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CONX > SEC Filings for CONX > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for CORGENIX MEDICAL CORP/CO


14-May-2013

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and accompanying notes included elsewhere herein and in the Annual Report on Fornm 10-K for the year ended June 30, 2012..

(a) Forward-Looking Statements

This 10-Q includes statements that are not purely historical and are "forward-looking statements", 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 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.

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. 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. For more discussion about each risk factor, see Part I Item 1A-"Risk Factors" in the Company's Annual Report on Form 10-K for the year ended June 30, 2012.

Contract revenues consist of service fees from research and development agreements with strategic partners.


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Beginning in fiscal year 1996, we began adding third-party OM licensed products to our diagnostic product line. Currently we sell 128 products licensed from or manufactured by third party manufacturers. We expect to expand our relationships with other companies in the future to gain access to additional products.

(c) Results of Operations

Three months ended March 31, 2013 compared to three months ended March 31, 2012

Total revenues. For the current quarter, total revenues decreased $221,797, or 8.2%, to $2,495,555 versus $2,717,352 in the quarter ended March 31, 2012. The decrease was primarily due to decreases in Phospholipid, Aspirin Works and Autoimmune assay sales in addition to a decrease in R & D contract revenue, partially offset by increases in contract manufacturing and Coagulation sales in addition to an increase in shipping and other revenue. The following two tables provide the reader with further insight as to the changes in the various components of our total revenues for the comparable quarters ended March 31, 2013 and March 31, 2012.

                               Quarter ended
                                 March 31,           % Incr.
                            2013          2012       (Decr.)
Total Revenues:
Geographical Breakdown
North America            $ 2,261,119   $ 2,464,069      (8.2 )%
International            $   234,436   $   253,283      (7.4 )%
Total Revenues           $ 2,495,555   $ 2,717,352      (8.2 )%




                               Quarter Ended
                                 March 31,           % Incr.
                            2013          2012       (Decr.)
Total Revenues:
By Category
Phospholipid Sales*      $   740,349   $   859,599     (13.9 )%
Coagulation Sales*       $   295,415   $   273,259       8.1 %
Aspirin Works Sales      $   218,002   $   243,233     (10.4 )%
Hyaluronic Acid Sales    $   213,810   $   234,420      (8.8 )%
Autoimmune Sales         $         -   $    25,050    (100.0 )%
Contract Manufacturing   $   618,634   $   582,176       6.3 %
R & D Contract           $   192,815   $   412,821     (53.3 )%
Shipping and Other       $   216,530   $    86,794     149.5 %
Total Revenues           $ 2,495,555   $ 2,717,352      (8.2 )%



* Includes OEM Sales $ 125,770 $ 193,108 (34.9 )%

Cost of revenues. Total cost of revenues, as a percentage of sales, were 53.0% for the quarter ended March 31, 2013 versus 62.7% for the prior fiscal year. The primary reasons for the decrease for the current quarter was that during the prior fiscal year's third quarter, the Company identified an error in the calculation of the ending inventory balance for the prior fiscal year's second quarter ended December 31, 2012 in which inventory was overstated by $158,416. Accordingly, the Company corrected the ending inventory balance in the third quarter of fiscal 2012, which increased cost of sales and increased the net loss by $158,416. Had the inventory error not occurred at December 31, 2011, the Company's cost of revenues for the quarter ended March 31, 2012 would have been 56.9% versus the 62.7% as reported. The remainder of the cost of revenue decrease was as a result of continuing efficiencies in our manufacturing processes.

The following table shows, for the quarters ended March 31, 2013 and March 31, 2012, the composition of the cost of revenues, between the cost of sales related to our core business and that the cost of revenues related to our contract research and development and grant revenues, and their relative percentage of related revenues.


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Three months ended March 31, 2013

                                             CORE       R & D AND
                                           BUSINESS       GRANT         TOTAL
REVENUES                                  $ 2,301,580   $  193,975   $ 2,495,555
DIRECTLY RELATED COST OF REVENUES         $ 1,162,324   $  160,102   $ 1,322,426
COST OF REVENUES AS % OF TOTAL REVENUES          50.5 %       82.5 %        53.0 %

Three months ended March 31, 2012

                                             CORE       R & D AND
                                           BUSINESS       GRANT         TOTAL
REVENUES                                  $ 2,304,531   $  412,821   $ 2,717,352
DIRECTLY RELATED COST OF REVENUES         $ 1,387,953   $  316,818   $ 1,704,771
COST OF REVENUES AS % OF TOTAL REVENUES          60.2 %       76.7 %        62.7 %

Selling and marketing expenses. For the quarter ended March 31, 2013, selling and marketing expenses decreased $111,270, or 21.8%, to $399,257 from $510,527 for the quarter ended March 31, 2012. The $111,270 decrease versus the prior period resulted primarily from decreases of $62,711and in labor-related expenses and $35,795 in trade show and travel related expenses, and a net increase of $12,764 in other selling and marketing expenses.

Research and development expenses. Gross research and development expenses, prior to the reclassification of a portion of said expenses to cost of revenues, decreased $68,205, or 16.8%, to $337,378 for the quarter ended March 31, 2013, from $405,583 for the quarter ended March 31, 2012. The $68,205 decrease resulted primarily from decreases of $47,778 in laboratory supplies and $44,647 in outside services expense, partially offset by a net increase of $24,220 in other research and development expenses.

General and administrative expenses. For the quarter ended March 31, 2013, general and administrative expenses increased $28,350, or 5.6%, to $533,603 from $505,253 for the quarter ended March 31, 2012. The $28,350 increase was primarily a result of a $62,107 increase in compensation-related expense, partially offset by a net decrease of $33,757 for the period.

Interest expense. Interest expense decreased $10,290, or 67.1%, to $5,047 for the quarter ended March 31, 2013, from $15,337 for the quarter ended March 31, 2012. This substantial decrease in interest expense was due primarily to the considerably lower borrowings for the current period.

Nine months ended March 31, 2013 compared to nine months ended March 31, 2012

Total revenues. For the current nine month period, total revenues increased $833,647, or 12.0%, to $7,794,847 versus $6,961,200 in the previous year. The increase was primarily due to increases in Aspirin Works, Coagulation and Hyaluronic Acid assay sales in addition to an increase in contract manufacturing sales and shipping and other revenue, partially offset by decreases in Phospholipid and Autoimmune assay sales in addition to a decrease in R & D contract revenue. The following two tables provide the reader with further insight as to the changes in the various components of our total revenues for the comparable nine month periods ended March 31, 2013 and March 31, 2012.

                             Nine months ended
                                 March 31,           % Incr.
                            2013          2012       (Decr.)
Total Revenues:
Geographical Breakdown
North America            $ 6,742,535   $ 6,073,875      11.0 %
International            $ 1,052,312   $   887,325      18.6 %
Total Revenues           $ 7,794,847   $ 6,961,200      12.0 %


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                             Nine months ended
                                 March 31,           % Incr.
                            2013          2012       (Decr.)
Total Revenues:
By Category
Phospholipid Sales*      $ 2,356,984   $ 2,443,497      (3.5 )%
Coagulation Sales*       $   990,168   $   964,467       2.7 %
Aspirin Works Sales      $   709,022   $   564,228      25.7 %
Hyaluronic Acid Sales    $   692,080   $   645,821       7.2 %
Autoimmune Sales         $    59,560   $    71,317     (16.5 )%
Contract Manufacturing   $ 1,711,352   $   863,412      98.2 %
R & D Contract           $   771,249   $ 1,051,647     (26.7 )%
Shipping and Other       $   504,432   $   356,811      41.4 %
Total Revenues           $ 7,794,847   $ 6,961,200      12.0 %



* Includes OEM Sales $ 582,269 $ 671,803 (13.3 )%

Cost of revenues. Total cost of revenues, as a percentage of sales, showed a slight decrease for the period, declining to 55.8% for the nine months ended March 31, 2013 versus 56.9% for the prior period. The primary reason for the decrease for the nine month period was as a result of continuing efficiencies in our manufacturing processes. The following table shows, for the nine months ended March 31, 2013 and March 31, 2012, the composition of the cost of revenues, between the cost of sales related to our core business and that the cost of revenues related to our contract research and development and grant revenues, and their relative percentage of related revenues.

Nine months ended March 31, 2013

                                             CORE       R & D AND
                                           BUSINESS       GRANT         TOTAL
REVENUES                                  $ 7,022,438   $  772,409   $ 7,794,847
DIRECTLY RELATED COST OF REVENUES         $ 3,754,119   $  596,740   $ 4,350,859
COST OF REVENUES AS % OF TOTAL REVENUES          53.5 %       77.3 %        55.8 %

Nine months ended March 31, 2012

                                             CORE        R & D AND
                                           BUSINESS        GRANT         TOTAL
REVENUES                                  $ 5,909,553   $ 1,051,647   $ 6,961,200
DIRECTLY RELATED COST OF REVENUES         $ 3,176,807   $   787,080   $ 3,963,887
COST OF REVENUES AS % OF TOTAL REVENUES          53.8 %        74.8 %        56.9 %

Selling and marketing expenses. For the nine months ended March 31, 2013, selling and marketing expenses decreased $192,517, or 13.1%, to $1,275,736 from $1,468,253 for the nine months ended March 31, 2012. The $192,517 decrease resulted primarily from decreases of $147,615 in labor-related expenses and $50,241 in trade show and travel related expenses, partially offset by a net increase of $5,339 in other selling and marketing expenses.

Research and development expenses. Gross Research and development expenses, prior to the reclassification of a portion of said expenses to cost of sales, increased $5,039 or less than 1% to $994,703 for the nine months ended March 31, 2013, from $989,664 for the nine months ended March 31, 2012. The $5,039 increase resulted primarily from an increase of $72,006 in labor-related expenses, partially offset by a net decrease of $66,967 in other research and development expenses.

General and administrative expenses. For the nine months ended March 31, 2013, general and administrative expenses increased $40,789, or 2.9%, to $1,441,617 from $1,400,828 for the nine months ended March 31, 2012. The $40,789 increase resulted primarily from increases of $124,098 in labor-related expenses, partially offset by a net decrease of $83,309 in other general and administrative expenses.

Interest expense. Interest expense decreased $87,503, or 83.8%, to $16,941 for the nine months ended March 31, 2013, from $104,444 for the nine months ended March 31, 2012. This substantial decrease in interest expense was due primarily to the considerably lower borrowings for the current period.


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(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") increased $241,066, or 319.6%, to $165,650 for the quarter ended March 31, 2013 compared with a negative $75,416 for the corresponding three month period in fiscal 2012. For the nine month period ended March 31, 2013, adjusted EBITDA increased $552,607, or 675.7%, to $634,390 compared with $81,783 for the corresponding nine month period in fiscal 2012. 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      3 Months ended      9 Months ended      9 Months ended
                                               March 31,           March 31,           March 31,           March 31,
                                                  2013                2012                2013                2012
RECONCILIATION OF ADJUSTED EBITDA:
Net income (loss)                           $         62,058    $       (185,145 )  $        310,744    $       (320,736 )

Add back:
Depreciation and amortization                         76,140              76,248             225,459             218,451
Stock-based compensation expense                      22,491              18,280              81,562              63,007
Interest expense, net of interest income               4,961              15,201              16,625             103,859
Costs associated with exit or disposal
activities                                                 -                   -                   -              17,202
Adjusted EBITDA                             $        165,650    $        (75,416 )  $        634,390    $         81,783

(e) Financing Agreements

On July 14, 2011, we entered into a Revolving Credit and Security Agreement (the "Loan Agreement") with LSQ Funding Group, L.C., a Florida limited liability company ("LSQ").

Pursuant to the terms of the Loan Agreement, LSQ is providing a line of credit (the "Line") to us under which LSQ agrees to make loans to us in the maximum principal amount outstanding at any time of $1,500,000. The maximum amount of the loans under the Line shall also be governed by a borrowing base equal to 85% of Eligible Accounts Receivable plus 50% of Eligible Inventory, with certain limits and exclusions more fully set forth in the Loan Agreement.

Interest accrues on the average outstanding principal amount of the loans under the Line at a rate equal to 0.043% per day (15.7% APR).

Loans under the Line may be repaid and such repaid amounts re-borrowed until the maturity date. Unless terminated by us or accelerated by LSQ in accordance with the terms of the Loan Agreement, the Line will terminate and all loans there under must be repaid on July 14, 2013.

The Loan Agreement contains certain representations, warranties, covenants and events of default typical in financings of this type, including, for example, limitations on additional debt and investments and limitations on the sale of additional equity by us or other changes in our ownership. Please refer to the Loan Agreement for all such representations, warranties, covenants and events of default.

In addition, pursuant to the terms of the Loan Agreement, we granted to LSQ a security interest in all of our personal property to secure the repayment of the loans under the Line and all other of our obligations to LSQ, whether under the Loan Agreement or otherwise.

We have used the money we received under the Loan Agreement and the Line to pay off our outstanding debt obligations to Summit Financial Resources, L.P. ("Summit"), which totaled $732,894 as of July 14, 2011, which was the date of payment. Such payment resulted in our indebtedness and obligations owing to Summit being terminated and satisfied in full.


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In accordance with the July 10, 2010 Common Stock Purchase Agreement with ELITech and Wescor, Wescor purchased $2,000,000 of the Company's common stock in three installments or tranches, and received warrants to purchase additional shares. Pursuant to the First Tranche of the Common Stock Purchase Agreement, on July 16, 2010, Wescor invested $1,250,000 to purchase 8,333,334 shares of the Company's common stock valued at $0.15 per share. For no additional consideration the Company issued a warrant to Wescor to purchase 4,166,667 shares at $0.15 per share. Pursuant to the Second Tranche of the Common Stock Purchase Agreement, Wescor invested $250,000 to purchase 1,666,667 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 833,333 shares at $0.15 per share. Pursuant to the Third Tranche of the Common Stock Purchase Agreement, in July 2011, Wescor invested $500,000 to purchase 3,333,334 shares of our common stock valued at $0.15 per share. For no additional consideration we issued a warrant to Wescor to purchase 1,666,667 shares at $0.15 per share.

In connection with the Common Stock Purchase Agreement, at the initial closing, which occurred on July 16, 2010, we entered into a Master Distribution Agreement with ELITech UK, and we entered into a 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, 2013, our working capital increased by $813,905 to $4,458,543 from $3,644,638 at June 30, 2012, and concurrently, our current ratio (current assets divided by current liabilities) increased from 4.16 to 1 at June 30, 2012 to 5.41 to 1 at March 31, 2013. This increase in working capital is primarily attributable to the net income for the period in addition to the cash provided by the issuance of common stock.

At March 31, 2013, trade receivables were $1,429,287 versus $1,396,938 at June 30, 2012. Accounts payable, accrued payroll and other accrued expenses decreased by a combined $127,302 to $878,004 from $1,005,306 at June 30, 2012. At March 31, 2013, inventories increased $14,410 to $2,133,079 versus $2,118,669 at June 30, 2012.

For the nine months ended March 31, 2013, cash provided by operating activities amounted to $421,902, versus cash provided by operating activities of $388,180 for the nine months ended March 31, 2012. The increase in the cash provided by operations for the current nine month period resulted primarily from the realization of significant net income for the current period versus the realization of a sizable net loss for the prior period.

Net cash used by investing activities, declined to $59,238 for the nine months ended March 31, 2013, compared to net cash used by investing activities for the nine months ended March 31, 2012 totaling $132,957.

Net cash provided by financing activities amounted to $265,837 for the nine months ended March 31, 2013 compared to net cash used by financing activities for the nine months ended March 31, 2012 totaling $337,040. This increase was primarily due to the significantly lower payments on borrowings for the current period.

We have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of accreted dividends on redeemable common and redeemable preferred stock, have aggregated $13,894,468 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 ELITech collaboration and investment.

In summary, the cash provided by operating and financing activities more than offset the net cash used in investing activities, resulting in a net increase in cash of $628,501 for the current nine month period.


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We believe that our current working capital, in conjunction with our current revised profitable forecasts indicating profitability for the current fiscal year, should provide adequate resources to continue operations for longer than 12 months.

(g) Off -Balance Sheet Arrangements

None.

(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. The Lease was amended on several occasions, as previously reported.

On April 11, 2011, we entered into Lease Amendment No. 5 (the "Fifth Lease Amendment") with the Landlord. The Fifth Lease Amendment extends the term of the Lease to April 30, 2019 and removes any option to further extend the Lease.

The Fifth Lease Amendment also adjusts the base rent ("Base Rent") payable under the Lease.

For the period of May 1, 2011 through April 30, 2012, Base Rent was $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 is $299,840.00 per annum payable in monthly installments of $24,986.67 per month.

For the period of May 1, 2013 through April 30, 2014, Base Rent will . . .

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