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 MARCH 31, 2011.
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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
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HEMAGEN DIAGNOSTICS, INC.
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(Exact name of registrant as specified in its charter)
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Delaware
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04-2869857
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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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(443) 367-5500
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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.
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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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 May 12, 2011, the registrant had 15,480,281 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; Marcy 31,
2011 (unaudited) and September 30, 2010
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3
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Consolidated Statements of Operations;
Three and Six-Months Ended March 31, 2011 and 2010 (unaudited)
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5
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Consolidated Statements of Cash Flows; Six-
Months Ended March 31, 2011 and 2010 (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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13
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Item 4.
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Controls and Procedures
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13
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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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14
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Item 4.
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Submission of Matters to a Vote of Security Holders
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14
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Item 5
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Other Information
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14
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Item 6.
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Exhibits
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14
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SIGNATURES
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15
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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
(unaudited)
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|
|
March 31
2011
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September 30,
2010
|
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ASSETS
|
|
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|
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|
|
|
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|
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|
|
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CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash
|
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$
|
299,408
|
|
|
$
|
151,743
|
|
|
Accounts receivable, less allowance for doubtful accounts of $71,338 and $60,016
at March 31, 2011 and September 30, 2010, respectively
|
|
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646,826
|
|
|
|
669,892
|
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Inventories, net
|
|
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1,249,619
|
|
|
|
1,386,317
|
|
|
Current portion of note receivable
|
|
|
140,000
|
|
|
|
210,000
|
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|
Prepaid expenses and other current assets
|
|
|
194,370
|
|
|
|
352,534
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,530,223
|
|
|
|
2,770,486
|
|
|
|
|
|
|
|
|
|
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|
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PROPERTY AND EQUIPMENT;
net of accumulated depreciation and amortization of
$6,415,572 and $6,297,906 at March 31, 2011 and September 30, 2010, respectively
|
|
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474,939
|
|
|
|
525,658
|
|
|
|
|
|
|
|
|
|
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|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Long term portion of note receivable
|
|
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--
|
|
|
|
35,000
|
|
|
Other assets
|
|
|
60,518
|
|
|
|
40,250
|
|
|
Total other assets
|
|
|
60,518
|
|
|
|
75,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,065,680
|
|
|
$
|
3,371,394
|
|
|
|
|
|
|
|
|
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|
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
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March 31,
2011
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September 30,
2010
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|
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
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CURRENT LIABILITIES:
|
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|
|
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Accounts payable and accrued liabilities
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$
|
803,236
|
|
|
$
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743,170
|
|
|
Revolving line of credit – Bay Bank
|
|
|
--
|
|
|
|
398,000
|
|
|
Revolving line of credit – TiFunding – Related Party
|
|
|
504,413
|
|
|
|
--
|
|
|
Deferred revenue
|
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|
35,340
|
|
|
|
27,337
|
|
|
Total Current Liabilities
|
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|
1,342,989
|
|
|
|
1,168,507
|
|
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|
|
|
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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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|
|
|
|
|
|
|
|
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Total liabilities
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|
5,392,847
|
|
|
|
5,218,365
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|
|
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|
|
|
|
|
|
|
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STOCKHOLDERS’ DEFICIT
|
|
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|
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|
|
|
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|
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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; 15,575,281 and 15,565,281
issued and outstanding as of March 31, 2011 and September 30, 2010, respectively
|
|
|
155,752
|
|
|
|
155,652
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|
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Additional paid-in capital
|
|
|
22,990,972
|
|
|
|
22,959,539
|
|
|
Accumulated deficit
|
|
|
(25,440,952
|
)
|
|
|
(24,890,439
|
)
|
Accumulated other comprehensive loss-
currency translation loss
|
|
|
56,698
|
|
|
|
17,914
|
|
|
Less treasury stock at cost; 100,000 shares
|
|
|
(89,637
|
)
|
|
|
(89,637
|
)
|
|
Total Stockholders’ Deficit
|
|
|
(2,327,167
|
)
|
|
|
(1,846,971
|
)
|
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
3,065,680
|
|
|
$
|
3,371,394
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
HEMAGEN DIAGNOSTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
Three Months Ended
|
|
|
Six-months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
1,217,704
|
|
|
$
|
1,421,374
|
|
|
$
|
2,594,378
|
|
|
$
|
2,573,167
|
|
|
Cost of Sales
|
|
|
902,177
|
|
|
|
766,426
|
|
|
|
1,769,040
|
|
|
|
1,409,095
|
|
|
Gross Profit
|
|
|
315,527
|
|
|
|
654,948
|
|
|
|
825,338
|
|
|
|
1,164,072
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
586,393
|
|
|
|
495,700
|
|
|
|
1,186,281
|
|
|
|
1,026,921
|
|
|
Research and development
|
|
|
1,146
|
|
|
|
5,232
|
|
|
|
2,528
|
|
|
|
22,112
|
|
|
Total operating expenses
|
|
|
587,539
|
|
|
|
500,932
|
|
|
|
1,188,809
|
|
|
|
1,049,033
|
|
|
Total operating income (loss)
|
|
|
(272,012
|
)
|
|
|
154,016
|
|
|
|
(363,471
|
)
|
|
|
115,039
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(96,996
|
)
|
|
|
(83,146
|
)
|
|
|
(185,640
|
)
|
|
|
(167,824
|
)
|
|
Other income (expense)
|
|
|
(166
|
)
|
|
|
3,230
|
|
|
|
(70
|
)
|
|
|
3,144
|
|
|
Gain on sale of assets
|
|
|
2,800
|
|
|
|
25,291
|
|
|
|
2,800
|
|
|
|
25,291
|
|
|
Total other expense
|
|
|
(94,362
|
)
|
|
|
(54,625
|
)
|
|
|
(182,910
|
)
|
|
|
(139,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), before income taxes
|
|
|
(366,374
|
)
|
|
|
99,391
|
|
|
|
(546,381
|
)
|
|
|
(24,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
(41
|
)
|
|
|
36,552
|
|
|
|
4,132
|
|
|
|
46,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
$
|
(366,333
|
)
|
|
$
|
62,839
|
|
|
$
|
(550,513
|
)
|
|
$
|
(71,178
|
)
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
14,100
|
|
|
|
(27,297
|
)
|
|
|
38,784
|
|
|
|
(121
|
)
|
|
Comprehensive income (loss):
|
|
$
|
(352,233
|
)
|
|
$
|
35,542
|
|
|
$
|
(511,729
|
)
|
|
$
|
(71,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share - Basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
Earnings (loss) per share - Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
Weighed average common shares used in calculation of earnings (loss) per share - Basic
|
|
|
15,472,670
|
|
|
|
15,455,003
|
|
|
|
15,471,160
|
|
|
|
15,445,885
|
|
|
Weighed average common shares used in calculation of earnings (loss) per share – Diluted
|
|
|
15,472,670
|
|
|
|
15,455,003
|
|
|
|
15,471,160
|
|
|
|
15,445,885
|
|
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Six-months Ended
March 31,
|
|
|
Cash flows from operating activities:
|
|
2011
|
|
|
2010
|
|
|
Net loss
|
|
$
|
(550,513
|
)
|
|
$
|
(71,178
|
)
|
|
Adjustments to reconcile net cash provided by (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
93,898
|
|
|
|
83,615
|
|
|
Non-cash interest expense – warrants
|
|
|
7,970
|
|
|
|
--
|
|
|
(Gain) on sale of assets
|
|
|
(2,800
|
)
|
|
|
(25,291
|
)
|
|
Provision for (recovery of) bad debts
|
|
|
9,844
|
|
|
|
(10,512
|
)
|
|
Stock based compensation
|
|
|
23,563
|
|
|
|
17,460
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
13,222
|
|
|
|
(58,878
|
)
|
|
Prepaid expenses and other current assets
|
|
|
158,164
|
|
|
|
10,741
|
|
|
Inventories
|
|
|
136,698
|
|
|
|
135,676
|
|
|
Other assets
|
|
|
(20,268
|
)
|
|
|
(18,559
|
)
|
|
Accounts payable and accrued expenses
|
|
|
60,067
|
|
|
|
(195,941
|
)
|
|
Deferred revenue
|
|
|
8,003
|
|
|
|
7,156
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(62,152
|
)
|
|
|
(125,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(31,482
|
)
|
|
|
(3,336
|
)
|
|
Proceeds from sale of assets
|
|
|
2,800
|
|
|
|
39,912
|
|
|
Payments received on notes receivable
|
|
|
105,000
|
|
|
|
105,000
|
|
|
Net cash provided by investing activities
|
|
|
76,318
|
|
|
|
141,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments (borrowings) on line of credit
|
|
|
106,413
|
|
|
|
(2,000
|
)
|
|
Payments on Notes – Itau Bank
|
|
|
--
|
|
|
|
(27,057
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
106,413
|
|
|
|
(29,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate
|
|
|
27,086
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
147,665
|
|
|
|
(12,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
151,743
|
|
|
|
156,314
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
299,408
|
|
|
$
|
143,621
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for period for interest
|
|
$
|
165,641
|
|
|
$
|
185,745
|
|
|
Cash payments for period for income taxes
|
|
$
|
6,108
|
|
|
$
|
18,094
|
|
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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 2010 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.
ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011 and did not have an impact on the Company’s 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 and six-months ended March 31, 2011 and 2010, 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 and six-month periods ended March 31, 2011 and 2010, respectively.
|
|
|
Three Months Ended
March 31,
|
|
|
Six-months Ended
March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(366,333
|
)
|
|
$
|
62,839
|
|
|
$
|
(550,513
|
)
|
|
$
|
(71,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted –average shares outstanding
|
|
|
15,472,670
|
|
|
|
15,455,003
|
|
|
|
15,471,160
|
|
|
|
15,445,885
|
|
|
Effect of dilutive shares
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Denominator for diluted earnings per share
|
|
|
15,472,670
|
|
|
|
15,455,003
|
|
|
|
15,471,160
|
|
|
|
15,445,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
Diluted Earnings per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
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
March 31,
|
|
|
Six-months Ended
March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
11,571,022
|
|
|
|
11,571,022
|
|
|
|
11,571,022
|
|
|
|
11,571,022
|
|
|
Warrants
|
|
|
2,944,444
|
|
|
|
--
|
|
|
|
1,456,044
|
|
|
|
--
|
|
|
Options to purchase common stock
|
|
|
3,059,986
|
|
|
|
1,007,208
|
|
|
|
2,996,164
|
|
|
|
1,007,208
|
|
|
Total antidilutive instruments
|
|
|
17,575,452
|
|
|
|
12,578,230
|
|
|
|
16,023,230
|
|
|
|
12,578,230
|
|
NOTE 4 – COMMON STOCK EQUIVALENTS
The following table summarizes the Company’s stock option activity for the six-months ended March 31, 2011:
|
|
|
Shares
|
|
|
Weighted average exercise price
|
|
|
Weighted average
life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding – October 1, 2010
|
|
|
2,932,208
|
|
|
$
|
0.15
|
|
|
|
8.56
|
|
|
Granted
|
|
|
180,000
|
|
|
|
0.10
|
|
|
|
4.81
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited, cancelled or expired
|
|
|
(10,000
|
)
|
|
|
0.15
|
|
|
|
--
|
|
|
Options outstanding – March 31, 2011
|
|
|
3,102,208
|
|
|
$
|
0.15
|
|
|
|
7.89
|
|
|
Options exercisable – March 31, 2011
|
|
|
1,075,708
|
|
|
$
|
0.21
|
|
|
|
6.28
|
|
We use the Black-Scholes option pricing model to determine the fair value of our awards on the date of grant. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing formula that uses the assumptions noted in the table and discussion that follows:
|
|
|
Three Months Ended
March 31,
|
|
|
Six-months Ended
March 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Expected volatility
|
|
|
136.27% - 137.95%
|
|
|
|
--
|
|
|
|
136.27% - 137.95%
|
|
|
|
--
|
|
|
Risk-free interest rate
|
|
|
2.02% - 3.48%
|
|
|
|
--
|
|
|
|
1.47% - 3.48%
|
|
|
|
--
|
|
|
Expected life in years
|
|
|
5 -10
|
|
|
|
--
|
|
|
|
5 -10
|
|
|
|
--
|
|
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 March 31, 2011, there was $101,723 of unrecognized compensation cost related to share-based compensation arrangements that we expect to vest. This cost will be fully incurred within 5 years. The options exercisable as of March 31, 2011 have no intrinsic value.
The following table summarizes the Company’s warrant activity for the six-months ended March 31, 2011:
|
|
|
Shares
|
|
|
Weighted average exercise price
|
|
|
Weighted average
life
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding – October 1, 2010
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
Granted
|
|
|
5,000,000
|
|
|
|
0.20
|
|
|
|
4.86
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited, cancelled or expired
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Options outstanding – March 31, 2011
|
|
|
5,000,000
|
|
|
$
|
0.20
|
|
|
|
4.86
|
|
|
Options exercisable – March 31, 2011
|
|
|
5,000,000
|
|
|
$
|
0.20
|
|
|
|
4.86
|
|
As of March 31, 2011, there was $231,121 of unrecognized interest expense related to warrant compensation that we expect to vest. This cost will be fully incurred within 5 years. The warrants exercisable as of March 31, 2011 have no intrinsic value.
NOTE 5 - INVENTORIES
Inventories at March 31, 2011 and September 30, 2010, respectively consist of the following:
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
1,079,811
|
|
|
$
|
1,171,982
|
|
|
Work-in-process
|
|
|
91,009
|
|
|
|
137,035
|
|
|
Finished goods
|
|
|
677,017
|
|
|
|
816,272
|
|
|
|
|
|
1,847,837
|
|
|
|
2,125,289
|
|
|
Less reserves
|
|
|
(598,218
|
)
|
|
|
(738,972
|
)
|
|
Inventories, net
|
|
$
|
1,249,619
|
|
|
$
|
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 warrants to purchase for $1,000,000 shares of the Company’s common stock at an exercise price of $0.20 per share. These warrants are exercisable at any time until February 7, 2016 and have certain demand registration rights. As of March 31, 2011, the outstanding balance on the facility was $504,413. 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.
The following table sets forth revenue for the periods reported and assets by geographic location for the six-months ended March 31, 2011 and 2010, respectively.
|
|
|
United*
States
|
|
|
Brazil
|
|
|
Consolidated
|
|
|
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,360,006
|
|
|
$
|
1,234,372
|
|
|
$
|
2,594,378
|
|
|
Long-lived assets
|
|
$
|
313,000
|
|
|
$
|
377,631
|
|
|
$
|
690,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,327,625
|
|
|
$
|
1,245,542
|
|
|
$
|
2,573,167
|
|
|
Long-lived assets
|
|
$
|
313,000
|
|
|
$
|
377,631
|
|
|
$
|
690,631
|
|
* 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 each of the six-month periods ended March 31, 2011 and 2010 the Company has received $105,000 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 March 31, 2011
Compared to the Three Month Period Ended March 31, 2010
Revenues for the three-month period ended March 31, 2011 decreased by approximately $203,000 (14%) to approximately $1,218,000 from approximately $1,421,000 for the three-month period ended March 31, 2010. The overall decrease in revenues is mainly attributable to a decrease in sales in the Analyst ® division of approximately $162,000 and a slight decrease in sales from our Brazilian subsidiary of approximately $41,000 during the current year verses the same period last year. Sales in Brazil local currency were down approximately 6% from the same quarter last year, but the Real to Dollar exchange rate averaged 1.69 during the current quarter as compared to 1.78 for the same quarter a year ago helping to offset this decrease in overall revenue.
Cost of product sales increased approximately $136,000 (18%) to approximately $902,000 from approximately $766,000 for the same period a year ago. Cost of product sales as a percentage of sales increased to 74% from 54% from the same period last year. This increase in cost of sales is primarily attributed to the higher payroll and outside consulting expenses as compared to the same quarter of the prior year.
Research and development expenses decreased by approximately $2,000 (40%) to approximately $3,000 during the second quarter of 2011 as compared to approximately $5,000 of expenses in the second quarter of 2010. This decrease was the result of the reduction of certain outside consulting expenses.
The Company continues toward working to complete several research and development programs including:
|
·
|
Taking steps related to 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 and alternative tests utilizing the Analysts’ rotor technology;
|
|
·
|
Developing new ELISA kits and enhancing existing ELISA kits; and
|
|
·
|
Developing and enhancing IFA kits.
|
Selling, general and administrative expenses increased by approximately $90,000 (18%) for the quarter ended March 31, 2011 to approximately $586,000 from approximately $496,000 in the previous period. The Company incurred increases in legal, facility, travel, audit and outside consulting expenses compared to the same period last year which combined increased the overall SG&A expenses for the period.
Total other expenses for the three months ending March 31, 2011 increased by $40,000 to approximately $94,000 from approximately $55,000 from the period ending March 31, 2010. The increase in net other expense is primarily attributed to the following: a reduction in interest income recognized due to the declining balance on the note receivable, and increase in interest expense due to an increased rate on the line of credit borrowings and interest expense related to the issuance of warrants in conjunction with the line of credit renewal, and a decrease of gain recognized on the sale of assets compared to the same quarter last year.
There was no income tax expense recognized for the quarter ended March 31, 2011 as compared to approximately $37,000 of expense for the quarter ended March 31, 2010. This tax expense resulted from income realized at the Company’s Brazilian subsidiary. The Company’s Brazilian subsidiary incurred a pre-tax net loss of approximately $6,000 for the period ending March 31, 2011 compared to net income before tax of approximately $81,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 12% year to date which includes the fact that there are net loss carry forwards being utilized from prior periods.
Net income for the period decreased by approximately $429,000 for the three months ended March 31, 2011 to a net loss of approximately $366,000 compared to net income of approximately $63,000 in the same quarter of the prior year. The decrease in net income is attributable to lower revenues in combination with lowers margins and increased selling and general administrative expenses.
The Six-month Period Ended March 31, 2011
Compared to the Six-month Period Ended March 31, 2010
Revenues for the six-month period ended March 31, 2011 increased by approximately $21,000 (1%) to approximately $2,594,000 from approximately $2,573,000 for the same six-month period ended March 31, 2010. The small net increase in revenues is attributed to an increase in sales in the autoimmune and infections disease line by approximately $98,000 offset by a decrease in the Analyst® division during the six-month period ending March 31, 2010 of approximately $76,000 verses the prior year quarter. Revenues in local Brazilian currency were approximately R$131,000 lower from that of the prior year, but the stabilization of the Brazilian Real resulted in only a decrease of approximately $11,000 for Brazil revenues in US dollars. The average exchange rates for the six-month periods ended March 31, 2011 and 2010 were 1.69 and 1.78, respectively.
Cost of product sales increased by approximately $360,000 (26 %) to approximately $1,769,000 from approximately $1,409,000 for the same period last year. Cost of product sales as a percentage of sales increased to approximately 68% compared to 54% for 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 during the current year and an increase in expenses related to outside consulting services.
Research and development expenses decreased by approximately $20,000 (43%) during the six-months ended March 31, 2011 to approximately $2,000 from $22,000 in 2010. This decrease was the result of an employee termination and a reduction of certain outside consulting expenses.
Selling, general and administrative expenses increased by approximately $159,000 (15%) for the six-months ended March 31, 2011 to approximately $1,186,000 from approximately $1,027,000 in the previous period ended March 31, 2010. The increases in expense for the current year was attributable to an increase in legal and travel related expenses, along with expenses related to an audit for the Brazilian subsidiary that took place during the current year.
Total other expenses for the six-months ended March 31, 2011 increased by approximately $44,000 to approximately $183,000 from approximately $139,000 from the six-month period ended March 31, 2010. This increase in expense was due to an increase in interest related expenses due to an increase in the percentage rate on the line of credit, a reduction of interest income of approximately $8,000 on the Note receivable, and increased interest expense related to the warrants issued in conjunction with the line of credit. There was also a net decrease of approximately $22,000 in the amounts recorded as gains on the sale of assets between the current and prior year periods.
Income tax expense for the six-months ended March 31, 2011 was approximately $4,000 as compared to $47,000 for the six-months ended March 31, 2010. This tax expense resulted from income realized at the Company’s Brazilian subsidiary. The income before tax for the Company’s Brazilian subsidiary for the six-month period ended March 31, 2011 was approximately $35,000 compared to net income before tax of approximately $157,000 in the prior year. The Brazilian income tax is calculated at an effective rate of approximately 12% for the current year which takes into consideration our use of net loss carry forwards from prior periods.
Net loss increased by approximately $479,000 for the six-months ended March 31, 2011 to a net loss of approximately $550,000 compared to a net loss of approximately $71,000 in the six-month period ended March 31, 2010. The increase in net loss was attributable to increase raw material costs, lower overall margins and an increase in expenses related to legal, travel and audit related fees during the current year.
Liquidity and Capital Resources
At March 31, 2011 Hemagen had $299,000 of cash, working capital of $1,187,234 and a current ratio of 1.88 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 March 31, 2011, the outstanding balance on the facility was $504,413. 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 March 31, 2011 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 used in operating activities during the six-months ended March 31, 2011 was approximately $62,000 compared to cash used by operating activities of approximately $126,000 during the six-month period ended March 31, 2010. The net decrease in cash used was due to a reduction of prepaid expenses, decreasing inventory balances and an increase in payables during the current year period.
Approximately $76,000 of cash was provided from investing activities during the six-month period ended March 31, 2011 as compared to approximately $142,000 of cash provided from investing activities during the six-month period ended March 31, 2010. The cash provided during the current six-month period ended March 31, 2011 was generated by the payments received against the Note and was offset by purchases of property and equipment of approximately $31,000 during the current quarter. The cash provided from investing activities during the six-month period ended March 31, 2010 was generated from payments received against the Note and was offset by purchases of property and equipment of approximately $3,000 during that quarter. Cash received as proceeds from the sale of Company assets compared to the same period last year declined approximately $37,000.
In accordance with the terms on the Note with the purchaser of Raichem, the Company received payments in the amount of $105,000, for each of the six-month periods ended March 31, 2011 and 2010.
Net cash provided by financing activities during the six-month period ended March 31, 2011 was approximately $106,000 compared to cash used in financing activities of approximately $29,000 in the six-month period ended March 31, 2010. The Company borrowed additional funds on the line of credit to fund operations during the current six-month period. During the six-month period ended March 31, 2010 the Company paid $2,000 against the line of credit and paid $27,057 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, 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 March 31, 2011. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of March 31, 2011 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 continues 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.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibits
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Exhibit 31.1
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Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
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Exhibit 31.2
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Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
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Exhibit 32.1
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Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
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Exhibit 32.2
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Certification of Principal Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
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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.
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Hemagen Diagnostics, Inc.
(Registrant)
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Date: May 16, 2011
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By:
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/s/ William P. Hales
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William P. Hales
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President and Chief Executive Officer
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(Principal Executive Officer)
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Date: May 16, 2011
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By:
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/s/ Catherine M. Davidson
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Catherine M. Davidson
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(Principal Financial Officer)
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15
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