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

Show all filings for CORGENIX MEDICAL CORP/CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CORGENIX MEDICAL CORP/CO


14-Nov-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 condensed consolidated financial statements and accompanying notes included elsewhere herein and in the Annual Report on Form 10-K for the year ended June 30, 2013.

(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 Exchange Act of 1934, as amended (the "Exchange Act"), 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.

We have incurred operating losses and negative cash flow from operations for most of our history. 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. 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 1, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended June 30, 2013.

(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 50 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 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.

Except for the fiscal years ending June 30, 1997, 2009, and 2011, we have experienced revenue growth since our inception, 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. We expect to expand our relationships with other companies in the future to gain access to additional products.


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(c) Results of Operations

Three months ended September 30, 2013 compared to three months ended September 30, 2012

Total revenues. The following two tables provide the reader with further insight as to the changes of the various components of our total revenues for the comparable quarters ended September 30, 2013 and September 30, 2012.

                                Quarter ended
                                September 30,         % Incr.
                             2013          2012       (Decr.)
Total Revenues
Geographical Breakdown:
North America             $ 2,720,694   $ 2,445,763      11.2 %
International             $   156,819   $   375,303     (58.2 )%
Total Revenues            $ 2,877,513   $ 2,821,066       2.0 %




                                        Quarter Ended
                                        September 30,         % Incr.
                                     2013          2012       (Decr.)
Total Revenues
By Category:
Phospholipid Sales*               $   759,558   $   786,698      (3.5 )%
Coagulation Sales*                $   251,967   $   425,504     (40.8 )%
Aspirin Works Sales               $   318,525   $   184,693      72.5 %
Hyaluronic Acid Sales             $   162,024   $   277,872     (41.7 )%
Autoimmune Sales                  $         -   $    26,130    (100.0 )%
Contract Manufacturing            $ 1,016,866   $   695,618      46.2 %
R & D and Grants                  $   248,011   $   285,398     (13.1 )%
Shipping, instruments and Other   $   120,562   $   139,153     (13.4 )%
Total Revenues                    $ 2,877,513   $ 2,821,066       2.0 %



* Includes OEM Sales $ 152,523 $ 271,007 (43.7 )%

Cost of revenues. Total cost of revenues, as a percentage of sales, decreased to 53.8% for the quarter ended September 30, 2013 versus 57.4% for the prior fiscal year. The primary reasons for the decrease for the quarter was the reduction in the cost of goods sold of our core products, which improved to 52.3% versus 55.4% in the previous year, along with the absolute and relative decrease in Research and Development and Grant revenue, which carry much higher cost of revenues than do our core business. The ongoing reduction in our manufacturing costs was primarily attributable to the continuing effort to better manage the Company's raw materials purchasing practices in addition to the continuing benefits being derived from the increased automation of the Company's manufacturing processes.

                        Quarter Ended September 30, 2013



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 2,629,502   $  248,011
DIRECTLY RELATED COST OF REVENUES         $ 1,375,228   $  171,328
COST OF REVENUES AS % OF TOTAL REVENUES          52.3 %       69.1 %

                        Quarter Ended September 30, 2012



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 2,535,667   $  285,399
DIRECTLY RELATED COST OF REVENUES         $ 1,403,507   $  215,607
COST OF REVENUES AS % OF TOTAL REVENUES          55.4 %       75.5 %


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Selling and marketing expenses. For the quarter ended September 30, 2013, selling and marketing expenses increased $42,334 or 9.6% to $483,684 from $441,350, for the quarter ended September 30, 2012. The increase in these expenses versus the prior period resulted primarily from increases in instrument service and support, consulting expenses, advertising expense, and trade show and travel related 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 $11,499 or 3.0% to $376,393 for the quarter ended September 30, 2013, versus 387,892 for the quarter ended September 30, 2012. The $11,499 decrease resulted primarily from decreases in labor-related expenses, laboratory supplies, and travel-related expenses, as the joint product development effort with ELITech winds down.

General and administrative expenses. For the quarter ended September 30, 2013, general and administrative expenses increased $111,674, or 26.0% to $540,510 from $428,836 for the quarter ended September 30, 2012. This increase was primarily due to increases in labor-related expenses and travel-related expenses.

Interest expense. Interest expense decreased $2,603, or 40.7% to $3,797 for the quarter ended September 30, 2013, from $6,400 for the quarter ended September 30, 2012.

(d) ADJUSTED EBITDA

Our adjusted earnings before interest, taxes, depreciation, amortization, and non cash expense associated with stock-based compensation (" ADJUSTED EBITDA") decreased $117,685 or 38.6% to $187,450 for the quarter ended September 30, 2013 compared with $305,135 for the corresponding three month period in fiscal 2013. 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
                                            September 30,      September 30,
                                                 2013               2012
RECONCILIATION OF ADJUSTED EBITDA:
Net income                                 $         84,047   $        198,314

Add back:
Depreciation and amortization                        62,998             74,326
Stock-based compensation expense                     22,754             26,213
Interest expense, net of interest income              3,651              6,282
Income taxes                                         14,000                  -
ADJUSTED EBITDA                            $        187,450   $        305,135

(e) Financing Agreements

On August 28, 2013, the Company entered into a Business Loan Agreement (the "Loan Agreement") effective August 15, 2013 between the Company and Bank of the West (the "Bank").

Pursuant to the terms of the Loan Agreement, the Bank is providing a revolving line of credit (the "Line") to the Company not to exceed $1,500,000. Interest accrues at a variable one month LIBOR (currently 0.18%) plus 4.00% per annum. Interest payments are due monthly.

Unless terminated by the Company or accelerated by the Bank in accordance with the terms of the Loan Agreement, the Line will terminate and all loans there under must be repaid on November 5, 2014.

The Loan Agreement contains certain representations, warranties, covenants and events of default typical in financings of this type, including, for example, limitations on assuming additional debt, making investments, or the sale of Company assets or other changes in the ownership of the Company.

In addition, pursuant to the terms of the Loan Agreement, the Company will grant to the Bank a security interest in all of the Company's assets to secure the repayment of the loans under the Line and to secure all other obligations of the Company to the Bank.


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The Company will use the money it receives under the Loan Agreement for general short term working capital purposes.

The Loan Agreement and the accompanying Promissory Note were filed as Exhibits 10.1 and 10.2, respectively, to the Current Report on Form 8-K filed on September 4, 2013, and the description of material terms of such documents herein are qualified in their entirety by reference to such exhibits.

The Line will be activated when the notice period to LSQ described below has elapsed and the Bank is able to secure a first lien on the Company's assets.

On August 28, 2013, the Company provided written notice to LSQ, that the Company desires to terminate the Revolving Credit and Security Agreement (the "LSQ Agreement") dated July 14, 2011 between the Company and LSQ. Under the LSQ Agreement, LSQ, the lender, provided a line of credit to the Company under which LSQ agreed to make loans to the Company in the maximum principal amount outstanding at any time of $1,500,000. The proceeds of the loans under the line of credit have been used to repay certain loans and other amounts payable by the Company. The LSQ Agreement requires 60 days' notice by the Company to LSQ to terminate, and thus the termination will be effective October 27, 2013. Any ancillary agreements and documents entered into in connection with the LSQ Agreement will terminate in connection with the termination of the LSQ Agreement.

The notice states that the Company is not dissatisfied with its relationship with LSQ but desires to pursue other borrowing opportunities.

The Company does not expect to incur any termination penalties as a result of the termination.

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.

(f) Liquidity and Capital Resources

At September 30, 2013, our working capital decreased by $42,064 to $4,511,653 from $4,553,717 at June 30, 2013, and concurrently, our current ratio (current assets divided by current liabilities) decreased slightly from 5.77 to 1 at June 30, 2013 to 5.74 to 1 at September 30, 2013.

At September 30, 2013, trade and other receivables were $1,525,887 versus $1,500,461 at June 30, 2013. At September 30, 2013 inventories were $1,768,522 versus $2,032,545 as of June 30, 2013. The decrease in inventories was primarily attributable to the continuing effort to better manage the Company's raw materials purchasing practices in addition to the continuing benefits being derived from the increased automation of the Company's manufacturing processes.

For the three months ended September 30, 2013, cash used by operating activities amounted to $5,553, versus cash used by operating activities of $130,410 for the three months ended September 30, 2012. The decrease in the cash used by operations for the current quarter resulted primarily from the decrease in inventories and increase in accounts payable for the period.

Net cash used by investing activities amounted to $43,840 for the three months ended September 30, 2013, compared to net cash used by investing activities for the three months ended September 30, 2012 totaling $14,265.

Net cash provided by financing activities amounted to $236,596 for the three months ended September 30, 2013 compared to net cash provided by financing activities for the three months ended September 30, 2012 totaling $93,591. This increase was primarily due to the increased proceeds received from the Company's revolving line of credit.

In summary, the $187,203 cash provided by financing activities less the $5,553 of cash used by operating activities and the $43,840 net cash used by investing activities, resulted in a net increase of $187,203 in our cash balance as of September 30, 2013.

We have incurred operating losses and negative cash flow from operations for most of our history. Losses incurred since our inception, net of accreted dividends on redeemable common and redeemable preferred stock, have aggregated $13,842,629 and there


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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.

We believe that we have sufficient working capital for our existing operations. However, we can provide no assurance that we will be able to secure additional funding for our future operations. A sustained period of unprofitable operations may strain our liquidity and make it difficult to maintain compliance with our financing arrangements. While we may seek additional sources of working capital in response, we can provide no assurance that we will be able to secure this funding if necessary. We may sell additional equity or borrow additional amounts to improve or preserve our liquidity or expand our existing business. We can provide no assurance that we will be able to secure the funding necessary for additional working capital needs at reasonable terms, if at all.

(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 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 is $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.


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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.

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