Q2: Strong Revenue, Another Profitable Quarter
By Brian Marckx, CFA
Q2 2013 Financial Results
Corgenix Medical (OTC Markets:CONX) reported financial results for the fiscal second quarter 2013 ending December 31, 2012 on February 14th. Revenue was up 20%, although slightly below our estimate. Strong gross margin and keeping a lid on operating expenses benefitted the bottom line with net income coming in a hair better than our forecast. Importantly, management continues to expect double digit revenue growth for the full year with current guidance at $10.6MM - $11.0MM (+14% - +18%). We model revenue of $10.9MM (+17%) for the current full year.
Q2 revenue came in at $2.5 million, up 20% yoy and down 12% sequentially. Gross margin is holding up very well despite a high proportion of revenue coming from relatively lower margin segments. And has we noted in prior updates, we think management has and continues to do a great job with discipline in expense management with SG&A expense ratcheting down over the last several quarters. SG&A, R&D and G&A expenses have all come in lower than our estimates in the last two quarters.
Another trend that we point to as meaningful is the relatively strong growth in International sales - something we also noted in our Q1 update. International revenue in Q1 2013 was $375k, which was the highest in two years (since fiscal Q1 2011) - yet this was crushed in Q2 2013 with International revenue of $443k. As a reminder, international revenue had declined every period (on a yoy quarterly as well as annual basis) since 2010 which had been a significant hindrance to growing CONX's top line. The expectation was that international sales would quickly turn around with the ELITech agreement in late 2010 but that inflection point seemed to be dragged out due to integration wrinkles and certain product launch delays. We think the current growth in International relates to those wrinkles being ironed out as well as some of these new products finally coming to market. Clearly the AspirinWorks launch in Asia has already been a significant contributor (and is expected to continue to be for at least the next several years). Entry into additional international markets (such as India, Latin America, and South America), deeper and broader penetration in existing territories and other new products which are expected to come to market in the near-term should further benefit revenue (both internationally as well as domestically) .
Near-to-Mid Term Milestones
<> Continue progress on development and clinical trials of infectious disease products with collaboration partners including Tulane University. Lassa virus rapid test is expected to be CE Marked by end of this quarter. Expect to bring other infectious disease products to market in near future
<> Submit Hyaluronic Acid (HA) test to FDA in Q3/early Q4
<> Automated AspirinWorks Test FDA submission and CE Mark in Q3/Q4
<> Companion diagnostics products program - continue to work w/ a partner (pharma?) and is in feasibility stage - expect project to progress over next few quarters, at which time CONX may be able to discuss further plan forward. 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
<> 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
<> Contract manufacturing - bring on additional customers/clients, increase capabilities and offerings to appeal to wider potential customer base, continue to increase efficiencies
Revenue
Q2 revenue of $2.5 million consisted of $2.0 million (+17%) in sales from North America and $443k (+33%) internationally, compared to our $2.3 million and $357k estimates. We now model 27% growth in international sales in fiscal 2013 which we think is fueled by new product launches, entry into new geographic markets (including China with AspirinWorks) and an ongoing ramp up in activity by ELITech with deeper penetration in existing markets.
Revenue from the domestic business, while up 17% yoy missed our estimate by about 12%. Management noted on the call that a reduction in AspirinWorks sales to a large lab customer in the U.S. resulted from a planned temporary slowdown from that customer - which likely largely reflects the difference between our estimated and actual North American sales for the quarter. Management expects this will not recur in 2H and is still shooting for AspirinWorks sales to at least double in the current fiscal year.
Net Income / EPS
Q2 net income and EPS came in at $50k and $0.00, compared to our $24k and $0.00 estimates. Lower than modeled operating expenses ($1,013k A vs $1,105k E) along with slightly better than modeled gross margin (43.1% A vs 42.6% E) contributed to the beat on the bottom line. We continue to expect to see additional operating leverage with revenue growth and GM to maintain near 43% in 2013 (and slightly widening in future years with economies of scale).
Cash
Corgenix exited Q2 with $1.2 million in cash and equivalents, roughly flat from the end of Q1 (9/30/2012). Cash flow from operating activities was an inflow of $141k but stripping out changes in working capital (which is more indicative of cash from operations) it was an inflow of $158k. Debt remained relatively insignificant at quarter end.
Maintaining Outlook / Price Target
While maybe still a little too early to call this a definitive inflection point for consistent improvement in financial performance, we think the recent financial and operational trends, coupled with meaningful and tangible progress on pipeline products, recent product introductions, collaborations, and entry into additional geographical territories bodes well as support for that to happen. 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 only relatively insignificant adjustments to our model following Q2 results. We continue to value CONX based on our comp valuation methodology (below) which values the shares at approximately $0.60/share. We maintaining our Outperform rating on the stock.
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