Guidance Affirmed For Record Revenue in 2013

Zacks Small Cap Research

By Brian Marckx, CFA

Q3 2013 Financial Results

Corgenix Medical (CONX) reported financial results for the fiscal third quarter 2013 ending March 31, 2013 on May 14th.  Revenue and net income were very similar to that of the previous quarter, as was the differences relative to our estimates.  CONX generated ~$161k and ~$618k in cash from operating activities (ex-changes in working capital) through the three and nine months ending 3/31/13.

Revenue was $2.5 million, flat sequentially and down about 8% on a yoy basis (we note that fiscal Q3 2012 was a particularly strong revenue quarter, making it a tough yoy comp.).  Similar to Q2, revenue came in about 7% lower than our estimate but strong gross margin and operating expense control resulted in net income coming in a hair better than our number.  Management revised its previous full-year revenue guidance downward from $10.6 million - $11.0 million to $10.3 million - $10.4 million - with the downward revision mostly related to some (anticipated short-term) delays of additional shipments of AspirinWorks to China.  The current guidance still implies a record revenue year and growth of between 11% - 12%.  Management's current guidance for full-year net income is $300k - $400k (which remains in-line with our estimate prior to Q3 results as well as our current estimate).  We model revenue of $2.6 million (+10%) in Q4 and $10.4 million (+12%) for the full year.

Operating expenses remained largely flat from Q2 and were in-line with our estimate.  Gross margin was particularly strong in the current quarter despite a fairly precipitous drop in the non-products (i.e. - R&D and grants) margin.  The recent GM improvement was credited to manufacturing efficiencies which management noted they should continue to benefit from.  We have only made some very slight upward revisions to our modeled GM which could end up somewhat conservative.

On the revenue front, International sales broke the two-quarter streak of double-digit revenue growth with Q3 revenue dipping 7%.  International sales can be somewhat volatile q-to-q and we continue to model positive growth in Q4 and about 17% growth for the full year.  Management did note that additional AspirinWorks orders to China, which initially commenced in Q2, have been delayed due to current lack of reimbursement and indicated that this was a contributor to the dip in international revenue.  While regulatory approval is in place nationwide in China, reimbursement must be approved on a territory-by-territory basis but the delay is not expected to be prolonged as the approval process should be relatively swift.

North American sales fell at a similar rate (8%) in Q3 and were negatively impacted by a 53% decrease in contract R&D revenue - which can be very volatile q-to-q.  AspirinWorks sales, while down 29% from Q2, actually increased by 47% in the U.S. over that period, indicating that the relative weakness in AspirinWorks sales contributed little to nothing to the 8% yoy drop in domestic revenue.

But while AspirinWorks sales increased ~26% through the first nine months of fiscal 2013, they are well off the anticipated doubling run-rate that management had earlier guided towards for the full year.  This has been somewhat of a disappointment and related to the planned slowdown in purchasing from a major U.S. customer that started during Q2 as well as zero sales to China in Q3.  Despite these hiccups, management is clearly determined in re-accelerating growth.  Near-term growth catalysts for AspirinWorks in the U.S. include further expansion of the customer base, increasing utilization and eventually, introduction of the automated version.  For the near-term, efforts focused on increasing awareness including direct sales efforts as well as clinical studies and published articles which should drive further interest from the clinical community and which are expected to pay dividends.  The recent agreement with Atherotech is a sign of meaningful progress in building the AspirinWorks franchise.  CONX noted on the call that AspirinWorks is now in the majority of the cardiac labs and this broad footprint should benefit domestic sales of the test going forward.  For international markets, particularly China, it will be a matter of working with ELITech and navigating the appropriate channels to gain reimbursement in various provinces (expected to start coming this year) and to expand their international footprint.

Operational progress towards growing the various business continued during the quarter which included an agreement with Atherotech Diagnostics Lab to carry the company's AspirinWorks test (which has been a big contributor to CONX's recent revenue growth), expansion of the contract services business to include additional offerings and services, and gaining CE Mark of a rapid test for lassa fever, dubbed ReLASV which should launch in the near-term.

Near-to-Mid Term Milestones

   Build up customer base and revenue from new contract services offerings

   Continue progress on development and clinical trials of infectious disease products with collaboration partners including Tulane University.  Lassa virus rapid test CE Marked in May.  Expect to bring other infectious disease products to market in near future

   Submit Hyaluronic Acid (HA) test to FDA in early Q4

   Automated AspirinWorks Test FDA submission and CE Mark in Q4 

   Companion diagnostics products program - continue to work w/ a partner (pharma?) and is in feasibility stage - expect project to progress over the near term, at which time CONX may be able to discuss further plan forward. CONX noted on the Q3 call that they hope to be able to name their initial alliance within the coming month(s).  Companion diagnostics could eventually become a meaningful part of the business

   Investigating ancillary applications for AspirinWorks biomarker  - may have utility in other clinical applications - working with scientists and physicians throughout the world on this. Could eventually lead to clinical trials

   AtherOx - have made significant progress in overcoming obstacles to be able to manufacture the product - these have largely been cleared. Expect to begin add'l studies in coming quarter(s) and simultaneously talking to potential collaborators for the product. Management remains committed to the product and believes it could eventually be their biggest product ever. If all goes right, FDA filing could potentially happen sometime in 2014

   Expect regular flow of regulatory filings for new products as well as new product launches.  Much of this will be related to ELITech agreement

   China / India - beef up distribution and continue to roll out AspirinWorks in China and soon India. Bring other (existing and pipeline) products to these Asian markets. Expect Asia to be a big opportunity for near and long-term growth

   U.S. market - continue to expand the customer base through new product introductions and sales efforts. Recently introduced Skylab instrument already starting to pay dividends by bringing in new customers.  Skylab and AspirinWorks remains the company's major focus for the U.S.  Direct sales efforts, clinical studies and published manuscripts should help drive further awareness of AspirinWorks over the near-to-mid-term

   Contract manufacturing - bring on additional customers/clients, increase capabilities and offerings to appeal to wider potential customer base, continue to increase efficiencies

Revenue

Q3 revenue of $2.5 million consisted of $2.3 million (-8%) in sales from North America and $234k (-7%) internationally, compared to our $2.4 million and $322k estimates.  The reimbursement situation in China with AspirinWorks will hopefully be sufficiently addressed in relatively short order.  We now model 17% growth in international sales in fiscal 2013.  Going forward we expect international sales to be fueled by new product launches, entry into new geographic markets and an ongoing ramp up in activity by ELITech with deeper penetration in existing markets.

Revenue from the domestic business showed meaningful yoy contraction for the first time since fiscal Q3 2011, which we think is directly attributable to the significantly lower contract R&D revenue over that period.  But while domestic sales were down 8% yoy, they grew about 11% on a sequential basis.  The 11% sequential growth benefitted from 47% growth in domestic AspirinWorks sales from Q2.  Domestic sales of AspirinWorks had been negatively impacted by a reduction in sales to a large lab customer due to a planned temporary slowdown - which management talked about on the previous earnings call.  On the Q3 call, CONX noted that sales have now begun to recover.

Net Income / EPS

Q3 net income and EPS came in at $62k and $0.00, compared to our $19k and $0.00 estimates.  Despite the 7% miss on revenue relative to our estimate, very strong gross margin (47% actual vs. 43% estimate) and operating expenses in-line with our numbers resulted in the beat on net income.  We continue to expect to see additional operating leverage with revenue growth and for GM to maintain at the low-to-mid 40% level for the remainder of 2013 (and slightly widening in future years with economies of scale).

Cash

Corgenix exited Q3 with $1.9 million in cash and equivalents, up from $1.2 million at the end of Q2 (12/31/2012).  Cash flow from operating activities was an inflow of $412k but stripping out changes in working capital (which is more indicative of cash from operations) it was an inflow of $161k.  For the nine months ending 3/31/2013 cash flow from operating activities was an inflow of $422k ($618k, ex-changes in working capital).  Debt remained relatively insignificant at quarter end.

Maintaining Outlook / Price Target

Despite the dip in Q3 revenue, we continue to believe CONX is well-positioned for consistent long-term improvement in financial performance driven by meaningful and tangible progress on pipeline products, recent product introductions, collaborations, and entry into additional geographical territories.  We remain big believers in Corgenix and management's ability to deliver ever-improving financial results and build long-term shareholder value.

We have made some minor adjustments to our model following Q3 results, mostly related to Q4 revenue.  Our 2013 net income and EPS remain substantially unchanged at $331k and $0.01.  Similarly our long-term outlook, recommendation and price targets all remain intact.  We continue to value CONX based on our comp valuation methodology (below) which values the shares at approximately $0.60/share.  We are maintaining our Outperform rating on the stock.

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