Hemagen Diagnostics, Inc. is a biotechnology company that develops, manufactures, and markets approximately 68 Food and Drug Administration ("FDA") cleared proprietary medical diagnostic test kits and components. There are two different product lines, the Virgo® line and the Analyst® line. The Virgo® product line consist of various diagnostic test kits that are 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 Benchtop Clinical
C
hemistry Analyzer System, including consumables that are used to measure important constituents in human and animal blood. The Company was incorporated in Delaware in 1985 and became a public company in 1993. Hemagen’s principal offices are 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 our web site free of charge as well as from the Securities and Exchange Commission website at www.sec.gov.
In September 1998, the Company acquired the Analyst
â
Benchtop Clinical Chemistry System, which was originally designed by Dupont, from Dade Behring, Inc. The Analyst® is a proprietary bench top clinical chemistry instrument and reagent system. The Analyst® instrument is used to test general chemistry profiles for both the human and veterinary markets using a proprietary consumable rotor that is manufactured by Hemagen at its Columbia, Maryland facility. The Analyst® is cleared by the FDA for marketing in the United States to physician office laboratories. In December 2002, Hemagen also acquired another veterinary chemistry analyzer system, the Endocheck. Today, Hemagen estimates that its customer base for the Analyst® is approximately 90% veterinary practices and 10% physician office laboratory practices.
In 1995, Hemagen completed the acquisition of a comprehensive line of diagnostic test kits utilizing immunofluorescence technology (“IFA products”) from Schiaparelli Biosystems, Inc. The IFA products and Hemagen’s comprehensive line of proprietary diagnostic test kits based on enzyme-linked immunosorbence assay technologies (“ELISA” or “EIA”) and hemagglutination technology (“HA”) form the Virgo
â
product line. These products are used to test for autoimmune and infectious diseases and are manufactured for manual use or for use on automated instrument platforms.
The Virgo® product-line is marketed directly to reference laboratories, hospitals, and universities in the United States, among others and internationally. There are over 30 distributors that market the Virgo
â
product line. Hemagen also markets the Virgo
â
product line in South America through its wholly-owned subsidiary Hemagen Diagnosticos Comercio, Importacao Exportacao, Ltd. (HDC), a Brazilian limited liability company.
Recent Developments
During fiscal 2012 management continued to work toward achieving its goal of increasing shareholder value and achieving sustained profitability. Some of the important steps taken toward achieving those goals were as follows:
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Hemagen has engaged several PhD level personnel to improve and bolster its manufacturing and product development capabilities.
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The Company looked for opportunities to consolidate operations into more efficient space, and continues to seek out and implement cost reductions.
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Hemagen completed improvements to certain of its autoimmune IFA product offerings.
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The Company is working on bringing various processes in house that were previously outsourced.
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Hemagen is evaluating several new technology innovations that it currently negotiating.
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Technology
Analyst Instrument System
The Analyst® is a bench-top centrifugal clinical chemistry analyzer. The Analyst® utilizes a consumable rotor that contains dry prepackaged reagents. The Analyst® spins the rotor, mixing the patient sample with the dry reagents, producing a result in approximately ten minutes. Hemagen currently markets four types of rotors providing a variety of clinical chemistry tests, which are 510(k) cleared by the FDA for the human medical market and two types of rotors that are exclusively sold for the veterinary market. The Analyst® instrument has been designated by the Clinical Laboratory Improvements Amendments (CLIA) as a moderately complex system, and is therefore suitable for both the physician and veterinary office laboratories. Hemagen’s blood chemistry and Analyst® system assays are used to aid in the monitoring and measurement of health profiles, such as cholesterol, blood urea nitrogen, triglycerides, glucose and uric acid.
In addition, Hemagen has entered into agreements to distribute a hematology analyzer and an electrolyte and blood gas analyzer to complement the Analyst®.
Autoimmune and Infectious Disease Assays
Detection of the presence and concentration of certain antibodies in human blood can assist physicians in the diagnosis of certain diseases. Hemagen's assays are
in vitro
(outside of a patient's body) diagnostic tests that are used to measure specific substances, antibodies, in blood or other body fluids. Our assays recognize specific antibodies that bind to our assay platforms in the proper environment, making it detectable either by the naked eye, or with the aid of a laboratory technique, which amplifies the reaction so that it is rendered visible. Hemagen's hemagglutination, ELISA and immunofluorescence assays are three examples of such techniques.
Immunofluorescence
Hemagen's immunofluorescence tests are manufactured using several procedures with the most common being mammalian cells grown on microscope slides treated with disease-producing organisms (viral or bacterial). Serum from a patient is placed in contact with the infected cells on the slides. If a patient has antibodies to the organism causing the disease, the antibodies will bind to the organism. A chemical reagent is added to the slide that binds to the organism and the antibody, if present and detectable. When the slide is illuminated with light at a specific wavelength in a fluorescent microscope, the chemically-treated cells will appear with a specific fluorescent pattern, indicating a positive test result. If the patient does not have detectable quantities of the appropriate antibody, no fluorescence will appear producing a negative test result.
Enzyme Linked Immunosorbent Assays
ELISA or EIA tests employ small plastic wells coated with particular antigens. The test process involves introducing the patient's serum into the well to allow a reaction to occur. If the antibody being tested for is present, it will bind to the antigens on the inner surface of the well. After the wells are rinsed, the specifically bound antibody will remain while any non-specific antibodies will be washed away. To detect the quantity of the specific antibody, other compounds (conjugate, substrate) are added which will cause a color change in the liquid, the intensity of which is proportionate to the quantity of the specific antibody found. If no color is noted, this indicates that the patient's serum did not contain detectable quantities of the specific antibody.
Hemagen has developed an application for its ELISA technology to detect cardiovascular and inflammatory risk factors (apolipoproteins) and inflammatory signals (acute phase reactants), the latter of which are present in a patient's blood prior to the clinical manifestation of infection or inflammation. If successful, these technologies could lead to earlier detection and prevention of cardiovascular disease, the imminent rejection of transplanted organs or the onset of infections. Such earlier detection could enable physicians to better plan appropriate treatment of patients with these conditions. Hemagen currently markets two test kits to detect inflammatory signals.
Hemagglutination
Hemagglutination is the agglutination or "clumping" of red blood cells (RBCs). Many substances, including
certain antibodies, when placed in contact with RBCs, will cause agglutination. Under the appropriate conditions, human RBCs may be modified or sensitized by binding specific foreign antigens to their surface. These sensitized RBCs will bind to the specific antibody and this will cause agglutination of these cells. The presence of certain antibodies in an individual’s serum (blood from which clotted RBCs have been removed) can indicate certain diseases. By sensitizing RBCs with an antigen that specifically reacts with a particular antibody, the simple visible observation of the agglutination reaction will indicate the presence of the disease-produced antibody. The use of RBCs instead of other particles can allow for simple visual observation of the agglutination reaction in the proper environment, and reduces the non-specific reactions seen in artificial systems such as those that utilize latex particles.
To perform Hemagen's hemagglutination test, a technician combines Hemagen's sensitized RBCs with a patient's serum in a small well with a V-shaped bottom according to directions included with Hemagen's test kits. If no agglutination takes place, the RBCs will settle to the bottom of the well, resulting in a clearly visible red dot which indicates that the test is negative. In contrast, if the particular antibody is present in the patient's blood, the RBCs will agglutinate, which prevents the RBCs from settling to the bottom of the well. Instead of the small red dot, the substance will appear a diffuse red, which indicates a positive reaction.
Current Products
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Analyst
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System Products
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Hemagen currently markets four FDA 510(k) cleared rotor types for use on the Analyst® clinical chemistry analyzer, two general chemistry rotors, a glucose test and a lipid screen test. In addition, Hemagen sells four rotors specifically designed for the veterinary marketplace: VET-16, VetFlex7, and VetFlex rotors.
Immunofluorescence or “IFA” Products
Hemagen's immunofluorescence products consist primarily of diagnostic assays for infectious diseases and several products for autoimmune diseases. Immunofluorescence kits are used as primary or confirmatory tests in many large clinical laboratories worldwide. Hemagen currently sells 15 kits in the immunofluorescence format.
Hemagen's immunofluorescence products are used to aid in the diagnosis of the following diseases:
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Cytomegalovirus
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Herpes simplex
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SLE (Lupus)
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German Measles
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Connective Tissue Diseases
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Chicken Pox
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Primary Bilary Cirrhosis
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Epstein-Barr virus (Mononucleosis)
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Toxoplasmosis
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Chlamydia
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Syphilis
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Measles
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RSV
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Mumps
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Autoimmune Diseases
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ELISA Assays
Hemagen develops, manufactures and markets ELISA test kits for the detection of disease. Along with the immunofluorescence and hemagglutination assays, Hemagen’s ELISA kits test for specific antibodies. The quantitative or semi-quantitative test results give useful information about the stage and prevalence of a particular disease. ELISA tests are widely used by large laboratories, due to their ready adaptability to automation and high volume testing. Hemagen’s autoimmune and infectious disease ELISA kits are used in the diagnosis of the following diseases:
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Systemic Lupus Erythematous (Lupus)
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Rheumatoid Arthritis
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Scleroderma
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Sjögren's Syndrome
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Glomerulonephritis
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Mixed Connective Tissue Disease
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Polymyositis
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Dermatomyositis
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Primary Biliary Cirrhosis
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Wegener’s Granulomatosis
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Systemic Vasculitides
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Anti-Phospholipid Syndrome
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Venous and Arterial Thromboses
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Thrombocytopenia
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Recurrent Abortion
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Toxoplasmosis
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Rubella (German Measles)
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Cytomegalovirus Infections
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Herpes simplex
1 & 2 Infections
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Chagas Disease
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Varicella Zoster Infections (Chicken Pox & Shingles)
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Hemagen has also developed specialized assays for quantitative analysis of the acute phase markers, specifically, C-Reactive Protein and Serum Amyloid A. These are believed to be important in the detection and prediction of inflammatory events associated with several diseases, including Systemic Lupus, Rheumatoid Arthritis, and Myocardial Infarction.
Hemagen also offers ELISA & Hemagglutination screening assays, capable of verifying the presence of as many as six analytes in a single test. This is a useful tool in a patient’s initial assessment. For example, if an individual’s autoimmune screen 6 test is positive, individual marker kits are then used to differentially diagnose the particular rheumatoid disease. To better serve customers’ needs, most of the reagents for these kits are offered in both lyophilized and liquid-stable formats.
Hemagglutination Assays
Hemagen's hemagglutination assays are based on Hemagen's proprietary technique to lyophilize, or "freeze dry," the RBCs which form the central component of a hemagglutination assay. Hemagen's proprietary lyophilization technique for the preservation of RBCs permits the production of standardized, easy-to-use and accurate hemagglutination tests with an extended shelf-life, most of which were previously unavailable using hemagglutination assays. The shelf-life of the lyophilized RBCs before reconstitution may be up to 48 months. A technician reconstitutes the powdered cells in a water-based solution prior to introducing to the patient's serum.
Each hemagglutination test also requires a specific formula to sensitize the RBCs prior to lyophilization such that they will react to a specific antibody. For each of its tests, Hemagen uses a proprietary formula to combine antigens and other reagents with RBCs in a manner that allows for standard, sensitive and specific agglutination reactions. Results from Hemagen's test kits are generally available within two hours. Hemagen's hemagglutination test kits aid in the diagnosis of the following diseases:
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SLE (Lupus)
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Dermatomyositis
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Mixed Connective Tissue Disease
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Polymyositis
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Sjögren's Syndrome
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Rheumatoid Arthritis
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Scleroderma (Systemic Sclerosis)
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Chagas' Disease
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Distribution and Marketing
General
In the United States, Hemagen sells its products directly and through distributors to clinical laboratories, hospitals, veterinary offices and research organizations, among other places. Internationally, Hemagen sells its products primarily through distributors and its wholly-owned subsidiary in Brazil. Hemagen grants both exclusive and non-exclusive distributorships, which generally cover limited geographic areas and specific test kits. Hemagen has relationships with over 30 distributors in various countries worldwide.
Hemagen markets its Virgo® product line in South America through its wholly owned subsidiary, Hemagen Diagnosticos Comerico, Importacao e Exportacao, Ltd. (“HDC”) in Sao Paulo, Brazil. Hemagen also engages numerous distributors throughout South America. HDC maintains a fully staffed sales, marketing and distribution force, warehouse and administrative office. In fiscal years 2012 and 2011, Hemagen derived product sales through HDC of approximately $1,533,000 and $2,390,000 respectively, which represents 38% and 46% of Hemagen’s total sales, respectively.
Products Under Development
Hemagen spent approximately $45,000 and $5,000 on research and development for the fiscal years ended September 30, 2012, and 2011, respectively.
The Company’s research and development efforts are currently focused on:
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Developing and enhancing its IFA kits.
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Complimenting the Analyst® product offering, including evaluating new products.
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Manufacturing and Sources of Supply
Hemagen manufactures its ELISA test kits, hemagglutination test kits, immunofluorescence test kits and Analyst® and Endochek consumables at its Columbia, Maryland facility. The Analyst® and the Endochek instruments are manufactured by third parties for Hemagen. Hemagen purchases many of the antigens and other reagents used in its kits from outside vendors. Certain of these antigens and reagents are from single suppliers. The Company attempts to mitigate such risk from these single suppliers by maintaining an adequate supply of inventory and/or backup suppliers. If the products purchased from these single sources become unavailable there can be no assurances that the Company will be able to substitute a new supplier in a timely manner. As a result, limits in the availability of such products or our failure to maintain relationships with such suppliers could have a material adverse effect on our business, financial condition, and results of operations. Certain reagents used in Hemagen's test kits are manufactured at Hemagen's facilities. Hemagen uses lyophilization equipment to preserve sensitized red blood cells for its hemagglutination test kits. All of Hemagen's products are manufactured under the Quality System Regulation as defined by the FDA.
Most components used in Hemagen’s products are available from multiple sources. Certain raw materials that are used in the Analyst® rotors are manufactured for the Company pursuant to manufacturing agreements with other manufacturing companies that have been vendors for the Company for many years. The Company continues to consider other potential vendors, including itself, or alternative vendors for manufacturing although there can be no assurances that we will be able to develop any new suppliers for these raw materials used in the Analyst® product line.
Government Regulation
Hemagen's manufacturing, distribution and marketing of diagnostic test kits is subject to a number of both domestic and international regulatory controls. In the United States, Hemagen’s production and marketing activities are subject to regulation by the U.S Food and Drug Administration (“FDA”), under the authority of the Federal Food, Drug, and Cosmetic Act, as amended.
These regulations require that Hemagen must formally notify the FDA of its intentions to market
in vitro
diagnostic devices through a regulatory submission process, either the 510(k) process or the Pre-market Approval (PMA) process. When a 510(k) process is used, Hemagen is required to demonstrate that the product is “substantially equivalent” to another product in commercial distribution. Under the 510(k) process, Hemagen cannot proceed with sales of its diagnostic products in the United States until it receives clearance from the FDA in the form of a substantial equivalency letter. Currently, the majority of products that are reviewed by the 510(k) process are cleared within 90 days. In certain cases, specifically for Class III devices, Hemagen must follow the PMA process which is lengthier and more burdensome.
Hemagen is registered with the FDA as a device manufacturer and to disclose its devices. Accordingly, Hemagen is subject to inspection on a routine basis for compliance with the FDA's Quality System Regulations. These regulations require that Hemagen manufacture its products and maintain its documents in a prescribed manner with respect to design, manufacturing, testing, process control and distribution activities. In addition, Hemagen is required to comply with various FDA requirements for labeling, pursuant to the applicable regulations. The most recent inspections by the FDA were in October 2010 for the Columbia, MD facility. The results of those inspections can be reviewed at
www.fda.gov
., the content of which is not incorporated herein. Finally, the FDA prohibits an approved device from being marketed for unapproved applications. Hemagen believes it is in compliance with all such regulations.
In January 2004, the Company received CE certification thereby allowing the Company to sell certain of its registered products in the European Community.
In October 2009, the Company received ISO 13485 certification in order to market additional products in the
European Community and Canada. ISO 13485 is a quality system standard specifically designed for medical device companies and is the most commonly chosen path for medical device companies to meet the quality system requirements in Europe, Canada, Japan, Australia and other countries In October 2010 Hemagen was re-audited for the ISO and was recertified for 2011. The Company is currently in the process of re-scheduling the audit for some time in January 2013.
Competition
The clinical diagnostic industry is highly competitive. There are many companies, both public and private, engaged in diagnostics-related sales, including a number of well-known pharmaceutical and chemical companies. Competition is based primarily on product reliability, customer service and price. Many of these companies have substantially greater capital resources and marketing and business organizations that are substantially greater in size than Hemagen. Many of these companies have also been working on immunodiagnostic reagents and products, including some products believed to be similar to those currently marketed or under development by Hemagen. Hemagen believes that its primary competitors in the market include Abaxis Inc., Bion, Bio-Rad Laboratories, Corgenix Medical Corporation, Diamedix Corporation, Heska Corporation, IDEXX Laboratories, Inc., Immco Diagnostics, INOVA Diagnostics, Inc., and Trinity Biotech PLC, among others. Hemagen expects competition within this industry to intensify.
Product Liability
The testing, marketing and sale of clinical diagnostic products entail an inherent risk of allegations of product liability, and there can be no assurance that product liability claims will not be asserted against Hemagen. Hemagen may incur product liability due to product failure or improper use of products by the user. Inaccurate detection may result in the failure to administer necessary therapeutic drugs or administration of unnecessary and potentially toxic drugs. Even with proper use of a product, there may be specific instances in which the results obtained from Hemagen's test kits could lead a physician to predict the inappropriate therapy for a particular patient. Hemagen maintains product liability insurance in the amount of up to $2,000,000 per incident and in the aggregate which, based on Hemagen's experience and industry practice, Hemagen believes to be adequate for its present operations. No assurance can be given that Hemagen's insurance coverage is sufficient to fully insure against claims which may be made against Hemagen.
Patents and Proprietary Rights
Hemagen protects its technology primarily as trade secrets rather than relying on patents, either because patent protection is not possible or, in management's opinion, would be less effective than maintaining secrecy. In addition, Hemagen relies upon confidentiality agreements with its employees. To the extent that it relies on confidentiality agreements and trade secret protection, there can be no assurance that Hemagen's efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently. In the future, Hemagen may apply for patent protection for certain of its technologies if management believes such protection would be beneficial to Hemagen. The protection afforded by patents depends upon a variety of factors which may severely limit the value of the patent protection, particularly in foreign countries, and no assurance can be given that patents, if granted, will provide meaningful protection for Hemagen's technology.
Employees
As of September 30, 2012, Hemagen had fifteen full-time employees and three employees working on a contractual basis. Ten employees are in sales, marketing, general and administrative activities and eight (including contractual personnel) are involved in production activities.
None of Hemagen’s employees are represented by a labor organization and Hemagen is not a party to any collective bargaining agreement. Hemagen has never experienced any strike or work stoppage and considers its relationship with its employees to be good. However, Hemagen can give no assurances that the Company will not experience such strikes or work stoppages in the future, either of which could have a material effect on the Company's results of operations
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Not applicable.
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Unresolved Staff Comments.
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Not applicable.
Hemagen leases its principal administrative office, laboratory and production facility in a 20,000 square foot building facility in Columbia, Maryland. The current lease expired on June 30, 2012 and the Company has been occupying on a month to month basis. The Company expects to enter into a new three year lease commencing the beginning of the year and running through December 2015. The Company expects to reduce its space to approximately 15,000 square feet. Hemagen expects to pay approximately $170,000 (assuming 20,000 square feet leased through December 2012 and a subsequent reduction to 15,000 square feet) per year in rent for the upcoming fiscal year.
Hemagen's subsidiary, Hemagen Diagnosticos Comercio, Importacao e Exportacao, Ltd, leases office space in Sao Paulo, Brazil. The lease runs through April 6, 2015. This subsidiary paid approximately $40,000 during fiscal 2012 in rent and expects to pay approximately $56,000 in fiscal year 2013. Management believes that all of the properties are adequately insured.
Not applicable.
Not applicable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ending September 30, 2012 and 2011
Hemagen Diagnostics, Inc. (the “Company”), a Delaware company, is a biotechnology company that develops, manufactures, and markets more than 68 FDA-cleared proprietary medical diagnostic test kits. Hemagen has two different product lines. The
Virgo®
product line consists of diagnostic test kits that are used to aid in the diagnosis of certain autoimmune and infectious diseases, using ELISA, Immunofluorescence, and hemagglutination technology. The
Analyst
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product line is an FDA-cleared bench top clinical
chemistry analyzer system, including consumables, that is used to measure important constituents in human and animal blood. In the United States, the Company sells its products through distributors and directly to physicians, veterinarians, clinical laboratories and blood banks and on a private-label basis through multinational distributors. Internationally, the Company sells its products primarily through distributors. The Company was incorporated in 1985 and became a public company in 1993.
NOTE 2 – FINANCIAL CONDITION
At September 30, 2012, Hemagen had $66,287 of unrestricted cash, working capital of $145,059 and a current ratio of 1.07 to 1.0. Hemagen currently has a revolving senior secured line of credit with TiFunding, a related party, for the purpose of financing working capital needs as required. The line of credit currently provides for borrowings up to $1,500,000 at an annual interest rate of 9%. As of September 30, 2012, the outstanding balance on the line was $976,868. Hemagen believes that cash flow from operations and cash on hand at September 30, 2012 will be sufficient to finance its operations for fiscal 2013. The Company’s ability to borrow on the line is based on a borrowing base calculation dependent on certain receivables and inventory. The line of credit’s maturity has been extended and currently expires October 1, 2013. The line of credit was also increased from $1,000,000 to $1,500,000 as of September 30, 2012 and is renewable annually thereafter. The Company intends to renew the line when it expires. However, Hemagen can give no assurances that it will have sufficient cash to repay the line of credit if it is not renewed or to finance its operations. Hemagen has no off-balance sheet transactions.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Hemagen Diagnostics Commercio, Importaco & Exporataco, Ltd. ("HDC"). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
The financial position and results of operations of HDC are measured using HDC's local currency, the Brazilian Real, as the functional currency. Revenues and expenses of HDC have been translated into U.S. dollars at average exchange rates prevailing during the year. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders' equity.
Accounts Receivable
A majority of the Company’s accounts receivable are due from distributors (domestic and international), hospitals, universities, and physician and veterinary offices and other entities in the medical field. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts with outstanding balances for longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are posted against the allowance for doubtful accounts. The balance of the allowance for doubtful accounts was $53,846 and $67,286 on September 30, 2012 and 2011, respectively. The Company does not accrue interest on accounts receivable past due.
Inventories
Inventories are stated at the lower of standard cost, determined on the first-in, first-out basis, or market. Inventory reserves are established for obsolescence based on expiration dating of perishable products and excess levels of inventory on hand. The Company had $564,284 and $541,158 of inventory reserves as of September 30, 2012 and 2011, respectively.
Long-lived Assets
The Company reviews the carrying values of its long-lived assets for possible impairment annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the review indicates that long-lived assets are not recoverable (i.e., the carrying amount is less than the future projected undiscounted cash flows), the carrying amount would be reduced to fair value and a charge to income would be recorded. Hemagen did not have any long-lived assets whose balances needed to be reduced.
Property and Equipment
Property and equipment is stated at net book value. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets, which range from 3 to 10 years. Expenditures for repairs and maintenance are expensed as incurred.
Other Assets
Other assets, net at September 30, 2012 and 2011 consists of product registration certificates that are being amortized over their 5 year life and security deposits relating to the facilities that are being leased.
Income Taxes
The Company follows the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amount and the tax basis of assets and liabilities at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. The provision for or benefit from income taxes is allocated based upon each subsidiary’s individual operations.
Management considers the likelihood of changes by taxing authorities in its filed income tax returns and recognizes a liability for or discloses potential changes that management believes are more likely than not to occur upon examination by tax authorities. Management has not identified any uncertain tax positions in filed income tax returns that require recognition or disclosure in the accompanying financial statements. The Company’s income tax returns for the past three years are subject to examination by tax authorities, and may change upon examination.
Revenue Recognition
Revenues from the sale of products are recognized when 1) product is shipped, 2) all contractual obligations have been satisfied, and 3) the collection of the resulting receivable is reasonably assured.
Revenues from product service contracts, which are based on their relative fair value, are recognized ratably over the term of the contract. Losses are provided for at the time that management determines that contract costs will exceed related revenues. The portion of product service contracts not complete at the balance sheet date is included in deferred revenue.
Stock- Based Compensation
The Company applies FASB ASC 718-10,
Share-Based Payment
, which requires companies to measure the cost of share-based awards based on the grant-date fair value of the award using an option pricing model and to recognize that cost over the period during which an employee is required to provide service in exchange for the award. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options granted and recognizes the compensation cost of share-based awards in its statement of operations using the straight-line method over the vesting period of the award, net of estimated forfeitures.
The use of the Black-Scholes option pricing model to estimate the fair value of share-based awards requires that the Company make certain assumptions and estimates for required inputs to the model, including (i) the fair value of the Company’s common stock at each grant date, (ii) the expected volatility of the Company’s common stock value, (iii) the expected life of the share-based award, (iv) the risk-free interest rate, and (v) the dividend yield.
Research and Development Costs
All costs incurred to research, design and develop products are considered research and development costs and are charged to expense as incurred.
Fair Value of Financial Instruments
Financial instruments include cash, customer receivables, accounts payable, certain other accrued liabilities and long-term debt. The carrying value of long-term debt approximates its fair value based on the current rate offered to the Company for debt of similar remaining maturities. The carrying values of all other financial instruments also approximate their fair values.
Advertising Expenses
Costs of advertising, which also include promotional expenses, are expensed as incurred. Advertising expenses for fiscal 2012 and 2011 were approximately $9,137 and $12,201, respectively.
Shipping and Handling
The cost of shipping products to customers is included in cost of goods sold. Amounts billed to a customer in a sale transaction related to shipping and handling are classified as revenue.
Recent Accounting Pronouncements
In September 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU allows entities to first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If this is the case, the entity is required to perform a more detailed two-step goodwill impairment test that is used to identify potential goodwill impairments and to measure the amount of goodwill impairment losses, if any, to be recognized. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company expects to adopt ASU 2011-08 in its first quarter of fiscal 2013 and does not expect it to have a material impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income, as amended, which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company expects to adopt ASU 2011-05 in its first quarter of fiscal 2013 and intends to present other comprehensive income in a single continuous statement of comprehensive income.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-05. ASU 2011-12 defers only those changes in ASU2011-05 that relate to the presentation of reclassification adjustments. The Board has reinstated the requirements for the presentation of reclassification out of accumulated other comprehensive income that were in place before the issuance of Update 2011-05. The adoption of the amendments of ASU 2011-12 are not expected to have a material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends ASC 820, Fair Value Measurement. ASU 2011-04 does not extend the use of fair value accounting but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRSs. ASU 2011-04 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU 2011-04 clarifies the FASB's intent about the application of existing fair value measurements. The amendments are effective during interim and annual periods beginning after December 15, 2011. The Company expects to adopt ASU 2011-04 in its first quarter of fiscal 2013 and does not expect the adoption to have a material impact on the Company’s consolidated financial statements.
NOTE 4 – RELATED PARTY TRANSACTIONS
William P. Hales, the Chairman of the Board of Directors and President and Chief Executive Officer of the Company, owns $884,450 in aggregate principal amount of the Company’s senior subordinated secured convertible notes due September 30, 2014. Refer to Note 9 for a description of the senior notes.
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 senior secured 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. Refer to Note 8 for a description of this line of credit.
NOTE 5 - INVENTORIES
|
Inventories at September 30, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,086,129
|
|
|
$
|
1,039,604
|
|
|
Work-in-process
|
|
|
63,121
|
|
|
|
48,049
|
|
|
Finished goods
|
|
|
778,086
|
|
|
|
914,285
|
|
|
|
|
|
1,927,336
|
|
|
|
2,001,938
|
|
|
Less reserves (obsolesce and dating),
|
|
|
(564,284
|
)
|
|
|
(541,158
|
)
|
|
Inventories, net
|
|
$
|
1,363,052
|
|
|
$
|
1,460,780
|
|
A large portion of the reserve is for Analyst® equipment and parts and discontinued VIRGO® inventory items that are no longer being used but have not yet been disposed.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, consists of the following:
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
6,688,546
|
|
|
$
|
6,723,107
|
|
|
Leasehold improvements
|
|
|
102,882
|
|
|
|
95,093
|
|
|
|
|
|
6,791,428
|
|
|
|
6,818,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(6,509,120
|
)
|
|
|
(6,431,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
282,307
|
|
|
$
|
386,520
|
|
|
Depreciation and amortization expense relating to property and equipment was $164,250 and $185,814 for the years ended September 30, 2012 and 2011, respectively. Of these amounts $138,430 and $153,643 were included in the SG&A for fiscal 2012 and 2011, respectively and $25,820 and $32,171 were included in costs of sales for fiscal years 2012 and 2011, respectively.
|
|
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities include the following at September 30:
|
|
|
2012
|
|
|
2011
|
|
|
Accounts payable – trade
|
|
$
|
368,775
|
|
|
$
|
415,221
|
|
|
Accrued professional fees
|
|
|
32,300
|
|
|
|
20,150
|
|
|
Accrued vacation
|
|
|
85,178
|
|
|
|
81,883
|
|
|
Accrued taxes
|
|
|
64,959
|
|
|
|
64,636
|
|
|
Accrued interest
|
|
|
198,949
|
|
|
|
36,511
|
|
|
Accrued other
|
|
|
201,679
|
|
|
|
200,474
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
951,840
|
|
|
$
|
818,875
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 - 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 senior secured 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, and increased the line of credit to $1,000,000 dollars. On October 1, 2012, the TiFunding increased the line of credit to $1,500,000. Interest expense related to this line of credit for the fiscal years ended 2012 and 2011 was $78,748 and $35,335, respectively.
The facility’s term maturity has been renewed and is now due on October 1, 2013. The line is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility not to exceed $1,500,000 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 $1,000,000 in 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. The expense related to the warrants is being amortized over the life of the warrants and is included as interest expense in the accompanying financial statements. As of September 30, 2012, the outstanding balance on the facility was $976,868. The Company is in compliance with all of the covenants in the facility as of the date of this report.
NOTE 9 – 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 $.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 they are subordinated to the following (i) a senior secured 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 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.
On July 6, 2012, the Company requested that the holders of the Modified Notes forego the right to receive interest payments for the quarters ending June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013. Under the terms of the Modified Notes, the Company’s failure to make such payments may constitute events of default which may result in the acceleration of the Company’s obligation to repay the $4,049,858 principal amount with accrued interest and penalties. As of September 30, 2012, holders of $3,352,868 (83%) principal amount of Modified Notes had agreed in writing to forgo the rights to receive the above-referenced interest payments. The remaining Noteholders have not responded. The Company will continue to seek such agreement from the other holders. The Company continues to accrue interest on these Notes. As of September 30, 2012, related accrued interest amounted to $162,438. There was no accrued interest on the Notes as of September 30, 2011.
NOTE 10 - STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue up to 1,000,000 shares of preferred stock, $.01 par value per share. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors and may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. No shares of preferred stock are issued or outstanding at September 30, 2012 or 2011.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments totaling $78,547 of loss and $20,587 of loss at September 30, 2012 and 2011, respectively.
Stock Options
On February 27, 2001, the shareholders voted to approve the 2001 Stock Option Plan. The 2001 Stock Option Plan provides for the grant of incentive and nonqualified stock options for the purchase of an aggregate of 1,000,000 shares of the Company's common stock by employees, directors and consultants of the Company. The 2001 Stock Option Plan expired in February of 2011. No additional options will be issued under this plan.
On April 25, 2007, the shareholders voted to approve the 2007 Stock Incentive Plan. Under this plan, the Board has reserved a maximum of 1,500,000 shares for issuance pursuant to stock options, stock appreciation rights, restricted stock awards, restricted stock units and stock awards.
On April 30, 2009, the shareholders voted to amend the 2007 Stock Incentive Plan to increase the number of shares authorized to be issued under the plan from 1,500,000 to 3,000,000.
The Compensation Committee of the Board of Directors is responsible for the administration of both Plans. The Compensation Committee determines the term of each option, the number of shares for which each option is
granted and the rate at which each option is exercisable.
The Company recorded in selling, general and administrative expenses, $47,326 and $45,999 of stock compensation expense for the years ended September 30, 2012 and 2011, respectively.
The following are the assumptions made in computing the fair value of the share-based awards:
|
|
|
2012
|
|
|
2011
|
|
|
Dividend yield
|
|
|
--
|
|
|
|
--
|
|
|
Expected volatility
|
|
|
131.48% - 134.20
|
%
|
|
|
129.73% - 137.95
|
%
|
|
Risk-free interest rate
|
|
|
1.52% - 1.97
|
%
|
|
|
1.47% - 3.48
|
%
|
|
Expected life in years
|
|
|
10
|
|
|
|
5 - 10
|
|
Expected volatilities are based on the historical volatility of the Company’s common stock. The expected term of the options granted represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination within the evaluation model. The risk-free rate for periods within the contractual life of the option is based on the U.S Treasury yield curve in effect at the time of the grant.
A summary of the stock option activity for the year ended September 30, 2012 and related information is shown below:
|
|
|
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-
Average
Life in years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 1, 2010
|
|
|
2,932,208
|
|
|
$
|
0.15
|
|
|
|
7.56
|
|
|
Granted
|
|
|
230,000
|
|
|
|
0.10
|
|
|
|
5.26
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled or expired
|
|
|
(20,000
|
)
|
|
$
|
0.17
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2011
|
|
|
3,142,208
|
|
|
$
|
0.14
|
|
|
|
7.43
|
|
|
Granted
|
|
|
54,000
|
|
|
$
|
0.07
|
|
|
|
9.49
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled or expired
|
|
|
(105,000
|
)
|
|
$
|
0.32
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2012
|
|
|
3,091,208
|
|
|
$
|
0.14
|
|
|
|
6.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2012
|
|
|
2,344,542
|
|
|
$
|
0.15
|
|
|
|
6.51
|
|
|
Exercise prices for options outstanding as of September 30, 2012 ranged from $0.04 to $0.70 as follows:
|
|
|
Options Outstanding
|
|
|
Range of Exercise Prices
|
|
|
Number Outstanding at September 30, 2012
|
|
|
Weighted-Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.04 – 0.14
|
|
|
|
2,279,000
|
|
|
|
7.3
|
|
|
|
0.11
|
|
|
|
0.15 – 0.24
|
|
|
|
682,208
|
|
|
|
4.9
|
|
|
|
0.19
|
|
|
|
0.25 – 0.34
|
|
|
|
55,000
|
|
|
|
2.3
|
|
|
|
0.28
|
|
|
|
0.35 – 0.59
|
|
|
|
50,000
|
|
|
|
5.6
|
|
|
|
0.35
|
|
|
|
0.60 – 0.70
|
|
|
|
25,000
|
|
|
|
1.4
|
|
|
|
0.70
|
|
|
|
0.04 – 0.70
|
|
|
|
3,091,208
|
|
|
|
6.7
|
|
|
|
0.14
|
|
The weighted-average grant date fair value of options granted during 2012 and 2011 was $1,617 and $10,158, respectively.
Assuming that no additional share-based payments are granted after September 30, 2012, $34,468 of compensation expense will be recognized in the consolidated statement of operations over a weighted-average period of five years. The options outstanding and exercisable as of September 30, 2012 have no intrinsic value.
Warrants
On February 7, 2011, TiFunding LLC, a Delaware limited liability company owned by William P. Hales , the Company’s Chief Executive Office and President, and his father purchased the senior secured credit line facility from Bay Bank, FSB for approximately $360,000. In connection with the facility, the Company issued to TiFunding warrants to purchase $1,000,000 in 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. The expense related to these warrants is being amortized over the life of the warrants and is included as interest expense in the accompanying financial statements.
The following table summarizes the Company’s warrant activity for the twelve months ended September 30, 2012:
|
|
|
Warrants
|
|
|
Average Weighted Exercise Price
|
|
|
Weighted Average Life (in years)
|
|
|
Warrants Outstanding – October 1, 2010
|
|
|
--
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,000,000
|
|
|
|
.20
|
|
|
|
5.00
|
|
|
Exercised
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding – September 30, 2011
|
|
|
5,000,000
|
|
|
|
.20
|
|
|
|
4.36
|
|
|
Granted
|
|
|
--
|
|
|
|
|
|
|
$
|
--
|
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited, cancelled or expired
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Warrants outstanding – September 30, 2012
|
|
|
5,000,000
|
|
|
$
|
.20
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable – September 30, 2012
|
|
|
5,000,000
|
|
|
$
|
.20
|
|
|
|
3.36
|
|
As of September 30, 2012 there was $159,394 of unamortized interest expense associated with these warrants. This expense will be fully amortized within five years.
Stockholder Rights Agreement
In April 2010, the Company's Board of Directors approved a Stockholder Rights Agreement (the "Agreement"). Under the Agreement the Company declared a dividend of one common stock purchase right (a "Right") for each share of the Company's outstanding common stock as of April 29, 2010. Each Right entitles the holder to purchase from the Company one share of Common Stock of the Company at a cash exercise price of $0.15 per share (the "Exercise Price"), subject to adjustment, under certain conditions provided in the Agreement.
The Rights become exercisable only if a person or group, as defined in Section 13(d)(3) of Securities Exchange Act of 1934, as amended, acquires beneficial ownership of 10 percent or more of the Company's outstanding common stock or announces a tender offer that would result in beneficial ownership of 10 percent or more of the Company's outstanding common stock.
William P. Hales, the Company's Chief Executive Officer, who is a stockholder and a debt holder of the Company, is exempt under the Agreement. The Rights, which are scheduled to Expire on April 29, 2020, are redeemable in whole at the Company's option at $0.0000001 per Right at the times and under the circumstances set forth in the Agreement. No Rights have yet been exercised or have redeemed under the Agreement.
NOTE 11 - INCOME TAXES
For the fiscal years ended September 30, 2012 and 2011, domestic and foreign losses before income taxes from continuing operations are as follows:
|
Years ended September 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(437,685
|
)
|
|
$
|
(666,931
|
)
|
|
Foreign
|
|
|
(469,630
|
)
|
|
|
(209,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
$
|
(907,315
|
)
|
|
$
|
(876,345
|
)
|
For the fiscal year ended September 30, 2011, the Company had current income tax expense of approximately $4,131 which related to foreign income tax expenses from its Brazilian subsidiary. The Company did not recognize any income tax expense for the fiscal year ended September 30, 2012 The difference between income taxes provided at the Company's effective tax rate and the Federal statutory rate is as follows:
|
Years ended September 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Federal tax at statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
Valuation allowance
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
|
Current tax expense on international operations
|
|
|
--
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
24
|
%
|
Deferred tax assets (liabilities) are comprised of the following at September 30, 2012 and 2011:
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
8,074,000
|
|
|
$
|
7,717,000
|
|
|
Inventory reserve
|
|
|
226,000
|
|
|
|
216,000
|
|
|
Accounts receivable reserve
|
|
|
4,000
|
|
|
|
8,000
|
|
|
Other
|
|
|
106,000
|
|
|
|
82,000
|
|
|
Total deferred tax assets
|
|
|
8,410,000
|
|
|
|
8,023.000
|
|
|
Basis difference in fixed assets
|
|
|
(24,000
|
)
|
|
|
(43,000
|
)
|
|
Net deferred tax assets
|
|
|
8,386,000
|
|
|
|
7,980,000
|
|
|
Valuation allowance
|
|
|
(8,386,000
|
)
|
|
|
(7,980,000
|
)
|
|
Total reported deferred tax assets
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
The Company has provided a valuation allowance equal to 100% of the net deferred tax asset in recognition of the uncertainty regarding the ultimate amount of the net deferred tax asset that will be realized.
At September 30, 2012, the Company had approximately $23,745,000 of federal operating loss carry-forwards available to offset future taxable income, which expire on various dates beginning 2016 through 2032. Ownership changes as defined in the Internal Revenue Code may limit the amount of net operating loss and tax credit carry-forwards that may be utilized annually. The Company also had Brazilian net operating loss carry-forwards of approximately R$2,046,907 which are available to offset future Brazilian taxable income.
NOTE 12 - SIGNIFICANT SALES AND CONCENTRATION OF CREDIT RISK
Revenues derived from export sales, excluding sales to the company’s subsidiary in Brazil, amounted to approximately $1,236,606 or 31% of total sales in 2012 and $1,543,973, or 30% of total sales in 2011. Export sales to Europe were approximately $719,042 or 18% of total sales in 2012 and $1,028,917 or 20% of total sales in 2011.
At September 30, 2012 and 2011, the Company had approximately $31,270 and $37,458 of cash in foreign bank accounts.
NOTE 13 - 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 twelve months ended September 30, 2012 and 2011, respectively.
|
|
|
United States*
|
|
|
Brazil
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,509,029
|
|
|
$
|
1,533,065
|
|
|
$
|
4,042,094
|
|
|
Long-lived assets
|
|
|
180,109
|
|
|
|
167,889
|
|
|
|
347,998
|
|
|
September 30, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,750,948
|
|
|
$
|
2,390,278
|
|
|
$
|
5,141,226
|
|
|
Long-lived assets
|
|
|
175,697
|
|
|
|
263,481
|
|
|
|
439,178
|
|
* Includes export sales to countries other than Brazil of approximately $1,236,606 and $1,543,973 for 2012 and 2011, respectively.
The long-lived assets include property and equipment and intangibles, net of any depreciation and amortization.
NOTE 14- COMMITMENTS
The Company leases certain facilities and equipment under non-cancelable operating leases lasting through 2015. Future minimum lease commitments under the non-cancelable operating leases are as follows:
Years ending September 30
,
|
2013
|
|
$
|
58,236
|
|
|
2014
|
|
$
|
56,896
|
|
|
2015
|
|
$
|
28,094
|
|
Rent expense was approximately $301,237 and $394,000 for 2012 and 2011, respectively. Rent expense is included in the selling, general and administrative expense category on the income statement.
Employee Benefit Plans
The Company maintains a defined contribution retirement plan, which qualifies under Section 401(k) of the Internal Revenue Code, covering substantially all employees. Participant contributions and employer matching contributions are made as defined in the 401(k) Plan agreement. The Company’s policy is to contribute to the ESOP plan rather than to match 401K contributions. As such, effective October 1, 2003, the Company created an Employee Stock Ownership Plan (ESOP) for the benefit of its employees, which has been determined by the Internal Revenue Service to be a qualified retirement plan subject to section 4975(E)7 of the Code. The Employer has no obligations to contribute any amount under this plan except as so determined at its sole discretion. Employees are eligible to participate in the ESOP after 90 days of active employment and fully vest in the benefits after five years of service. The Company’s contributions to the ESOP were $6,365 and $10,000 in cash during the fiscal years 2012 and 2011, respectively. The compensation committee of the Board of Directors approves all contributions to the ESOP plan. At September 30, 2012 and 2011, the ESOP owned approximately 881,281 shares of Hemagen common stock that were either purchased in the open market by the ESOP, or contributed by the company to the ESOP. As of September 30, 2012 the ESOP plan had approximately $3,519 of cash available to purchase additional shares in the open market. The 881,281 shares owned by the ESOP represent approximately 6% of the shares outstanding as of September 30, 2012.
Directors Plan
The Company maintains a Rule 10b5-1 Stock Purchase Plan (the 10b5-1 Plan) for its Non-employee Directors for which the company deposited cash as part of the directors’ compensation plan. Effective October 1, 2008, the director compensation plan changed and the non-employee Directors now receive a $2,500 cash payment and 2,500 shares of the Company’s common stock each quarter. The 10b5-1 Plan will continue to purchase shares in the open market until the cash balance is depleted.
NOTE 15 – EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic earnings (loss) per common share are computed based upon the weighted average number of common shares outstanding during the twelve months ended September 30, 2012 and 2011, 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 twelve month periods ended September 30, 2012 and 2011, respectively.
|
|
|
Twelve Months Ended
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(907,315
|
)
|
|
$
|
(880,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
De Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
|
|
15,496,237
|
|
|
|
15,476,486
|
|
|
Effect of dilutive shares
|
|
|
--
|
|
|
|
--
|
|
|
Denominator for diluted earnings per share
|
|
|
15,496,237
|
|
|
|
15,476,486
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
Diluted Earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
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:
|
|
|
Twelve Months Ended
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes
|
|
|
11,571,022
|
|
|
|
11,571,022
|
|
|
Warrants
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
Options to purchase common stock
|
|
|
3,091,208
|
|
|
|
3,142,208
|
|
|
Total antidilutive instruments
|
|
|
19,662,230
|
|
|
|
19,713,230
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 - SUPPLEMENTAL DISCLOSURE OF CASH
|
September 30,
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
202,558
|
|
|
$
|
388,914
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes (Brazil)
|
|
$
|
--
|
|
|
$
|
4,132
|
|
