Corgenix Medical Should Quickly Recoup Revenue Miss

| About: Corgenix Medical (CONX)

Fiscal Q1 2012 Financial Results

Corgenix Medical (OTCQB:CONX) reported financial results for the first fiscal quarter 2012 on November 14. Revenue was materially lower than our estimate, although this miss on the top line was partially offset by a better gross margin, resulting in a relatively small negative variance in net income relative to our forecast.

Importantly, management indicated that international sales through ELITech have yet to fully gear-up but should progress throughout the year. U.S. sales are also expected to show substantial improvement. Management noted that while Q2 total revenue may be similar to that of Q1, that the second half of fiscal 2012 should be significantly better and bolstered by sequential growth in AspirinWorks sales and higher Contract R&D and Contract Manufacturing revenue.

The Q1 earnings release also notes that the two initial joint-development products should launch in Europe in the second quarter, which presumably should help international sales growth in H2 2012. Management noted on the call that the expected pick up in revenue in the second half of the year should allow them to hit their previously issued financial guidance of revenue of approximately $10 million and positive net income and cash flow.

We have made some slight adjustments to our model - mostly pushing some of our modeled Q2 revenue to the back half of the year and tweaking gross margins incrementally upwards. The net change to revenue and net income/EPS for the full year ends up being relatively immaterial. We now look for fiscal 2012 revenue of $9.95 million, compared to $10.1 million prior to Q1 results. Net income/EPS moved from $299,000 / $0.01 to $273,000 / $0.01.

Revenue

Q1 revenue was $2.18 million, up 10% y-o-y but about 10% less than our $2.42 million forecast. North America sales were $1.88 million, up 28% y-o-y but about 8% less than our $2.03 million forecast. International sales were $302,000, down 41% and 24% below our $395,000 forecast.

The miss in U.S. sales relative to our estimate was spread across almost all domestic product lines and businesses, with Contract Manufacturing revenue coming in especially light. This is one the areas that is expected to show significant improvement throughout the year. Meanwhile, sales of the currently marketed AspirinWorks tests continued to show strong growth, with revenue coming in at $155k, up 116% from $72,000 in fiscal Q1 2011. Management continues to expect AspirinWorks sales to approximately double from fiscal 2011, which implies continued strong revenue growth throughout the remainder of the year.

International sales were softer than anticipated as a result of the launch of the two new products developed under the joint development agreement with ELITech being pushed to Q2. As these orders should be essentially deferred to future periods, we expect revenue in upcoming quarters (mainly Q3/Q4 2012) to benefit. The IT version (automated) of the AspirinWorks test is also expected to make its debut in Europe before the current fiscal year-end, which should contribute marginally to international revenue later in the year.

Gross Margin

Gross margin was 48.1%, a significant increase sequentially (Q4 2011 GM was 41.9%) and materially better than our 45.7% estimate. Some of the difference between our estimated and actual GM can be attributed to lower than modeled Contract R&D revenue, a relatively low margin business. The bulk of the difference, however, is Corgenix's core business (i.e., everything other than Contract R&D) producing a gross margin of 50.6%, 260 basis points wider than what we modeled. Management indicated that they expect to be able to maintain gross margins near this level going forward; we have made some adjustments to our model to reflect this.

Operating Expenses

Operating expenses were $1.02 million, in-line with our $1.02 million estimate. However, sales and marketing expenses at $509,000 were above our estimated $451,000 and was even higher as a percentage sales (23% actual vs. 19% estimate). This, along with slightly higher than modeled R&D expense ($90,000 actual vs. $68,000 estimated), was offset general/administrative expenses coming in about $74,000 less than our estimate. Corgenix also took a $17,000 charge in the quarter related to the closing of Corgenix UK.

Net Income / EPS

Q1 net income and EPS came in at ($55,300) and ($0.00), largely in-line with our $43,500 and $0.00 estimates.

Cash

Corgenix exited Q1 with $1.4 million in cash and equivalents, up from $1.1 million at 6/30/2011. The sequential increase in cash balance came from a net increase in cash from financing activities of $329,000, which included the $500,000 received from Wescor (ELITech) in September related to the third tranche investment of the product development agreement. Cash from operating activities and investing activities was ($20,000) and ($14,000), respectively. We continue to believe Corgenix can generate positive cash flow (although this may be slightly negative to break-even in Q2) from here on out. We also believe they have ample liquidity and borrowing capacity to meet any sporadic spikes in working capital needs (i.e., inventory building, etc.) to meet demand.

Corgenix cleaned up its balance sheet during the quarter by securing a revolving and eliminating a $164,000 inventory loan, $791,000 in factored receivables and paying off $48,000 worth of outstanding notes. Debt at September 30, 2011, stood at $943,000, including $822,000 drawn on the revolver and $121,000 in notes payable ($74,000 of which is due within 1 year).

Valuation

Our comparable cohort used to value CONX consists of several companies (including IDEXX Labs (NASDAQ:IDXX), Meridian Bioscience (NASDAQ:VIVO), Quidel (NASDAQ:QDEL) and ABAXIS (NASDAQ:ABAX), among others) in the medical diagnostic testing space, some of which are considered direct competitors to Corgenix. Our valuation methodology uses the average of four metrics; price-to-2015 estimated EPS, price-to-book value, price-to-sales (trailing 12 months), and enterprise value-to-sales (trailing 12 months).

Based on these four metrics, Corgenix is valued between $0.36/share (based on an average 3.7x book value multiple) and $0.61/share (based on an average 3.2x sales multiple). Our other two metrics value the company at $0.49/share (based on average 2015 P/E multiple of 16.3x) and $0.54/share (based on average EV/sales multiple of 2.8x). Average valuation based on these four metrics is almost exactly $0.50/share which, based on CONX's current market price of approximately $0.17/share, indicates the stock is significantly undervalued. As such, we recommend accumulating the stock and are maintaining our Outperform rating on Corgenix.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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