UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER
31, 2010.
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
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Commission File No. 1-11700
HEMAGEN DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
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State of Organization
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IRS Employer I.D.
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9033 Red Branch Road, Columbia, Maryland 21045-2105
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(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
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Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES
x
NO
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
o
NO
o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
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Non-accelerated filer
o
Smaller reporting company
x
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of December 31, 2010, the registrant had 15,470,281 shares of Common Stock $.01 par value per share outstanding.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Consolidated Balance Sheets; December 31,
2010 (unaudited) and September 30, 2010
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3
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Consolidated Statements of Operations;
Three Months Ended December 31, 2010 and 2009 (unaudited)
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5
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Consolidated Statements of Cash Flows; Three
Months Ended December 31, 2010 and 2009 (unaudited)
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6
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Notes to Consolidated Financial Statements (unaudited)
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7
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operation
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11
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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14
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Item 4.
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Controls and Procedures
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14
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PART
II
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OTHER INFORMATION
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Item 2.
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Unregistered Sales of Equity Securities and Use Of Proceeds
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15
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Item 5
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Other Information
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15
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Item 6.
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Exhibits
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16
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SIGNATURES
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17
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CERTIFICATIONS
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“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this report that are not historical facts constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Forward looking statements may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and by the context in which they are used. Such statements, whether express or implied, are based on current expectations of the company and speak only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Hemagen undertakes no obligation to update any forward-looking statements as a result of new information or to reflect events or circumstances after the date on which they are made or otherwise.
Statements concerning the establishments of reserves and adjustments for dated and obsolete products, expected financial performance, on-going business strategies and possible future action which Hemagen intends to pursue to achieve strategic objectives constitute forward-looking information. All forward looking statements, including those relating to the sufficiency of such charges, implementation of strategies and the achievement of financial performance are each subject to numerous conditions, uncertainties, risks and other factors. Factors which could cause actual performance to differ materially from these forward-looking statements, include, without limitation, management’s analysis of Hemagen’s assets, liabilities and operations, the failure to sell date–sensitive inventory prior to its expiration, competition, new product development by competitors which could render particular products obsolete, the inability to develop or acquire and successfully introduce new products or improvements of existing products, recessionary pressures on the economy and the markets in which our customers operate, costs and difficulties in complying with the laws and regulations administered by the United States Food and Drug Administration, changes in the relative strength of the U.S. Dollar and Brazilian Reals, unfavorable political or economic developments in Brazilian operations, the ability to assimilate successfully product acquisitions and other factors disclosed in our reports on Forms 10-K, 10-Q and 8-K filed with the SEC.
PART I - Financial Information
Item 1. - Financial Statements
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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December 31,
2010
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September 30,
2010
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(unaudited)
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ASSETS
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CURRENT ASSETS:
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Cash
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$
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256,672
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$
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151,743
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Accounts receivable, less allowance for doubtful accounts of $64,808 and $60,016 at
December 31, 2010
and September 30, 2010, respectively
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705,399
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669,892
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Inventories, net
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1,303,849
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1,386,317
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Current portion of note receivable
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192,500
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210,000
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Prepaid expenses and other current assets
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235,436
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352,534
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Total current assets
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2,693,856
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2,770,486
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PROPERTY AND EQUIPMENT;
net of accumulated depreciation
and amortization of $6,358,840 and
$6,297,906 at December 31, 2010 and September 30, 2010, respectively
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515,650
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525,658
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OTHER ASSETS:
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Long term portion of note receivable
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--
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35,000
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Other assets
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35,331
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40,250
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Total other assets
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35,331
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75,250
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Total Assets
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$
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3,244,837
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$
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3,371,394
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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December 31,
2010
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September 30,
2010
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(unaudited)
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CURRENT LIABILITIES:
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Accounts payable and accrued liabilities
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$
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763,338
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$
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743,170
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Revolving line of credit
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398,000
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398,000
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Deferred revenue
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28,147
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27,337
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Total Current Liabilities
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1,189,485
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1,168,507
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LONG TERM LIABILITIES:
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Senior subordinated secured convertible notes
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4,049,858
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4,049,858
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Total Long Term Liabilities
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4,049,858
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4,049,858
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Total liabilities
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5,239,343
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5,218,365
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STOCKHOLDERS’ DEFICIT
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Preferred stock, $0.01 par value - 1,000,000 shares authorized; none issued
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--
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--
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Common stock, $.01 par value - 45,000,000 shares authorized; 15,570,281 and
15,565,281 issued and outstanding as of December 31, 2010 and September 30, 2010, respectively
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155,702
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155,652
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Additional paid-in capital
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22,971,450
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22,959,539
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Accumulated deficit
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(25,074,619
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)
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(24,890,439
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Accumulated other comprehensive loss-
currency translation loss
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42,598
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17,914
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Less treasury stock at cost; 100,000 shares at December 31, 2010
and September 30, 2010, respectively.
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(89,637
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)
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(89,637
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Total Stockholders’ Deficit
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(1,994,506
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)
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(1,846,971
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)
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Total Liabilities and Stockholders’ Deficit
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$
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3,244,837
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$
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3,371,394
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The accompanying notes are an integral part of the financial statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended
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December 31,
2010
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December 31,
2009
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Net Sales
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$
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1,376,674
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$
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1,151,793
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Cost of Sales
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866,863
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642,669
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Gross Profit
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509,811
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509,124
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Operating Expenses:
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Selling, general and administrative
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599,887
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531,222
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Research and development
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1,382
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16,880
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Total operating expenses
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601,269
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548,102
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Total operating loss
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(91,458
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)
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(38,978
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)
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Other income (expenses):
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Interest expense (net)
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(88,644
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)
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(84,678
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)
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Other income (expense)
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96
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(85
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)
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Total other expense
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(88,548
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)
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(84,763
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)
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Net loss before income taxes
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(180,006
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)
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(123,741
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Income Tax expense
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4,173
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10,276
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Net income (loss):
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(184,179
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)
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(134,017
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)
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Other comprehensive income (loss), net of tax:
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Foreign currency translation adjustments
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24,684
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27,176
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Comprehensive (loss) income:
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$
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(159,495
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)
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$
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(106,841
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)
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Earnings (loss) per share - Basic
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$
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(0.01
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)
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$
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(0.01
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)
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Earnings (loss) per share - Diluted
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$
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(0.01
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)
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$
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(0.01
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)
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Weighted average common shares used in calculation of earnings (loss) per share - Basic
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15,469,683
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15,436,966
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Weighted average common shares used in calculation of earnings (loss) per share – Diluted
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15,469,683
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15,436,966
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three Months Ended
December 31,
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Cash flows from operating activities:
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2010
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2009
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Net (loss) income
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$
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(184,180
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)
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$
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(134,017
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)
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Adjustments to reconcile net loss to net
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cash provided by operating activities:
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Depreciation
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46,968
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43,265
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Provision for Bad Debts
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4,080
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(7,904
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)
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Stock Based Compensation
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11,961
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15,655
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Changes in operating assets and liabilities:
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Accounts receivable
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(39,587
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)
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90,316
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Prepaid expenses and other current assets
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117,098
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(6,571
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)
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Inventories
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82,468
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(27,525
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)
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Accounts payable and accrued expenses
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20,168
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(98,908
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)
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Other assets
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810
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|
231
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Deferred revenue
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4,919
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(18,001
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)
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Net cash (used in) provided by operating activities
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64,705
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(143,459
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)
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Cash flows from investing activities:
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Purchase of property and equipment
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|
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(29,458
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)
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|
|
(2,730
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)
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Payments Received on Notes Receivable
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|
52,500
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|
|
|
52,500
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Net cash provided by (used in) investing activities
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|
|
23,042
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|
|
|
49,770
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|
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|
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Cash flows from financing activities:
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|
|
|
|
|
|
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Net borrowings on Line of Credit
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|
|
--
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|
|
|
24,000
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|
|
Payments on Notes – Itau Bank
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|
|
--
|
|
|
|
(24,345
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)
|
|
Net cash provided by (used in) financing activities
|
|
|
--
|
|
|
|
(345
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)
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate
|
|
|
17,182
|
|
|
|
17,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
104,929
|
|
|
|
(77,012
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)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
151,743
|
|
|
|
156,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
256,672
|
|
|
$
|
79,302
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
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Cash paid during the period for interest
|
|
$
|
95,281
|
|
|
$
|
60,562
|
|
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2010 and 2009
NOTE 1 – BASIS OF PRESENTATION
Hemagen Diagnostics, Inc. (“Hemagen” or the “Company”) has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission instructions to Form 10-Q. These financial statements should be read together with the financial statements and notes in the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of the entire year.
NOTE 2- RECENT ACCOUNTING PRONOUNCEMENTS
The Subsequent Events Topic of the FASB ASC establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This accounting standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. This standard also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This accounting standard is effective for interim or annual periods ending after June 15, 2009. In February 2010, the FASB issued ASU No. 2010-09 which amended ASC 855. This amendment, which was effective upon issuance, removed the requirement for SEC registrants to disclose the date through which such registrants have evaluated subsequent events.
In October 2009, the FASB issued ASU 2009-13, Multiple Deliverable Revenue Arrangements, (“ASU 2009-13”), which applies to all deliverables in contractual arrangements in which a vendor will perform multiple revenue-generating activities. In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method, (“ASU 2010-17”), which defines a milestone and determines when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. These pronouncements are codified in ASC Topic 605, Revenue Recognition, and will be effective for our fiscal year that begins January 1, 2011. These pronouncements may be applied prospectively or retrospectively, and early adoption is permitted. We are evaluating the impact that adoption of ASU 2009-13 and ASU 2010-17 may have on our consolidated financial statements
ASU 2010-01, “Equity (Topic 505) — Accounting for Distributions to Shareholders with Components of Stock and Cash.” ASU 2010-01 was issued in January 2010 and clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation
on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. ASU 2010-01 had no impact on our consolidated financial statements.
ASU 2010-06, “Improving Disclosure about Fair Value Measurements,” was issued in January 2010 and requires additional disclosures regarding fair value measurements, amends disclosures about post-retirement benefit plan assets and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Adoption of ASU 2010-06 had no material impact on our consolidated financial statements.
NOTE 3- EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed based upon the weighted average number of common shares outstanding during the three months ended December 31, 2010 and 2009, respectively. Diluted earnings per common share is computed based on common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents consisting of stock options and convertible debentures. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock and if-converted method based on the Company’s average stock price for the period.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended December 31, 2010 and 2009, respectively.
|
|
|
Three Months Ended
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(184,180
|
)
|
|
$
|
(137,014
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted –average shares outstanding
|
|
|
15,469,683
|
|
|
|
15,436,966
|
|
|
Effect of dilutive shares
|
|
|
--
|
|
|
|
--
|
|
|
Denominator for diluted earnings per share
|
|
|
15,469,683
|
|
|
|
15,436,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Diluted net income per share does not include the effect of the following common stock equivalents related to outstanding convertible debentures and stock purchase options as their effect would be antidilutive:
|
|
|
Three Months Ended
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
11,571,022
|
|
|
|
11,571,022
|
|
|
Options to purchase common stock
|
|
|
2,942,208
|
|
|
|
1,007,208
|
|
|
Total antidilutive instruments
|
|
|
14,513,230
|
|
|
|
12,578,208
|
|
NOTE 4 – STOCK BASED COMPENSATION
The following table summarizes the Company’s stock option activity for the three months ended December 31, 2010:
|
|
|
Shares
|
|
|
Weighted average exercise price
|
|
|
Weighted average
life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – October 1, 2010
|
|
|
2,932,208
|
|
|
$
|
0.15
|
|
|
|
8.56
|
|
|
Granted
|
|
|
20,000
|
|
|
|
0.10
|
|
|
|
4.92
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited, cancelled or expired
|
|
|
(10,000
|
)
|
|
|
0.15
|
|
|
|
--
|
|
|
Options outstanding – December 31, 2010
|
|
|
2,942,208
|
|
|
$
|
0.15
|
|
|
|
8.30
|
|
|
Options exercisable – December 31, 2010
|
|
|
1,033,708
|
|
|
$
|
0.22
|
|
|
|
6.62
|
|
The Company incurs stock-based compensation expense over the requisite service period. We have estimated forfeitures and incur expense on shares we expect to vest.
As of December 31, 2010, there was $104,942 of unrecognized compensation cost related to share-based compensation arrangements that we expect to vest. This cost will be fully incurred within four years. The options exercisable as of December 31, 2010 have no intrinsic value.
NOTE 5 - INVENTORIES
Inventories at December 31, 2010 and September 30, 2010, respectively, consist of the following:
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,081,040
|
|
|
$
|
1,171,982
|
|
|
Work-in-process
|
|
|
126,419
|
|
|
|
137,035
|
|
|
Finished goods
|
|
|
755,012
|
|
|
|
816,272
|
|
|
|
|
|
1,962,471
|
|
|
|
2,125,289
|
|
|
Less reserves
|
|
|
(658,623
|
)
|
|
|
(738,972
|
)
|
|
Inventories, net
|
|
$
|
1,303,848
|
|
|
$
|
1,386,317
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 - LINE OF CREDIT
TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, provides a line of credit facility to the Company for the purpose of financing working capital needs. TiFunding acquired this facility on February 7, 2011 from Bay Bank, FSB for approximately $360,000.
The facility’s term expires on February 28, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility not to exceed $1,000,000 are based on certain receivables and inventory of the Company. The facility is secured by a first lien on all assets of the Company. In connection with the facility, the Company issued to TiFunding a warrant to purchase for $1,000,000 shares of Company Common Stock at an exercise price of $0.20 per share. The warrant is exercisable at any time until February 7, 2016 and has certain demand registration rights. As of December 31, 2010, the outstanding balance on the facility was $398,000. The Company is in compliance with all of the covenants in the facility as of the date of this report.
NOTE 7 – SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES
During September 2009, the Company completed an Exchange Offer of its senior subordinated secured convertible notes due on September 30, 2009. The Company offered to exchange new, modified 8% Senior Subordinated Convertible Notes due 2014 for the outstanding 8% Senior Subordinated Secured Convertible Notes due 2009. The principal features of the Exchange Offer included $4,049,858 principal amount of Senior Subordinated Secured Convertible Notes, due September 30, 2014, which bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share. The Company can require the conversion of these Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.
The Company has accounted for the Exchange Offer as though the exchange of the entire amount of $4,049,858 of the Outstanding Notes was effective as of September 30, 2009, because at September 30, 2009 all of the terms and conditions for the consummation of the Exchange Offer had been satisfied.
The Modified Notes are secured by a first lien on all real, tangible and intangible property except that the terms of the Modified Notes provide that the Modified Notes are subordinate to the following: (i) a credit facility that is equal to or less than Three Million Dollars ($3,000,000), (ii) any secured financing that is greater than Two Million Dollars ($2,000,000), provided that (A) the Company provides the Holder twenty (20) business days’ written notice of such secured financing, and (B) all of the funds raised in connection with such secured financing shall be used to reduce, on a pro rata basis, the principal amount and accrued and unpaid interest owed on the Modified Notes, (iii) real estate financing that the Company may incur for the purchase of a corporate facility provided that the annual mortgage payments are less than the rent expense that the Company pays in the year of such purchase for its leased facilities, and (iv) secured financing not to exceed Four Million Dollars ($4,000,000) at any one time for the purpose of financing an acquisition by the Company of the business of another person or entity.
NOTE 8 – GEOGRAPHICAL INFORMATION
The Company considers its manufactured kits, tests and instruments as one operating segment, as defined under FASB ASC 280, Segment Reporting. The following table sets forth revenue for the periods reported, from continuing operations, and assets by geographic location for the three months ended December 31, 2010 and 2009 respectively.
|
|
|
United*
States
|
|
|
Brazil
|
|
|
Consolidated
|
|
|
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
721,963
|
|
|
|
654,711
|
|
|
|
1,376,674
|
|
|
Long-lived assets
|
|
|
195,972
|
|
|
|
355,009
|
|
|
|
550,981
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
526,483
|
|
|
|
625,310
|
|
|
|
1,151,793
|
|
|
Long-lived assets
|
|
|
392,718
|
|
|
|
422,477
|
|
|
|
815,195
|
|
* Includes export sales to countries other than Brazil.
NOTE 9 – NOTE RECEIVABLE
The Company received an $840,000 Note during the period ending December 31, 2007 related to the sale of assets of the Company’s wholly owned subsidiary Reagents Applications Inc. The Note is payable in forty-eight monthly installments of principal of $17,500 plus accrued interest at the rate of 8% beginning on December 31, 2007. For the three months ending December 31, 2010 and 2009, the Company received $52,500 and $52,500, respectively, in principal payments against the Note. All payments that have been received on the Note have been made in accordance with the terms of the Note.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Refer to "Forward Looking Statements" following the Index in front of this Form 10-Q.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the Company’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.
Overview
Hemagen Diagnostics, Inc. is a biotechnology company that develops, manufactures, and markets approximately 68 FDA-cleared proprietary medical diagnostic test kits. Hemagen has two different product lines. The Virgo® product line of diagnostic test kits is used to aid in the diagnosis of certain autoimmune and infectious diseases, using ELISA, Immunoflourescence, and hemagglutination technology. The Analyst® product line is an FDA-cleared clinical
chemistry analyzer system, including consumables, that is used to measure important constituents in human and animal blood. The Company sells its products both directly and through distributors to reference labs, physicians, veterinarians, clinical laboratories and blood banks. The Company also sells its products on a private-label basis
through multinational distributors. The Company was incorporated in 1985 and became a public company in 1993.
Hemagen’s principal office is located at 9033 Red Branch Road, Columbia, Maryland 21045 and the telephone number is (443) 367-5500. Hemagen maintains a website at
www.hemagen.com
. Investors can obtain copies of our filings with the Securities and Exchange Commission from this site free of charge as well as from the Securities and Exchange Commission website at
www.sec.gov
.
Critical Accounting Policies
We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 filed with the Securities and Exchange Commission.
Results of Operations
The Three Month Period Ended December 31, 2010
Compared to the Three Month Period Ended December 31, 2009
Revenues for the three-month period ended December 31, 2010 increased by approximately $225,000 (20%) to approximately $1,377,000 from approximately $1,152,000 for the same period ended December 31, 2009. The increase is due to higher sales of Analyst consumables of approximately $101,000, an increase of sales of Virgo ® products of approximately $107,000 and an overall increase in sales in Brazil of approximately $29,000. Consumable sales can vary substantially from quarter to quarter based on distributor orders.
Cost of product sales increased by approximately $224,000 (34%) to approximately $867,000 from approximately $643,000 for the same period last year. Cost of product sales as a percentage of sales increased to 63% from 56% from the same period last year. The increase in cost of sales as a percentage of sales is predominately attributable to an increase in raw material costs from one supplier who increased its prices for certain orders. While the Company is negotiating to reduce such pricing increases, no assurances can be given that the Company will be successful in this regard.
Research and development expenses decreased approximately $15,000 from the same quarter last year. The decrease was the result of the departure of one employee.
The Company continues to work to complete several research and development programs including:
|
·
|
Upgrading the Analyst instrument and product offerings such as evaluating and developing complimentary products for Hemagen’s Analyst product line to distribute to the veterinary market;
|
|
·
|
Developing new ELISA kits and enhancing existing ELISA kits; and
|
|
·
|
Developing and enhancing IFA kits.
|
Selling, general and administrative expenses increased by approximately $69,000 (13%) for the quarter ended December 31, 2010 to approximately $600,000 from approximately $531,000 in the previous period. The majority of this increase was due to increased legal expenses incurred during
the current quarter of approximately $26,000 and an increase in travel related expenses of approximately $35,000 during the quarter ended December 31, 2010.
Total other expenses for the three months ended December 31, 2010 increased by approximately $4,000 to approximately $89,000 from approximately $85,000 from the period ended December 31, 2009. The increase in net expenses was due to the reduction of interest income received on the Note.
Income tax expense for the quarter ended December 31, 2010 was approximately $4,000 as compared to approximately $10,000 for the quarter ended December 31, 2009. This tax expense resulted from income realized at the Company’s Brazilian subsidiary. The net income before tax for the Company’s Brazilian subsidiary for the period ended December 31, 2010 was approximately $41,000 compared to net income before tax of approximately $76,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 24%, which includes the fact that there are net loss carry forwards being utilized from prior periods.
Net loss for the period increased by approximately $50,000 for the three months ended December 31, 2010 to approximately $184,000 compared to a net loss of approximately $134,000 in the prior year quarter. The reduction in net loss is attributable to lower gross margins and an increase in SG&A expenses during the current fiscal quarter.
Liquidity and Capital Resources
At December 31, 2010, Hemagen had $256,672 of cash, working capital of $1,504,371 and a current ratio of 2.26 to 1.0. At September 30, 2010, the Company had $151,743 of cash, working capital of $1,601,979 and a current ratio of 2.37 to 1.0.
On December 31, 2010, the Company had a loan outstanding in the amount of $398,000 with Bay Bank, FSB. On February 7, 2011, TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, purchased the loan from Bay Bank, FSB for approximately $360,000 and agreed to provide a $1 million line of credit facility to the Company for the purpose of financing working capital needs.
The facility’s term expires on February 28, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility are for up to $1,000,000 based on certain receivables and inventory of the Company. The facility is secured by a first lien on all assets of the Company. In connection with the facility, the Company issued to TiFunding a warrant to purchase for $1,000,000 shares of Company Common Stock at an exercise price of $0.20 per share. The warrant is exercisable at any time until February 7, 2016 and has certain demand registration rights. As of December 31, 2010, the outstanding balance on the facility was $398,000. The Company is in compliance with all of the covenants in the facility as of the date of this report.
The Company believes that cash flow from operations and cash on hand at December 31, 2010 will be sufficient to finance its operations for the remainder of fiscal 2011. However, the Company can give no assurances that it will have sufficient cash to finance its operations. The Company has no off-balance sheet financing arrangements.
On September 30, 2009, the Company successfully completed an Exchange Offer of $4,049,858 of Old Notes, for Modified Notes due September 30, 2014. The Modified Notes bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share after September 30, 2009. The Company can require the conversion of the Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.
Net cash provided by operating activities during the three months ended December 31, 2010 was approximately $65,000 compared to cash used by operating activities of approximately $143,000 during the three-month period ended December 31, 2009. This is attributable primarily to a reduction in a large prepaid inventory expense on record at September 30, 2010, and received during the three months ended December 31, 2010 as compared to the three months ended December 31, 2009, and a decrease in inventory due to increased sales during the quarter ended December 31, 2010 as compared to the prior year quarter.
Approximately $23,000 of cash was provided from investing activities during the three-month period ended December 31, 2010 as compared to approximately $50,000 of cash provided for investing activities during the three-month period ended December 31, 2009. The cash provided during the current quarter was generated by the payments received against the Note and was offset by purchases of property and equipment of approximately $29,000 during the current quarter. The cash provided from investing activities during the three-month period ended December 31, 2009 was generated from payments received against the Note and was offset by purchases of property and equipment of approximately $ 3,000 during that quarter.
In accordance with the terms on the Note with the purchaser of Raichem, the Company received payments in the amount of $52,500, for both three-month periods ended December 31, 2010 and 2009.
There was no cash used or provided by financing activities during the three-month period ended December 31, 2010. Net cash used by financing activities for the three-month period ended December 31, 2009 was $345. In the three months ended December 31, 2009, the Company borrowed $24,000 against the line of credit and paid $24,345 against the Brazil notes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer (Principal Executive Officer), William P. Hales and Principal Financial Officer, Catherine Davidson have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2010. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of December 31, 2010 except for the matters described below.
Management is aware that there is a lack of segregation of duties due to the small number of employees within the financial and administrative functions of the Company. As a result of the limitations of the resources and segregation of duties, Stegman and Company, the Company’s current auditor, has informed the Company that these limitations represent a material weakness in internal controls. Management will continue to evaluate this segregation of duties issue. Over the past
several months, management has documented the Company’s critical control procedures and will continue to review and update such procedures as changes occur.
There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Hemagen’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
|
Period
|
(
a
)
Total Number of Shares Purchased
|
(b)
Average
Price Paid per Share
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
|
|
October 1-31, 2010
|
-
|
-
|
-
|
-
|
|
November 1-30, 2010
|
-
|
-
|
-
|
-
|
|
December 1-31, 2010
|
21,190
|
$0.06
|
21,190
|
-
|
|
Total
|
21,190
|
$0.06
|
21,190
|
-
|
|
|
(1)
|
Represents shares of the Company’s Common Stock purchased pursuant to the Company’s Employee Stock Ownership Plan (ESOP) that was established October 1, 2003 with no expiration. The purpose of the plan is not to repurchase, but rather it is an employee benefit plan.
|
|
|
(2)
|
There is no maximum number of shares that may be purchased under the Company’s Employee Stock Ownership Plan.
|
The information in Item 5 below is incorporated herein by reference.
Item 5. Other Information.
On December 31, 2010, the Company had a loan outstanding in the amount of $398,000 with Bay Bank, FSB. On February 7, 2010, TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, purchased the loan from Bay Bank, FSB for approximately $360,000 and agreed to provide a $1 million line of credit facility to the Company for the purpose of financing working capital needs.
The facility’s term expires on February 28, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility are for up to $1,000,000 based on certain receivables and inventory of the Company. The facility is secured by a first lien on all assets of the Company. In connection with the facility, the Company issued to TiFunding a warrant to purchase for $1,000,000 shares of Company Common Stock at an exercise price of $0.20 per share. The warrant is exercisable at any time until February 7, 2016 and has certain demand registration rights. As of December 31, 2010, the outstanding balance on the facility was $398,000. The Company is in compliance with all of the covenants in the facility as of the date of this report.
Item 6. Exhibits.
(a) Exhibits
|
Exhibit 10.1
|
Ninth Modification to Loan and Security Agreement between the Company and TiFunding LLC
|
|
|
|
|
Exhibit 10.2
|
Sixth Allonge to Promissory Note executed by Company in Favor of TiFunding LLC
|
|
|
|
|
Exhibit 10.3
|
Warrant to Purchase Shares of Common Stock issued to TiFunding LLC
|
|
|
|
|
Exhibit 31.1
|
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
|
|
|
|
|
Exhibit 31.2
|
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
|
|
|
|
|
Exhibit 32.1
|
Certification of Principal Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
|
|
|
|
|
Exhibit 32.2
|
Certification of Principal Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.
|
|
Hemagen Diagnostics, Inc.
(Registrant)
|
|
|
|
|
|
|
|
February 9, 2011
|
By:
|
/s/ William P. Hales
|
|
|
|
|
William P. Hales
|
|
|
|
|
President and
Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
February 9, 2011
|
By:
|
/s/ Catherine M. Davidson
|
|
|
|
|
Catherine M. Davidson
|
|
|
|
|
Controller
|
|
Hemagen Diagnostics (CE) (USOTC:HMGN)
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