directors in July 2010. Mr. Ludvigson is currently President of Knight-Ludvigson Advisors, a business consultancy firm in addition to being CEO and a Director of China Stem Cells since June of 2010. From 2003 until 2009, Mr. Ludvigson was an executive with Nanogen, Inc., a molecular and point of care diagnostics company. Mr. Ludvigson joined Nanogen full-time as Executive Vice President, Chief Financial Officer and Treasurer and was appointed to the position of President and Chief Operating Officer in June, 2004. Mr. Ludvigson was a director of Nanogen from 1996 until June 2003. Prior to joining Nanogen, he was President and Chief Executive Officer of Black Pearl, Inc. ("Black Pearl"), an event-based business intelligence software company, from November 2001 until January, 2003. Prior to Black Pearl, from August 2000 to January 2001, Mr. Ludvigson was President of InterTrust Technologies, a digital rights management software company. Prior to joining InterTrust Technologies, Mr. Ludvigson was a Senior Vice President and Chief Operating Officer of Matrix Pharmaceuticals, Inc. ("Matrix") from October 1999 to August 2000. In addition, from 1998 to August 2000 he was also the Chief Financial Officer of Matrix. From February 1996 to June 1998, Mr. Ludvigson was President and Chief Operating Officer of NeTpower. From 1992 to 1995, Mr. Ludvigson was Senior Vice President and Chief Financial Officer of IDEC Pharmaceuticals. Prior to that time, he served as Senior Vice President of Sales and Marketing for Conner Peripherals and as Executive Vice President, Chief Financial Officer and a director of MIPS Computer Systems, Inc., a RISC microprocessor developer and systems manufacturer Mr. Ludvigson received a B.S. and an M.A.S. from the University of Illinois.
Bruce Huebner was elected to the Company's Board of Directors in January, 2011. Mr. Huebner is currently Managing Director of LynxCom Partners, LLC, a healthcare consulting firm ("LynxCom"). Mr. Huebner has served as Managing Director of LynxCom since July 2010 and also served as Managing Director of LynxCom from October 2008 to October 2009 and October 2004 to May 2005. From October 2009 to June 2010, Mr. Huebner was President and Chief Executive Officer of TrovaGene, Inc., a California molecular diagnostics company. Mr. Huebner also served as President of Osmetech Molecular Diagnostics, another California molecular diagnostics company from May 2005 to July 2008. Mr. Huebner joined Nanogen in 2002 as President and Chief Operating Officer and served until September 2004. From 1996 to 2002, Mr. Huebner was the Executive Vice President and Chief Operating Officer of Gen-Probe Incorporated, a Japanese owned biotech diagnostics company ("Gen-Probe"). From 1992 to 1995 Mr. Huebner was the Vice President of Marketing and Sales for Gen-Probe. Mr. Huebner received a B.S. in Chemistry from the University of Wisconsin-La Crosse.
Dennis Fusco was elected to the Board of Directors in December of 2012. Mr. Fusco is currently a member of Hub Investment Group, LLC, an early stage organized angel group, with a focus on emerging technologies, healthcare, and life sciences. In addition, since 2006, Mr. Fusco has been Chairman of the Board of Bay Club Members LLC, a member owned real estate and recreational community, and a consultant providing executive advisory, growth and recapitalization services to both a professional services and wealth management firm, and a private global design and manufacturing company. Concurrently, from 2009 to 2011, Mr. Fusco was New England Practice Leader and interim Managing Partner of Tatum, a division of Randstad US, a national firm that specializes in providing executive leadership and consulting services in finance, operations, and technology to public and private organizations. He was primarily responsible for private equity relationships, development, and account management services for portfolio companies. Mr. Fusco, from 1985 to 2004, also served as Chairman and Member of the Board of BDO USA, LLP (formerly BDO Seidman LLP), which is the U.S. member of BDO International, the fifth largest public accounting and consulting firm in the world, with affiliations in over 100 countries. While with BDO and prior to his becoming Chairman of the Board, Mr. Fusco was at various times Boston Office Managing Partner, National Assurance Business Line Leader, and Vice Chairman. From 1973 to 1985, Mr. Fusco was a Partner of Bornhofft Company, a
37
Boston based regional public accounting firm, which merged its practice into BDO Seidman in 1985. While with Bornhofft Company, Mr. Fusco was a Partner prior to his election as Managing Partner. Mr. Fusco is a Certified Public Accountant in Massachusetts and received a B.S. in Accounting and a M.S.T. in Taxation from Bentley College, and also completed the Executive Education Program at Harvard Business School.
All directors serve until their successors have been duly elected and qualified, unless they earlier resign.
Directors are elected by a plurality of the shareholders at annual or special meetings of shareholders held for that purpose. There have been no material changes to the way in which shareholders may recommend nominees to the Board of Directors.
Audit Committee
The Audit Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of the Company. Because the Company's common stock is traded on the Over the Counter Bulletin Board, the Company is not subject to the listing requirements of any securities exchange or the NASDAQ regarding the membership of the Company's Audit Committee. However, each of the members of the audit committee is independent as defined in the listing standards for the American Stock Exchange.
The Board has adopted a written charter for the Audit Committee. The charter may be viewed on the Company's website at www.Corgenix.com.
The Audit Committee currently consists of two outside directors: Messrs. Fusco and Walczewski. Mr. William Critchfield, the Senior Vice President Operations and Finance and Chief Financial Officer, participates in Audit Committee meetings as requested. The Board has determined that Mr. Fusco qualifies as an "Audit Committee Financial Expert" as that term is defined in rules promulgated by the Securities and Exchange Commission and is independent as defined by the American Stock Exchange listing standards.
The functions of the Audit Committee include:
Five Audit Committee meetings were held during the last fiscal year.
The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling its responsibilities with respect to matters involving our accounting, financial reporting and internal control functions. The Audit Committee has sole authority to select our independent registered public accounting firm.
Management is responsible for preparing the financial statements so that they comply with generally accepted accounting principles of the United States of America and fairly present our financial condition, results of operations and cash flows; issuing financial reports that comply with the requirements of the Securities and Exchange Commission; and establishing and maintaining adequate internal control structures and procedures for financial reporting. The Audit Committee's responsibility is to monitor and oversee these processes.
38
In this context, the Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee also has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees), as currently in effect, as adopted by the Public Company Accounting Oversight Board (PCAOB) in Rule 3200T.
Our independent registered public accounting firm also provided to the Audit Committee the written disclosures and letter required by the PCAOB, as currently in effect, and the Audit Committee has discussed with the independent registered public accounting firm that firm's independence. The Audit Committee has considered whether the independent registered public accounting firm's provision of non-audit services is compatible with maintaining the independence of the accountants.
Based on the above discussion and review with management and the independent registered public accounting firm, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 for filing with the SEC.
Code of Ethics
We have adopted a written code of ethics that applies to our CEO and CFO. A copy of the code of ethics can be found on our website at www.Corgenix.com. We intend to post on our website any amendments or waivers of the Code of Ethics.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, as well as persons beneficially owning more than 10% of our outstanding common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission within specified time periods. Such officers, directors and stockholders are also required to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of such forms received by us, or written representations from certain reporting persons, we believe that all Section 16(a) filing requirements applicable to our officers, directors and 10% stockholders were complied with during the fiscal year ended June 30, 2013.
Item 11. Executive Compensation.
The following table shows how much compensation was paid by Corgenix for the last three fiscal years to our Principal Executive Officer, and the other two most highly compensated Executive Officers, for services rendered during such fiscal years (collectively, the "Named Executive Officers").
39
Summary Compensation Table
Name and principal position
|
Fiscal Year Ended June 30, |
Salary ($) |
Bonus ($) |
Stock Awards ($)(3) |
Option Awards ($) |
Nonequity Incentive Plan Comp ($) |
All other Comp. ($)(1)(2) |
Total ($) |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Douglass T. Simpson |
2013 | $ | 227,970 | $ | — | $ | — | $ | — | $ | — | $ | 20,777 | $ | 248,747 | ||||||||||
President, Chief Executive |
2012 | $ | 227,970 | $ | — | $ | — | $ | 13,454 | $ | — | $ | 17,130 | $ | 258,554 | ||||||||||
Officer |
2011 | $ | 218,970 | $ | 15,000 | $ | — | $ | 8,873 | $ | — | $ | 17,471 | $ | 260,314 | ||||||||||
William H. Critchfield, |
2013 |
$ |
206,703 |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
20,777 |
$ |
227,480 |
||||||||||
Senior Vice President |
2012 | $ | 206,703 | $ | — | $ | — | $ | 11,212 | $ | — | $ | 17,130 | $ | 235,045 | ||||||||||
Operations and Finance |
2011 | $ | 191,502 | $ | 15,000 | $ | — | $ | 8,873 | $ | — | $ | 18,221 | $ | 233,596 | ||||||||||
Ann L. Steinbarger |
2013 |
$ |
171,344 |
$ |
— |
$ |
— |
$ |
— |
$ |
— |
$ |
21,408 |
$ |
192,752 |
||||||||||
Senior Vice President Sales |
2012 | $ | 171,344 | $ | — | $ | — | $ | 8,969 | $ | — | $ | 17,644 | $ | 197,957 | ||||||||||
and Marketing |
2011 | $ | 165,550 | $ | 3,500 | $ | — | $ | — | $ | — | $ | 17,995 | $ | 187,045 | ||||||||||
Outstanding Equity Awards at Fiscal Year End
| |
OPTION AWARDS | STOCK AWARDS | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Number of Securities Underlying Exercisable Options (#) |
Number of Securities Underlying Unexercisable Options (#) |
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised, Unearned Options (#) |
Weighted Average Option Exercise Price ($/Share) |
Option Expiration Dates |
Number of Shares of Stock That Have Not Vested (#) |
Market Value of Shares of Stock That Have Not Vested ($) |
Equity Incentive Plan Awards: Number of Unearned Shares That Have Not Vested (#) |
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares That Have Not Vested ($) |
|||||||||||||||||||
Douglass T. Simpson |
567,000 | 60,000 | — | $ | 0.31 | 8/2/13 - 8/22/17 | — | — | — | — | ||||||||||||||||||
William H. Critchfield |
451,000 | 50,000 | — | $ | 0.29 | 8/2/13 - 8/22/17 | — | — | — | — | ||||||||||||||||||
Ann L. Steinbarger |
263,000 | 40,000 | — | $ | 0.38 | 8/2/13 | — | — | — | — | ||||||||||||||||||
Director Compensation
Name
|
Fees Earned |
Stock Awards ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
Nonqualified Deferred Compensation Earnings |
All Other Compensation ($) |
Total ($) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Douglass T. Simpson |
— | — | — | — | — | — | — | |||||||||||||||
David Ludvigson |
— | — | $ | 3,881 | — | — | — | $ | 3,881 | |||||||||||||
Dennis Walczewski |
$ | 7,500 | — | $ | 3,881 | — | — | — | $ | 11,381 | ||||||||||||
Robert Tutag |
$ | 7,500 | — | $ | 3,881 | — | — | — | $ | 11,381 | ||||||||||||
Bruce A. Huebner(1) |
$ | 6,500 | — | $ | 3,881 | — | — | — | $ | 10,381 | ||||||||||||
Stephen P. Gouze |
$ | 6,000 | — | $ | 3,881 | — | — | — | $ | 9,881 | ||||||||||||
Dennis J. Fusco |
$ | 5,500 | — | $ | 7,374 | — | — | — | $ | 12,874 | ||||||||||||
40
Our current policy is to pay each independent director a quarterly retainer of $1,500, plus $500 per board meeting and $500 per board committee (audit, compensation and nominating) either attended in person or via telephone. In addition, annually each independent director is granted options to purchase shares of our common stock at the fair market value at the date of grant and vesting 100% upon grant. Per our arrangement with ELITech, Mr. Ludvigson is not compensated in cash by Corgenix for board meetings attended, but does, however, receive stock options in parallel with the independent members of our Board of Directors.
The purpose of the Compensation Committee is to (i) discharge the Board's responsibility relating to compensation of our executive officers; (ii) review and recommend to the Board compensation plans, policies and programs as well as approve individual executive officer compensation and (iii) prepare the annual report on executive compensation required to be included in our annual proxy statement. Additionally, the Committee oversees the Chief Executive Officer, or CEO, as well as executive management appointments at our headquarters and major subsidiaries. Committee members are appointed by the Board of Directors on the recommendation of the Corporate Governance and Nominating Committee and serve such terms as the Board may determine, or until their earlier resignation, death or removal by the Board.
The main objective of the Compensation Committee is the development of the philosophy and policy that will guide executive pay practices and decisions, such as:
The most significant duties and responsibilities of the Compensation Committee are as follows:
Our compensation Committee has the authority to seek advice and assistance from outside consultants and our executive officers in determining and evaluating director, CEO and other executive officer compensation. The overall goals have been to attract, retain, motivate, and align the executives
41
and directors with stockholder share value. During the fiscal years ended June 30, 2013 and 2012, we solicited advice from an outside consultant. The data provided in 2013 and 2012 is referred to as the "2013 and 2012 Reports." The consultant provided us with recommendations and findings on executive base pay, bonus, long-term incentive cash and equity awards. The recommendations and findings are used for executives as a long-term target to give the various pay components a grounded focus. The Compensation Committee has the authority to obtain advice and assistance from any officer or any outside legal experts or other advisors. The Compensation Committee has also utilized the advice of the CEO in determining compensation and performance of executive officers.
Long-Term Incentive Compensation
The Company's 2011 Incentive Compensation Plan (the "2011 Plan") and the 2007 Incentive Compensation Plan (the "2007 Plan") each provide for two separate components. The Stock Option Grant Program, administered by the Compensation Committee appointed by the Company's Board of Directors, provides for the grant of incentive and non-statutory stock options to purchase common stock to employees, directors or other independent advisors designated by the Committee. In the fiscal year ended June 30, 2013, 350,000 stock options were granted under the 2011Plan, at exercise prices ranging from $0.10 to $0.22. In the fiscal year ended June 30, 2012, there were a total of 1,160,000 stock options granted under the 2007 Plan, and 840,000 stock options granted under the 2011 Plan, at exercise prices ranging from $0.085 to $0.17 and with vesting periods ranging from immediate vesting to three years. All of the options have a life of seven years. The Restricted Stock Program administered by the Committee provides for the issuance of Restricted Stock Awards to employees, directors or other independent advisors designated by the Committee.
Short-Term Incentive Compensation
For the fiscal year ended June 30, 2013, we adopted a One Year Short-term Incentive Compensation Plan to provide executive officers an opportunity to earn shares of our common stock as a bonus and in lieu of cash compensation upon the achievement by the Company of certain stipulated and targeted financial results. No shares of common stock have been issued under this plan.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning option exercises by the Named Executive Officers during the fiscal year ended June 30, 2013 and outstanding options held by the Named Executive Officers as of June 30, 2013:
Name
|
Number of Shares Acquired on Exercise |
Value Realized ($) |
Number of Shares Underlying Options at FY-End # Exercisable and Unexercisable |
Value of In-the-Money Options at FY-End ($) Exercisable/Unexercisable(1) |
||||||
|---|---|---|---|---|---|---|---|---|---|---|
Douglass T. Simpson |
0 | 0 | 507,000 and 60,0000 | $197,530/$10,571 | ||||||
William H. Critchfield |
0 | 0 | 401,000 and 50,000 | $194,007/$7,047 | ||||||
Ann L. Steinbarger |
0 | 0 | 223,000 and 143,000 | $21,140/$8,809 | ||||||
42
Employment Agreements
Since 2001, we have entered into employment agreements with each of the Company's three executive officers. Effective May 1, 2010, these contracts were modified. As of July 1, 2013 the annual salaries for the three Executive Officers are as noted opposite each of their names:
Officer
|
Current Annual Salary | |||
|---|---|---|---|---|
• Douglass T. Simpson |
$ | 240,000 as of July 1, 2013 | ||
• William H. Critchfield |
$ | 219,000 as of July 1, 2013 | ||
• Ann L. Steinbarger |
$ | 182,000 as of July 1, 2013 | ||
Each of the above employment agreements is for an initial term of three years, provides for severance payments equal to twelve month's salary and benefits if the employment of the officer is terminated without cause (as defined in the respective agreements), and an automobile expense reimbursement of $500 per month.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of June 30, 2013, certain information regarding the ownership of our common stock by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of our directors, (iii) each executive officer and (iv) all of our executive officers and directors as a group. Unless otherwise indicated, the address of each person shown is c/o Corgenix, 11575 Main Street, Suite 400, Broomfield, CO 80020. Beneficial ownership, for purposes of this table, includes debt convertible into common stock and options and warrants to purchase common stock that are either currently exercisable or convertible or will be exercisable or convertible within 60 days of June 30, 2013. No director or executive officer beneficially owned more than 5% of the common stock.
The percentage ownership data is based on shares of our common stock outstanding as of June 30, 2013, plus warrants and stock options outstanding in addition to common shares underlying convertible debt and redeemable convertible preferred stock. Under the rules of the SEC, beneficial ownership includes shares over which the indicated beneficial owner exercises voting and/or investment power. Shares of common stock subject to options or warrants or underlying convertible debt that are currently exercisable or convertible, or will become exercisable or convertible, within 60 days of June 30, 2013 are deemed outstanding for the purpose of computing the percentage ownership of the person holding the option or warrant, or convertible promissory note, but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise noted, we believe that
43
the beneficial owners of the shares of common stock listed below have sole voting and investment power with respect to all shares beneficially owned.
| |
Amount and Nature of Beneficial Owner |
||||||
|---|---|---|---|---|---|---|---|
Name and Address of Beneficial Owner
|
Number | Percent of Class | |||||
Wescor, Inc |
25,613,694 | 45.05 | % | ||||
Warrant Strategies Fund LLC(2) |
3,269,304 | 4.99 | % | ||||
Douglass T. Simpson(1) |
942,838 | 1.86 | % | ||||
William H. Critchfield(1) |
767,545 | 1.52 | % | ||||
Robert Tutag(1) |
1,221,000 | 2.42 | % | ||||
Ann L. Steinbarger(1) |
405,855 | 0.80 | % | ||||
Bruce A. Huebner(1) |
120,000 | 0.24 | % | ||||
Stephen P. Gouze(1) |
1,252,612 | 2.48 | % | ||||
David Ludvigson(1) |
120,000 | 0.24 | % | ||||
Dennis Walczewski(1) |
260,000 | 0.51 | % | ||||
Dennis Fusco(1) |
40,000 | 0.08 | % | ||||
All current directors and current executive officers as a group (9 persons) |
5,129,850 | 10.07 | % | ||||
Equity Compensation
Equity Compensation Plan Information
Plan Category
|
Number of securities to be issued upon exercise of outstanding options, and rights (a) |
Weighted average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders |
3,612,000 | $ | 0.19 | 3,273,000 | ||||||
Total |
3,612,000 | $ | 0.19 | 3,273,000 | ||||||
Item 13. Certain Relationships and Related Transactions and Director Independence.
Certain Relationships and Related Transactions
There have not been any transactions, or series of similar transactions, since the beginning of the our 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 $120,000 and in which any director or executive officer of the Company, nominee for election as a
44
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.
Director Independence
Because the Company's common stock is traded on the Over the Counter Bulletin Board, the Company is not subject to the independence requirements of any securities exchange or the Nasdaq regarding our directors, the membership of our board of directors or our committees. However, the Board has determined that Messrs. Tutag, Gouze, Huebner, Fusco and Walczewski are each "independent" as that term is defined by the American Stock Exchange. Under the American Stock Exchange definition, an independent director is a person who (1) is not an executive officer or employee of the Company; (2) is not currently and has not been over the past three years employed by the Company, other than prior employment as an interim executive officer (provided the interim employment did not last longer than one year); (3) has not (or whose immediate family members have not) been paid more than $120,000 during any period of twelve consecutive months within the past three fiscal years [excluding compensation for board or board committee service, compensation paid to an immediate family member who is an employee (other than an executive officer) of the company, compensation received for former service as an interim executive officer (provided the interim employment did not last longer than one year), or benefits under a tax-qualified retirement plan or non-discretionary compensation]; (4) is not an immediate family member of an individual who is, or at any time during the past three fiscal years was, employed by the Company as an executive officer; (5) is not (or whose immediate family member is not) a partner in, controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities or payments under non-discretionary charitable contribution matching programs) that exceed 5% of the organization's consolidated gross revenues for that year, or $200,000, whichever is more, in any of the most recent three fiscal years; (6) is not (or whose immediate family member is not) employed as an executive officer of another entity where at any time during the most recent three fiscal years any of the issuer's executive officers serve on the compensation committee of such other entity; or (7) is not (or whose immediate family member is not) a current partner of the Company's outside auditor, or was a partner or employee of the Company's outside auditor who worked on the Company's audit at any time during any of the past three years.
Item 14. Principal Accountant Fees and Services.
Our principal outside accountant who serves as our auditor and our principal outside accountant for preparation of our Federal and State income tax returns is Hein & Associates LLP. The aggregate fees billed for each of the last two fiscal years for professional services rendered by our principal accountants are as follows:
| |
Audit Fees (Includes Form 10-Q Reviews & Consents) |
Audit Related Fees |
Tax Fees | All Other Fees |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
$ | 107,145 | $ | — | $ | 8,100 | $ | — | |||||
2012 |
$ | 111,983 | $ | — | $ | 15,325 | $ | — | |||||
Our Audit Committee (the "Committee"), consisting of Messrs. Fusco (Chairman) and Walczewski, is responsible for the appointment, compensation, retention and oversight of the work of the registered public accounting firm (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company. The Committee pre-approves all permissible non-audit services and all audit, review or attest engagements required under the securities laws (including the fees and terms thereof) to be performed for us by its registered public accounting firm, provided, however, that de-minimus non-audit services may instead be approved in accordance with applicable SEC rules.
45
Item 15. Exhibits and Reports to Form 10-K
a. |
Finance Statements: | |
|
Consolidated Balance Sheets as of June 30, 2013 and 2012 |
|
|
Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2013 and 2012 |
|
|
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2013 and 2012 |
|
|
Consolidated Statements of Cash Flows for the years ended June 30, 2013 and 2012 |
|
|
Notes to Consolidated Financial Statements |
|
b. |
Index to and Description of Exhibits |
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 3.1 | Amended and Restated Articles of Incorporation, dated June 19, 2008, filed as Exhibit 3.1 to the Company's Form 10-Q filed on November 10, 2010 and incorporated herein by reference. | ||
| 3.2 | Amended and Restated Certificate of Designations, Preferences, Rights and Limitations of Series A Convertible Preferred Stock for Corgenix Medical Corporation, filed as Exhibit 3.1 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 3.3 | Amended and Restated Bylaws dated September 30, 2010 filed as Exhibit 3.2 to the Company's Form 10-Q filed on November 10, 2010 and incorporated herein by reference. | ||
| 10.1 | Management Agreement dated May 1, 2010 between Luis R. Lopez and the Company, filed as Exhibit 10.3 to the Company's Form 8-K filed May 5, 2010 and incorporated herein by reference. | ||
| 10.2 | Management Agreement dated May 1, 2010 between Douglass T. Simpson and the Company, filed as Exhibit 10.1 to the Company's Form 8K filed May 5, 2010 and incorporated herein by reference. | ||
| 10.3 | Management Agreement dated May 1, 2010 between Ann L. Steinbarger and the Company, filed as Exhibit 10.4 to the Company's Form 8-K filed May 5, 2010 and incorporated herein by reference. | ||
| 10.4 | Management Agreement dated May 1, 2010 between Taryn G. Reynolds and the Company, filed as Exhibit 10.5 to the Company's Form 8-K filed May 5, 2010 and incorporated herein by reference. | ||
| 10.5 | Management Agreement dated May 1, 2010 between William H. Critchfield and the Company, filed as Exhibit 10.2 to the Company's Form 8-K filed May 5, 2010 and incorporated herein by reference. | ||
| 10.6 | 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. | ||
| 10.7 | Amended and Restated License Agreement dated April 14, 2010 between Eiji Matsuura, PhD and the Company, filed as Exhibit 10.1 to the Company's Form 8-K filed April 19, 2010 and incorporated herein by refeence. | ||
46
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 10.8 | Amended and Restated 1999 Incentive Stock Plan filed with the Company's filing of Proxy Statement Schedule 14A Information on October 23, 2002 and incorporated herein by reference. | ||
| 10.9 | Amended and Restated Employee Stock Purchase Plan, filed with the Company's filing of Proxy Statement Schedule 14A Information on October 23, 2002 and incorporated herein by reference. | ||
| 10.10 | Form of Securities Purchase Agreement dated May 19, 2005, filed as Exhibit 2.1 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.11 | Form of Secured Convertible Term Note dated May 19, 2005, filed as Exhibit 10.32 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.12 | Form of Registration Rights Agreement dated May 19, 2005, filed as Exhibit 10.33 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.13 | Form of Restricted Account Agreement dated May 19, 2005, filed as Exhibit 10.34 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.14 | Form of Restricted Account Side Letter dated May 19, 2005, filed as Exhibit 10.35 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.15 | Form of Stock Pledge Agreement dated May 19, 2005, filed as Exhibit 10.36 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.16 | Form of Lockup Letter dated May 19, 2005, filed as Exhibit 10.37 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.17 | Form of Subsidiary Guaranty dated May 19, 2005, filed as Exhibit 10.38 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.18 | Form of Letter Agreement dated June 7, 2005 between the Company and certain officers, directors and affiliated persons, filed as Exhibit 10.39 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.19 | Lease Agreement dated February 8, 2006 between Corgenix Medical Corporation and York County, LLC, a California limited liability company (as landlord), filed as Exhibit 10.27 to the Company's Registration Statement on Form SB-2 filed April 6, 2006 and incorporated herein by reference. | ||
| 10.20 | First Amendment to Lease Agreement between Corgenix Medical Corporation and York County, LLC, dated December 11, 2006, filed as Exhibit 10.28 to the Company's Form 10-KSB filed Sepember 14, 2007 and incorporated herein by reference. | ||
| 10.21 | Second Amendment to Lease Agreement between Corgenix Medical Corporation and York County, LLC, dated June 19, 2007, filed as Exhibit 29 to the Company's Form 10-KSB filed September 14, 2007 and incorporated herein by reference. | ||
| 10.22 | Third Amendment to Lease Agreement between Corgenix Medical Corporation and York County, LLC, dated July 19, 2007, filed as Exhibit 10.30 to the Company's Form 10-KSB filed September 14, 2007 and incorporated herein by reference. | ||
47
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 10.23 | Preferred Stock Purchase Agreement between Corgenix Medical Corporation and Barron Partners L.P., dated December 28, 2005, filed as Exhibit 10.1 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.24 | Escrow Agreement between Corgenix Medical Corporation, Barron Partners LP and Epstein, Becker & Green, P.C., dated December 28, 2005, filed as Exhibit 10.2 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.25 | Registration Rights Agreement between Corgenix Medical Corporation and Barron Partners L.P., dated December 28, 2005, filed as Exhibit 10.3 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.26 | Common Stock Purchase Warrant "A" dated December 28, 2005 issued to Barron Partners, filed as Exhibit 10.4 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.27 | Common Stock Purchase Warrant "B" dated December 28, 2005 issued to Barron Partners, filed as Exhibit 10.5 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.28 | Common Stock Purchase Warrant "C" dated December 28, 2005 issued to Barron Partners, filed as Exhibit 10.6 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.29 | Common Stock Purchase Warrant #118 dated December 28, 2005 issued to Ascendiant Securities, L.L.C., filed as Exhibit 10.7 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.30 | Common Stock Purchase Warrant #119 dated December 28, 2005 issued to Ascendiant Securities, L.L.C., filed as Exhibit 10.8 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.31 | Common Stock Purchase Warrant #120 dated December 28, 2005 issued to Ascendiant Securities, L.L.C., filed as Exhibit 10.9 to the Company's quarterly report on Form 10-QSB filed February 13, 2006 and incorporated herein by reference. | ||
| 10.32 | Form of Barron Lockup Letter, filed as Exhibit 10.3 to the Company's Form 8-K filed December 20, 2005 and incorporated herein by reference. | ||
| 10.33 | Form of Lockup Letter with Truk Opportunity Fund, LLC, Truk International Fund, LP, and CAMOFI Master LDC in connection with Secured Convertible Term Note financing, filed as Exhibit 10.7 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 10.34 | Securities Purchase Agreement dated December 28, 2005 by and among Corgenix Medical Corporation and Truk Opportunity Fund, LLC, Truk International Fund, LP, and CAMOFI Master LDC filed as Exhibit 10.5 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 10.35 | Registration Rights Agreement among Truk International Fund, LP, Truk Opportunity Fund, LLC, CAMOFI Master LDC and Corgenix Medical Corporation, filed as Exhibit 10.6 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 10.36 | Product Development, Manufacturing and Distribution Agreement dated May 13, 2004 between Creative Clinical Concepts, Inc. and the Company, filed as Exhibit 10.26 to the Company's Form 10-K filed September 22, 2005 and incorporated herein by reference. | ||
48
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 10.37 | Supply Agreement dated September 12, 2003 between DiaDexus, Inc. and the Company, filed as Exhibit 10.31 to the Company's Form 10-K filed September 22, 2005 and incorporated herein by reference. | ||
| 10.38 | Distribution Agreement and OEM Supply Agreement dated March 31, 2005 between MBL International, Inc. and the Company, filed as Exhibit 10.33 to the Company's Form 10-K filed September 22, 2005 and incorporated herein by reference. | ||
| 10.39 | Form of secured convertible Term Note dated May 19, 2005, filed as Exhibit 4.1 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.40 | Form of Common Stock Purchase Warrant dated May 19, 2005, filed as Exhibit 4.2 to the Company's Registration Statement on Form SB-2 filed June 24, 2005 and incorporated herein by reference. | ||
| 10.41 | Form of Secured Convertible Term Note dated December 30, 2005, filed as Exhibit 4.3 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 10.42 | Form of Common Stock Purchase Warrant dated December 30, 2005, filed as Exhibit 4.4 to the Company's Form 8-K filed December 30, 2005 and incorporated herein by reference. | ||
| 10.43 | Corgenix Medical Corporation 2005 Incentive Compensation Plan, filed with the Company's filing of Proxy Statement Schedule 14A Information on October 27, 2005 and incorporated herein by reference. | ||
| 10.44 | Amendment Concerning Secured Convertible Term Notes (including Amendment No. 1 to each Secured Convertible Term Note), filed as Exhibit 10 to the Company's Form 8-K filed December 5, 2006 and incorporated herein by reference. | ||
| 10.45 | Corgenix Medical Corporation 2007 Incentive Compensation Plan, filed with the Company's filing of Proxy Statement Schedule 14A Information on April 26, 2007 and incorporated herein by reference. | ||
| 10.46 | Placement Agent Agreement dated June 17, 2008, filed as Exhibit 4.4 to the Company's Form 8-K filed July 27, 2007 and incorporated herein by reference. | ||
| 10.47 | Form of Common Stock Purchase Warrant, filed as Exhibit 4.1 to the Company's Form 8-K filed July 27, 2007 and incorporated herein by reference. | ||
| 10.48 | Form of Subscription Agreement, filed as Exhibit 4.2 to the Company's Form 8-K filed July 27, 2007 and incorporated herein by reference. | ||
| 10.49 | Form of Registration Rights Agreement, filed as Exhibit 4.3 to the Company's Form 8-K filed July 27, 2007 and incorporated herein by reference. | ||
| 10.50 | Consulting Agreement dated March 1, 2006 between Corgenix Medical Corporation and Gordon E. Ens, filed as Exhibit 10.1 to the Company's Form 10-QSB filed May 15, 2007 and incorporated herein by reference. | ||
| 10.51 | License Agreement dated March 1, 2008 between Corgenix Medical Corporation and Creative Clinical Concepts, filed as Exhibit 10.2 to the Company's Form 10-QSB filed May 15, 2007 and incorporated herein by reference. | ||
| 10.52 | Letter Agreement dated August 15, 2007 between Corgenix Medical Corporation and Barron Partners, LP., filed as Exhibit 10.1 to the Company's Form 8-K filed on September 21, 2007and incorporated herein by reference. | ||
49
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 10.53 | Lease Agreement dated January 1, 2008 between Andrew Dean T/A Andrew Dean Investments and Corgenix UK, Ltd., filed as Exhibit 10.6 to the Company's Form 10-KSB filed September 25, 2008 and incorporated herein by reference. | ||
| 10.54 | Common Stock Purchase Agreement dated July 12, 2010 by and among Corgenix Medical Corporation, Financière ELITech SAS, and Wescor, Inc., filed as Exhibit 10.1 to the Company's Form 8-K filed July 15, 2010 and incorporated herein by reference. | ||
| 10.55 | Form of Warrant by and among Corgenix Medical Corporation and Wescor, Inc., filed as Exhibit 10.2 to the Company's Form 8-K filed July 15, 2010 and incorporated herein by reference. | ||
| 10.56 | Mutual Confidentiality Agreement dated as of July 16, 2010 by and among Financière ELITech SAS, Wescor, Inc., ELITech UK Limited, Corgenix Medical Corporation, and Corgenix U.K. Ltd. filed as Exhibit 10.3 to the Company's Form 8-K filed July 15, 2010 and incorporated herein by reference. | ||
| 10.57 | Form of Assignment and Assumption Agreement by and among ELITech UK Limited, Corgenix Medical Corporation, and Corgenix U.K. Ltd. filed as Exhibit 10.4 to the Company's Form 8-K filed July 15, 2010 and incorporated herein by reference. | ||
| 10.58 | Master Distribution Agreement dated July 16, 2010 by and between Corgenix Medical Corporation and ELITech UK Limited filed as Exhibit 10.5 to the Company's Form 8-K filed July 15, 2010 and incorporated herein by reference. | ||
| 10.59 | Fifth Amendment to Lease Agreement between Corgenix Medical Corporation and KE Denver One, LLC, dated April 11, 2011, filed as Exhibit 10.2 to the Company's Form 8-K filed April 15, 2011 and incorporated herein by reference. | ||
| 10.60 | Revolving Credit & Security Agreement dated July 14, 2011 between Corgenix Medical Corporation and LSQ Fund Group, LC (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on July 20, 2011). | ||
| 10.61 | Revolving Promissory Note dated July 14, 2011, executed by Corgenix Medical Corporation (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on July 20, 2011). | ||
| 10.662 | First Amended & Restated Joint Product Development Agreement dated July 28, 2011 among Corgenix Medical Corporation, Financier Elitech SAS and wescor, Inc. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 2, 2011). | ||
| 10.63 | 2011 Incentive Compensation Plan, filed with the Company's Schedule 14A filed on December 5, 2011 and incorporated herein by reference. | ||
| 10.64 | Third Amended and Restated Employee Stock Purchase Plan, filed with the Company's Schedule 14A filed on December 5, 2011 and incorporated herein by reference. | ||
| 10.65 | (1) | Supply Agreement dated July 1, 2011 between the Company and diaDexus, Inc., filed as Exhibit 10.67 to the Company's Annual Report filed on September 27, 2012 and incorporated herein by reference(filed in redacted form since confidential treatment was requested pursuant to Rule 24b-2 for certain portions thereof). | |
| 21.1 | Subsidiaries of the Registrant, filed as Exhibit 21.1 to the Company's Registration Statement on Form 10-SB, filed June 29, 1998 and incorporated herein by reference. | ||
| 23.1 | * | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | * | Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
50
| Exhibit Number |
Description of Exhibit | ||
|---|---|---|---|
| 31.2 | * | Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | * | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, or adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document** | ||
| 101.SCH | XBRL Taxonomy Extension Schema Document** | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | ||
51
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated
Financial Statements
June 30, 2013 and 2012
(With Independent Registered Public Accounting Firm's Report Thereon)
52
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Financial Statements
June 30, 2013 and 2012
53
Report of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders
Corgenix Medical Corporation:
We have audited the accompanying consolidated balance sheets of Corgenix Medical Corporation and subsidiaries (the "Company") as of June 30, 2013 and 2012, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Corgenix Medical Corporation and subsidiaries as of June 30, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Hein & Associates LLP
Denver,
Colorado
September 27, 2013
54
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
| |
June 30, 2013 |
June 30, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Assets |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 1,956,624 | $ | 1,248,537 | |||
Accounts receivable, less allowance for doubtful accounts of $30,000 |
967,881 | 958,897 | |||||
Accounts receivable due from affiliates (note 7) |
298,956 | 438,041 | |||||
Other receivables |
233,624 | 17,637 | |||||
Inventories |
2,032,545 | 2,118,669 | |||||
Prepaid expenses |
17,838 | 15,341 | |||||
Total current assets |
5,507,468 | 4,797,122 | |||||
Property and Equipment: |
|||||||
Capitalized software costs |
357,832 | 357,832 | |||||
Machinery and laboratory equipment |
1,644,354 | 1,585,687 | |||||
Furniture, fixtures and office equipment |
1,747,199 | 1,743,088 | |||||
|
3,749,385 | 3,686,607 | |||||
Accumulated depreciation and amortization |
(2,853,891 | ) | (2,580,489 | ) | |||
Net Property and equipment |
895,494 | 1,106,118 | |||||
Intangible assets: |
|||||||
License, net of amortization of $166,546 and $137,688 |
259,718 | 288,576 | |||||
Other assets: |
|||||||
Due from officer |
12,000 | 12,000 | |||||
Other |
58,161 | 59,161 | |||||
Total assets |
$ | 6,732,841 | $ | 6,262,977 | |||
Liabilities, Redeemable Stocks, and Stockholders' Equity |
|||||||
Current liabilities: |
|||||||
Current portion of notes payable, net of discount (note 2) |
$ | 22,239 | $ | 38,585 | |||
Current portion of capital lease obligations |
85,403 | 108,593 | |||||
Revolving line of credit (note 3) |
— | — | |||||
Accounts payable |
476,839 | 576,694 | |||||
Accrued payroll and related liabilities |
220,240 | 281,642 | |||||
Accrued liabilities |
149,030 | 146,970 | |||||
Total current liabilities |
953,751 | 1,152,484 | |||||
Notes payable, net of discount, less current portion (note 2) |
— | 22,240 | |||||
Capital lease obligation, less current portion |
16,624 | 102,020 | |||||
Deferred Facility Lease Payable, less current portion |
329,366 | 348,104 | |||||
Total liabilities |
1,299,741 | 1,624,848 | |||||
Commitments and contingencies (note 5) |
|||||||
Redeemable preferred stock, $0.001 par value. 36,680 shares issued and outstanding, aggregate redemption value of $9,170 (note 4) |
11,738 | 11,738 | |||||
Stockholders' Equity: |
|||||||
Common stock, $0.001 par value. Authorized 200,000,000 shares; Issued and outstanding 50,233,992 and 47,213,534 shares in 2013 and 2012, respectively |
50,234 | 47,186 | |||||
Additional paid-in capital |
21,700,207 | 21,183,746 | |||||
Accumulated deficit |
(16,329,079 | ) | (16,604,541 | ) | |||
Total stockholders' equity |
5,421,362 | 4,626,391 | |||||
Total liabilities, redeemable stocks, and stockholders' equity |
$ | 6,732,841 | $ | 6,262,977 | |||
See accompanying notes to consolidated financial statements.
55
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended June 30, 2013 and 2012
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Revenues: |
|||||||
Product sales |
$ | 9,241,116 | $ | 7,909,047 | |||
Contract R & D and grant revenues |
946,689 | 1,380,311 | |||||
Total revenues |
10,187,805 | 9,289,358 | |||||
Cost of revenues: |
|||||||
Cost of goods sold |
4,910,946 | 4,310,071 | |||||
Cost of R & D and grant revenues |
713,326 | 1,044,924 | |||||
Total cost of revenues |
5,624,272 | 5,354,995 | |||||
Gross profit |
4,563,533 | 3,934,363 | |||||
Operating expenses: |
|||||||
Selling and marketing |
1,701,578 | 1,996,989 | |||||
Research and development |
582,795 | 517,062 | |||||
General and administrative |
1,982,775 | 1,889,318 | |||||
Costs associated with exit or disposal activities (note 9) |
— | 17,202 | |||||
Total expenses |
4,267,148 | 4,420,571 | |||||
Operating income (loss) |
296,385 | (486,208 | ) | ||||
Other income (expense): |
|||||||
Other income |
2,584 | 4,095 | |||||
Interest income |
470 | 674 | |||||
Interest expense |
(20,903 | ) | (122,263 | ) | |||
Total other income (expense) |
(17,849 | ) | (117,494 | ) | |||
Net income (loss) |
278,536 | (603,702 | ) | ||||
Accreted dividends on redeemable preferred and redeemable common stock |
3,074 | 19,689 | |||||
Net income (loss) attributable to common shareholders |
$ | 275,462 | $ | (623,391 | ) | ||
Earnings (loss) per share: |
|||||||
Basic |
$ | 0.01 | $ | (0.01 | ) | ||
Diluted |
$ | 0.01 | $ | (0.01 | ) | ||
Weighted-average shares outstanding: |
|||||||
Basic |
49,145,446 | 44,864,021 | |||||
Diluted |
51,233,360 | 44,864,021 | |||||
See accompanying notes to consolidated financial statements.
56
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2013 and 2012
| |
Common Stock, Number of Shares |
Common Stock, $0.001 par |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Stockholders' Equity |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balances at July 1, 2011 |
40,894,847 | $ | 40,703 | $ | 20,183,651 | $ | (15,981,150 | ) | $ | (49,296 | ) | $ | 4,193,908 | ||||||
Issuance of common stock for services |
337,219 | 337 | 34,068 | — | — | 34,405 | |||||||||||||
Issuance of common stock for cash |
6,146,516 | 6,146 | 915,824 | — | — | 921,970 | |||||||||||||
Compensation expense recorded as a result of stock options issued |
— | — | 50,206 | — | — | 50,206 | |||||||||||||
Cancellation of redeemable stock upon note pay down |
(165,048 | ) | — | — | — | — | — | ||||||||||||
Accreted dividend on redeemable Common and redeemable Preferred stock |
— | — | — | (19,689 | ) | — | (19,689 | ) | |||||||||||
Liquidation of Corgenix-UK |
— | — | (3 | ) | — | 49,296 | 49,293 | ||||||||||||
Net loss |
— | — | — | (603,702 | ) | — | (603,702 | ) | |||||||||||
Balances at June 30, 2012 |
47,213,534 | $ | 47,186 | $ | 21,183,746 | $ | (16,604,541 | ) | $ | — | $ | 4,626,391 | |||||||
Issuance of common stock for services |
247,463 | 248 | 27,551 | — | — | $ | 27,799 | ||||||||||||
Issuance of common stock for cash |
2,800,510 | 2,800 | 417,287 | — | — | 420,087 | |||||||||||||
Compensation expense recorded as a result of stock options issued |
— | — | 71,623 | — | — | 71,623 | |||||||||||||
Cancellation of redeemable stock upon note pay down |
(27,515 | ) | — | — | — | — | — | ||||||||||||
Accreted dividend on redeemable Common and redeemable preferred stock |
— | — | — | (3,074 | ) | — | (3,074 | ) | |||||||||||
Net income |
— | — | — | 278,536 | — | 278,536 | |||||||||||||
Balances at June 30, 2013 |
50,233,992 | $ | 50,234 | $ | 21,700,207 | $ | (16,329,079 | ) | $ | — | $ | 5,421,362 | |||||||
See accompanying notes to consolidated financial statements.
57
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| |
Years ended June 30 | ||||||
|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | |||||
Cash flows from operating activities: |
|||||||
Net income (loss) |
$ | 278,536 | $ | (603,702 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|||||||
Depreciation and amortization |
302,260 | 292,610 | |||||
Non-cash costs associated with exit or disposal |
— | 49,296 | |||||
Common stock issued for services |
27,799 | 34,405 | |||||
Compensation expense recorded for stock options issued |
71,623 | 50,206 | |||||
Changes in operating assets and liabilities: |
|||||||
Accounts receivable |
123,488 | 157,485 | |||||
Inventories |
86,124 | 681,804 | |||||
Prepaid expenses and other assets |
(1,497 | ) | 22,823 | ||||
Accounts payable |
(99,855 | ) | (26,270 | ) | |||
Accrued payroll and related liabilities |
(61,402 | ) | 7,957 | ||||
Accrued interest and other liabilities |
(16,678 | ) | (62,078 | ) | |||
Net cash provided by operating activities |
710,398 | 604,536 | |||||
Cash flows used in investing activities: |
|||||||
Additions to equipment |
(62,778 | ) | (184,500 | ) | |||
Net cash used in investing activities |
(62,778 | ) | (184,500 | ) | |||
Cash flows provided by (used in) financing activities: |
|||||||
Decrease in amounts due to factor |
— | (791,325 | ) | ||||
Decrease in inventory loan |
— | (163,460 | ) | ||||
Proceeds received from revolving line of credit |
7,662,034 | 7,030,921 | |||||
Payments on revolving line of credit |
(7,871,408 | ) | (7,048,557 | ) | |||
Proceeds from issuance of common stock |
420,087 | 921,970 | |||||
Payments on notes payable |
(41,660 | ) | (121,363 | ) | |||
Payments on capital lease obligations |
(108,586 | ) | (94,924 | ) | |||
Net cash provided by (used in) financing activities |
60,467 | (266,738 | ) | ||||
Net increase in cash and cash equivalents |
708,087 | 153,298 | |||||
Cash and cash equivalents at beginning of year |
1,248,537 | 1,095,239 | |||||
Cash and cash equivalents at end of year |
$ | 1,956,624 | $ | 1,248,537 | |||
Supplemental cash flow disclosures: |
|||||||
Cash paid for interest |
$ | 20,761 | $ | 115,365 | |||
Noncash investing and financing activities |
|||||||
Equipment acquired under capital leases or installment financing |
$ | — | $ | 109,198 | |||
Accreted dividends on redeemable common and redeemable preferred stock |
$ | 3,074 | $ | 19,689 | |||
See accompanying notes to consolidated financial statements.
58
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies
(a) Business and Basis of Presentation
Corgenix (formerly known as REAADS Medical Products) 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 offices and manufacturing facility are located in Broomfield, Colorado.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Corgenix, Inc. and Corgenix (UK) Limited ("Corgenix UK"). Corgenix UK was established as a United Kingdom company during 1996 to market the Company's products in Europe. Transactions are generally denominated in U.S. dollars. However, commencing October 1, 2010, the Company began the process of winding down with the intent of permanently closing its international subsidiary, Corgenix UK, and its international product sales began to be executed solely through ELITech, the Company's master distributor. As of September 30, 2011, Corgenix UK has been liquidated and is no longer in existence.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Corgenix Medical Corporation and its wholly-owned subsidiaries, Corgenix, Inc. and Corgenix (UK) Limited ("Corgenix UK"). Corgenix UK was established as a United Kingdom company during 1996 to market our products in Europe. Transactions are generally denominated in U.S. dollars, but also invoices in Euros and British Pound Sterling. All amounts are converted into U.S. dollars upon consolidation of our financial statements. Inter-company balances and transactions have been eliminated in consolidation. The financial statements ceased to be consolidated as of September 30, 2011, since Corgenix UK has been liquidated and is no longer in existence.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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. Significant estimates in these consolidated financial statements include allowance for doubtful accounts, share-based compensation expense, useful lives of long-lived assets, and the recognition and measurement of income tax benefits and related deferred tax asset valuation allowances. Actual results could differ significantly from those estimates.
(d) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of three months or less at purchase to be cash equivalents.
59
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
(e) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on historical write-off experience. We review our allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance sheet credit exposure related to customers.
(f) Inventories
Inventories are recorded at the lower of average 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 years ended June 30, 2013 and 2012. Components of inventories as of June 30 are as follows:
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Raw materials |
$ | 587,216 | $ | 425,582 | |||
Work-in-process |
602,400 | 785,726 | |||||
Finished goods |
698,683 | 907,361 | |||||
Laboratory instrument related |
144,246 | — | |||||
|
$ | 2,032,545 | $ | 2,118,669 | |||
(g) 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. There was no equipment acquired under capital leases and installment financing in fiscal year ended June 30, 2013. In the fiscal year ended June 30, 2012, there was $109,198 of equipment acquired under capital leases and installment financing. Depreciation and amortization expense, which totaled $273,402 and $263,753 for the years ended June 30, 2013 and 2012, 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. Capitalized software costs are related to the Company's accounting software, which is being amortized over five years, beginning in March 2008, and additionally in March 2011.
(h) Intangible Assets
Intangible assets consist of purchased licenses. Purchased licenses are amortized using the straight-line method over the shorter of 15 years or the remaining life of the license. We have adopted the provisions of the Goodwill and Other Intangible Assets Topic of the FASB ASC. Pursuant to these provisions, goodwill and intangible assets acquired in a purchase business combination and determined to have indefinite lives and licenses acquired with no definite term are not amortized, but instead are tested for impairment at least annually in accordance with the provisions of this statement. Identifiable
60
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
intangibles with estimated useful lives continue to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with the Accounting for Impairment or Disposal of Long Lived Assets Topic as set forth in the FASB ASC.
On March 1, 2007, we executed an exclusive license agreement (the "License Agreement") with Creative Clinical Concepts, Inc. ("CCC"). The License Agreement provides that CCC license to us certain products and assets related to determining the effectiveness of aspirin and / or anti-platelet therapy (collectively, "Aspirin Effectiveness Technology," or the "Licensed Products"). The Aspirin Effectiveness Technology includes US trademark registration number 2,688,842, which includes the term "AspirinWorks"® and related designs. As previously reported, the License Agreement required us to pay or issue certain amounts of cash, common stock, and warrants to CCC, subject to various caps. As of June 30, 2013 and 2012, the Company had no accrual with respect to the cumulative amount due to CCC. For the fiscal years ended June 30, 2013 and June 30, 2012, we issued neither shares nor warrants to CCC.
The License Agreement also requires that, for all sales of the Licensed Products subsequent to the execution of the agreement, we pay CCC a quarterly royalty fee equal to seven percent (7%) of net sales of the Licensed Products during the immediately preceding quarter. The License Agreement's caps on payments from us to CCC do not apply to royalty payments.
The following is a summary of intangible assets as of June 30, 2013:
| |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Amortizing intangible assets: |
||||||||||
License |
$ | 426,264 | $ | (166,546 | ) | $ | 259,718 | |||
No impairment was recognized in the value of amortizing intangible assets during the years ending June 30, 2013 or 2012. Amortization expense of licenses totaled $28,858 and $28,857 for the years ended June 30, 2013 and 2012, respectively. Estimated amortization expense for the next five years is as follows:
Year Ending June 30,
|
Estimated Amortization Expense |
|||
|---|---|---|---|---|
2014 |
$ | 28,857 | ||
2015 |
$ | 28,857 | ||
2016 |
$ | 28,857 | ||
2017 |
$ | 28,857 | ||
2018 |
$ | 28,857 | ||
(i) Financial Instruments
Financial instruments consist principally of cash, money market funds, accounts receivable, accounts payable and notes payable. The Company believes that the fair value of financial instruments
61
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
approximates the recorded book value of those instruments due to the short term nature of the instruments, or stated interest rates that approximate market interest rates.
(j) Advertising Costs
Advertising costs are expensed when incurred. Advertising costs included in selling and marketing expenses totaled $41,752 and $61,458 in the fiscal years ended June 30, 2013 and 2012, respectively.
(k) 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 carry forwards 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 that 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 carry forwards.
(l) 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. When revenue is received by a customer in advance of shipment of products, in exchange for a discount, it is credited to deferred revenue and taken into revenue upon eventual shipment of the products. The Company also has contract manufacturing arrangements under which it manufactures products for other companies, and, in some cases, holds the product for shipment to designated customers, pursuant to the manufacturing agreement. Revenue under these arrangements is recognized when the manufacturing process is complete and risk of ownership has passed.
(m) Research and Development and Grants
The Company serves as a sub-contractor to Tulane University for several NIH funded grants and contracts related to development of diagnostics, vaccines and therapeutics for hemorrhagic fever viruses. Under the terms of the subcontracts, the Company invoices Tulane monthly for all allocable expenses incurred in support of the grants and contracts. This includes fully burdened salaries, supplies, production kits, travel and equipment. The Company serves as the principal investigator for an NIH funded two-year contract to develop recombinant diagnostic tests for the filoviruses (Ebola and Marburg), and has engaged three subcontractors (Tulane University, Autoimmune Technologies and the Scripps Research Institute) to assist in the development. Each month the subcontractors invoice the
62
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
Company for allocable monthly expenses including fully burdened salaries, supplies and travel; the Company consolidates these expenses with its own allocable expense and invoices the NIH.
Research and development costs and any costs associated with grants, internally developed patents, formulas or other proprietary technology are expensed as incurred. Expenses that are directly related to the generation of specific research and development and grant revenue are expensed as incurred and included in cost of revenues. Since contract R & D and Grant related revenue has become a more meaningful aspect of its business over the past two years, the R & D expenses which are directly related to the generation of specific contract R & D and Grant revenue, have been reclassified out of R & D expense to cost of revenues. Gross Research and development expenses, prior to the reclassification of a portion of said expenses to cost of revenues, decreased $97,990 or 7.0% to $1,294,818 for the fiscal year ended June 30, 2013, from $1,392,808 for the fiscal year ended June 30, 2012. The amounts of gross research and development expenses included in cost of revenues for the years ended June 30, 2013 and 2012 amounted to $713,326 and $1,044,924, respectively.
Revenue from research and development contracts represent amounts earned pursuant to agreements to perform research and development activities for third parties and is recognized as earned under the respective agreement. Revenue is recognized as work is performed and expenditures are made over the contract period. Research and development agreements in effect in 2013 and 2012 provided for fees to the Company based on time and materials in exchange for performance specified research and development functions. Contract research and development revenues were $630,266 and $771,856 for the years ended June 30, 2013 and 2012, respectively. Research and development contracts have terms from one to three years with options to extend, and can be cancelled under specific circumstances.
(n) 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 the fair value of the related assets.
(o) Share-Based Compensation
The Company accounts for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options based on estimated fair values. The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the required service period in its Statements of Operations. Share- based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. The guidance further requires forfeitures to be estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures differ from those estimates.
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CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
For purposes of determining estimated fair value of share-based payment awards on the date of grant under this guidance, the Company uses the Black- Scholes option-pricing model (Black Scholes Model). The Black Scholes Model requires the input of highly subjective assumptions. Because its employee stock options may have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not provide a reliable single measure of the fair value of the Company's employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share- based compensation. Circumstances may change and additional data may become available over time, which result in changes to these assumptions and methodologies, which could materially impact its fair value determination.
The application of guidance for share-based compensation may be subject to further interpretation and refinement over time. There are significant differences among option valuation models, and this may result in a lack of comparability with other companies that use different models, methods and assumptions. If factors change and the Company employs different assumptions in the application of the guidance in future periods, or if it decides to use a different valuation model, the compensation expense that the Company records in the future under this guidance may differ significantly from what it has recorded in the current period and could materially affect its loss from operations, net loss and net loss per share.
(p) Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding increased for potentially dilutive common shares outstanding during the period. The dilutive effect of stock options and their equivalents is calculated using the treasury stock method. Options and warrants to purchase common stock, totaling 23,589,264 shares for the fiscal year ended June 30, 2012 were not included in the calculation of weighted average
64
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
diluted common shares below as their effect would be to lower the net loss per share and thus be anti-dilutive.
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Net earnings (loss) attributable to common shareholders |
$ | 275,462 | $ | (623,391 | ) | ||
Common and common equivalent shares outstanding: |
|||||||
Historical common shares outstanding at beginning of period |
47,213,534 | 40,894,847 | |||||
Weighted average common equivalent shares issued during the period |
1,931,912 | 3,969,174 | |||||
Weighted average common shares—basic |
49,145,446 | 44,864,021 | |||||
Dilutive potential common shares: |
|||||||
Stock options and warrants |
2,087,914 | — | |||||
Weighted average common shares and dilutive potential common shares |
51,233,360 | 44,864,021 | |||||
Net income (loss) per share—basic |
$ | 0.01 | $ | (0.01 | ) | ||
Net income (loss) per share—diluted |
$ | 0.01 | $ | (0.01 | ) | ||
Options and warrants totaling 23,589,284 shares as of June 30, 2012, were not considered in the calculation of weighted average common shares and dilutive potential common shares above, as their effect would be to lower the net loss per share and thus be anti-dilutive.
(q) Liquidity
At June 30, 2013, our working capital increased by $909,079 to $4,553,717 from $3,644,638 at June 30, 2012, and concurrently, our current ratio (current assets divided by current liabilities) increased from 4.16 to 1 at June 30, 2012 to 5.77 to 1 at June 30, 2013. This increase in working capital is primarily attributable to the net income for the period.
At June 30, 2013, trade and other receivables were $1,500,461 versus $1,414,575 at June 30, 2012. Accounts payable, accrued payroll and other accrued expenses were $846,109 as of June 30, 2013, versus $1,005,306 as of June 30, 2012. At June 30, 2013, inventories were $2,032,545 versus $2,118,669 at June 30, 2012. This decrease in inventories occurred as a result of a continuing effort to better manage the company's purchasing practices in addition to the streamlining of the manufacturing process related to our products.
For the fiscal year ended June 30, 2013, cash provided by operating activities amounted to $710,398, versus $604,536 for the fiscal year ended June 30, 2012. The $710,398 cash provided by operating activities was primarily attributable to the net income for the current year, supplemented by a reduction in inventories and accounts receivable during the current fiscal year. The $710,398 cash provided by operating activities less the $62,778 of cash used by investing activities (primarily due to
65
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
the purchase of equipment), plus the $60,467 net cash provided by financing activities, resulted in a net increase of $708,087 in our cash balance as of June 30, 2013.
We have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of dividends on redeemable common and redeemable preferred stock, have aggregated $13,926,676, 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. Historically, we have financed our operations primarily through long-term debt, short term lines of credit, and the sales of common stock, redeemable common stock, and preferred stock. We have also financed operations through sales of diagnostic products and agreements with strategic partners. We have developed and are continuing to modify an operating plan intended to eventually achieve sustainable profitability, positive cash flow from operations, and an adequate level of financial liquidity. Key components of this plan include consistent revenue growth and the cash to be derived from such growth, as well as the expansion of our strategic alliances with other biotechnology and diagnostic companies, securing diagnostic-related government contracts and grants, improving operating efficiencies to reduce our cost of sales as a percentage of sales, thereby improving gross margins, and lowering our overall operating expenses. If our sales were to decline, are flat, or achieve very slow growth, we would undoubtedly incur operating losses and a decreasing level of liquidity for that period of time. In view of this, and in order to further improve our liquidity and operating results, we entered into the ELITech collaboration and investment, described above.
(r) Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold.
(s) Recently Issued Accounting Pronouncements
There are no newly issued standards expected to have a material effect on the Company.
(t) Fair Value Measurements
The fair value of its financial instruments reflect the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The guidance also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1—quoted prices in active markets for identical assets and liabilities.
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3—unobservable inputs.
66
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(1) Summary of Significant Accounting Policies (Continued)
The Company's financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following tables set forth the fair value of the Company's financial assets that were measured on a recurring basis:
| |
Level 1 | Level 2 | Level 3 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of June 30, 2013: |
|||||||||||||
Money market funds |
$ | 1,038,946 | — | — | $ | 1,038,946 | |||||||
Total |
$ | 1,038,946 | — | — | $ | 1,038,946 | |||||||
| |
Level 1 | Level 2 | Level 3 | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of June 30, 2012: |
|||||||||||||
Money market funds |
$ | 585,027 | — | — | $ | 585,027 | |||||||
Total |
$ | 585,027 | — | — | $ | 585,027 | |||||||
(2) Notes Payable
Notes payable consist of the following:
| |
June 30, 2013 | June 30, 2012 | |||||
|---|---|---|---|---|---|---|---|
Note payable, net of discount of $3,074 at June 30, 2012, unsecured, to redeemable common stockholders, with interest at prime plus 2.0% (5.25% as of June 30, 2012) due in monthly installments with principal payments of $5,200 plus interest through August 2012 |
$ | — | $ | 7,526 | |||
Installment loan payable, payable to PNC Equipment Finance, to finance upgrade of accounting software, with interest at 8.63%, due in monthly installments of $2,871 plus interest through February 2014, collateralized by certain equipment |
22,239 | 53,299 | |||||
|
22,239 | 60,825 | |||||
Current portion, net of current portion of discount |
(22,239 | ) | (38,585 | ) | |||
Notes payable, excluding current portion and net of long-term portion of discount |
$ | — | $ | 22,240 | |||
(3) Revolving Line of Credit
On July 14, 2011, the Company entered into a Revolving Credit and Security Agreement (the "Loan Agreement") with LSQ Funding Group, L.C., a Florida limited liability company ("LSQ"), which provided the Company with a $1,500,000 revolving line of credit (the "Line").
Pursuant to the terms of the Loan Agreement, LSQ is providing the Line to us under which LSQ agrees to make loans to us in the maximum principal amount outstanding at any time of $1,500,000. The maximum amount of the loans under the Line shall also be governed by a borrowing base equal to
67
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(3) Revolving Line of Credit (Continued)
85% of Eligible Accounts Receivable plus 50% of Eligible Inventory, with certain limits and exclusions more fully set forth in the Loan Agreement.
Interest accrues on the average outstanding principal balance of the loans under the Line at an interest rate equal to 0.043% per day (15.7% APR).
Loans under the Line may be repaid and such repaid amounts re-borrowed until the maturity date. Unless terminated by us or accelerated by LSQ in accordance with the terms of the Loan Agreement, the Line will terminate and all loans there under must be repaid on July 14, 2013. Although the Line did mature on July 14, 2013, the Line has continued to function in the same manner as it had over the prior two years.
In addition, pursuant to the terms of the Loan Agreement, we granted to LSQ a security interest in all of our personal property to secure the repayment of the loans under the Line and all other of our obligations to LSQ, whether under the Loan Agreement or otherwise.
We used the money which we received under the Loan Agreement and the Line to pay off our prior outstanding debt obligations to Summit Financial Resources, L.P. ("Summit"), which totaled $732,487 as of July 14, 2011, the date of payment. Such payment resulted in our indebtedness and obligations owing to Summit being terminated and satisfied in full. Currently, we have made a concerted effort to minimize our use of the Line, and consequently for the fiscal years ended June 30, 2013 and June 30, 2012, LSQ funded a total of $7,662,034 and $7,030,921, respectively under the Line, none of which was outstanding as of June 30, 2013 or June 30, 2012. As a consequence, $227,011 and $17,637 was owed to the Company by LSQ as of June 30, 2013 and June 30, 2012, respectively.
(4) Equity
(a) Common Stock
On September 16, 2011, Wescor , a wholly owned subsidiary of ELITech ("Wescor") invested an additional $500,000 pursuant to the Third Tranche under a Common Stock Purchase Agreement and was issued 3,333,333 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 1,666,667 shares at $0.15 per share. As a condition to the closing of the Third Tranche, the Executive Committee, comprised of key scientific and executive personnel of both the Company and ELITech, established under the Joint Product Development Agreement has determined the feasibility of creating not less than two (2) new Corgenix assays as further described in the Joint Product Development Agreement, entered into with ELITech on July 16, 2010 (the "Joint Product Development Agreement.").
On July 28, 2011, we entered into a First Amended Joint Product Development Agreement (the "2011 Development Agreement") with ELITech and Wescor. Each party is responsible for its own costs, expenses and liabilities incurred under the Agreement; however, ELITech and Wescor will be responsible for expenses related to the development of new Corgenix Assays and systems. Pursuant to this agreement, each month we will notify Wescor of the amount of their stock purchase commitment, which is equal to sixty-six and 7/10 percent (66.7%) of the amount of each monthly R & D invoice at a per share price of $0.15. Wescor must purchase such shares within thirty (30) days of each notification.
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CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(4) Equity (Continued)
For the fiscal years ended June 30, 2013 and June 30, 2012, we generated $503,514 and $793,356, respectively in R & D revenue from Wescor, and issued 2,800,510 and 2,813,182 shares, respectively under this arrangement. Also, pursuant to the 2011 Development Agreement, as of June 30, 2013 and June 30, 2012 there was $34,421 and $213,663, respectively, in accounts receivable for ELITech/Wescor-funded research and development and $22,959 and $107,191 due from Wescor with respect to stock purchase commitments owing from Wescor for 153,057 and 950,083 shares, respectively, to be issued subsequent to June 30, 2013 and June 30, 2012, respectively. The $22,959 and $107,191 stock purchase commitments were not recorded as of June 30, 2013 or June 30, 2012.
As a result of these transactions and including warrants, ELITech beneficially (which takes into effect both the stock and warrants) owned 45.0% of the Company's outstanding shares as of June 30, 2013, and is considered a related party.
(b) Employee 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. On April 26, 2008, Shareholders approved the Company's Second Amended and Restated Employee Stock Purchase Plan. These plans are 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 600,000 common shares have been registered with the Securities and Exchange Commission (SEC) for purchase under the two plans. In fiscal 2013, 247,463 shares were issued under the plans. In the fiscal year ended June 30, 2012, 337,219 shares were issued under the plan.
On January 17, 2012, at our Annual Meeting of shareholders, the shareholders voted to approve The Third Amended & Restated Employee Stock Purchase Plan, effective January 1, 2012. The maximum number of shares that may be sold under the Third Amended & Restated Employee Stock Purchase Plan is 500,000 shares, which shares have been registered with the SEC.
In the fiscal years ended June 30, 2013 and 2012, the benefits expense recognized for the 15% discount on shares purchased under the plans amounted to $27,799 and $5,161, respectively.
(c) Incentive Stock Option and Compensation Plans
Stock Options as of March 31, 2013
Our third Amended and Restated Employee Stock Purchase Plan and the 2007 and 2011 Incentive Compensation Plans (the "Plans") provide for two separate components. The Stock Option Grant Program, administered by the Compensation Committee (the "Committee") appointed by our Board of Directors, provides for the grant of incentive and non-statutory stock options to purchase common stock to employees, directors or other independent advisors designated by the Committee. The Restricted Stock Program administered by the Committee, provides for the issuance of Restricted Stock
69
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(4) Equity (Continued)
Awards to employees, directors or other independent advisors designated by the Committee. The following table summarizes stock options outstanding as of June 30, 2013, and changes during the twelve months then ended:
| |
Outstanding Options | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term (in months) |
Aggregate Intrinsic Value |
|||||||||
Options outstanding at June 30, 2011 |
2,420,000 | $ | 0.30 | 36.2 | $ | — | |||||||
Granted |
2,000,000 | $ | 0.09 | — | |||||||||
Exercised |
— | $ | — | — | |||||||||
Cancelled, expired or forfeited |
(695,000 | ) | $ | 0.24 | — | ||||||||
Options outstanding at June 30, 2012 |
3,725,000 | $ | 0.19 | 52.6 | $ | — | |||||||
Granted |
350,000 | $ | 0.13 | 74.6 | |||||||||
Exercised |
— | $ | — | — | |||||||||
Cancelled, expired or forfeited |
(463,000 | ) | $ | 0.19 | — | ||||||||
Options outstanding at June 30, 2013 |
3,612,000 | $ | 0.19 | 26.2 | $ | 15,930 | |||||||
Options exercisable at June 30, 2013 |
2,510,333 | $ | 0.23 | 37.6 | $ | — | |||||||
The total intrinsic value of outstanding options as of June 30, 2013 measures the difference between the market price as of June 30, 2013 ($0.18) and the respective option's exercise price. No options were exercised during the fiscal years ended June 30, 2013 or June 30, 2012. Consequently, no cash was received, nor did we realize any tax deductions related to exercise of stock options during the period.
As of June 30, 2013, estimated unrecognized compensation cost from unvested stock options amounted to $64,410, which is expected to be recognized over a weighted average period of 63.6 months.
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CORGENIX MEDICAL CORPORATION
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Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(4) Equity (Continued)
The weighted average per share fair value of stock options granted during the fiscal year ending June 30, 2013 was $0.13. The weighted average per share fair value of stock options granted during the fiscal year ending June 30, 2012 was $0.08. The fair value was estimated as of the respective option's grant date using the Black-Scholes option pricing model with the following assumptions:
| |
June 30, | ||||||
|---|---|---|---|---|---|---|---|
Valuation Assumptions
|
2013 | 2012 | |||||
Expected life |
7years | 7 years | |||||
Risk-free interest rate |
2.69 | % | 2.69 | % | |||
Expected volatility |
161.5 | % | 113.7 | % | |||
Expected dividend yield |
0 | % | 0 | % | |||
(d) Short-Term Incentive Compensation
For the fiscal year ended June 30, 2013, the Company adopted a one year Short-term Incentive Compensation Plan to provide executive officers an opportunity to earn cash or shares of its common stock as a bonus and in lieu of cash compensation upon the achievement by the Company of certain stipulated and targeted sales and net income amounts. No shares of common stock have been issued under this plan.
(e) Redeemable Convertible Preferred Stock
On February 3, 2009, as part of a debt restructuring agreement, the Company issued 36,680 shares of its Series B Convertible Preferred Stock ("Series B") to Truk Opportunity Fund, LLC, a Delaware company and Truk International Fund, LP, a Cayman Islands company (collectively, "Truk"). The shares have a liquidation preference of $9,170, which will be convertible into 146,720 shares of its common stock at the rate of $0.25 per share.
The liquidation preference of the convertible preferred stock has been deemed to be a redemption feature of said stock. Accordingly, over the three year period, the amount of the convertible preferred stock as shown on the Balance Sheet, was accreted, such that, at the end of the three year period, the amount equaled the amount of common stock capable of being converted by the convertible preferred stock. This accretion of the convertible preferred stock has been reflected on the Statement of Operations, as accreted dividends.
According to the Company's Certificate of Designations of Preferences, Rights & Limitations, Series B Convertible Preferred Stock, the Company did not automatically redeem Truk's Series B Convertible Preferred Stock as required. According to the terms of the preferred shares, automatic redemption was to occur on February 3, 2012, at the Conversion Value per share, which at the time was $0.25 multiplied by 36,680 issued and outstanding shares for a total cash redemption of $9,170. The Company intends to inform the investor and will work with the investor to determine whether the investor would like to be redeemed at that time while verifying the cash payment that should have been made in February 2012, and arrange to make that payment as soon as possible.
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CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(5) Commitments and Contingencies
(a) Leases
The Company is obligated under various non-cancellable operating and capital leases primarily for its operating facilities and certain office equipment. The leases generally require the Company to pay related insurance costs, maintenance costs and taxes. Rent expense on operating leases is reflected on a straight-line basis over the lease term. Future minimum lease payments under non-cancelable leases, with initial or remaining terms in excess of one year, as of June 30, 2013, are as follows:
| |
Capital Leases |
Operating Leases |
|||||
|---|---|---|---|---|---|---|---|
Years ending June 30: |
|||||||
2014 |
$ | 90,723 | $ | 404,013 | |||
2015 |
17,051 | $ | 417,330 | ||||
2016 |
— | $ | 412,751 | ||||
2017 |
— | $ | 419,241 | ||||
2018 |
— | 430,352 | |||||
2019 |
— | $ | 329,777 | ||||
Total future minimum lease payments |
107,774 | $ | 2,413,464 | ||||
Less amounts representing interest |
(5,747 | ) | |||||
Present value of minimum capital lease payments |
102,027 | ||||||
Less current portion |
(85,403 | ) | |||||
Capital lease obligations less current portion |
$ | 16,624 | |||||
Rent expense totaled $329,242 and $348,054 for the years ended June 30, 2013 and 2012, respectively.
(b) Employment Agreements
The Company has employment agreements with five key employees, all of whom are also stockholders. In addition to salary and benefit provisions, each of the above employment agreements is for an initial term of three years, provides for severance payments equal to twelve month's salary and benefits if the employment of the officer is terminated without cause (as defined in the respective agreements), and an automobile expense reimbursement of $500 per month.
(6) Income Taxes
The Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal authorities for the years 2010 through 2013. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company's financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.
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CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(6) Income Taxes (Continued)
The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company has accrued $0 for interest and penalties as of June 30, 2013.
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 38% to pretax income as a result of the following:
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Computed expected tax benefit (expense) |
$ | 98,000 | $ | (205,000 | ) | ||
Reduction (increase) in income taxes resulting from: |
|||||||
Permanent differences: |
|||||||
Stock Options and Other |
36,000 | 28,000 | |||||
Change in valuation allowance |
(230,000 | ) | 206,000 | ||||
Expiration of NOL, research and development credit and other |
54,000 | — | |||||
Expected state tax benefit (expense), net |
8,000 | (18,000 | ) | ||||
Other |
34,000 | (11,000 | ) | ||||
|
$ | — | $ | — | |||
Deferred tax assets related to the Company's operations are comprised of the following at June 30, 2013.
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Deferred tax assets (liabilities): |
|||||||
Current— |
|||||||
Salary and other accruals |
$ | 21,000 | $ | 49,000 | |||
Bad debt allowance |
11,000 | 11,000 | |||||
Section 263A inventory capitalization |
42,000 | 23,000 | |||||
Deferred revenue |
8,000 | — | |||||
Non-Current— |
|||||||
Tax effect of net operating loss carry forward and R & D credit carryforward |
2,452,000 | 2,718,000 | |||||
Long-lived assets |
121,000 | 85,000 | |||||
Net deferred tax assets |
2,655,000 | 2,886,000 | |||||
Less valuation allowance |
(2,655,000 | ) | (2,886,000 | ) | |||
Net deferred tax assets |
$ | — | $ | — | |||
At June 30, 2013, the Company has a net operating loss carry forward for income tax purposes of approximately $5,594,000 expiring during the period from 2015 to 2032. Research and experimentation tax credit carry forwards approximate $339,000. The utilization of net operating losses may also be limited due to a change in ownership under Internal Revenue Code Section 382.
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.
73
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(7) Related Party Transactions
The ELITech Group, a French diagnostic company, via its wholly owned subsidiaries, ELITech-UK (our master international distributor) and Wescor (located in Logan, Utah) (the "ELITech Group") combined are considered to be a related party, beneficially owning 45.0% of the Company's outstanding shares, and, as of June 30, 2013, was the Company's largest customer. For the fiscal years ended June 30, 2013 and June 30, 2012, we generated $503,514 and $793,356, respectively in R & D revenue from Wescor. In addition, the company's international product sales to ELITech-UK for the fiscal years ended June 30, 2013 and June 30, 2012 amounted to $1,132,493 and $999,005, respectively. Thus, in total, the ELITech Group (ELITech-UK and Wescor) represented approximately 16.1% and 19.3% of total revenues for the fiscal years ended June 30, 2013 and June 30, 2012, respectively. Finally, the ELITech Group represented 23.6% and 31.0% of total trade accounts receivable at June 30, 2013 and June 30, 2012, respectively.
(8) Concentration of Credit Risk
The Company's customers, with the exception of the ELITech Group, are principally located in the U.S. The Company performs periodic credit evaluations of its customers' financial condition but generally does not require collateral for receivables. In the fiscal year ended June 30, 2013, our largest customers, the ELITech Group, DiaDexus, Inc., and BG Medicine, Inc. accounted for 16.1%, 10.8%, and 10.2% of our total revenues, respectively. With respect to our total accounts receivable, the ELITech Group accounted for 23.6% of our total accounts receivable, while DiaDexus, Inc. and BG Medicine, Inc. each represented less than 1% of total accounts receivable.
(9) Costs Associated with Exit or Disposal Activities
On July 12, 2010, the Company announced that under the terms and conditions of the distribution agreement ("Master Distribution Agreement") with ELITech UK entered into on July 12, 2010, and as a condition precedent to the closing of the Second Tranche of the Common Stock Purchase Agreement with ELITech and Wescor, also entered into on July 12, 2010, ELITech UK became the exclusive distributor of its Products (as that term is defined therein) outside of North America. Accordingly, the Company along with Corgenix UK assigned and/or transferred the economic benefit to ELITech UK, and ELITech UK assumed all of the obligations of the Company or Corgenix UK under all distribution agreements executed by us or Corgenix UK, as the case may be, related to any distributor whose territory is outside of North America. Thus, as a condition to the closing of the Second Tranche investment with the ELITech group, it has effectively transferred its product distribution activity outside of North America from its subsidiary, Corgenix UK, to ELITech UK.
Pursuant to this plan, beginning October 1, 2010, the Company began winding down the business activities heretofore carried out by Corgenix UK. As of September 30, 2011, Corgenix-UK was completely liquidated and all of the costs associated with exit or disposal activities have been incurred and accounted for.
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CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(10) Subsequent Events
The Bank of the West Line of Credit
On August 28, 2013, the Company entered into a Business Loan Agreement (the "Loan Agreement") effective August 15, 2013 between the Company and Bank of the West (the "Bank").
Pursuant to the terms of the Loan Agreement, the Bank is providing a revolving line of credit (the "Line") to the Company not to exceed $1,500,000. Interest accrues at a variable one month LIBOR (currently 0.18%) plus 4.00% per annum. Interest payments are due monthly.
Unless terminated by the Company or accelerated by the Bank in accordance with the terms of the Loan Agreement, the Line will terminate and all loans thereunder must be repaid on November 5, 2014.
The Loan Agreement contains certain representations, warranties, covenants and events of default typical in financings of this type, including, for example, limitations on assuming additional debt, making investments, or the sale of Company assets or other changes in the ownership of the Company.
In addition, pursuant to the terms of the Loan Agreement, the Company will grant to the Bank a security interest in all of the Company's assets to secure the repayment of the loans under the Line and to secure all other obligations of the Company to the Bank.
The Company will use the money it receives under the Loan Agreement for general short term working capital purposes.
The Loan Agreement and the accompanying Promissory Note were filed as Exhibits 10.1 and 10.2, respectively, to the Current Report on Form 8-K filed on September 4, 2013, and the description of material terms of such documents herein are qualified in their entirety by reference to such exhibits.
The Line will be activated when the notice period to LSQ described below has elapsed and the Bank is able to secure a first lien on the Company's assets.
On August 28, 2013, the Company provided written notice to LSQ, that the Company desires to terminate the Revolving Credit and Security Agreement (the "LSQ Agreement") dated July 14, 2011 between the Company and LSQ. The LSQ Agreement requires 60 days' notice by the Company to LSQ to terminate, and thus the termination will be effective October 27, 2013. Any ancillary agreements and documents entered into in connection with the LSQ Agreement will terminate in connection with the termination of the LSQ Agreement.
Under the LSQ Agreement, LSQ, the lender, provides a line of credit to the Company under which LSQ agreed to make loans to the Company in the maximum principal amount outstanding at any time of $1,500,000. The proceeds of the loans under the line of credit have been used to repay certain loans and other amounts payable by the Company. The LSQ Agreement was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 20, 2011, and the description of material terms of the LSQ Agreement is qualified in its entirety by reference to that exhibit.
The notice states that the Company is not dissatisfied with its relationship with LSQ but desires to pursue other borrowing opportunities.
75
CORGENIX MEDICAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
June 30, 2013 and 2012
(10) Subsequent Events (Continued)
The Company does not expect to incur any termination penalties as a result of the termination.
The New AtherOx™ Agreement
On July 5, 2013, we filed a Current Report on Form 8-K disclosing that Corgenix Medical Corporation (the "Company") received written notice from legal counsel for Eiji Matsuura, Ph.D. ("Dr. Matsuura") that Dr. Matsuura desired to terminate the Amended and Restated License Agreement dated April 14, 2010 between the Company and Dr. Matsuura (the "Prior License Agreement") because Dr. Matsuura believed the Company breached certain obligations under the Prior License Agreement. We stated that the Company disputed that Dr. Matsuura had sufficient cause for terminating the Prior License Agreement and intended to contest the proposed termination.
Since the Company's receipt of Dr. Matsuura's notice, the Company and Dr. Matsuura have, through discussions, resolved any and all disputes regarding the Prior License Agreement, and Dr. Matsuura retracted his notice of termination and demand for arbitration of disputes. To evidence the terms of the Company's and Dr. Matsuura's joint resolutions and revised arrangement going forward, the parties entered into a new License and Cooperation Agreement (the "New License and Cooperation Agreement"), effective September 4, 2013, which replaces the Prior License Agreement, and the Prior License Agreement is thereby terminated.
As described above, effective September 4, 2013, the Company entered into the New License and Cooperation Agreement with Dr. Matsuura, which amends and restates the Prior License Agreement between the parties. On September 10, 2013, the Company issued a press release announcing its entry into the New License and Cooperation Agreement, a copy of which is filed herewith as Exhibit 99.1. Under the New License and Cooperation Agreement, Dr. Matsuura grants the Company access to certain technology owned by Dr. Matsuura for the determination of oxidized lipoproteins and related analytes, antibodies and antigens to develop human in-vitro diagnostic products to be manufactured and sold by the Company. In consideration for the license, the Company will pay Dr. Matsuura consulting fees and royalty payments in accordance with the terms of the New License and Cooperation Agreement. The New License and Cooperation Agreement will continue in effect until September 29, 2022, unless terminated earlier in accordance with the terms of the New License and Cooperation Agreement, and may be renewed upon the mutual agreement of the parties.
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CORGENIX MEDICAL CORPORATION | ||||||
September 27, 2013 |
||||||
By: |
/s/ WILLIAM H. CRITCHFIELD William H. Critchfield Senior Vice President Operations and Finance and Chief Financial Officer |
By: |
/s/ DOUGLASS T. SIMPSON Douglass T. Simpson President, Chief Executive Officer and Director |
|||
By: |
/s/ DENNIS FUSCO Dennis Fusco Director |
|||||
By: |
/s/ ROBERT TUTAG Robert Tutag Director |
|||||
By: |
/s/ STEPHEN P. GOUZE Stephen P. Gouze Director and Chairman of the Board |
|||||
/s/ DENNIS WALCZEWSKI Dennis Walczewski Director |
||||||
By: |
/s/ BRUCE A. HUEBNER Bruce A. Huebner Director |
|||||
By: |
/s/ DAVID LUDVIGSON David Ludvigson Director |
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