Table of Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2011**

 

**o****         TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from               to**

 

**Commission File Number 000-24541**

 

**CORGENIX MEDICAL CORPORATION**

(Name of Small Business Issuer in its Charter)

 

| **Nevada**                      | ** ** | **93-1223466**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**11575 Main Street, Number 400, Broomfield, CO 80020**

(Address of principal executive offices, including zip code)

 

**(303) 457-4345**

(Issuer’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing guidance for the past 90 days.  Yes x  No o

 

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 o  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                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o  No x

 

The number of shares of Common Stock outstanding was 40,894,847 as of May 9, 2011.

 

 

 

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Table of Contents

 

**CORGENIX MEDICAL CORPORATION**

**March 31, 2011**

 

**TABLE OF CONTENTS**

 
| **Part I**           |                                                                                         |   |
|---------------------------|----------------------------------------------------------------------------------------------|--------|
|                      |                                                                                         |   |
| **Financial Information** | 3                                                                                            |
|                      |                                                                                         |   |
| Item 1.                   | Consolidated Financial   Statements                                                          | 3      |
|                      |                                                                                         |   |
| Item 2.                   | Management’s Discussion and Analysis Of   Financial Condition and Results of Operations | 21     |
|                      |                                                                                         |   |
| Item 3.                   | Quantitative and Qualitative Disclosures   About Market Risk                                 | 28     |
|                      |                                                                                         |   |
| Item 4.                   | Controls and Procedures                                                                      | 28     |
|                      |                                                                                         |   |
| **Part II**          |                                                                                         |   |
|                      |                                                                                         |   |
| **Other Information**     | 28                                                                                           |
|                      |                                                                                         |   |
| Item 1.                   | Legal Proceedings                                                                            | 28     |
|                      |                                                                                         |   |
| Item 2.                   | Unregistered   Sales of Equity Securities and Use of Proceeds                                | 28     |
|                      |                                                                                         |   |
| Item 3.                   | Defaults   Upon Senior Securities                                                            | 29     |
|                      |                                                                                         |   |
| Item 4.                   | Submission   of Matters to a Vote of Security Holders                                        | 29     |
|                      |                                                                                         |   |
| Item 5.                   | Other Information                                                                            | 29     |
|                      |                                                                                         |   |
| Item 6.                   | Exhibits                                                                                     | 29     |
|                      |                                                                                         |   |
| Certifications            | 31                                                                                           |

 

2

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Table of Contents

 

**PART I**

**Item 1. Consolidated Financial Statements**

**CORGENIX MEDICAL CORPORATION**

**AND SUBSIDIARIES**

Consolidated Balance Sheets

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                        | ** ** | **March 31,   2011** | ** ** | **June 30, 2010** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                        | ** ** | ** **                | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                                        | ** ** | ** **                | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                                   |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                         |       | $                         | 1,086,263  |                        | $          | 494,096 |   |
| Accounts receivable, less allowance for doubtful   accounts of $30,000 as of March 31, 2011 and   June 30, 2010                                                                                          |       | 1,159,515                 |       | 1,269,795                   |       |
| Other receivables                                                                                                                                                                                                                 |       | 86,639                    |       | 139,174                     |       |
| Inventories                                                                                                                                                                                                                       |       | 2,840,726                 |       | 2,499,557                   |       |
| Prepaid expenses and other current assets                                                                                                                                                                                         |       | 19,449                    |       | 77,425                      |       |
| Total current assets                                                                                                                                                                                                              |       | 5,192,592                 |       | 4,480,047                   |       |
| Equipment                                                                                                                                                                                                                         |       |                      |       |                        |       |
| Capitalized software costs                                                                                                                                                                                                        |       | 355,186                   |       | 258,947                     |       |
| Machinery and laboratory equipment                                                                                                                                                                                                |       | 1,246,816                 |       | 1,061,357                   |       |
| Furniture, fixtures, leaseholds & office   equipment                                                                                                                                                                     |       | 1,782,131                 |       | 1,862,179                   |       |
|                                                                                                                                                                                                                              |       | 3,384,133                 |       | 3,182,483                   |       |
| Accumulated depreciation and amortization                                                                                                                                                                                         |       | (2,320,809                | )          | (2,014,327                  | )          |
| Net equipment                                                                                                                                                                                                                     |       | 1,063,324                 |       | 1,168,156                   |       |
| Intangible assets:                                                                                                                                                                                                                |       |                      |       |                        |       |
| Licenses                                                                                                                                                                                                                          |       | 324,647                   |       | 340,934                     |       |
| Other assets:                                                                                                                                                                                                                     |       |                      |       |                        |       |
| Deferred financing costs net of amortization of   $1,991,094 and $1,929,008                                                                                                                                                       |       | —                    |       | 55,879                      |       |
| Other assets                                                                                                                                                                                                                      |       | 94,335                    |       | 109,749                     |       |
| Total assets                                                                                                                                                                                                                      |       | $                         | 6,674,898  |                        | $          | 6,154,765 |   |
| **Liabilities and Stockholders’   Equity**                                                                                                                                                                                   | ** ** | ** **                | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                                              |       |                      |       |                        |       |
| Current portion of notes payable, net of discount   (Note 7)                                                                                                                                                                      |       | $                         | 100,816    |                        | $          | 43,953 |   |
| Current portion of capital lease obligations                                                                                                                                                                                      |       | 60,973                    |       | 70,758                      |       |
| Inventory loan payable                                                                                                                                                                                                            |       | 188,881                   |       | 306,556                     |       |
| Due to factor (Note 6)                                                                                                                                                                                                            |       | 518,830                   |       | 826,955                     |       |
| Accounts payable                                                                                                                                                                                                                  |       | 746,397                   |       | 487,576                     |       |
| Accrued payroll and related liabilities                                                                                                                                                                                           |       | 250,190                   |       | 291,831                     |       |
| Accrued liabilities-other                                                                                                                                                                                                         |       | 296,763                   |       | 306,488                     |       |
| Total current liabilities                                                                                                                                                                                                         |       | 2,162,850                 |       | 2,334,117                   |       |
| Notes payable, net of discount, less current   portion (Note 7)                                                                                                                                                                   |       | 88,887                    |       | 23,742                      |       |
| Capital lease obligations, less current portion                                                                                                                                                                                   |       | 80,013                    |       | 8,612                       |       |
| Deferred facility lease payable, excluding current   portion (Note 2)                                                                                                                                                             |       | 296,157                   |       | 452,266                     |       |
| Total liabilities                                                                                                                                                                                                                 |       | 2,627,907                 |       | 2,818,737                   |       |
| Redeemable common stock, $0.001 par value. 220,070   and 302,600 shares issued and outstanding, aggregate redemption   value of $125,000 and $171,877 (Note 4)                                                          |       | —                    |       | 122,306                     |       |
|                                                                                                                                                                                                                              |       |                      |       |                        |       |
| Redeemable preferred stock, $0.001 par value.   36,680 and 236,680 shares issued and   outstanding, aggregate redemption value of $9,170 and $59,170, net   of unaccreted dividends of $2,181 and $18,672 (Note 4) |       | 10,024                    |       | 57,066                      |       |
|                                                                                                                                                                                                                              |       |                      |       |                        |       |
| Stockholders’ equity (Note 5):                                                                                                                                                                                               |       |                      |       |                        |       |
| Common stock, $0.001 par value. Authorized   200,000,000 shares; Issued and outstanding 40,893,004 and 30,982,803 at   March 31 and June 30, respectively                                                               |       | 40,701                    |       | 30,680                      |       |
| Additional paid-in capital                                                                                                                                                                                                        |       | 20,178,008                |       | 18,724,906                  |       |
| Accumulated deficit                                                                                                                                                                                                               |       | (16,158,000               | )          | (15,566,597                 | )          |
| Accumulated other comprehensive income                                                                                                                                                                                            |       | (23,742                   | )          | (32,333                     | )          |
| Total stockholders’ equity                                                                                                                                                                                                   |       | 4,036,967                 |       | 3,156,656                   |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                   |       | $                         | 6,674,898  |                        | $          | 6,154,765 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CORGENIX MEDICAL CORPORATION AND SUBSIDIARIES**

Consolidated Statements of Operations and Comprehensive Loss

**(Unaudited)**

 
| ** **                                                               | ** ** | **Three Months Ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                               | ** ** | **March 31,   2011**        | ** ** | **March 31,   2010**       | ** ** | **March 31,   2011** | ** ** | **March 31,   2010** | ** ** |
| ** **                                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                |       | $                                | 1,828,943  |                            | $          | 2,196,010 |   | $ | 5,593,116 |   | $ | 6,200,429 |   |
| Cost of sales                                                            |       | 942,099                          |       | 1,129,658                       |       | 2,770,980 |   | 3,057,989 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                             |       | 886,844                          |       | 1,066,352                       |       | 2,822,136 |   | 3,142,440 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                      |       |                             |       |                            |       |   |   |   |   |
| Selling and marketing                                                    |       | 370,502                          |       | 375,369                         |       | 1,081,206 |   | 1,204,581 |   |
| Research and development                                                 |       | 49,331                           |       | 30,573                          |       | 219,280 |   | 232,519 |   |
| General and administrative                                               |       | 492,052                          |       | 514,183                         |       | 1,435,924 |   | 1,462,914 |   |
| Costs associated with exit or disposal activities   (note 8)             |       | 85,678                           |       | —                          |       | 452,317 |   | — |   |
| Total expenses                                                           |       | 997,563                          |       | 920,125                         |       | 3,188,727 |   | 2,900,014 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Operating income (loss)                                                  |       | (110,719                         | )          | 146,227                         |       | (366,591 | ) | 242,426 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):                                                  |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                          |       | 202                              |       | 94                              |       | 664 |   | 409 |   |
| Loss on early extinguishment of debt                                     |       | —                           |       | —                          |       | — |   | (22,000 | ) |
| Interest expense                                                         |       | (54,292                          | )          | (65,146                         | )          | (209,067 | ) | (230,252 | ) |
| Total other income (expense)                                             |       | (54,090                          | )          | (65,052                         | )          | (208,403 | ) | (251,843 | ) |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                        |       | (164,809                         | )          | 81,175                          |       | (574,994 | ) | (9,417 | ) |
| Accreted dividends on redeemable preferred and   redeemable common stock |       | 5,078                            |       | 10,884                          |       | 16,409 |   | 32,653 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) attributable to common   shareholders                  |       | (169,887                         | )          | 70,291                          |       | (591,403 | ) | (42,070 | ) |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net loss per share, basic and diluted                                    |       | $                                | (0.00      | )*                              | $          | 0.00 | * | $ | (0.01 | ) | $ | (0.00 | )* |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares outstanding, basic and   diluted (note 2)        |       | 40,900,832                       |       | 31,035,354                      |       | 39,906,418 |   | 30,789,725 |   |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                        |       | $                                | (164,809   | )                               | $          | 81,175 |   | $ | (574,994 | ) | $ | (9,417 | ) |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Other comprehensive income (loss)-foreign currency   translation         |       | (1,559                           | )          | (26,405                         | )          | 8,591 |   | (69,766 | ) |
|                                                                     |       |                             |       |                            |       |   |   |   |   |
| Total comprehensive income (loss)                                        |       | $                                | (166,368   | )                               | $          | 54,770 |   | $ | (566,403 | ) | $ | (79,183 | ) |

 

----

*Less than $0.01 per share

 

See accompanying notes to consolidated financial statements.

 

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**CORGENIX MEDICAL CORPORATION AND SUBSIDIARIES**

Consolidated Statement of Stockholders’ Equity

For the nine months ended March 31, 2011

(Unaudited)

 
| ** **                                                                        | ** ** | **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 June 30, 2010**                                                |       | 30,982,803                                    |       | $                                  | 30,680     |                               | $          | 18,724,906                |       | $                                                | (15,566,597 | )                                       | $          | (32,333 | ) | $ | 3,156,656 |   |
| Issuance of common stock for services                                        |       | 4,942                                         |       | 4                                  |       | 485                                |       | —                    |       | —                                           |        | 489                                     |       |
| Issuance of common stock for cash                                            |       | 10,000,001                                    |       | 10,001                             |       | 1,489,999                          |       | —                    |       | —                                           |        | 1,500,000                               |       |
| Issuance of warrants for license                                                  |       | —                                        |       | —                             |       | 3,412                              |       | —                    |       | —                                           |        | 3,412                                   |       |
| Issuance costs for common stock offering                                          |       | —                                        |       | —                             |       | (95,481                            | )          | —                    |       | —                                           |        | (95,481                                 | )          |
| Compensation expense recorded as a result of   stock options Issued     |       | —                                        |       | —                             |       | 16,439                             |       | —                    |       | —                                           |        | 16,439                                  |       |
| Issuance of common stock for license                                         |       | 15,296                                        |       | 16                                 |       | 1,362                              |       | —                    |       | —                                           |        | 1,378                                   |       |
| Accreted dividend on redeemable common   and redeemable preferred stock |       | —                                        |       | —                             |       | —                             |       | (16,409                   | )          | —                                           |        | (16,409                                 | )          |
| Warrant extension as a result of MBL Agreement   Amendment                        |       | —                                        |       | —                             |       | 36,886                             |       | —                    |       | —                                           |        | 36,886                                  |       |
| Cancellation of redeemable common stock upon   note pay down                 |       | (110,038                                      | )          | —                             |       | —                             |       | —                    |       | —                                           |        | —                                  |       |
| Foreign currency translation                                                      |       | —                                        |       | —                             |       | —                             |       | —                    |       | 8,591                                            |        | 8,591                                   |       |
| Net loss                                                                          |       | —                                        |       | —                             |       | —                             |       | (574,994                  | )          | —                                           |        | (574,994                                | )          |
| **Balances at March 31, 2011**                                               |       | 40,893,004                                    |       | $                                  | 40,701     |                               | $          | 20,178,008                |       | $                                                | (16,158,000 | )                                       | $          | (23,742 | ) | $ | 4,036,967 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CORGENIX MEDICAL CORPORATION AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **March 31,   2011**       | ** ** | **March 31,   2010** | ** ** |
| ** **                                                                    | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                         |       |                            |       |   |   |
| Net loss                                                                      |       | $                               | (574,994   | ) | $ | (9,417 | ) |
| Adjustments to reconcile net loss to net cash used   by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                 |       | 323,243                         |       | 326,302 |   |
| Accretion of discount on note payable                                         |       | —                          |       | 2,244 |   |
| Common stock issued for services                                              |       | 489                             |       | 2,805 |   |
| Compensation expense recorded for stock options   issued                      |       | 16,439                          |       | 24,634 |   |
| Amortization of deferred financing costs                                      |       | 24,355                          |       | 28,358 |   |
| Changes in operating assets and liabilities:                                  |       |                            |       |   |   |
| Trade and other receivables, net                                              |       | 182,870                         |       | (206,637 | ) |
| Inventories                                                                   |       | (336,056                        | )          | 60,071 |   |
| Prepaid expenses and other assets, net                                        |       | 107,297                         |       | (17,803 | ) |
| Accounts payable                                                              |       | 231,460                         |       | (127,415 | ) |
| Accrued payroll and related liabilities                                       |       | (41,641                         | )          | (15,997 | ) |
| Accrued interest and other liabilities                                        |       | (167,974                        | )          | (165,028 | ) |
|                                                                          |       |                            |       |   |   |
| Net cash used in operating activities                                         |       | (234,512                        | )          | (97,883 | ) |
|                                                                          |       |                            |       |   |   |
| Cash flows from investing activities:                                         |       |                            |       |   |   |
| Proceeds from sale of equipment                                               |       | 111,018                         |       | — |   |
| Additions to equipment                                                        |       | (75,954                         | )          | (85,479 | ) |
| Net cash provided by (used in) investing activities                           |       | 35,064                          |       | (85,479 | ) |
| Cash flows from (used in) financing activities:                               |       |                            |       |   |   |
| Increase (decrease) in amount due to factor                                   |       | (308,125                        | )          | (275,264 | ) |
| Increase (decrease) in inventory loan                                         |       | (117,675                        | )          | 320,000 |   |
| Payment for redemption of convertible preferred   stock                       |       | (50,000                         | )          | — |   |
| Proceeds from issuance of common stock, net of   financing costs              |       | 1,404,519                       |       | — |   |
| Proceeds from issuance of notes payable                                       |       | —                          |       | 125,000 |   |
| Payments on notes payable                                                     |       | (67,632                         | )          | (140,312 | ) |
| Payments on capital lease obligations                                         |       | (74,577                         | )          | (134,976 | ) |
| Net cash provided by (used) in financing   activities                         |       | 786,510                         |       | (105,552 | ) |
|                                                                          |       |                            |       |   |   |
| Net increase (decrease) in cash and cash   equivalents                        |       | 587,062                         |       | (288,914 | ) |
| Impact of exchange rate changes on cash                                       |       | 5,105                           |       | (8,898 | ) |
| Cash and cash equivalents at beginning of period                              |       | 494,096                         |       | 785,466 |   |
| Cash and cash equivalents at end of period                                    |       | $                               | 1,086,263  |   | $ | 487,654 |   |
| Supplemental cash flow disclosures:                                           |       |                            |       |   |   |
| Cash paid for interest                                                        |       | $                               | 177,697    |   | $ | 201,776 |   |
| Noncash investing and financing activities                                    |       |                            |       |   |   |
| Issuance of warrants for license                                              |       | $                               | 3,412      |   | $ | 3,903 |   |
| Issuance of stock for license                                                 |       | $                               | 1,378      |   | $ | 2,548 |   |
| Equipment acquired under capital leases                                       |       | $                               | 226,057    |   | $ | — |   |
| Conversion of redeemable common stock to note   payable                       |       | $                               | 125,000    |   | $ | — |   |
| Warrant extensions as a result of note   modification                         |       | $                               | 36,886     |   | $ | — |   |
| Common stock issued for accrued stock-based   compensation                    |       | $                               | —     |   | $ | 70,024 |   |
| Accreted dividends on redeemable common and   redeemable preferred stock      |       | $                               | 16,409     |   | $ | 32,653 |   |

 

See accompanying notes to consolidated financial statements.

 

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**CORGENIX MEDICAL CORPORATION AND SUBSIDIARIES**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**1.****            ****DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION**

 

***(a)******          ******Outlook***

 

In fiscal 2011, we will be focused on expanding our relationship with the Elitech group (“Elitech”) including completion of the Joint Product Development agreement between our two companies, accelerating the market launch of our AspirinWorks assay, beginning the market launch of our Anti-AtherOx Test Kit, submission of a 510(k) Premarket Notification to the FDA for our AtherOx Test Kit, completing further clinical studies for our Hyaluronic Test Kit, and continuing the development and strategic collaboration towards the development of a group of products to detect potential bio-terrorism agents.

 

***(b)******          ******Recent Developments***

 

On October 8, 2010, we closed the Second Tranche of the Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Elitech, a société par actions simplifiée organized under the laws of France, and Wescor, Inc., a Utah corporation and subsidiary of Elitech (“Wescor”), effective as of October 1, 2010.  As a condition to closing the Second Tranche, we transferred our product distribution activity outside of North America from our subsidiary, Corgenix UK Ltd., (“Corgenix UK”) to Elitech UK Limited, (“Elitech UK”), pursuant to the Assignment and Assumption Agreement, effective as of October 1, 2010 by and among us, Corgenix UKand Elitech UK.  As an additional condition to closing the Second Tranche, Wescor purchased 1,666,667 shares of our common stock (the “Second Tranche Shares”) for $250,000, or $0.15 per share.  For no additional consideration, we issued a warrant to Wescor to purchase 833,333 shares of our common stock at $0.15 per share (the “Second Tranche Warrant”).

 

The foregoing descriptions of the Common Stock Purchase Agreement, the Assignment and Assumption Agreement and the Second Tranche Warrant are not complete descriptions of all the terms of those agreements.  For a complete description of all the terms, we refer you to the full text of the Common Stock Purchase Agreement, the Assignment and Assumption Agreement and the Second Tranche Warrant, copies of which were filed as Exhibits 10.1, 10.2 and 10.3, respectively, to the Form 8-K filed on October 12, 2010.

 

On October 8, 2010, we also completed a repurchase of 200,000 shares of our Series B Convertible Preferred Stock (the “Repurchased Shares”) held by CAMOFI Master LDC, a Cayman Islands company (“CAMOFI”), for a purchase price of $50,000.  Pursuant to the Second Modification of Secured Convertible Term Notes dated January 29, 2009 by and between us and CAMOFI, the Repurchased Shares bore a $50,000 liquidation preference and were convertible into 800,000 shares of our common stock at the option of CAMOFI.  The repurchase was funded in part by cash on hand and in part by proceeds from the sale of the Second Tranche Shares.

 

On October 4, 2010, Corgenix UK entered into a letter agreement with Faunus Group International, Inc. (“FGI”), pursuant to which, among other things, Corgenix UK and FGI agreed to terminate that certain Receivables Finance Agreement dated March 29, 2010 by and between Corgenix UK and FGI (as amended, the “FGI Agreement”), effective as of September 30, 2010.

 

Under the FGI Agreement, Corgenix UK agreed to sell to FGI all of Corgenix UK’s right, title and interest in and to specified accounts receivable and all merchandise represented by those accounts.  In exchange, FGI advanced funds to the Company.

 

Contemporaneously with the termination of the FGI Agreement, each of following agreements were terminated effective as of September 30, 2010: (a) Guaranty dated March 29, 2010 by and between the Company and FGI, (b) Guaranty dated March 29, 2010 by and between Corgenix Inc. and FGI, and (c) Debenture Agreement dated March 29, 2010 by and between Corgenix UK and FGI.  Corgenix UK paid FGI a termination fee of $25,000.

 

On July 12, 2010 we entered into the Common Stock Purchase Agreement with Elitech and Wescor.  In accordance with the Common Stock Purchase Agreement, Wescor will purchase up to $2,000,000 of the Company’s common stock in three installments (subject to various conditions) and will receive warrants to purchase additional shares. Also, in connection with the Common Stock Purchase Agreement, we entered into (i) a distribution agreement (“Master Distribution Agreement”) with Elitech UK and (ii) a joint product development agreement (“Joint Product Development Agreement”) with Elitech. The details of the Common Stock Purchase Agreement, Master Distribution Agreement, and Joint Product Development Agreement are outlined below.

 

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The initial investment by Wescor was to take place over three tranches:

 

First Tranche under the Common Stock Purchase Agreement—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. The Company entered into the Master Distribution Agreement with Elitech UK  and the Joint Product Development Agreement with Elitech, contemporaneously with the issuance of the First Tranche Shares.

 

Second Tranche under the Common Stock Purchase Agreement—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. As a condition to the closing of the Second Tranche, the Companyhas effectively transferred its product distribution activity outside of North America from our subsidiary, Corgenix UK, to Elitech UK.

 

Third Tranche under the Common Stock Purchase Agreement—Pursuant to the Third Tranche of the Common Stock Purchase Agreement, Wescor will invest $500,000 to purchase 3,333,333 shares of our common stock valued at $0.15 per share. For no additional consideration we will issue 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 will have determined the feasibility of creating not less than two (2) new Corgenix assays as further described in the Joint Product Development Agreement.

 

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.

 

Under the terms and conditions of the Joint Product Development Agreement, the Company and Elitech will work towards developing efficient technology for the commercialization of biochemical testing of substances related to human health. The goal of the co-development effort is the modification of certain of our assays for use in Elitech chemistry analyzers, serology instruments or other instruments, and the commercialization of those modified assays by Elitech and its affiliates. Phase I of the co-development is focused on the sharing and licensing of our assay technology to facilitate this purpose. The intent is that, in order to achieve joint development of our assays modified to be used with certain Elitech technology, all of our relevant assay technology will be available to Elitech and its affiliates to establish the broadest common immunoassay technology base to pursue co-development of new Corgenix assay technology. Such technology would include, for example, manufacturing know-how, testing and reliability information, visits to production facilities, and technical consultation, for which the burden of disclosure is reasonable.

 

Wescor has the right to designate one individual for election or appointment to our Board of Directors, for so long as Wescor owns at least five percent of our outstanding common stock.

 

After the First Tranche closed, through to the third (3rd) anniversary of the First Tranche’s closing date, the rights and responsibilities of Wescor with respect to a potential change of control transaction by us will be governed by the Common Stock Purchase Agreement.

 

Pursuant to the Common Stock Purchase Agreement, if our board determines to initiate the solicitation of offers or indications of interest in pursuing a Change of Control transaction, as defined therein, (without having first received an unsolicited offer from a third party) then the board will, consistent with its fiduciary duty to maximize shareholder value, design a process in consultation with legal counsel and any financial advisor the board elects. Wescor may participate in the process, on terms established by the Company’s board, to govern the solicitation of offers process.

 

Pursuant to the Common Stock Purchase Agreement, if our board receives an unsolicited third-party offer (or indication of interest in making an offer) with respect to a Change of Control transaction, we will provide written notice to Wescor. If our board elects to begin a process that could lead to a Change of Control then we will commence negotiations with the unsolicited bidder and with Wescor to seek the highest value available from those parties. The terms of the process are further outlined in the Common Stock Purchase Agreement.

 

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***(c)******          ******Company Overview***

 

Our business includes the research, development, manufacture, and marketing of in vitro (i.e., outside the human body) diagnostic products for use in disease detection and prevention.  We currently sell 52 diagnostic products on a worldwide basis to hospitals, clinical testing laboratories, universities, biotechnology and pharmaceutical companies and research institutions.  We have developed and we manufacture most of our products at our Colorado facility, and we purchase what we refer to as OM Products (other manufacturers’ products) from other healthcare manufacturers for resale by us.  All of these products are used in clinical laboratories for the diagnosis and/or monitoring of three important areas of health care:

 

·      Autoimmune disease (diseases in which an individual creates antibodies to one’s self, for example systemic lupus erythematosus (“SLE”) and rheumatoid arthritis (“RA”);

 

·      Vascular disease (diseases associated with certain types of thrombosis or clot formation, for example antiphospholipid syndrome, deep vein thrombosis, stroke and coronary occlusion); and

 

·      Liver diseases (fibrosis and cirrhosis).

 

In addition to our current products, we are actively developing new laboratory tests in other important diagnostic testing areas.  See “— Other Strategic Relationships.”  We manufacture and market to clinical laboratories and other testing sites worldwide.  Our customers include large and emerging health care companies such as the Elitech Group, Bio Rad Laboratories, Inc., BG Medicine, Instrumentation Laboratories, Helena Laboratories and Diagnostic Grifols, S.A.

 

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.  Our products are sold as “test kits” that include all of the materials required to perform the test, except for routine laboratory chemicals and instrumentation.  A test using ELISA technology involves a series of reagent additions into the Microplate, triggering a complex immunological reaction in which a resulting color occurs.  The amount of color developed in the final step of the test is directly proportional to the amount of the specific marker being tested for in the patient or unknown sample.  The amount of color is measured and the results calculated using routine laboratory instrumentation.  Our technology specifies a process by which biological materials are attached to the fixed surface of a diagnostic test platform.  Products developed using this unique attachment method typically demonstrate a more uniform and stable molecular configuration, providing a longer average shelf life, increased accuracy and superior specificity than the products of our competitors.

 

Some of the OM products which we obtain from other manufacturers and sell through our distribution network utilize technologies other than our patented and proprietary ELISA technology.

 

Our diagnostic tests are intended to aid in the identification of the causes of illness and disease, enabling a physician to select appropriate patient therapy.

 

Internally and through collaborative arrangements, we are developing additional products that are intended to broaden the range of applications for our existing products and to result in the introduction of new products.

 

Since 1990, our sales force and distribution partners have sold over 12 million tests worldwide under the REAADS and Corgenix labels, as well as products sold under other manufacturers’ labels, referred to as OEM products.  An integral part of our strategy is to work with corporate partners to develop market opportunities and access important resources.  We believe that our relationships with current and potential partners will enable us to enhance our menu of diagnostic products and accelerate our ability to penetrate the worldwide markets for new products.

 

We currently use the REAADS and Corgenix trademarks and trade names in the sale of the products which we manufacture.  These products constitute the majority of our product sales.

 

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**2.****            ****Summary of Significant Accounting Policies**

 

*(a)**         ****Application of New Accounting Standards***

 

In April 2010, the FASB (Financial Accounting Standards Board) issued Accounting Standards Update 2010-17 (ASU 2010-17), Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.

 

***(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. 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.

 

***(c)****          ****Reclassifications***

 

Certain reclassifications have been made to the statement of operations for the three months and nine months ended March 31, 2010, to conform to the March 31, 2011 presentation.  Such reclassifications had no effect on the net loss for the period.

 

***(d)******          ******Use of Estimates***

 

The preparation of our 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. Actual results could differ significantly from those estimates. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted from these unaudited consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.  The results of operations for the three and nine months ended March 31, 2011 and 2010 are not necessarily indicative of the operating results for the full year. In the opinion of management, all adjustments, consisting only of normal recurring accruals, have been made to present fairly our financial position at March 31, 2011 and the results of operations and our cash flows for the three and nine months ended March 31, 2011 and 2010.

 

***(e)******          ******Cash and Cash Equivalents***

 

We consider all highly liquid debt instruments purchased with original maturities of three months or less at purchase to be cash equivalents.

 

***(f)******           ******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.

 

We have adhered to the guidance set forth in the *Sale of Accounts Receivable* Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), which provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.

 

Pursuant to the provisions of this Topic, we have reflected the sales of accounts receivable to the factors as secured borrowings. We have also established an accounts receivable from the factors for the retained amounts, less the costs of the transactions, less any anticipated future loss in the value of the retained asset. The retained amounts are equal to 15% of the total

 

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accounts receivable invoice sold to the factors. The periodic interest expense and administrative fees assessed by the factors on the amounts owing, are charged to interest expense, and are credited against the accounts receivable due from them.

 

***(g)******          ******Inventories***

 

Inventories consist of raw materials, work in process and finished goods and 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 March 31, 2011 or March 31, 2010. Components of inventories as of March 31 and June 30 are as follows:

 
| ** **      | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------|------------|--------------------|------------|-------------------|------------|
| ** **      | ** ** | **2011**           | ** ** | **2010**          | ** ** |
| Raw materials   |       | $                  | 538,131    |              | $          | 431,235 |   |
| Work-in-process |       | 1,302,149          |       | 883,272           |       |
| Finished goods  |       | 1,000,446          |       | 1,185,050         |       |
|            |       | $                  | 2,840,726  |              | $          | 2,499,557 |   |

 

***(h)******          ******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. For the quarter ended March 31, 2011, there was $160,051 worth of equipment acquired under capital leases. For the quarter ended March 31, 2010, there was no equipment acquired under capital leases. For the nine months ended March 31, 2011, there was $226,057 worth of equipment acquired under capital leases, and for the nine months ended March 31, 2010, no equipment was acquired under capital leases. Depreciation and amortization expense, which totaled $107,675 and $111,102 for the quarters ended March 31, 2011 and March 31, 2010, respectively, and $323,243 and $326,302 for the nine months ended March 31, 2011 and March 2010, 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 our web site development, our R & D statistical software, which were and are both amortized over three years, and our accounting software, which is being amortized over five years, beginning in March 2008.

 

***(i)******           ******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 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 “CCC License Agreement”) with Creative Clinical Concepts, Inc. (“CCC”). The CCC 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.

 

The CCC License Agreement imposes caps on the total amount of cash, common stock, and warrant payments from us to CCC from the date of execution through to and including the third anniversary payment. Under that cap limitation, the total of all anniversary payments will not exceed $200,000 in cash, with each anniversary cash payment determined by multiplying $50,000 by an anniversary ratio which is the ratio of cumulative revenue at the respective anniversary date divided by the cumulative sales target for the same period of time. Likewise, the total of all anniversary common stock payments will not exceed $300,000 in value of shares of common stock (as valued on the date of issue), with the number of shares for each anniversary stock issuance determined by dividing 75,000 by the closing stock price as of the respective anniversary date and multiplying that result by the anniversary ratio noted above. Finally, the total of all anniversary warrant payments will not exceed 300,000 warrants, with the value of each anniversary warrant issuance determined by multiplying 75,000 (the number of warrants to be issued) by a newly calculated Black Scholes value per warrant as of the fiscal year end. As of March 31, 2011, we had no accrual with respect to the cumulative amount due to CCC. For the nine month period ended March 31, 2011, we issued to CCC 15,296 shares of our common stock and 75,000 warrants with an exercise price of $0.35, pursuant to the CCC License Agreement versus  23,164 shares and  75,000 warrants issued for the quarter and nine months ended March 31, 2010.

 

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The CCC 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 of net sales of the Licensed Products during the immediately preceding quarter. The CCC License Agreement’s caps on payments from us to CCC do not apply to royalty payments.

 

***(j)******           ******Advertising Costs***

 

Advertising costs are expensed when incurred, and are included in Selling and Marketing expenses. Advertising costs totaled $7,504 and $14,602 for the quarters ended March 31, 2011 and March 31, 2010, respectively, and $30,544 and $21,158 for the nine month periods ended March 31, 2011 and March 31, 2010, 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. We also have arrangements in which we manufacture products for other companies. Revenue under certain of these arrangements is recognized when the manufacturing process is complete and risk of ownership has passed.

 

***(m)******         ******Research and Development (“R & D”)***

 

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 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. As a result of the reclassification, only those R & D expenses not directly related to the generation of specific contract R & D and Grant related contract revenue, are included in  R & D expense in the Statement of Operations operating expense section. Research and development expense, net of the amounts reclassified as cost of sales,  totaled $49,331 and $190,155 for the quarters ended March 31, 2011 and March 31, 2010, respectively, and $219,280 and $506,574 for the nine month periods ended March 31, 2011 and March 2010, respectively. Revenue from research and development contracts represents amounts earned pursuant to agreements to perform research and development activities for third parties and is recognized as earned under the respective agreement. Because research and development services are provided evenly over the contract period, revenue is recognized ratably over the contract period. Research and development agreements in effect in 2011 and 2010 provided for fees to us based on time and materials in exchange for performing specified research and development functions. Contract research and development and grant revenues totaled $264,009 and $248,183 for the quarters ended March 31, 2011 and March 31, 2010, respectively, and $684,289 and $426,213 for the nine month periods ended March 31, 2011 and March 2010, respectively. Research and development contracts are generally short term with options to extend, and can be cancelled under specific circumstances.

 

***(n)******          ******Long-Lived Assets***

 

We review 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. We evaluate the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should an impairment in value be indicated, the carrying value of intangible assets will be adjusted based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.

 

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***(o)******          ******Deferred Facility Lease Payable***

 

Prior to occupying our headquarters facility in Broomfield, Colorado, the landlord expended a total of $1,052,140 for the tenant improvements. This amount was recorded as a charge to leasehold improvements and a credit to deferred facility lease payable, which is being amortized against rent expense over the 84 month period of the lease.

 

***(p)******          ******Stock-Based Compensation***

 

In accordance with the guidance of the *Share-Based Payment* Topic of the FASB ASC, we account for share-based payments by measuring and recognizing the amount of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including employee stock options based on estimated fair values. Pursuant to this guidance, we estimate 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 our Statements of Operations. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated forfeitures. In further adherence to this guidance, we estimate any future forfeiture at the time of grant and revise these estimates, as necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

For purposes of determining the estimated fair value of share-based payment awards on the date of grant, and as allowed by the guidance of the *Share-Based Payment* Topic in the FASB ASC, we use the Black-Scholes option-pricing model (Black Scholes Model). The Black Scholes Model requires the input of highly subjective assumptions. Because our 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 our 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 our fair value determination.

 

The application of the accounting principles set forth in the guidance of the *Share-Based Payment* Topic of the FASB ASC 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 we employ different assumptions in the application of these accounting principles in future periods, or if we decide to use a different valuation model, the compensation expense that we record in the future under these principles may differ significantly from what we have recorded in the current period and could materially affect our loss from operations, net loss and net loss per share.

 

***(q)******          ******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 24,292,526 and 36,168,177 shares as of March 31, 2011 and March 31, 2010, respectively, are not included in the calculation of weighted average common shares-diluted below, as their effect would be to lower the net loss per share and thus be anti-dilutive. Redeemable common stock is included in the common shares outstanding for purposes of calculating net income (loss) per share.

 

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| ** **                                                                     | ** ** | **3 Months ended   March 31,   2011** | ** ** | **3 Months ended   March 31,   2010** | ** ** | **9 Months ended   March 31,   2011** | ** ** | **9 Months ended   March 31,   2010** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Net income (loss) attributable to common   shareholders                        |       | $                                                    | (169,887   | )                                                    | $          | 70,291                                               |       | (591,403                                             | )          | $ | (42,070 | ) |
|                                                                           |       |                                                 |       |                                                 |       |                                                 |       |                                                 |       |
| Common and common equivalent shares outstanding:                               |       |                                                 |       |                                                 |       |                                                 |       |                                                 |       |
| Historical common shares outstanding at beginning   of period                  |       | 40,918,853                                           |       | 31,034,299                                           |       | 30,982,803                                           |       | 30,294,505                                           |       |
| Weighted average common equivalent shares issued   (retired) during the period |       | (18,021                                              | )          | 1,154                                                |       | 8,923,615                                            |       | 495,220                                              |       |
| Weighted average common shares — basic and diluted                        |       | 40,900,832                                           |       | 31,035,454                                           |       | 39,906,418                                           |       | 30,789,725                                           |       |
| Net loss per share — basic and diluted                                    |       | $                                                    | *(0.00     | )                                                    | $          | *0.00                                                |       | $                                                    | (0.01      | ) | $ | *(0.00 | ) |
|                                                                                |            |                                                      |            |                                                      |            |                                                      |            |                                                      |            |  |  |  |  |

 

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*Less than $0.01 per share

 

***(r)******           ******Foreign Currency Transactions and Comprehensive Income (Loss)***

 

The accounts of our foreign subsidiary are generally measured using the local currency as the functional currency. For those operations, assets and liabilities are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average monthly exchange rates. Adjustments resulting from such translation are accumulated in other comprehensive income as a separate component of stockholders’ equity.

 

We adhere to the guidance set forth in the *Reporting Comprehensive Income* Topic of the FASB ASC, which establishes standards for reporting and displaying comprehensive income (loss) and its components. Comprehensive income (loss) includes all changes in equity during a period from non-owner sources.

 

***(s)******           ******Cost of Sales and Operating Expenses***

 

*Cost of sales* includes costs associated with manufacturing and costs associated with the generation of research and development and grant revenue, including labor, raw materials, specific supplies, specific consulting, freight-in, manufacturing administration, quality assurance and quality control, repairs and maintenance, scrap and other indirect costs.

 

*Selling and marketing expenses* consist primarily of shipping and handling costs, wages and benefits for sales and marketing support personnel, travel, sales commissions, business insurance, promotional costs, as well as other indirect cots.

 

*Research and development expense (“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 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.

 

*General and administrative expenses* consist primarily of wages and benefits associated with management and administrative support departments, business insurance costs, professional fees, outside services, office facility related expense, and other general support costs.

 

***(t)******           ******Liquidity***

 

At March 31, 2011, our working capital increased by $883,812 to $3,029,742 from $2,145,930 at June 30, 2010, and concomitantly, our current ratio (current assets divided by current liabilities) increased from 1.92 to 1 at June 30, 2010 to 2.4 to 1 at March 31, 2011. This increase in working capital is primarily attributable to the $1,500,000 strategic investments by Elitech in July and October, 2010.

 

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At March 31, 2011, trade and other receivables were $1,246,154 versus $1,408,969 at June 30, 2010. Accounts payable, accrued payroll and other accrued expenses increased by a combined $207,455 from June 30, 2010. At March 31, 2011, inventories were $2,840,726, versus $2,499,557 at June 30, 2010.

 

For the nine months ended March 31, 2011, cash used by operating activities amounted to $234,512, versus $97,883 used for the nine months ended March 31, 2010. The $234,512 cash used by operating activities was primarily attributable to the net loss for the nine months, increases in inventories, and decreases in other accrued liabilities. The $234,512 cash used by operating activities was more than offset by $35,064 in net cash provided by investing activities (primarily due to the proceeds from disposal of equipment), $786,510 cash provided by financing activities (primarily due to the proceeds from the issuance of common stock to Elitech), and a $5,105 positive cash from the impact of foreign currency translation, resulted in a $592,167 net increase in our cash balance as of March 31, 2011.

 

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 $13,783,438 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, factoring of accounts receivables, 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 Elites collaboration and investment, described above.

 

The $1,500,000 Elitech common stock investments in addition to the Summit $1,750,000 March 31, 2010 credit facility, when considered in conjunction with our current revised forecasts, should provide adequate resources to continue operations for longer than 12 months.

 

***(u)******                                ******Fair Value Measurements***

 

As of July 1, 2008, we adopted the guidance set forth in the *Fair Value Measurements* Topic of the FASB ASC. This guidance established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. The guidance does not require any new fair value measurements in GAAP. The guidance further introduced, or reiterated a number of key concepts which form the foundation of the fair value measurement approach to be utilized for financial reporting purposes. The fair value of our 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.

 

The adoption of these provisions did not have a material effect on our financial condition and results of operations, but introduced new disclosures about how we value certain assets and liabilities. Much of the disclosure requirement is focused on the inputs used to measure fair value, particularly in instances where the measurement uses significant unobservable (Level 3) inputs. Our financial instruments are valued using quoted prices in active markets or based upon other observable inputs. The following table sets forth the fair value of our financial assets that were measured on a recurring basis as of March 31, 2011:

 
| ** **         | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|--------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market funds |       | $                | 985,807    |             | —     |             | —     |      | $          | 985,807 |   |
| Total              |       | $                | 985,807    |             | —     |             | —     |      | $          | 985,807 |   |

 

We have adopted the guidance set forth in the *Fair Value Option for Financial Assets and Financial Liabilities* Topic of the FASB ASC. Pursuant to the guidance of this Topic, we are allowed the irrevocable option to elect fair value for the initial and 

 

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subsequent measurements for specified financial assets and liabilities on a contract-by-contract basis. We did not elect to adopt the fair value option included in this Topic. The provisions of the *Non-controlling Interests in Consolidated Financial Statements* Topic of the FASB ASC change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. These provisions will change the accounting and reporting for minority interests, which will be re characterized as non-controlling interests and classified as a component of equity. These provisions are effective for both public and private companies for fiscal years beginning on or after December 15, 2008 (the fiscal year ended June 30, 2010 for our company). The provisions will be applied prospectively. The provisions also require retroactive adoption of the presentation and disclosure guidance for existing minority interests. All other guidance under this Topic will be applied prospectively. Early adoption is prohibited for both standards. Management has evaluated the guidance under this Topic and has determined that there is no impact on our financial statements.

 

The provisions of the *Interim Disclosures about Fair Value of Financial Instruments* Topic of the FASB ASC, which is effective for interim periods ending after June 15, 2009, require the disclosures of fair value of financial instruments in interim financial statements as well as in annual financial statements. We have adopted these provisions and believe that they do not have a significant impact on our financial position, cash flows, or disclosures.

 

**3.****            ****SEGMENT INFORMATION**

 

Our diagnostic medical products are sold in North America (the U.S., Canada and Mexico) directly and through independent sales representatives, to hospital laboratories, laboratory chains, independent laboratories, university laboratories and reference laboratories. Internationally, in prior years, our diagnostic medical products were sold wholesale through distributors, via our wholly owned subsidiary, Corgenix UK However, commencing October 1, 2010, we began the process of winding down with the intent of eventually closing our international subsidiary, Corgenix UK, and our international product sales began to be executed solely through the Elitech Group, our master distributor. Consequently, it is no longer meaningful to organize our business around the two geographic segments of business: North American and International operations.

 

**4.****            ****REDEEMABLE COMMON STOCK AND REDEEMABLE CONVERTIBLE PREFERRED STOCK**

 

***(a)******          ******Redeemable Common Stock and Warrants***

 

On July 1, 2002, as part of the Medical & Biological Laboratories Co., Ltd. (“MBL”) Stock Purchase Agreement (the “MBL Agreement”), MBL purchased shares of the Company’s common stock for $500,000, which MBL can require the Company to repurchase at the same price in the event that a previously existing distribution agreement with RhiGene, Inc. is terminated. For no additional consideration, MBL was also issued warrants to purchase an additional 880,282 shares of Common Stock (the “Purchased Shares”) at a price of $.568 per share, which is equal to an aggregate amount of $500,000. These warrants were due to expire on July 3, 2009 and may be exercised in whole or in part at any time prior to their expiration. The estimated fair value of the warrant upon issuance was calculated as $401,809 using the Black-Scholes option-pricing model with the following assumptions: no expected dividend yield, 143% volatility, risk free interest rate of 4.2% and an expected life of five years. The gross proceeds of $500,000 were allocated $277,221 to redeemable common stock and $222,779 to the related warrants based on the relative fair values of the respective instruments to the fair value of the aggregate transaction. Issuance costs and the discount attributed to the redeemable common stock upon issuance were accreted over the 33-month period to the first date whereupon the put option may be exercised, which was the expiration date of the distribution agreement between the Company and RhiGene, Inc. (March 31, 2008). Furthermore, pursuant to the agreement with MBL, as long as MBL holds at least 50% of the common stock purchased under the MBL Agreement, MBL must give its written consent with respect to the payment of any dividend, the repurchase of any of the Company’s equity securities, the liquidation or dissolution of the Company or the amendment of any provision of the Company’s Articles of Incorporation or Bylaws which would adversely affect the rights of MBL under the stock purchase transaction documents. MBL was granted standard anti-dilution rights with respect to stock issuances not registered under the Securities Act. MBL also received standard piggyback registration rights along with certain demand registration rights.

 

As previously reported, on August 1, 2005 the Company and MBL entered into an Amendment to the Common Stock Purchase Agreement and Warrant (the “First MBL Amendment”) wherein one-half, or 440,141, of the Purchased Shares were exchanged for a three-year promissory note in the principal amount of $250,000 payable with interest at the prime rate plus two percent (the “First MBL Note”) with payments having commenced in September 1, 2005.  The First MBL Amendment also extended the warrants to August 31, 2008 or until the principal balance of the First MBL Note was paid in full and re-priced the warrants from $0.568 per share to $0.40 per share.  The First MBL Note has been paid in full and all of the 440,041 Purchased Shares exchanged for the First MBL Note have been returned to the Company.  Pursuant to the First MBL Amendment, the remaining 440,141 Purchased Shares not exchanged for the First Note were originally due to be redeemed by the Company at $0.568 per share on August 1, 2008 unless MBL was able to sell the remaining Purchased Shares on the open market.

 

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As previously reported, on August 1, 2008, the Company and MBL entered into a Second Amendment to the Common Stock Purchase Agreement and Warrant (the “Second MBL Amendment”) wherein one-half, or 220,070, of the remaining Purchased Shares were exchanged for a two-year promissory note in the principal amount of $125,000 payable with interest at the prime rate plus two percent (the “Second MBL Note”) with payments having commenced in September 1, 2008.  The Second MBL Amendment also extended the warrants to August 1, 2010 or until the principal balance of the Second MBL Note was paid in full.  As of the date of this report, no unpaid principal balance remained on the Second MBL Note, and the 220,070 Purchased Shares exchanged for the Second MBL Note have been returned to the Company.  Pursuant to the Second MBL Amendment, the remaining 220,071 Purchased Shares not exchanged for the Second MBL Note were originally due to be redeemed by the Company at $0.568 per share on August 1, 2010 unless MBL was able to sell the remaining Purchased Shares on the open market.

 

On August 27, 2010, the Company entered into a Third MBL Amendment to the Common Stock Purchase Agreement and Warrant dated August 1, 2010 (the “Third MBL Amendment”) among the Company and MBL, wherein the remaining 220,070 Purchased Shares were exchanged for a two-year promissory note in the principal amount of $125,000, payable with interest at the prime rate plus two percent (the “Third MBL Note”) with payments having commenced on September 1, 2010. The Third MBL Amendment also extended the warrants to August 1, 2012.

 

As of March 31, 2011, a total of 687,720 shares have been returned to us pursuant to the three notes payable. As a result, 192,562 and 302,600 shares remained outstanding as of March 31, 2011 and June 30, 2010, as they have not been returned to the Company under the agreements.

 

***(b)******                                ******Redeemable Convertible Preferred Stock***

 

On February 3, 2009, we entered into two agreements (the “Restructuring Agreements”) to restructure the debt evidenced by convertible term notes that Truk purchased on May 19, 2005 and December 28, 2005. The Restructuring Agreements suspended all amortizing principal amount payments otherwise due under each note, beginning November 1, 2008 and ending on the earlier of (i) the first day of the month next succeeding the closing of any new financing transaction or (ii) May 1, 2009 (the “Repayment Date”), at which time payments would again have become due and payable on the first day of each subsequent month until March 31, 2011 (the “Maturity Date”). Payments would be equal to the amount of principal outstanding divided by the number of months from the Repayment Date until the Maturity Date. On the Maturity Date, the amortizing principal amount for each of the term notes and all other amounts due and owing must be repaid in full, whether by payment of cash, or at Truk’s or CAMOFI’s option, by the conversion into common stock.

 

Under the Restructuring Agreements, Truk and CAMOFI agreed that their security interest in our accounts receivable and inventory would only be subordinated to that of the lenders in any new financing, but that their security interest in all of our other assets will remain a perfected first security interest. This provision was effective upon completion of the Financing Agreement with Benefactor. In addition, upon the closing of the Financing Agreement with Benefactor, the remaining principal balance of each outstanding term note held by Truk was increased by five percent (5%), and was accounted for as additional interest expense.

 

Simultaneously with the execution of the Restructuring Agreements:

 

(1)           We paid $22,466 to Truk and CAMOFI for accrued and unpaid interest from November 1, 2008 to February 3, 2009 with respect to term notes held by each;

 

(2)           We extended the expiry dates of common stock purchase warrants held by the note-holders (warrants dated May 19, 2005 were extended to expire May 19, 2017, rather than May 19, 2012, and common stock purchase warrants dated December 28, 2005 were extended to expire December 28, 2015, rather than December 28, 2010);

 

(3)           We issued to CAMOFI 200,000 shares of our Series B Convertible Preferred Stock (“Series B”), with a liquidation preference of $50,000, which is convertible into 800,000 shares of our common stock at the rate of $0.25 per share; and

 

(4)           We issued to Truk 36,680 shares of Series B, with a liquidation preference of $9,170, which is convertible into 146,720 shares of our common stock at the rate of $0.25 per share. The calculated cost of items (2) through (4) above, were charged to deferred finance costs and was amortized over nine months through December 2009.

 

On October 8, 2010, we completed a repurchase of 200,000 shares of our Series B Convertible Preferred Stock held by CAMOFI, for a purchase price of $50,000.  Pursuant to the Second Modification of Secured Convertible Term Notes dated January 29, 2009 by and between us and CAMOFI, the Repurchased Shares bore a $50,000 liquidation preference and were convertible into 800,000 shares of our common stock at the option of CAMOFI.  The repurchase was funded in part by cash on hand and in part by proceeds from the sale of the Second Tranche Shares.

 

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**5.****           ****STOCKHOLDERS’ EQUITY**

 

***(a)******          ******Employee Stock Purchase Plan***

 

Effective January 1, 1999, we adopted an Employee Stock Purchase Plan to provide eligible employees an opportunity to purchase shares of our common stock through payroll deductions, up to 10% of eligible compensation. On April 26, 2007, Shareholders approved our Second Amended and Restated Employee Stock Purchase Plan. These plans fully comply with 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 the quarter and nine months ended March 31, 2011, 1,659 and 4,942 shares were issued under the plan. In the quarter and nine months ended March 31, 2010, 1,760 and 36,307 shares, respectively, were issued under the plans.

 

***(b)******          ******Incentive Stock Option Plan***

 

*Stock Options as of March 31, 2011*

 

Our Amended and Restated 1999 Incentive Stock Plan (the “1999 ISP”) and the 2007 Incentive Compensation Plan (the “2007 ICP”) (collectively, the “Plans”) provides for two separate components. A 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. A 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. The following table summarizes stock options outstanding as of March 31, 2011, and changes during the nine 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, 2010  |       | 2,440,000                    |       | $ | 0.32 |   | 41.3 |   | $ | — |   |
| Granted                                    |       | 440,000                      |       | $ | 0.08 |   | 63.0 |   |   |   |
| Exercised                                  |       | —                       |       | $ | — |   | — |   |   |   |
| Cancelled, expired or forfeited            |       | (440,000                     | )          | $ | 0.26 |   | 22.6 |   |   |   |
| Options outstanding at March 31, 2011 |       | 2,440,000                    |       | $ | 0.30 |   | 36.2 |   | $ | — |   |
| Options exercisable at March 31, 2011 |       | 2,440,000                    |       | $ | 0.30 |   | 36.2 |   | $ | — |   |

 

The total intrinsic value as of March 31, 2011 measures the difference between the market price as of March 31, 2011 and the exercise price. No options were exercised during the nine months ended March 31, 2011. Consequently, no cash was received, nor did we realize any tax deductions related to exercise of stock options during the period.

 

There was no unrecognized compensation cost from unvested stock options as of March 31, 2011.

 

The weighted average per share fair value of stock options granted during the nine month periods ending March 31, 2011 was $0.102. The weighted average per share fair value of stock options granted during the nine months ended March 31, 2010 was $0.095. The fair value was estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:

 

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| ** **                     | ** ** | **Quarters Ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **March 31,**      | ** ** | **March 31,**              | ** ** |
| **Valuation Assumptions** | ** ** | **2011**                | ** ** | **2010**                        | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                     | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected life                  | * *   | *N/A*                   |       | 7 years                         |       | 7years | * * | *7 years* | * * |
| *Risk-free interest rate*      | * *   | *N/A*                   | * *   | *2.69*                          | *%*        | *2.69* | *%* | *2.69* | *%* |
| *Expected volatility*          | * *   | *N/A*                   | * *   | *84.7*                          | *%*        | *135.8* | *%* | *84.7* | *%* |
| *Expected dividend yield*      | * *   | *N/A*                   | * *   | *0*                             | *%*        | *0* | *%* | *0* | *%* |

 

**6.****           ****DUE TO FACTOR**

 

On October 4, 2010, Corgenix UK entered into a letter agreement with FGI, pursuant to which, among other things, Corgenix UK and FGI agreed to terminate the FGI Agreement, effective as of September 30, 2010.

 

Under the FGI Agreement, Corgenix UK agreed to sell to FGI all of Corgenix UK’s right, title and interest in and to specified accounts receivable and all merchandise represented by those accounts.  In exchange, FGI advanced funds to the Company.

 

Contemporaneously with the termination of the Agreement, each of following agreements were terminated effective as of September 30, 2010: (a) Guaranty dated March 29, 2010 by and between the Company and FGI, (b) Guaranty dated March 29, 2010 by and between Corgenix Inc. and FGI, and (c) Debenture Agreement dated March 29, 2010 by and between Corgenix UK and FGI.  Corgenix UK paid FGI a termination fee of $25,000.

 

The accounts receivable sold to FGI were treated as a secured borrowing. During the quarter ended March 31, 2011, we did not sell any of our accounts receivable invoices to FGI. During the nine months ended March 31, 2011, we sold $207,584 of our accounts receivable invoices to FGI for approximately $176,027. Fees paid to FGI for interest and other services for the same periods totaled zero and $36,263.

 

On September 30, 2009, we, along with our wholly owned subsidiary, Corgenix, Inc., entered into the Summit Financing Agreement, an Addendum to the Summit Financing Agreement, a Summit Loan and Security Agreement and a Summit Promissory Note (collectively, the “Summit Agreements”) with Summit Financial Resources (“Summit”). We are jointly and severally liable for all obligations pursuant to the Summit Agreements. The Agreements provide us and our subsidiary with a maximum credit line of $1,750,000 pursuant to an account factoring relationship, coupled with a secured line of credit.

 

Under the Summit Financing Agreement, we agreed to sell all of our right, title and interest in and to accounts identified for purchase by Summit from time to time. The purchase price for each sold account equals the face amount of each account multiplied by the applicable advance rate, minus all interest and fees and charges as described in the Summit Financing Agreement. In addition, interest will accrue on advances made by way of purchased accounts at the rate of prime plus 1.5% per annum until Summit receives payment in full on each account. If Summit does not receive full payment on a purchased account by the due date specified in the Summit Financing Agreement, then we or our subsidiary (as applicable) must repurchase that account, and pay Summit the default interest rate until it is repaid.

 

Currently, the advance rate on eligible accounts receivable is 85%, and will remain the same unless Summit elects in its discretion to apply a different percentage.

 

The accounts receivable sold to Summit are also treated as a secured borrowing. During the quarter and nine months ended March 31, 2011 we sold $1,096,785 and $3,251,996 respectively, of our accounts receivable invoices to Summit for approximately $932,267 and $2,764,196. Fees paid to Summit for interest and other services for the same periods totaled $40,466 and $123,315, respectively.

 

Other receivables at March 31, 2010 and March 31, 2010 represent the retained percentages of the factored accounts receivable.

 

**7.****           ****NOTES PAYABLE**

 

Notes payable consist of the following at March 31, 2011 and June 30, 2010:

 

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| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **March 31,   2011** | ** ** | **June 30, 2010** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Note payable, net of discount of $26,128, unsecured,   to redeemable common stockholders, with interest at prime plus   2.0% (5.25% as of March 31, 2011 due in monthly installments   with principal payments of $5,200 plus interest through August 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | $                         | 72,872     |                        | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                      |       |                        |       |
| Note payable, payable to Summit Financial   Resources, with interest at prime rate plus 2.75% (6% as of   March 31, 2011 and June 30, 2010) due in monthly installments with   principal payments of $3,804 plus interest through   November 2009 plus interest, and via a note modification dated November 30, 2009,   weekly principal payments of $12,500 plus interest, on December 7, 2009   and December 14, 2009, and $21,835 plus interest on December 28,   2009, and then in monthly installments with principal and interest of   $1,647, commencing January 31, 2010 through September 30,   2012, collateralized by all assets of Corgenix |       | 28,281                    |       | 41,494                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                      |       |                        |       |
| 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 88,550                    |       | —                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                      |       |                        |       |
| Note payable, unsecured, to redeemable common   stockholders, with interest at prime plus 2.0% (5.25% as of   June 30, 2010) due in monthly installments with   principal payments of $5,200 plus interest through August 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | —                    |       | 26,200                      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 189,703                   |       | 67,694                      |       |
| Current portion, net of current portion of   discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (100,816                  | )          | (43,953                     | )          |
| Notes payable, excluding current portion and net   of long-term portion of discount                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | $                         | 88,887     |                        | $          | 23,741 |   |

 

**8.****           ****COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES**

 

On July 12, 2010, we announced that 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. Thus, as a condition to the closing of the Second Tranche investment with the Elitech group, we will have effectively transferred our product distribution activity outside of North America from our subsidiary, Corgenix UK, to Elitech UK. Pursuant to this plan, beginning October 1, 2010, we began winding down the business activities heretofore carried out by Corgenix UK and permanently closing the business on or about May 31, 2011. In order to accomplish this wind down and closing of Corgenix UK, we transferred one of Corgenix UK’s seven employees to Elitech UK, terminated the employment of all but two of the remaining Corgenix UK employees at September 30, 2010, retained one employee and one consultant until November 30, 2010, and retained the last remaining employee until March 31, 2011. In connection with this reduction in workforce, we incurred cash charges of approximately $131,751 for one-time costs associated with the severance of these employees, which has been accounted for on a straight-line basis over the period from notification through each employee’s termination date.  In addition to the above one-time charges amounting to $131,751, we have sold, where possible, the fixed assets, and transferred the facility lease of Corgenix UK. In that regard, we incurred an additional $90,237 in costs related to the loss on sale or abandonment of fixed assets, and $230,329 of charges relating to facility leases and other fixed obligations.  Although we believe that our remaining estimates are appropriate and reasonable based on available information, actual results could differ from these estimates.  The majority of the above estimated costs have been either incurred or accrued as of March 31, 2011, and we believe that the accruals as of March 31, 2011 are reasonable and appropriate.

 

**9.****           ****SUBSEQUENT EVENTS**

 

On April 11, 2011, we entered into a Lease Amendment No. 5 (the “Fifth Lease Amendment”) with KE Denver One, LLC, a Delaware limited liability company (“Landlord”).  The Fifth Lease Amendment relates to the Lease Agreement entered into by Company and York County, LLC, a California limited liability company (and predecessor in interest to Landlord) on February 8, 2006, and amended on December 11, 2006, June 18, 2007, July 19, 2007, and October 20, 2008 (the “Lease”).  The Lease pertains to our lease of approximately 32,000 square feet located in the building commonly known as Broomfield One at 11575 Main Street,

 

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Broomfield, Colorado 80020.  The property 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 original term of the Lease was seven years and five months from July 6, 2006 to December 6, 2013.  Following the original term, we also had the option to extend the Lease for two additional five-year terms.  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.

 

·                  For the period of May 1, 2011 through April 30, 2012, Base Rent will be $289,600 per annum payable in monthly installments of $24,133 per month.

·                  For the period of May 1, 2012 through April 30, 2013, Base Rent will be $299,840 per annum payable in monthly installments of $24,986 per month.

·                  For the period of May 1, 2013 through April 30, 2014, Base Rent will be $254,720 per annum payable in monthly installments of $21,226 per month.

·                  For the period of May 1, 2014 through April 30, 2015, Base Rent will be $277,120 per annum payable in monthly installments of $23,093 per month.

·                  For the period of May 1, 2015 through April 30, 2016, Base Rent will be $288,204 per annum payable in monthly installments of $24,017 per month.

·                  For the period of May 1, 2016 through April 30, 2017, Base Rent will be $299,732 per annum payable in monthly installments of $24,977 per month.

·                  For the period of May 1, 2017 through April 30, 2018, Base Rent will be $311,722 per annum payable in monthly installments of $25,976 per month.

·                  For the period of May 1, 2018 through April 30, 2019, Base Rent will be $324,191 per annum payable in monthly installments of $27,015 per month.

 

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.

 

**Item 2.**

 

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere herein.

 

**(a)           Forward-Looking Statements**

 

This 10-Q 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 10-Q, including, without limitation, statements regarding future capital guidance, acquisition strategies, strategic partnership expectations, technological developments, the development, the availability of necessary components, research and development programs and distribution plans, are forward-looking statements.  All forward-looking statements included in this 10-Q are based on information available to us on the date hereof, and we assume no obligation to update such forward-looking statements.  Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct or that we will take any actions that may presently be planned.

 

**(b)           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 52 products covering autoimmune disorders, vascular diseases, infectious diseases and liver disease. Our products are sold in the United States, the UK and other countries through our marketing and sales organization that includes direct sales representatives, contract sales representatives, internationally through an extensive distributor network, and to several significant OEM partners.

 

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We manufacture products for inventory based upon expected sales demand, shipping products to customers, usually within 24 hours of receipt of orders if in stock.  Accordingly, we do not operate with a significant customer order backlog.

 

Since our inception, our revenues have come 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.

 

Beginning in fiscal year 1996, we began adding third-party OM licensed products to our diagnostic product line.

 

Although, we have generally experienced growth in revenues over the past 21 years, 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.

 

**(c)           Results of Operations**

 

***Three Months Ended March 31, 2011************compared to 2010***

 

*Net sales.*The two tables below provide the reader with further insight as to the changes of the various components of our sales for the comparable quarters and nine months periods ended March 31, 2011and March 31, 2010.

 

*Cost of sales*.  These costs includes the costs associated with both manufacturing and the costs associated with the generation of research and development and grant revenue, and include labor, raw materials, specific supplies, specific consulting, freight-in, manufacturing administration, quality assurance and quality control, repairs and maintenance, scrap and other indirect costs. Total  Cost of sales, as a percentage of sales, increased to 51.5% for the quarter ended March 31, 2011 from 51.4% in the prior year’s comparable quarter. The following table shows, for the  three months ended March 31, 2011, the composition of the cost of sales, between the cost of sales related to our core business and that related to our contract research and development and grant revenues, and their relative percentage of related revenues.

 

**3 Months Ended March 31, 2011**

 
| ** **                                 | ** ** | **CORE BUSINESS** | ** ** | **R & D AND GRANT** | ** ** |
|--------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| **SALES/REVENUES**                         |       | $                      | 1,564,934  |                                        | $          | 264,009 |   |
| **DIRECTLY RELATED COST OF SALES**         |       | $                      | 772,148    |                                        | $          | 169,861 |   |
| **COST OF SALES AS % OF   SALES/REVENUES** |       | 49.3                   | %          | 64.3                                        | %          |

 

*Selling and marketing expenses. *For the quarter ended March 31, 2011, selling and marketing expenses decreased $4,867 or 1.3% to $370,502 from $375,369 for the quarter ended March 31, 2010. The $4,867 decrease versus the prior year resulted primarily from decreases of $62,480 in Corgenix UK sales and marketing expenses, partially offset by a net increase of $57,613 in other selling and marketing expenses.

 

*Research and development (“R & D”) Expense.* 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 new and existing diagnostic products. As mentioned above in the analysis of cost of sales,  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.  As a result, only those  R & D expenses not directly related to the generation of specific contract R & D and Grant related contract revenue, are included in   R & D expense in the Statement of Operations operating expense section. Gross R & D expense, prior to the reclassification of a portion of said expenses to cost of sales,  decreased  $22,070 or 11.2% to $175,259 for the quarter ended March 31, 2011, from $197,329 for the quarter ended March 31, 2010. The $22,070 decrease versus the prior year resulted primarily from decreases of $15,844 in labor-related expenses and $20,967 in travel-related expenses expenses, partially offset by a net increase of $14,741 in other research and development expenses.

 

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* *

*General and administrative expenses.* For the quarter ended March 31, 2011, general and administrative expenses decreased $22,131 or 4.3% to $492,052 from $514,183 for the quarter ended March 31, 2010. The $22,131 decrease versus the prior year resulted primarily from a decrease of $47,148 in Corgenix UK general and administrative expenses, partially offset by a net increase of $25,017 in other general and administrative expenses.

 

*Interest expense.* Interest expense decreased $10,854, or 16.7% to $54,292 for the quarter ended March 31, 2011, from $65,146 for the quarter ended March 31, 2010. The $10,854 decrease in interest expense was due primarily to the reduced interest expense brought about by the termination of the FGI financing agreement.

 

***Nine months ended March 31, 2011************compared to 2010***

 

*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 quarters and nine months periods ended March 31, 2011 and March 31, 2010.

 
| ** **                 | ** ** | **Quarters Ended** | ** ** | ** **       | ** ** | **Nine months ended** | ** ** | ** **       | ** ** |
|----------------------------|------------|-------------------------|------------|------------------|------------|---------------------------------|------------|------------------|------------|
| ** **                 | ** ** | **March 31,**      | ** ** | **% Incr.** | ** ** | **March 31,**              | ** ** | **% Incr.** | ** ** |
| ** **                 | ** ** | **2011**                | ** ** | **2010**         | ** ** | **(Decr.)**                     | ** ** | **2011**         | ** ** | **2010** | ** ** | **(Decr.)** | ** ** |
| **Sales:**                 |       |                    |       |             |       |                            |       |             |       |   |   |   |   |
| **Geographical Breakdown** |       |                    |       |             |       |                            |       |             |       |   |   |   |   |
| North America              |       | $                       | 1,554,888  |             | $          | 1,579,818                       |       | (1.6             | )%         | $ | 4,438,852 |   | $ | 4,494,278 |   | (1.2 | )% |
| International              |       | $                       | 274,055    |             | $          | 616,192                         |       | (55.5            | )%         | $ | 1,154,264 |   | $ | 1,706,151 |   | (32.3 | )% |
| Total Sales                |       | $                       | 1,828,943  |             | $          | 2,196,010                       |       | (16.7            | )%         | $ | 5,593,116 |   | $ | 6,200,429 |   | (9.8 | )% |

 
| ** **              | ** ** | **Quarters Ended** | ** ** | ** **       | ** ** | **Nine months ended** | ** ** | ** **       | ** ** |
|-------------------------|------------|-------------------------|------------|------------------|------------|---------------------------------|------------|------------------|------------|
| ** **              | ** ** | **March 31,**      | ** ** | **% Incr.** | ** ** | **March 31,**              | ** ** | **% Incr.** | ** ** |
| ** **              | ** ** | **2011**                | ** ** | **2010**         | ** ** | **(Decr.)**                     | ** ** | **2011**         | ** ** | **2010** | ** ** | **(Decr.)** | ** ** |
| **Sales:**              |       |                    |       |             |       |                            |       |             |       |   |   |   |   |
| **By Category**         |       |                    |       |             |       |                            |       |             |       |   |   |   |   |
| Phospholipid Sales *    |       | $                       | 863,595    |             | $          | 957,484                         |       | (9.8             | )%         | $ | 2,533,444 |   | $ | 2,731,196 |   | (7.2 | )% |
| Coagulation Sales*      |       | $                       | 270,817    |             | $          | 371,778                         |       | (27.2            | )%         | $ | 986,575 |   | $ | 1,178,128 |   | (16.3 | )% |
| Aspirin Works Sales     |       | $                       | 91,090     |             | $          | 44,951                          |       | 102.6            | %          | $ | 271,499 |   | $ | 138,992 |   | 95.3 | % |
| Hyaluronic Acid Sales   |       | $                       | 174,661    |             | $          | 271,689                         |       | (35.7            | )%         | $ | 575,251 |   | $ | 689,414 |   | (16.6 | )% |
| Autoimmune Sales        |       | $                       | 25,215     |             | $          | 51,230                          |       | (50.8            | )%         | $ | 106,693 |   | $ | 138,176 |   | (22.8 | )% |
| Contract Manufacturing  |       | $                       | 78,673     |             | $          | 95,577                          |       | (17.7            | )%         | $ | 134,573 |   | $ | 345,916 |   | (61. | )% |
| R & D Contract |       | $                       | 264,009    |             | $          | 248,183                         |       | 6.4              | %          | $ | 684,289 |   | $ | 426,213 |   | 60.6 | % |
| Shipping and Other      |       | $                       | 60,883     |             | $          | 155,118                         |       | (60.8            | )%         | $ | 300,792 |   | $ | 552,394 |   | (45.5 | )% |
| Total Sales             |       | $                       | 1,828,943  |             | $          | 2,196,010                       |       | (16.7            | )%         | $ | 5,593,116 |   | $ | 6,200,429 |   | (9.8 | )% |

 

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| *Includes OEM Sales |   | $ | 162,895 |   | $ | 156,364 |   | 4.2 | % | $ | 615,318 |   | $ | 624,327 |   | (1.4 | )% |
|---------------------|--------|---|---------|--------|---|---------|--------|-----|---|---|---------|--------|---|---------|--------|------|----|

 

*Cost of sales*.  Total cost of sales, as a percentage of sales, were 49.5% for the nine months ended March 31, 2011 versus 49.3% in the prior year’s comparable nine months.  The following table shows, for the  nine months ended March 31, 2011, the composition of the cost of sales, between the cost of sales related to our core business and that related to our contract research and development and grant revenues, and their relative percentage of related revenues.

 

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**9 Months Ended March 31, 2011**

 
| ** **                                 | ** ** | **CORE BUSINESS** | ** ** | **R & D AND GRANT** | ** ** |
|--------------------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| **SALES/REVENUES**                         |       | $                      | 4,908,827  |                                        | $          | 684,289 |   |
| **DIRECTLY RELATED COST OF SALES**         |       | $                      | 2,307,391  |                                        | $          | 463,589 |   |
| **COST OF SALES AS % OF   SALES/REVENUES** |       | 47.0                   | %          | 67.8                                        | %          |

 

*Selling and marketing expenses. *For the nine months ended March 31, 2011, selling and marketing expenses decreased $123,375 or 10.2% to $1,081,206 from $1,204,581 for the nine months ended March 31, 2010. The $123,375 decrease versus the prior year resulted primarily from decreases of $170,135 in Corgenix UK sales and marketing expenses and $39,461 in consulting and outside services expenses, partially offset by a net increase of $86,221in other selling and marketing expenses.

 

*Research and development expenses.* Gross R & D expense, prior to the reclassification of a portion of said expenses to cost of sales,  decreased  $10,252 or 2.0% to $496,322 for the nine months ended March 31, 2011, from $506,574 for the nine months ended March 31, 2010. The $10,252 decrease versus the prior year resulted primarily from a decrease of $15,844 in labor-reltated expenses and $20,967 in travel-related expenses, partially offset by a net increase of $26,559 in other research and development expenses.

 

*General and administrative expenses.* For the nine months ended March 31, 2011, general and administrative expenses decreased $26,990 or 1.8% to $1,435,924 from $1,462,914 for the nine months ended March 31, 2010. The $26,990 decrease versus the prior year resulted primarily from a decrease of $110,090 in Corgenix UK general and administrative expenses, partially offset by a net increase of $83,190 in other general and administrative expenses.

 

*Interest expense.* Interest expense decreased $21,185, or 9.2% to $209,067 for the nine months ended March 31, 2011, from $230,252 for the nine months ended March 31, 2010. The $21,185 decrease in interest expense was due primarily to the reduced interest expense brought about by the termination of the FGI financing agreement.

 

**(d)           ADJUSTED EBITDA**

 

Our adjusted earnings before interest, taxes, depreciation, amortization, non cash expense associated with stock-based compensation and the one-time costs associated with exit or disposal activities (“Adjusted EBITDA”) decreased $178,029 or 66.9% to $88,279 for the quarter ended March 31, 2011 compared with $266,308 for the corresponding quarter in fiscal 2010. For the nine months ended March 31, 2011, Adjusted EBITDA decreased $148,270 or 25.8% to $425,897 compared with $574,167 for the corresponding nine month period in fiscal 2010. Although adjusted EBITDA is not a GAAP measure of performance or liquidity, we believe that it may be useful to an investor in evaluating our ability to meet future debt service, capital expenditures and working capital guidance. 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 our 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 earnings (loss) can be made by adding depreciation and amortization expense, corporate stock-based compensation expense, interest expense, and income tax expense to net income (loss) as in the following table:

 
| ** **                                            | ** ** | **3 Months ended   March 31,   2011** | ** ** | **3 Months ended   March31,   2010** | ** ** | **9 Months ended   March 31,   2011** | ** ** | **9 Months ended   March 31,   2010** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **RECONCILIATION OF ADJUSTED EBITDA:** |       |                                                 |       |                                           |       |                                                 |       |                                                 |       |
| Net income (loss)                                     |       | $                                                    | (164,809   | )                                              | $          | 81,175                                               |       | $                                                    | (574,994   | ) | $ | (9,417 | ) |
|                                                  |       |                                                 |       |                                           |       |                                                 |       |                                                 |       |
| Add back:                                             |       |                                                 |       |                                           |       |                                                 |       |                                                 |       |
| Depreciation and amortization                         |       | 107,675                                              |       | 111,102                                        |       | 323,243                                              |       | 326,302                                              |       |
| Stock-based compensation expense                      |       | 5,645                                                |       | 8,979                                          |       | 16,928                                               |       | 27,439                                               |       |
| Interest expense, net of interest income              |       | 54,090                                               |       | 65,052                                         |       | 208,403                                              |       | 229,843                                              |       |
| Costs associated with exit or disposal activities     |       | 85,678                                               |       | —                                         |       | 452,317                                              |       | —                                               |       |
| Adjusted EBITDA                                       |       | $                                                    | 88,279     |                                           | $          | 266,308                                              |       | $                                                    | 425,897    |   | $ | 574,167 |   |

 

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**(e)           Financing Agreement**

 

On October 8, 2010, we closed the Second Tranche of the Common Stock Purchase Agreement (the “Common Stock Purchase Agreement”) with Elitech, a société par actions simplifiée organized under the laws of France, and Wescor, Inc., a Utah corporation and subsidiary of Elitech (“Wescor”), effective as of October 1, 2010.  As a condition to closing the Second Tranche, we transferred our product distribution activity outside of North America from our subsidiary, Corgenix UK Ltd., (“Corgenix UK”) to Elitech UK Limited, (“Elitech UK”), pursuant to the Assignment and Assumption Agreement, effective as of October 1, 2010 by and among us, Corgenix UKand Elitech UK.  As an additional condition to closing the Second Tranche, Wescor purchased 1,666,667 shares of our common stock (the “Second Tranche Shares”) for $250,000, or $0.15 per share.  For no additional consideration, we issued a warrant to Wescor to purchase 833,333 shares of our common stock at $0.15 per share (the “Second Tranche Warrant”).

 

The foregoing descriptions of the Common Stock Purchase Agreement, the Assignment and Assumption Agreement and the Second Tranche Warrant are not complete descriptions of all the terms of those agreements.  For a complete description of all the terms, we refer you to the full text of the Common Stock Purchase Agreement, the Assignment and Assumption Agreement and the Second Tranche Warrant, copies of which were filed as Exhibits 10.1, 10.2 and 10.3, respectively, to the Form 8-K filed on October 12, 2010.

 

On October 8, 2010, we also completed a repurchase of 200,000 shares of our Series B Convertible Preferred Stock (the “Repurchased Shares”) held by CAMOFI Master LDC, a Cayman Islands company (“CAMOFI”), for a purchase price of $50,000.  Pursuant to the Second Modification of Secured Convertible Term Notes dated January 29, 2009 by and between us and CAMOFI, the Repurchased Shares bore a $50,000 liquidation preference and were convertible into 800,000 shares of our common stock at the option of CAMOFI.  The repurchase was funded in part by cash on hand and in part by proceeds from the sale of the Second Tranche Shares.

 

On October 4, 2010, Corgenix UK entered into a letter agreement with Faunus Group International, Inc. (“FGI”), pursuant to which, among other things, Corgenix UK and FGI agreed to terminate that certain Receivables Finance Agreement dated March 29, 2010 by and between Corgenix UK and FGI (as amended, the “FGI Agreement”), effective as of September 30, 2010.

 

Under the FGI Agreement, Corgenix UK agreed to sell to FGI all of Corgenix UK’s right, title and interest in and to specified accounts receivable and all merchandise represented by those accounts.  In exchange, FGI advanced funds to the Company.

 

Contemporaneously with the termination of the FGI Agreement, each of following agreements were terminated effective as of September 30, 2010: (a) Guaranty dated March 29, 2010 by and between the Company and FGI, (b) Guaranty dated March 29, 2010 by and between Corgenix Inc. and FGI, and (c) Debenture Agreement dated March 29, 2010 by and between Corgenix UK and FGI.  Corgenix UK paid FGI a termination fee of $25,000.

 

On July 12, 2010 we entered into the Common Stock Purchase Agreement with Elitech and Wescor.  In accordance with the Common Stock Purchase Agreement, Wescor will purchase up to $2,000,000 of the Company’s common stock in three installments (subject to various conditions) and will receive warrants to purchase additional shares. Also, in connection with the Common Stock Purchase Agreement, we entered into (i) a distribution agreement (“Master Distribution Agreement”) with Elitech UK and (ii) a joint product development agreement (“Joint Product Development Agreement”) with Elitech. The details of the Common Stock Purchase Agreement, Master Distribution Agreement, and Joint Product Development Agreement are outlined below.

 

The initial investment by Wescor was to have taken place over three tranches:

 

First Tranche under the Common Stock Purchase Agreement—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. The Company entered into the Master Distribution Agreement with Elitech UK  and the Joint Product Development Agreement with Elitech, contemporaneously with the issuance of the First Tranche Shares.

 

Second Tranche under the Common Stock Purchase Agreement—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. As a condition to the closing of the Second Tranche, the Company has effectively transferred its product distribution activity outside of North America from our subsidiary, Corgenix UK, to Elitech UK.

 

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Third Tranche under the Common Stock Purchase Agreement—Pursuant to the Third Tranche of the Common Stock Purchase Agreement, Wescor will invest $500,000 to purchase 3,333,333 shares of our common stock valued at $0.15 per share. For no additional consideration we will issue 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 will have determined the feasibility of creating not less than two (2) new Corgenix assays as further described in the Joint Product Development Agreement.

 

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.

 

**(f)            Liquidity and Capital Resources**

 

At March 31, 2011, our working capital increased by $883,812 to $3,029,742 from $2,145,930 at June 30, 2010, and concomitantly, our current ratio (current assets divided by current liabilities) increased from 1.92 to 1 at June 30, 2010 to 2.4 to 1 at March 31, 2011. This increase in working capital is primarily attributable to the $1,500,000 strategic investments by Elitech in July and October, 2010.

 

At March 31, 2011, trade and other receivables were $1,246,154 versus $1,408,969 at June 30, 2010. Accounts payable, accrued payroll and other accrued expenses increased by a combined $207,455 from June 30, 2010. At March 31, 2011, inventories were $2,840,726, versus $2,499,557 at June 30, 2010.

 

For the nine months ended March 31, 2011, cash used by operating activities amounted to $234,512, versus $97,883 used for the nine months ended March 31, 2010. The $234,512 cash used by operating activities was primarily attributable to the net loss for the nine months, increases in inventories, and decreases in other accrued liabilities. The $234,512 cash used by operating activities was more than offset by $35,064 in net cash provided by investing activities (primarily due to the proceeds from disposal of equipment), $786,510 cash provided by financing activities (primarily due to the proceeds from the issuance of common stock to Elitech), and a $5,105 positive cash from the impact of foreign currency translation, resulted in a $592,167 net increase in our cash balance as of March 31, 2011.

 

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 $13,783,438 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, factoring of accounts receivables, 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 Elites collaboration and investment, described above.

 

The $1,500,000 Elitech common stock investments in addition to the Summit $1,750,000 March 31, 2010 credit facility, when considered in conjunction with our current revised forecasts, should provide adequate resources to continue operations for longer than 12 months.

 

**(g)           Off -Balance Sheet Arrangements**

 

None.

 

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**(h)           Contractual Obligations and Commitments**

 

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.

 

On the following dates, we executed the following amendments to the Lease:

 

·                  December 1, 2006- The First Lease Amendment to the Lease Agreement (the “First Amendment”) established July 6, 2006 as the date of the commencement of the Lease

 

·                  June 19, 2007- The Second Lease Amendment to the Lease Agreement (the “Second Amendment”) redefined the amount of available rental space from 32,480 to 32,000 square feet and recalculated the lease rates per square foot, and

 

·                  July 19, 2007- The Third Lease Amendment to the Lease Agreement (the “Third Amendment”) established the base rent matrix for the period 11/28/2013 to 12/05/2013 which was inadvertently omitted in the Second Amendment.

 

The term of the Lease (the “Term”) was originally seven years and five months and commenced on July 6, 2006 with tenant options to extend the Term for up to two five-year periods.  We also had a one time right of second refusal to lease contiguous premises.

 

Initially there was no base lease rate payable on 25,600 square feet of the Property, plus estimated operating expenses of $1.61 per square foot.

 

The base lease rate payable on 25,600 square feet of the Property increased to $4.00 per square foot on January 28, 2007, plus amortization of tenant improvements of $5.24 per square foot, plus estimated operating expenses of $1.61 per square foot.  The base lease rate on 25,600 square feet of the Property increased to $5.64 per square foot on January 28, 2008, with fixed annual increases each January 28 thereafter during the initial Term, plus the amortization of tenant improvements of $5.24 per square foot, and estimated operating expenses of $1.61 per square foot.

 

Initially, there was no base lease rate payable on 6,400 square feet of the Property, plus estimated operating expenses of $1.61 per square foot.  The base lease rate on 6,400 square feet of the Property increased to $3.00 per square foot commencing on August 28, 2007, increased to $3.09 on January 28, 2008, increased to $3.19 on January 28, 2009, and increased to $3.28 on January 28, 2010, with fixed annual increases each January 28 thereafter during the initial Term, plus estimated operating expenses of $1.61 per square foot.

 

Thus, the estimated total rent (this is dependent upon the actual operating expenses) on the entire 32,000 square feet of the Property was initially $1.61 per square foot, then increased to approximately $9.00 per square foot on January 28, 2007, then increased to approximately $9.60 per square foot on August 28, 2007, then increases to approximately $10.93 per square foot on January 28, 2008, then increased to $11.92 on January 28, 2009, and increased to $12.21 on January 28, 2010, with annual increases in the base lease rate each January 28 thereafter during the initial Term, up to an estimated total rent of $13.18 per square foot during the final year of the initial Term.

 

The base lease rate for an extension period is 100% of the then prevailing market rental rate (but in no event less than the rent for the last month of the then current Term) and shall thereafter increase annually by 3% for the remainder of the applicable extension period.

 

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.

 

·                  For the period of May 1, 2011 through April 30, 2012, Base Rent will be $289,600.00 per annum payable in monthly installments of $24,133.33 per month.

·                  For the period of May 1, 2012 through April 30, 2013, Base Rent will be $299,840.00 per annum payable in monthly installments of $24,986.67 per month.

 

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·                  For the period of May 1, 2013 through April 30, 2014, Base Rent will be $254,720.00 per annum payable in monthly installments of $21,226.67 per month.

·                  For the period of May 1, 2014 through April 30, 2015, Base Rent will be $277,120.00 per annum payable in monthly installments of $23,093.33 per month.

·                  For the period of May 1, 2015 through April 30, 2016, Base Rent will be $288,204.00 per annum payable in monthly installments of $24,017.00 per month.

·                  For the period of May 1, 2016 through April 30, 2017, Base Rent will be $299,732.99 per annum payable in monthly installments of $24,977.75 per month.

·                  For the period of May 1, 2017 through April 30, 2018, Base Rent will be $311,722.31 per annum payable in monthly installments of $25,976.86 per month.

·                  For the period of May 1, 2018 through April 30, 2019, Base Rent will be $324,191.20 per annum payable in monthly installments of $27,015.93 per month.

 

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 3.**

 

**Quantitative and Qualitative Disclosures about Market Risk**

 

Not required for smaller reporting companies.

 

**Item 4.**

 

**Controls and Procedures**

 

Under the supervision and with the participation of our President and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report as defined in Rule 13a-15(b) or Rule 15(d)-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, the President and Chief Financial  Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective and ensure that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the President and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

There were no changes in our internal control over financial reporting as of the end of the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II**

 

**Other Information**

 

**Item 1.****                                  ****Legal Proceedings**

 

None

 

**Item 2.****                                  ****Unregistered Sales of Equity Securities and Use of Proceeds**

 

On July 12, 2010 we entered into a Common Stock Purchase Agreement with Elitech and Wescor. In accordance withthe Common Stock Purchase Agreement, Wescor will purchase up to $2,000,000 of the Company’s common stock inthree installments (subject to various conditions) and will receive warrants to purchase additional shares. The investment by Wescor will take place over a maximum of three tranches:

 

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.

 

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On October 8, 2010, we closed the Second Tranche of the Common Stock Purchase Agreement with Elitech and Wescor, effective as of October 1, 2010. As a condition to closing the Second Tranche, we transferred our product distribution activity outside of North America from our subsidiary, Corgenix U.K. Ltd. to Elitech UK Limited. As an additional condition to closing the Second Tranche, Wescor purchased 1,666,667 shares of our common stock for $250,000, or $0.15 per share.  For no additional consideration, we issued a warrant to Wescor to purchase 833,333 shares of our common stock at $0.15 per share.

 

The shares and warrants offered under the Common Stock Purchase 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.****The warrants offered by the Company to Wescor, under each Tranche in the Common Stock Purchase Agreement, give Wescor the right to purchase up to a total of 6,666,667 shares of the Company’s common stock, $.001 par value, exercisable at $0.15 per share, with each warrant expiring after five years from the date of issuance.

 

**Item 3.****                                  ****Defaults Upon Senior Securities**

 

None

 

**Item 4.****                                  ****Submission of Matters to a Vote of Security Holders**

 

None

 

**Item 5.****                                  ****Other Information**

 

None

 

I**tem 6.****                                  ****Exhibits**

 

**a. Index to and Description of Exhibits***.*

 
| **Exhibit   Number** | ** ** | **Description of Exhibit**                                                                                                                                                           |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                     |
| 10.1**               |       | Assignment   and Assumption Agreement effective as of October 1, 2010 by and among   Elitech UK Limited, Corgenix Medical Corporation and Corgenix U.K. Ltd.                              |
|                 |       |                                                                                                                                                                                           |
| 10.2**               |       | Second   Tranche Warrant effective as of October 1, 2010 issued by Corgenix   Medical Corportion.                                                                                         |
|                 |       |                                                                                                                                                                                           |
| 31.1*                |       | Certification   of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley   Act of 2002.                                                                                   |
|                 |       |                                                                                                                                                                                           |
| 31.2*                |       | Certification   of Chief Financial Officers 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. |

 

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*                                         Filed herewith.

**                                  Incorporated by reference to the Company’s Report on Form 8-K, filed on October 12, 2010.

 

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** **

**SIGNATURES**

 

In accordance with the guidance 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 |
|---------------------------|--------------------------------|
|                      |                           |   |
|                      |                           |   |
| May  13,   2011 | By:                            | /s/   Douglass T. Simpson |
|                      |                           | Douglass   T. Simpson |
|                      |                           | President   and Chief Executive Officer |
| ** **                | ** **                     | **(Principal   Executive Officer)** |
|                      |                           |   |
|                      |                           |   |
|                      | By:                            | /s/   William H. Critchfield |
|                      |                           | Chief   Financial Officer |
| ** **                | ** **                     | **(Principal   Financial and Accounting Officer)** |

 

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