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CONX > SEC Filings for CONX > Form 10-Q on 13-Feb-2014All Recent SEC Filings

Show all filings for CORGENIX MEDICAL CORP/CO

Form 10-Q for CORGENIX MEDICAL CORP/CO


13-Feb-2014

Quarterly Report

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 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.


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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 over 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, 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.

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 manufacturing and research and development agreements with strategic partners.

Other than our instrument related sales, we generate an insignificant amount of sales of third-party OM licensed products.

(c) Results of Operations

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

Total revenues. Total revenues for the current quarter increased $233,452 or 9.4% versus the prior year. This increase was primarily due to a 45.5% increase in coagulation sales plus a 54.6% increase in our contract manufacturing 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 December 31, 2013 and December 31, 2012.

                                  Quarter ended
                                  December 31,          % Incr.
                               2013          2012       (Decr.)
Total Revenues:
By Geographical Breakdown
North America               $ 2,348,791   $ 2,035,654      15.4 %
International               $   362,888   $   442,573     (18.0 )%
Total Revenues              $ 2,711,679   $ 2,478,227       9.4 %




                               Quarter Ended
                               December 31,          % Incr.
                            2013          2012       (Decr.)
Total Revenues:
By Category
Phospholipid Sales*      $   726,840   $   829,937     (12.4 )%
Coagulation Sales*       $   391,755   $   269,248      45.5 %
Aspirin Works Sales      $   296,868   $   306,327      (3.1 )%
Hyaluronic Acid Sales    $   200,526   $   200,398        .1 %
Autoimmune Sales         $         -   $    33,430    (100.0 )%
Contract Manufacturing   $   613,794   $   397,100      54.6 %
R & D Contract           $   206,516   $   293,036     (29.5 )%
Shipping and Other       $   275,380   $   148,751      85.1 %
Total Revenues           $ 2,711,679   $ 2,478,227       9.4 %



* Includes OEM Sales $ 263,437 $ 185,493 42.0 %


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Cost of revenues. Total cost of revenues, as a percentage of sales, decreased to 51.4% for the quarter ended December 31, 2013 versus 56.9% for the quarter ended December 31, 2012. 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 49.8% versus 54.4% in the previous year, 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 December 31, 2013



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 2,505,164   $  206,516
DIRECTLY RELATED COST OF REVENUES         $ 1,247,720   $  146,950
COST OF REVENUES AS % OF TOTAL REVENUES          49.8 %       71.2 %

                        Quarter Ended December 31, 2012



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 2,185,191   $  293,036
DIRECTLY RELATED COST OF REVENUES         $ 1,188,289   $  221,031
COST OF REVENUES AS % OF TOTAL REVENUES          54.4 %       75.4 %

Selling and marketing expenses. For the quarter ended December 31, 2013, selling and marketing expenses decreased $5,494 or 1.3% to $429,634 from $435,128 for the quarter ended December 31, 2012. The $5,494 decrease resulted primarily from decreases of $37,248 in labor-related expenses, partially offset by a net increase of $31,754 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 $25,180 or 7.9% to $294,698 for the quarter ended December 31, 2013, from $319,878 for the quarter ended December 31, 2012. The $25,180 decrease resulted primarily from decreases of $15,811 in labor-related expenses, and a net decrease of $9,369 in other research and development expenses.

General and administrative expenses. For the quarter ended December 31, 2013, general and administrative expenses increased $79,771 or 16.7% to $558,948 from $479,177 for the quarter ended December 31, 2012. This increase was primarily a result of a $81,661 increase in labor and board of director-related expenses, partially offset by a net decrease of $1,890 in other general and administrative expenses.

Interest expense. Interest expense decreased $3,136, or 57.1% to $2,359 for the quarter ended December 31, 2013, from $5,495 for the quarter ended December 31, 2012. This substantial decrease in interest expense was due primarily to the considerably lower borrowings for the current period.

Six months ended December 31, 2013 compared to six months ended December 31, 2012

Total revenues. 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 six month periods ended December 31, 2013 and December 31, 2012. Total revenues for the current six month period increased $289,899 or 5.5% versus the prior year. This increase was primarily due to a 25.3% increase in Aspirin Works sales plus a 49.2% increase in our contract manufacturing revenue.


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                                Six months ended
                                  December 31,          % Incr.
                               2013          2012       (Decr.)
Total Revenues:
By Geographical Breakdown
North America               $ 5,069,486   $ 4,481,417      13.1 %
International               $   519,706   $   817,876     (36.5 )%
Total Revenues              $ 5,589,192   $ 5,299,293       5.5 %




                             Six months Ended
                               December 31,          % Incr.
                            2013          2012       (Decr.)
Total Revenues:
By Category
Phospholipid Sales*      $ 1,486,398   $ 1,616,635      (8.1 )%
Coagulation Sales*       $   643,722   $   694,753      (7.4 )%
Aspirin Works Sales      $   615,393   $   491,020      25.3 %
Hyaluronic Acid Sales    $   362,550   $   478,270     (24.2 )%
Autoimmune Sales         $         -   $    59,560    (100.0 )%
Contract Manufacturing   $ 1,630,660   $ 1,092,718      49.2 %
R & D Contract           $   454,527   $   578,435     (21.4 )%
Shipping and Other       $   395,942   $   287,902      37.5 %
Total Revenues           $ 5,589,192   $ 5,299,293       5.5 %


*Includes OEM Sales $ 415,960 $ 456,499 (8.9 )%

Cost of revenues. Cost of revenues. Total cost of revenues, as a percentage of sales, decreased to 52.6% for the six months ended December 31, 2013 versus 57.1% for the six months ended December 31, 2012. The primary reasons for the decrease was the reduction in the cost of goods sold of our core products, which improved to 51.1% versus 54.9% in the previous year, 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.

                       Six Months Ended December 31, 2013



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 5,134,666   $  454,527
DIRECTLY RELATED COST OF REVENUES         $ 2,622,948   $  318,278
COST OF REVENUES AS % OF TOTAL REVENUES          51.1 %       70.0 %

                       Six Months Ended December 31, 2012



                                             CORE       R & D AND
                                           BUSINESS       GRANT
REVENUES                                  $ 4,720,858   $  578,435
DIRECTLY RELATED COST OF REVENUES         $ 2,591,796   $  436,638
COST OF REVENUES AS % OF TOTAL REVENUES          54.9 %       75.5 %

Selling and marketing expenses. For the six months ended December 31, 2013, selling and marketing expenses increased $36,840 or 4.2% to $913,318 from $876,478 for the six months ended December 31, 2012. The $36,840 increase resulted primarily from increases of $69,495 in outside services, $22,265 in trade show and travel related expenses, and $17,887 in advertising expenses, partially offset by a net decrease of $72,807 in other selling and marketing expenses, most notably being labor-related 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 $8,437 or 1.3% to $671,091 for the six months ended December 31, 2013, from $662,654 for the six months ended December 31, 2012. The $8,437 increase resulted primarily from increases of $21,069 in laboratory supplies and $28,384 in development project expenses, partially offset by a net decrease of $41,016 in other research and development expenses.

General and administrative expenses. For the six months ended December 31, 2013, general and administrative expenses increased $191,443 or 21.1% to $1,099,458 from $908,015 for the six months ended December 31, 2012. The $191,442 increase


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resulted primarily from increases of $150,788 in labor and board of directors-related expenses, $21,862 in outside services, and a net increase of $18,792 in other general and administrative expenses.

Interest expense. Interest expense decreased $5,738, or 48.2% to $6,156 for the six months ended December 31, 2013, from $11,894 for the six months ended December 31, 2012. This substantial decrease in interest expense was due primarily to the considerably lower borrowings for the current period.

(d) ADJUSTED EBITDA

Our adjusted earnings before interest, taxes, depreciation, amortization, and non cash expense associated with stock-based compensation ("Adjusted EBITDA") increased $121,074 or 74.0% to $284,680 for the quarter ended December 31, 2013 compared with $163,606 for the corresponding three month period in fiscal 2012. For the six month period ended December 31, 2013, adjusted EBITDA increased $3,391, or less than 1% to $472,131 compared with $468,740 for the corresponding six 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      6 Months ended      6 Months ended
                                              December 31,        December 31,        December 31,        December 31,
                                                  2013                2012                2013                2012
RECONCILIATION OF ADJUSTED EBITDA:
Net income                                  $        178,497    $         50,372    $        262,544    $        248,686

Add back:
Depreciation and amortization                         66,338              74,993             129,336             149,319
Stock-based compensation expense                      37,663              32,858              60,417              59,071
Interest expense, net of interest income               2,182               5,383               5,833              11,664
Income taxes                                               -                   -              14,000                   -
Adjusted EBITDA                             $        284,680    $        163,606    $        472,130    $        468,740

(e) Financing Agreements

Under the LSQ Revolving Credit and Security Agreement dated July 14, 2011 between the Company and LSQ (the "LSQ Agreement"), LSQ, the lender provided a line of credit ("Line") 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 were used to repay certain loans and other amounts payable by the Company. The LSQ Agreement was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 20, 2011, and the description of material terms of the LSQ Agreement is qualified in its entirety by reference to that exhibit. 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 were permitted to be repaid and such repaid amounts re-borrowed until the maturity date. 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. For the quarters ended December 31, 2013 and December 31, 2012, LSQ funded a total of $922,569 and $1,850,415, respectively under the Line. For the six months ended December 31, 2013 and December 31, 2012, LSQ funded a total of $3,043,708 and $3,750,924 respectively under the Line.As of December 31, 2013 and June 30, 2013, $375 and $227,281, respectively were owed us by LSQ under the line. Fees paid to LSQ for interest and other services for the quarters ended December 31, 2013 and December 31, 2012 totaled $353 and $415, respectively, and for the six months ended December 31, 2013 and December 31, 2012, were $793 and $924, respectively. On August 28, 2013, the Company provided written notice to LSQ that the Company desired to terminate the LSQ Agreement. The LSQ Agreement required 60 days notice by the Company to LSQ to terminate, and thus the termination was effective October 27, 2013. Any ancillary agreements and documents entered into in connection with the LSQ Agreement terminated in connection with the termination of the LSQ Agreement.

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"). This Loan Agreement replaced the LSQ Agreement noted above.


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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.

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

The Line was activated on October 30, 2013. During the current quarter, the Bank did not fund anything under the Line. Consequently, there were no fees paid to the Bank for interest and other services for the same period.

(f) Liquidity and Capital Resources

At December 31, 2013, our working capital increased by $210,544 to $4,764,261 from $4,553,717 at June 30, 2013, and concurrently, our current ratio (current assets divided by current liabilities) increased from 5.77 to 1 at June 30, 2013 to 7.2 to 1 at December 31, 2013. This significant 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 December 31, 2013, trade and other receivables were $1,948,705 versus $1,500,461 at June 30, 2013. At December 31, 2013, inventories were $1,610,084 versus $2,032,545 at June 30, 2013. Accounts payable, accrued payroll and other accrued expenses decreased by a combined $194,570 to $651,539 from $846,109 at June 30, 2013.

For the six months ended December 31, 2013, cash used by operating activities amounted to $122,995, versus cash provided by operating activities of $10,207 for the six months ended December 31, 2012. The decrease in the cash provided by operations for the current six month period resulted primarily from the increases in accounts receivable and decreases in accounts payable and accrued liabilities, which more than offset the increase in the net income realized for the current period and the substantial reduction in inventories.

Net cash used by investing activities was $162,305 for the six months ended December 31, 2013, compared to net cash used by investing activities for the six months ended December 31, 2012 totaling $43,477. This increase was primarily due to increased purchases of manufacturing equipment for the current period.

Net cash provided by financing activities amounted to $283,581 for the six months ended December 31, 2013 compared to net cash provided by financing activities for the six months ended December 31, 2012 totaling $16,756. This increase was primarily due to the significantly lower borrowings for the current period.

In summary, the $283,581 of cash provided by financing activities was more than offset by the net cash used in operating and investing activities, resulting in a slight net decrease in cash of $1,719 for the current six month 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 $13,664,132 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


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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, 2012 through April 30, 2013, Base Rent was $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. . . .

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