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CONX > SEC Filings for CONX > Form 10-K on 30-Sep-2013All Recent SEC Filings

Show all filings for CORGENIX MEDICAL CORP/CO

Form 10-K for CORGENIX MEDICAL CORP/CO


30-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

General

Since our inception, we have been primarily involved in the research, development, manufacturing and marketing/distribution of diagnostic tests for sale to clinical laboratories. We currently market products covering autoimmune disorders, vascular diseases and liver disease. Our products are sold in the U.S. through our marketing and sales organization, internationally through ELITech and their extensive distributor network, and to several significant OEM partners.

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

Beginning in fiscal year 1996, we began adding third-party OM licensed products to our diagnostic product line. We expect to expand our relationships with other companies in the future to gain access to additional products. This category comprises approximately 30-40 products, with an annual growth rate in excess of 10% annually. All of the third-party OM licensed products support our own manufactured products, adding to our competitive capabilities, especially in many international markets.

We have generated revenues over the past 23 years primarily from sales of products and contract revenues from strategic partners. Contract revenues consist of service fees from research and development agreements with strategic partners. There can be no assurance that, in the future, we will sustain revenue growth, current revenue levels, or achieve or maintain profitability. Our results of operations may fluctuate significantly from period-to-period as the result of several factors, including: (i) whether and when new products are successfully developed and introduced, (ii) market acceptance of current or new products, (iii) seasonal customer demand, (iv) whether and when we receive research and development payments from strategic partners, (v) changes in reimbursement policies for the products that we sell, (vi) competitive pressures on average selling prices for the products that we sell, and (vii) changes in the mix of products that we sell.

Recently Issued Accounting Pronouncements

There are no newly issued standards expected to have a material effect on the Company.


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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") and our significant accounting policies are summarized in Note 1 to the accompanying consolidated financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

Revenue is only recognized when it is realized or realizable and earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, and when, in the case of products sold, the transfer of title of the respective goods has been accomplished, or, in the case of services, when the service has been rendered.

We maintain an allowance for doubtful accounts based on our historical experience and provide for any specific collection issues that are identified. Such allowances have historically been adequate to provide for our doubtful accounts but involve a significant degree of management judgment and estimation. Worse than expected future economic conditions, unknown customer credit problems and other factors may require additional allowances for doubtful accounts to be provided for in future periods.

Equipment and software are recorded at cost. Equipment under capital leases is recorded initially at the present value of the minimum lease payments. Depreciation and amortization is calculated primarily using the straight-line method over the estimated useful lives of the respective assets which range from 3 to 7 years.

The internal and external costs of developing and enhancing software costs related to website development, other than initial design and other costs incurred during the preliminary project stage, are capitalized until the software has been completed. Such capitalized amounts began to be amortized commencing when the website was placed in service on a straight-line basis over a three-year period.

When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and a gain or loss is recognized. Repair and maintenance costs are expensed as incurred.

We evaluate the ability to realize the value of our long-lived assets, including property and equipment, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Revenue from sale of products is recognized upon shipment of products.

The Company serves as a sub-contractor to Tulane University for several NIH funded grants and contracts related to development of diagnostics, vaccines and therapeutics for hemorrhagic fever viruses. Under the terms of the subcontracts, the Company invoices Tulane monthly for all allocable expenses incurred in support of the grants and contracts. This includes fully burdened salaries, supplies, production kits, travel and equipment. The Company serves as the principal investigator for an NIH funded two-year contract to develop recombinant diagnostic tests for the filoviruses (Ebola and Marburg), and has engaged three subcontractors (Tulane University, Autoimmune Technologies and the Scripps Research Institute) to assist in the development. Each month the subcontractors invoice the Company for allocable monthly expenses including fully burdened salaries, supplies and travel; the Company consolidates these expenses with its own allocable expense and invoices the NIH. The Ebola/Marburg project was completed in the fiscal year ended June 30, 2013.

R & D expense consists primarily of the labor related costs, the cost of clinical studies and travel expenses, laboratory supplies and product testing expenses related to the research and development of


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new and existing diagnostic products. During the current fiscal year, since contract R & D and Grant related revenue has become a more meaningful aspect of our business, the R & D expenses which are directly related to the generation of specific contract R & D and Grant revenue, have been reclassified out of R & D expense to cost of sales. Research and development costs and any costs associated with internally developed patents, formulas or other proprietary technology are expensed as incurred. Revenue from research and development contracts, as noted above, represents amounts earned pursuant to agreements to perform research and development activities for third parties and is recognized as earned under the respective agreement. Revenue is recognized as work is performed and expenditures are made over the contract period. Research and development agreements in effect in 2013 and 2012 provided for fees to the Company based on time and materials in exchange for performing specified research and development functions. Research and development contracts are generally short and intermediate term with options to extend, and can be cancelled under specific circumstances.

Inventories are recorded at the lower of cost or market, using the first-in, first-out method.

Results of Operations

Year Ended June 30, 2013 compared to 2012

Net sales. The following two tables provide the reader with further insight as to the changes of the various components of our sales for the comparable fiscal years ended June 30, 2013 and June 30, 2012.

                                     Fiscal Year Ended June 30,      % Incr.
                                        2013             2012        (Decr.)
          Sales:
          Geographical Breakdown
          North America             $    8,897,977    $ 8,113,535         9.7 %
          International             $    1,289,828    $ 1,175,823         9.7 %

          Total Sales               $   10,187,805    $ 9,289,358         9.7 %

                                     Fiscal Year Ended June 30,     % Incr.
                                        2013             2012       (Decr.)
          Sales:
          By Category
          Phospholipid Sales*       $    3,193,695    $ 3,279,274       (2.6 )%
          Coagulation Sales*        $    1,308,954    $ 1,334,404       (1.9 )%
          Aspirin Works Sales       $      960,048    $   905,221        6.1 %
          Hyaluronic Acid Sales     $      882,002    $   834,342        5.7 %
          Autoimmune Sales          $       68,890    $    93,675      (26.5 )%
          Contract Manufacturing    $    2,140,989    $ 1,011,640      111.6 %
          R & D Contract            $      946,689    $ 1,380,311      (31.4 )%
          Instruments               $      386,892    $         -        N/A
          Shipping and Other        $      299,646    $   450,491      (33.5 )%

          Total Sales               $   10,187,805    $ 9,289,358        9.7 %



* Includes OEM Sales $ 812,030 $ 844,440 (3.8 )%


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Cost of revenues. Total cost of revenues, as a percentage of sales, were 55.2% for the fiscal year ended June 30, 2013 versus 57.7% for the prior fiscal year. The primary reason for the decrease was as a result of continuing efficiencies in our manufacturing processes. The following table shows, for the fiscal year ended June 30, 2013, the composition of the cost of revenues, between the cost of revenues related to our core business and that related to our contract research and development and grant revenues, and their relative percentage of related revenues.

                        Fiscal Year Ended June 30, 2013

                                                           R & D
                                              CORE          AND
                                            BUSINESS       GRANT        TOTAL
       SALES/REVENUES                      $ 9,241,116   $ 946,689   $ 10,187,805
       DIRECTLY RELATED COST OF REVENUES   $ 4,910,946   $ 713,326   $  5,624,272
       COST OF REVENUES AS % OF REVENUES          53.1 %      75.4 %         55.2 %

                        Fiscal Year Ended June 30, 2012

                                                           R & D
                                             CORE           AND
                                           BUSINESS        GRANT         TOTAL
      SALES/REVENUES                      $ 7,909,047   $ 1,380,311   $ 9,289,358
      DIRECTLY RELATED COST OF REVENUES   $ 4,310,071   $ 1,044,924   $ 5,354,995
      COST OF REVENUES AS % OF REVENUES          54.5 %        75.7 %        57.7 %

Selling and marketing expenses. For the fiscal year ended June 30, 2013, selling and marketing expenses decreased $295,411 or 14.8% to $1,701,578 from $1,996,989 in fiscal 2012. The $295,411 decrease versus the prior year resulted primarily from decreases of $276,255 in labor-related expenses, $46,032 in travel and trade show-related expenses, and $19,706 in advertising expense, partially offset by increases of $46,582 in other selling and marketing expenses.

Research and development expenses. Gross research and development expenses, prior to the reclassification of a portion of said expenses to cost of sales, decreased $97,990 or 7.0% to $1,294,818 for the fiscal year ended June 30, 2013, from $1,392,808 for the fiscal year ended June 30, 2012. The $97,990 decrease versus the prior year resulted primarily from decreases of $77,015 in laboratory supplies, $54,384 in consulting and outside service expenses, and $37,350 in travel-related expenses, partially offset by increases of $70,759 in other research and development expenses.

General and administrative expenses. For the fiscal year ended June 30, 2013, general and administrative expenses increased $93,457 or 5.0% to $1,982,775 from $1,889,318 in fiscal 2012. The $93,457 increase versus the prior year resulted primarily from increases of $188,493 in labor-related expenses, the vast majority of which being due to the Company no longer charging a portion of said labor-related expenses to manufacturing overhead, partially offset by a net decrease of $95,036 in other general and administrative expenses.

Interest expense. Interest expense decreased $101,360 or 82.9%, from $122,263 in fiscal 2012 to $20,903 for the fiscal year ended June 30, 2013. This substantial reduction in interest expense was primarily due to the considerably lower borrowings for the current fiscal year.

ADJUSTED EBITDA

The Company's earnings before interest, taxes, depreciation, amortization, costs associated with exit or disposal activities, and non cash expense associated with stock-based compensation ("Adjusted


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EBITDA") increased $788,341 or 889.0% to $700,651 for the fiscal year ended June 30, 2013 compared with negative Adjusted EBITDA of $87,690 for the prior fiscal year ended June 30, 2012. The primary reason for the substantial increase in Adjusted EBITDA for the current fiscal year was the net income earned for the current period. Although adjusted EBITDA is not a GAAP measure of performance or liquidity, the Company believes that it may be useful to an investor in evaluating the Company's ability to meet future debt service, capital expenditures and working capital requirements. However, investors should not consider these measures in isolation or as a substitute for operating income, cash flows from operating activities or any other measure for determining the Company's operating performance or liquidity that is calculated in accordance with GAAP. In addition, because adjusted EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of Adjusted EBITDA to net income
(loss) as shown on the accompanying Statement of Operations can be made by eliminating depreciation and amortization expense, corporate stock-based compensation expense, interest expense, and income tax expense, if any, from the net loss and further eliminating any interest income from said net loss as in the following table:

                                                           Fiscal Year Ended
                                                                June 30,
                                                           2013         2012
     RECONCILIATION OF ADJUSTED EBITDA:
     Net income (loss)                                   $ 278,536   $ (603,702 )
     Add back:
     Depreciation and Amortization                         302,260      292,610
     Stock-based compensation expense                       99,422       84,611
     Interest income                                          (470 )       (674 )
     Interest expense                                       20,903      122,263
     Costs associated with exit or disposal activities           -       17,202

     Adjusted EBITDA                                     $ 700,651   $  (87,690 )

Financing Agreements

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

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

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

Loans under the Line may be repaid and such repaid amounts re-borrowed until the maturity date. Unless terminated by us or accelerated by LSQ in accordance with the terms of the Loan Agreement, the Line will terminate and all loans there under must be repaid on July 14, 2013. Although the Line did mature on July 14, 2013,, the Line has continued to function in the same manner as it had over the prior two years.

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


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

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

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

In connection with the Common Stock Purchase Agreement, at the initial closing, which occurred on July 16, 2010, we entered into the Master Distribution Agreement with ELITech UK, and we entered into the Joint Product Development Agreement with ELITech. Under the terms and conditions of the Master Distribution Agreement, and as a condition precedent to the closing of the Second Tranche, ELITech UK became the exclusive distributor of the Company's Products (as that term is defined therein) outside of North America. Accordingly, we along with Corgenix UK assigned and/or transferred the economic benefit to ELITech UK, and ELITech UK assumed all of the obligations of the Company or Corgenix UK under all distribution agreements executed by us or Corgenix UK, as the case may be, related to any distributor whose territory is outside of North America.

Liquidity and Capital Resources

At June 30, 2013, our working capital increased by $909,079 to $4,553,717 from $3,644,638 at June 30, 2012, and concurrently, our current ratio (current assets divided by current liabilities) increased from 4.16 to 1 at June 30, 2012 to 5.77 to 1 at June 30, 2013. This increase in working capital is primarily attributable to the $2,000,000 strategic investments by ELITech in 2010 and 2011 in addition to their ongoing additional R & D funding.

At June 30, 2013, trade and other receivables were $1,500,461 versus $1,414,575 at June 30, 2012. Accounts payable, accrued payroll and other accrued expenses were $846,109 as of June 30, 2013, versus $1,005,306 as of June 30, 2012. At June 30, 2013, inventories were $2,032,545 versus $2,118,669 at June 30, 2012. This decrease in inventories occurred as a result of a continuing effort to better manage the company's purchasing practices in addition to the streamlining of the manufacturing process related to our products.

For the fiscal year ended June 30, 2013, cash provided by operating activities amounted to $710,398, versus $604,536 for the fiscal year ended June 30, 2012. The $710,398 cash provided by operating activities was primarily attributable to the net income for the current year, supplemented by a reduction in inventories and accounts receivable during the current fiscal year. The $710,398 cash provided by operating activities less the $62,778 of cash used by investing activities (primarily due to the purchase of equipment), plus the $60,467 net cash provided by financing activities, resulted in a net increase of $708,087 in our cash balance as of June 30, 2013.


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Although we generated a profit in the current fiscal year, we have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of dividends on redeemable common and redeemable preferred stock, have aggregated $13,926,676, and there can be no assurance that we will be able to generate positive cash flows to fund our operations in the future or to pursue our strategic objectives. Historically, we have financed our operations primarily through long-term debt, short term lines of credit, and the sales of common stock, redeemable common stock, and preferred stock. We have also financed operations through sales of diagnostic products and agreements with strategic partners. We have developed and are continuing to modify an operating plan intended to eventually achieve sustainable profitability, positive cash flow from operations, and an adequate level of financial liquidity. Key components of this plan include consistent revenue growth and the cash to be derived from such growth, as well as the expansion of our strategic alliances with other biotechnology and diagnostic companies, securing diagnostic-related government contracts and grants, improving operating efficiencies to reduce our cost of sales as a percentage of sales, thereby improving gross margins, and lowering our overall operating expenses. If our sales were to decline, are flat, or achieve very slow growth, we would undoubtedly incur operating losses and a decreasing level of liquidity for that period of time. In view of this, and in order to further improve our liquidity and operating results, we entered into the ELITech collaboration and investment, described above.

We believe that our current working capital, in conjunction with our current forecasts indicating profitability for the fiscal year ending June 30, 2014, should provide adequate resources to continue operations for longer than 12 months.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than the lease agreement described below.

     Contractual Obligations and Commitments

    We have the following contractual obligations and commitments as of June 30,
2013:

                                                    Payments Due by Period
                                                                                          More than
Contractual Obligations      Total       Within 1 year     2 - 3 years    4 - 5 years      5 years
Secured notes payable     $    22,239    $       22,239    $          -    $         -       $     -
Capital lease
obligations               $   102,027    $       85,403    $     16,624              -             -
Interest on secured
debt                      $       727    $          727               -              -             -
Interest on capital
lease obligations         $     5,747    $        5,325    $        422              -             -
Operating leases          $ 2,413,464    $      404,013    $    830,081    $ 1,179,370             -

Total contractual cash
obligations               $ 2,544,204    $      517,707    $    847,127    $ 1,179,370       $     -

On February 8, 2006, we entered into a Lease Agreement (the "Lease") with York County, LLC, a California limited liability company ("York") pursuant to which we leased approximately 32,000 rentable square feet (the "Property") of York's approximately 102,400 square foot building, commonly known as Broomfield One and located at 11575 Main Street, Broomfield, Colorado 80020. In 2008, the Property was sold to The Krausz Companies, Inc. a California corporation, aka KE Denver One, LLC (the "Landlord"), and is part of Landlord's multi-tenant real property development known as the Broomfield Corporate Center. We use the Property for our headquarters, laboratory research and development facilities and production facilities. The Lease was amended on several occasions, as previously reported.

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


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


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.


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.

. . .

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