UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | X | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009. |
| | | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________. |
Commission File No. 1-11700
HEMAGEN DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
| |
| State of Organization | IRS Employer I.D. |
9033 Red Branch Road, Columbia, Maryland 214045-2105
(Address of principal executive offices)
(443) 367-5500
(Registrant’s telephone number, including area code)
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 ____
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 NO ____
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | o |
| | | | |
| Non-accelerated filer | o | Smaller reporting company | x |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X_
As of April 30, 2009, the registrant had 15,240,281 shares of Common Stock $.01 par value per share outstanding.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
| | | | Page Number |
| PART I. | FINANCIAL INFORMATION | |
| | | |
| | Item 1. | Financial Statements | |
| | | | |
| | | Consolidated Balance Sheets; March 31, 2009 (unaudited) and September 30, 2008 | 3 |
| | | | |
| | | Consolidated Statements of Operations; Three and Six Months Ended March 31, 2009 and 2008 (unaudited) | 5 |
| | | | |
| | | Consolidated Statements of Cash Flows; Six Months Ended March 31, 2009 and 2008 (unaudited) | 6 |
| | | | |
| | | Notes to Consolidated Financial Statements | 7 |
| | | | |
| | Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 13 |
| | | | |
| | Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 |
| | | | |
| | Item 4. | Controls and Procedures | 17 |
| | | |
PART II. | OTHER INFORMATION | |
| | | | |
| | Item 2. | Unregistered Sales of Equity Securities and Use Of Proceeds | 18 |
| | | | |
| | Item 6. | Exhibits | 18 |
| | | | |
| SIGNATURES | 19 |
| | |
| CERTIFICATIONS | |
“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
| | | | | | September 30, 2008 | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash | | $ | 90,438 | | | $ | 98,799 | |
Accounts receivable, less allowance for doubtful accounts of $64,800 and $62,485 at March 31, 2009 and September 30, 2008, respectively | | | 678,432 | | | | 866,306 | |
| Inventories, net | | | 1,877,876 | | | | 2,037,049 | |
| Current portion of note receivable | | | 210,000 | | | | 210,000 | |
| Prepaid expenses and other current assets | | | 135,001 | | | | 304,038 | |
| Total current assets | | | 2,991,747 | | | | 3,516,192 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
PROPERTY AND EQUIPMENT; net of accumulated depreciation and amortization of $5,967,580 and $5,970,504 at March 31, 2009 and September 30, 2008, respectively | | | 583,839 | | | | 697,071 | |
| | | | | | | | | |
| OTHER ASSETS: | | | | | | | | |
| | | | | | | | | |
| Long term portion of note receivable | | | 350,000 | | | | 455,000 | |
| Other assets | | | 59,825 | | | | 98,057 | |
| Total other assets | | | 409,825 | | | | 553,057 | |
| | | | | | | | | |
| Total Assets | | $ | 3,985,411 | | | $ | 4,766,320 | |
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | March 31, 2009 (unaudited) | | | September 30, 2008 | |
| CURRENT LIABILITIES: | | | | | | |
Accounts payable and accrued liabilities | | $ | 927,588 | | | $ | 1,127,599 | |
Revolving line of credit | | | 475,000 | | | | 500,000 | |
Deferred revenue | | | 120,023 | | | | 102,680 | |
Note Payable – Itau Bank | | | 64,277 | | | | 32,257 | |
Senior subordinated secured convertible notes, net of unamortized discount of $31,868 and $70,587 as of March 31, 2009 and September 30, 2008, respectively | | | 4,017,982 | | | | 3,979,263 | |
Total Current Liabilities | | | 5,604,870 | | | | 5,741,799 | |
| | | | | | | | | |
| LONG TERM LIABILITIES: | | | | | | | | |
Note Payable – Itau Bank, net of current portion | | | 6,912 | | | | 119,466 | |
Total Long Term Liabilities | | | 6,912 | | | | 119,466 | |
Total liabilities | | | 5,611,782 | | | | 5,861,265 | |
| | | | | | | | | |
| STOCKHOLDERS’ DEFICIT | | | | | | | | |
| | | | | | | | | |
| Preferred stock, $0.01 par value - 1,000,000 shares authorized; none issued | | | -- | | | | -- | |
Common stock, $.01 par value - 30,000,000 shares authorized; 15,340,281 and 15,325,281 issued and outstanding as of March 31, 2009 and September 30, 2008, respectively | | | 153,402 | | | | 153,252 | |
| Additional paid-in capital | | | 22,874,047 | | | | 22,867,507 | |
| Accumulated deficit | | | (24,297,348 | ) | | | (23,925,977 | ) |
Accumulated other comprehensive loss-currency translation loss | | | (266,835 | ) | | | (100,090 | ) |
Less treasury stock at cost; 100,000 shares at March 31, 2009 and September 30, 2008, respectively. | | | (89,637 | ) | | | (89,637 | ) |
| Total Stockholders’ Deficit | | | (1,626,371 | ) | | | (1,094,945 | ) |
| Total Liabilities and Stockholders’ Deficit | | $ | 3,985,411 | | | $ | 4,766,320 | |
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 | | $ | 1,300,624 | | | $ | 1,793,465 | | | $ | 2,686,974 | | | $ | 3,333,311 | |
| Cost of Sales | | | 775,903 | | | | 1,015,305 | | | | 1,653,549 | | | | 1,903,941 | |
| Gross Profit | | | 524,721 | | | | 778,160 | | | | 1,033,425 | | | | 1,429,370 | |
| Operating Expenses: | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 572,963 | | | | 590,882 | | | | 1,194,184 | | | | 1,167,246 | |
| Research and development | | | 16,437 | | | | 50,515 | | | | 39,394 | | | | 91,593 | |
| Total operating expenses | | | 589,400 | | | | 641,397 | | | | 1,233,578 | | | | 1,258,839 | |
| Total operating income (loss) from continuing operations | | | (64,679 | ) | | | 136,763 | | | | (200,153 | ) | | | 170,531 | |
| Other income (expenses): | | | | | | | | | | | | | | | | |
Interest expense (net), including $19,517 and $17,626 for the three months ended March 31 2009 and 2008, respectively and $38,719 and $36,197 for the six months ended March 31, 2009 and 2008, respectively of debt discount amortization. | | | (98,418 | ) | | | (87,659 | ) | | | (198,264 | ) | | | (176,069 | ) |
Other income | | | 449 | | | | 5,995 | | | | 400 | | | | 6,347 | |
| Gain on sale of assets | | | -- | | | | -- | | | | 43,117 | | | | -- | |
| Total other expense | | | (97,969 | ) | | | (81,664 | ) | | | (154,747 | ) | | | (169,722 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss), before income taxes, from continuing operations | | | (162,648 | ) | | | 55,099 | | | | (354,900 | ) | | | 809 | |
| | | | | | | | | | | | | | | | | |
| Income Tax expense | | | 223 | | | | 27,030 | | | | 16,471 | | | | 56,578 | |
| Net income (loss), from continuing operations | | | (162,871 | ) | | | 28,069 | | | | (371,371 | ) | | | (55,769 | ) |
| | | | | | | | | | | | | | | | | |
Income from Discontinued Operations (includes a gain on sale of assets in the amount of $1,094,817 for the six months ended March 31, 2008) | | | -- | | | | -- | | | | -- | | | | 856,446 | |
| Net income (loss): | | $ | (162,871 | ) | | $ | 28,069 | | | $ | (371,371 | ) | | $ | 800,677 | |
| Other comprehensive loss, net of tax: | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 19,849 | | | | 13,393 | | | | (166,745 | ) | | | 36,814 | |
| Comprehensive income (loss): | | $ | (143,022 | ) | | $ | 41,462 | | | $ | (538,116 | ) | | $ | 837,491 | |
| | | | | | | | | | | | | | | | | |
| Earnings (loss) per share, from continuing operations - Basic | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.00 | |
| Earnings (loss) per share, from continuing operations - Diluted | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.00 | |
| Earnings (loss) per share, from discontinued operations - Basic | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.05 | |
| Earnings (loss) per share, from discontinued operations - Diluted | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.00 | | | $ | 0.05 | |
| Earnings (loss) per share - Basic | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.05 | |
| Earnings (loss) per share - Diluted | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.05 | |
Weighed average common shares used in calculation of earnings (loss) per share - Basic | | | 15,234,039 | | | | 15,225,281 | | | | 15,233,344 | | | | 15,225,281 | |
Weighed average common shares used in calculation of earnings (loss) per share – Diluted | | | 15,234,039 | | | | 15,225,281 | | | | 15,233,344 | | | | 15,225,281 | |
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | Six Months Ended March 31, | |
| Cash flows from operating activities: | | 2009 | | | 2008 | |
| Net Income (Loss) | | $ | (371,370 | ) | | $ | 800,677 | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 74,066 | | | | 28,842 | |
Amortization of debt discount | | | 38,719 | | | | 36,198 | |
(Gain) on sale of assets | | | (43,117 | ) | | | (838,907 | ) |
Provision for Bad Debts | | | 30,841 | | | | (21,028 | ) |
Stock Based Compensation | | | 6,690 | | | | 3,225 | |
| Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 157,033 | | | | (116,444 | ) |
Prepaid expenses and other current assets | | | 169,036 | | | | 50,123 | |
Inventories | | | 159,173 | | | | 540,275 | |
Accounts payable and accrued expenses | | | (200,011 | ) | | | (183,011 | ) |
Other assets | | | 38,232 | | | | (3,680 | ) |
Deferred revenue | | | 17,342 | | | | 8,592 | |
Net cash provided by operating activities | | | 76,634 | | | | 304,862 | |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Purchase of property and equipment | | | (111,848 | ) | | | (322,843 | ) |
| Proceeds from sale of assets | | | 51,805 | | | | 4,090 | |
| Payments Received on Notes Receivable | | | 105,000 | | | | 70,000 | |
Net cash provided by (used in) investing activities | | | 44,957 | | | | (248,753 | ) |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Net (payments) borrowings on Line of Credit | | | (25,000 | ) | | | (56,769 | ) |
| Borrowings on Notes – Itau Bank | | | (80,534 | ) | | | 181,964 | |
Net cash provided by (used in) financing activities | | | (105,534 | ) | | | 125,195 | |
| | | | | | | | | |
| Effects of foreign exchange rate | | | (24,418 | ) | | | 27,110 | |
| | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (8,361 | ) | | | 208,414 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 98,799 | | | | 6,592 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 90,438 | | | $ | 215,006 | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for interest | | $ | 185,805 | | | $ | 164,211 | |
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
FOR THE SIX MONTHS ENDED MARCH 31, 2009 and 2008
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 2008 Annual Report on Form 10-KSB 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
Financial Accounting Standards No. 157 (“FAS 157”). In September 2006, the Financial Accounting, Standards Board (“FASB”) issued FAS 157, “Fair Value Measurements.” FAS 157 defines fair values establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of FAS 157 to significantly affect its consolidated financial condition or results of operations.
Financial Accounting Standards No 159 (“FAS 159”). In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including the amendment of FASB Statement 115,” which provides companies with an option to measure eligible financial assets and liabilities in their entirety at fair value. The fair value option may be applied instrument by instrument, and may be applied only to entire instruments. If a company elects the fair value option for an eligible item, changes in the items fair value must be report as unrealized gains and losses in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of FAS 159 to significantly affect its consolidated financial condition or results of operations.
SFAS No. 141(R), “Business Combinations–a Replacement of FASB Statement No. 141” (SFAS No. 141 (R)) In December 2007, the FASB issued SFAS 141 (R), “Business Combinations.” The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring of cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company does not expect the adoption of SFAS 141(R) to significantly affect its consolidated financial statements.
SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements–an Amendment of ARB No. 51” (SFAS No. 160) In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 will change the accounting for minority interests, which will be recharacterized as noncontrolling interests and classified by the parent company as a component of equity. This statement is effective for fiscal years beginning on or after December 15, 2008, with early adoption prohibited. Upon adoption, SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests and prospective adoption for all other requirements. The Company does not expect the adoption of SFAS 160 to significantly affect its consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP), FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company will ascertain its impact, if any, during the three-month period ending March 31, 2009.
SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities–an Amendment of FASB Statement No. 133” (SFAS No. 161) During March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires entities to provide enhanced disclosures about how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and how derivative instruments and related hedged items affect financial position, financial performance, and cash flows. The Company is currently evaluating the impact, if any, of adopting SFAS 161.
SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162) In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement shall be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the impact of adopting SFAS 162 on its consolidated financial statements.
NOTE 3- EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share are computed based upon the weighted average number of common shares outstanding during the three and six months ended March 31, 2009 and 2008. 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, 2009 and 2008.
| | | Three Months Ended March 31, | | | Six Months Ended March 31, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Net (loss) income | | $ | (162,871 | ) | | $ | 28,069 | | | $ | (371,371 | ) | | $ | 800,677 | |
| | | | | | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | | | | | |
| Weighted –average shares outstanding | | | 15,234,039 | | | | 15,225,281 | | | | 15,233,344 | | | | 15,225,280 | |
| Effect of dilutive shares | | | -- | | | | -- | | | | -- | | | | -- | |
| Denominator for diluted earnings per share | | | 15,234,039 | | | | 15,225,281 | | | | 15,233,344 | | | | 15,225,280 | |
| | | | | | | | | | | | | | | | | |
| Basic Earnings per share | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.05 | |
| Diluted Earnings per share | | $ | (0.01 | ) | | $ | 0.00 | | | $ | (0.02 | ) | | $ | 0.05 | |
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, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | |
| Convertible notes | | | 5,399,800 | | | | 5,399,800 | | | | 5,399,800 | | | | 5,399,800 | |
| Options to purchase common stock | | | 2,465,903 | | | | 2,314,014 | | | | 2,465,294 | | | | 2,314,014 | |
| Total antidilutive instruments | | | 7,865,703 | | | | 7,713,814 | | | | 7,865,094 | | | | 7,713,814 | |
NOTE 4 – STOCK BASED COMPENSATION
The following table summarizes the Company’s stock option activity for the six months ended March 31, 2009:
| | | Shares | | | Weighted average exercise price | | | Weighted average life | |
| | | | | | | | | | |
| Options outstanding – October 1, 2008 | | | 2,464,014 | | | $ | 1.05 | | | | 2.36 | |
| Granted | | | 15,000 | | | | 0.16 | | | | 4.69 | |
| Exercised | | | -- | | | | -- | | | | -- | |
| Forfeited, cancelled or expired | | | (16,000 | ) | | | 0.19 | | | | 3.78 | |
| Options outstanding – March 31, 2009 | | | 2,463,014 | | | $ | 1.05 | | | | 1.87 | |
| Options exercisable – March 31, 2009 | | | 2,304,347 | | | $ | 1.10 | | | | 1.77 | |
Under SFAS No. 123R, “Share-Based Payment” 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, |
| |
| | 2009 | 2008 | 2009 | 2008 |
| Dividend yield | -- | -- | -- | -- |
| Expected volatility | 105.2% | 95.10% | 95.1% - 105.25% | 95.10% |
| Risk-free interest rate | 1.67% | 2.46% - 3.16% | 1.67% - 2.45% | 2.46% - 3.16% |
| Expected life in years | 1.5 | 5 | 1.5 | 5 |
We have elected to incur 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, 2009, there was $17,492 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 both issued and exercisable as of March 31, 2009 have no intrinsic value.
NOTE 5 - INVENTORIES
Inventories at March 31, 2009 and September 30, 2008 consist of the following:
| | | | | | | |
| | | | | | | |
| Raw Materials | | $ | 1,315,085 | | | $ | 1,385,253 | |
| Work-in-process | | | 211,690 | | | | 159,903 | |
| Finished goods | | | 961,336 | | | | 1,018,609 | |
| | | | 2,488,111 | | | | 2,563,765 | |
| Less reserves | | | (610,235 | ) | | | (526,716 | ) |
| Inventories, net | | $ | 1,877,876 | | | $ | 2,037,049 | |
NOTE 6 - LINE OF CREDIT
The Company has a revolving line of credit with a bank for the purpose of financing working capital needs as required which was renewed effective March 31, 2009. The line of credit facility provides for borrowings up to $500,000 at an interest rate of Prime Rate plus .75%, with an interest rate floor of 5.5% and is due April 1, 2010. If however, Hemagen fails to renew or recapitalize its existing bond indebtedness by September 30, 2009, the final and absolute due date will be September 30, 2009. Maximum borrowings under the loan are based on the domestic receivables and inventory of the Company. The line of credit facility has a first lien on all assets of the Company. As of March 31, 2009, the outstanding balance on the line of credit was $475,000 with an effective interest rate of 4.00%. As of March 31, 2009, the Company was in compliance with its debt covenants.
NOTE 7 – SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES
The Notes pay interest quarterly at an annual rate of 8%, are convertible at the option of the holder at $0.75 per share into shares of the Company’s common stock and mature September 30, 2009. The Secured Indebtedness shall be secured by the Security Interest in the Collateral, and shall be senior to all other indebtedness of the Obligors. Notwithstanding the foregoing, the Security Interest shall be subordinate to (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 Obligors provide 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 2009 Notes and (iii) real estate financing that the Obligors may incur in the future for the purchase of a corporate facility provided that the annual mortgage payments are less than the rent expense that the Obligors paid in 2004 for its leased facilities. The Company has the right to require conversion of the Notes if the Company’s common stock has traded at or above $1.25 per share for a consecutive twenty-day trading period. The Company may also prepay the Notes at their full face amount plus any accrued and unpaid interest. At March 31, 2009 and September 30, 2008, the unamortized discount of these notes was $31,868 and $70,587, respectively.
On September 30, 2009 these Notes in the amount of $4,049,850 become due and payable. Hemagen does not have sufficient cash to repay these Notes and therefore expects to restructure the debt by, amongst other things, extending the maturity date of the notes. However, Hemagen can give no assurances that it will be able to refinance or repay these notes.
NOTE 8 – GEOGRAPHICAL INFORMATION
The Company considers its manufactured kits, tests and instruments as one operating segment, as defined under Statement of Financial Accounting Standards No. 131 “Disclosures about Segments of an Enterprise and Related Information.”
The following table sets forth revenue for the periods reported, from continuing operations, and assets by geographic location for the six months ended March 31, 2009 and 2008.
| | | United* States | | | Brazil | | | Consolidated | |
| March 31, 2009: | | | | | | | | | |
| Revenues | | | 1,634,437 | | | | 1,052,537 | | | | 2,686,974 | |
| Long-lived assets | | | 590,458 | | | | 403,206 | | | | 993,664 | |
| | | | | | | | | | | | | |
| March 31, 2008: | | | | | | | | | | | | |
| Revenues | �� | | 2,254,242 | | | | 1,079,069 | | | | 3,333,311 | |
| Long-lived assets | | | 734,044 | | | | 435,491 | | | | 1,169,535 | |
* Includes export sales to countries other than Brazil.
NOTE 9 – NOTE RECEIVABLE
The Company received an $840,000 Note during the period ending December 31, 2007 related to the sale of assets of the Company’s wholly owned subsidiary Reagents Applications Inc. The Note is payable in forty-eight monthly installments of principal of $17,500 plus accrued interest at the rate of 8% beginning on December 31, 2007. For the six months ending March 31, 2009 and 2008, the Company has received $105,000 and $70,000, respectively in principal payments against the Note. All payments that have been received on the Note have been made in accordance with the terms of the Promissory Note.
NOTE 10 – DISCONTINUED OPERATIONS
On October 8, 2007, the Company sold the assets of its wholly owned subsidiary Reagents Applications, Inc. The results of operations for this division have been presented as discontinued operations in the accompanying financial statements for the periods ending March 31, 2009 and 2008.
Results from discontinued operations, net of income tax, for the three and six month periods ending March 31, 2009 and 2008 are as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | | | | | | | | | | | |
| Net sales | | $ | 17,863 | | | $ | 154,079 | | | $ | 37,783 | | | $ | 371,240 | |
| Costs of sales | | | 17,863 | | | | 154,079 | | | | 37,783 | | | | 410,967 | |
| Gross Profit | | | -- | | | | -- | | | | -- | | | | (39,727 | ) |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | -- | | | | -- | | | | -- | | | | 196,936 | |
| Research and development | | | -- | | | | -- | | | | -- | | | | 1,708 | |
| Total operating costs and expenses | | | -- | | | | -- | | | | -- | | | | 198,644 | |
| | | | | | | | | | | | | | | | | |
| Operating loss | | | -- | | | | -- | | | | -- | | | | (238,371 | ) |
| | | | | | | | | | | | | | | | | |
| Other income (expenses): | | | | | | | | | | | | | | | | |
| Other Income (expense) | | | -- | | | | -- | | | | -- | | | | -- | |
| Gain on Sale of Assets | | | -- | | | | -- | | | | -- | | | | 1,094,817 | |
Total other income (expense) | | | -- | | | | -- | | | | -- | | | | 1,094,817 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) before income taxes | | | -- | | | | -- | | | | -- | | | | 856,446 | |
| | | | | | | | | | | | | | | | | |
Income Tax | | | -- | | | | -- | | | | -- | | | | -- | |
| Net income (loss) from discontinued operations | | | -- | | | | -- | | | | -- | | | $ | 856,446 | |
The revenues generated for the three and six month periods ending March 31, 2009 were from the sale of inventory from the discontinued division. Pursuant to an inventory agreement, the remaining inventory was being sold at cost to the purchaser for a period of eighteen months subsequent to the sale.
As of March 31, 2009 the Company had approximately $7,800 of accounts receivable remaining from the Raichem operation which is fully reserved.
In addition, the Company has the following inventory consisting of Raichem products which is being sold pursuant to the inventory purchase agreement.
| | | | |
| Raw Materials | | $ | 123,933 | |
| Work-in-process | | | 392 | |
| Finished goods | | | 45,653 | |
| | | | 169,978 | |
| Less reserves | | | (40,226 | ) |
| Inventories, net | | $ | 129,752 | |
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.
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-KSB for the fiscal year ended September 30, 2008 filed with the Securities and Exchange Commission.
Results of Operations
The Three Month Period Ended March 31, 2009
Compared to the Three Month Period Ended March 31, 2008
Revenues from continuing operations for the three-month period ended March 31, 2009 decreased by approximately $492,000 (27%) to approximately $1,301,000 from approximately $1,793,000 for the same period ended March 31, 2008. The decrease in revenues of approximately $393,000 is attributable to lower sales of Analyst equipment during the quarter as compared to the same period last year. Sales from the Brazilian subsidiary are approximately $92,000 lower than last year due to the currency devaluation of approximately 30% of the Brazilian Real.
Cost of product sales from continuing operations decreased approximately $239,000 (23%) to approximately $776,000 from approximately $1,015,000 for the same period last year. Cost of product sales as a percentage of sales increased to 60% from 57% from the same period last year. This increase in cost of sales as a percentage of sales is primarily attributed to lower sales volume during the second quarter as the fixed cost of sales expenses remained relatively constant.
Research and development expenses from continuing operations decreased by approximately $35,000 (66%) to approximately $16,000 from approximately $51,000 in 2008. This decrease was the result of an employee termination.
The Company continues toward working to complete several research and development programs including:
| · | Activities 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 from continuing operations decreased by approximately $18,000 (3%) for the quarter ended March 31, 2009 to approximately $573,000 from approximately $591,000 in the previous period. The majority of this overall decrease is related to the currency devaluation in Brazil with overall Brazil SG&E expenses approximately $26,000 lower than the same period last year.
Total other expenses for the three months ending March 31, 2009 increased by $16,000 to approximately $98,000 from approximately $82,000 from the period ending March 31, 2008. This increase in net other expense is attributed to an increase in interest expense of approximately $5,000 on the Brazil bank notes obtained to finance equipment purchases, a decrease in interest income of approximately $5,000 related to the declining balance on the Note Receivable. During the quarter ending March 31, 2008 the company also recorded a gain on the sale of assets in the amount of approximately $4,000 that did not reoccur in the quarter ending March 31, 2009.
Income tax expense for the quarter ended March 31, 2009 was approximately $200 as compared to approximately $27,000 for the quarter ended March 31, 2008. This tax expense resulted from income realized at the Company’s Brazilian subsidiary. The net income before tax for the Company’s Brazilian subsidiary for the period ending March 31, 2009 was approximately $20,000 compared to net income before tax of approximately $127,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 22% which includes the fact that there are net loss carry forwards being utilized from prior periods.
Net income for the period decreased by approximately $191,000 for the three months ended March 31, 2009 to net loss of approximately $163,000 compared to net income of approximately $28,000 in the same quarter of the prior year. The reduction in net income is directly attributable to the lower sales during the most recent quarter.
The Six Month Period Ended March 31, 2009
Compared to the Six Month Period Ended March 31, 2008
Revenues from continuing operations for the six month period ended March 31, 2009 decreased by approximately $646,000 (19%) to approximately $2,687,000 from $3,333,000 for the same period ended March 31, 2008. The decrease in revenues is primarily attributable to a decrease in sales volume of approximately $634,000 in the Analyst line, of which approximately $605,000 is related to the lower sales of equipment and approximately $26,000 of lower sales of Analyst consumables. The remaining decline in revenues is attributed to currency devaluation in Brazil.
Cost of product sales from continuing operations decreased by approximately $250,000 (54%) to approximately $1,654,000 from approximately $1,904,000 for the same period last year. Cost of product sales as a percentage of sales increased slightly to approximately 61% compared to 57% for the same period last year. The increase in cost of sales as a percentage of revenue resulted from lower sales volume.
Research and development expenses from continuing operations decreased by approximately
$53,000 (57%) during the six months ended March 31, 2009 to approximately $39,000 from $92,000 in 2008. This decrease was the result of an employee termination.
Selling, general and administrative expenses from continuing operations increased slightly by approximately $27,000 (2%) for the six months ended March 31, 2009 to approximately $1,194,000 from approximately $1,167,000 in the previous period. Hemagen had an increase in deprecation expense of approximately $32,000 which was mainly offset by the overall lower SG&A expenses in Brazil which was attributable to the currently devaluation during fiscal 2009.
Total other expenses for the six months ending March 31, 2009 decreased approximately $15,000 to approximately $155,000 from approximately $170,000 from the six month period ending March 31, 2008. The decrease in other expenses is a combination of an overall increase in net interest expense offset by the gain of approximately $43,000 from the sale of a company asset. The increase in net interest expense was attributed to the declining principal balance of the Note Receivable.
Income tax expense for the six months ended March 31, 2009 was approximately $16,000 as compared to $57,000 for the six months ended March 31, 2008. 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 ending March 31, 2009 was approximately $20,000 compared to a net income before tax of approximately $259,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 22% which includes the fact we are utilizing some net loss carry forwards from prior periods.
Net income decreased by approximately $1,172,000 for the six months ended March 31, 2009 to a net loss of approximately $371,000 compared to net income of approximately $801,000 in the six month period ended March 31, 2008. Included in the six months ended March 31, 2008 was net income from discontinued operations in the amount of approximately $856,000. The remaining decrease was the result of lower revenues and margins from continuing operations during current period.
Liquidity and Capital Resources
At March 31, 2009, Hemagen had $90,438 of cash, a working deficit of $2,613,123 and a current ratio of .5 to 1.0. At September 30, 2008, the Company had $98,799 of cash, a working deficit of $2,225,607 and a current ratio of .6 to 1.0. Included in the calculation of working capital and the current ratio is approximately $4,018,000 and $3,979,000 of subordinated debt as of March 31, 2009 and September 30, 2008, respectively, which is due on September 30, 2009.
During the next several months, the Company expects to restructure the debt by among other things, extending the maturity date of the Notes representing such debt, but no assurances can be made in this regard. Excluding the subordinated debt in the calculation, which assumes that it is restructured successfully, working capital would be $1,404,860 with a current ratio of 1.9 to 1.0 and $1,753,656 and a current ratio of 2.1 to 1.0, as of March 31, 2009 and September 30, 2008, respectively.
The Company has a revolving line of credit with a bank for the purpose of financing working capital needs as required which was renewed effective March 31, 2009. The line of credit facility provides for borrowings up to $500,000 at an interest rate of Prime Rate plus .75%, with an interest rate floor of 5.5% and is due April 1, 2010. If however, Hemagen fails to renew or recapitalize its existing bond indebtedness by September 30, 2009, the final and absolute due date will be September 30, 2009. Maximum borrowings under the loan are based on the domestic receivables and inventory of the Company. The line of credit facility has a first lien on all assets of the Company. As of March 31, 2009, the outstanding balance on the line of credit was $475,000 with an effective interest rate of 4.00%. As of May 2, 2009 the current outstanding balance on the line of credit was $445,000. As of March 31, 2009, the Company was in compliance with its debt covenants.
The Company believes that cash flow from operations and cash on hand at March 31, 2009 will be sufficient to finance its operations for the remainder of fiscal 2009. However, the Company can give no assurances that it will have sufficient cash finance its operations. The Company has no off-balance sheet financing arrangements.
On September 30, 2009, the Company’s Senior Subordinated Secured Convertible Notes outstanding in the amount of $4,049,850 becomes due and payable. Hemagen does not have sufficient cash to repay these Notes and, therefore, expects to restructure the debt, by among other things, extending the maturity date of the Notes. However, the Company can give no assurances that it will be able to refinance or repay these Notes.
Net cash provided by operating activities during the six months ended March 31, 2009 was approximately $77,000 compared to cash provided of approximately $305,000 during the six months ended March 31, 2008. The decrease in cash provided by operations resulted from the combination of lower sales during the current year as compared to same period last year, and a significant reduction of inventory being sold to the purchaser of the Company’s Raichem division from the same period of the prior year, offset by a reduction in prepaid expenses and account receivable during the current quarter.
Approximately $45,000 of cash was generated from investing activities during the six months ended March 31, 2009 as compared to approximately $249,000 of cash used for investing activities during the six months ended March 31, 2008. The cash was generated by the payments made on the Note receivable and the sale of lab equipment, offset by additional purchases of lab equipment and computers. The cash used from investing activities during the six months ended March 31, 2008 was primarily for the purchase of lab equipment for use in the Brazil operations.
In accordance with the terms on the Note with the purchaser of Raichem, the Company received payments in the amount of $105,000, and $70,000 for the six months ended March 31, 2009 and 2008, respectively, against the Note receivable.
Cash used by financing activities was approximately $106,000 during the six months ended March 31, 2009, compared to cash provided by financing activities of approximately $125,000 for the six months ended March 31, 2008. During the six months ended March 31, 2008, the Company’s Brazilian subsidiary secured financing to purchase lab equipment for use with our products. During the six months ended March 31, 2009, the Company made payments against this Note in the amount of $80,534.
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, 2008. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of March 31, 2009 except for the matters described below.
Management is aware that there is a lack of segregation of duties due to the small number of employees within the financial and administrative functions of the Company. As a result of the limitations of the resources and segregation of duties, Stegman and Company, the Company’s current auditor, has informed the company that these limitations represent a material weakness in internal controls. Management will continue to evaluate this segregation of duties issue. Over the past several months, management has documented the Company’s critical control procedures and will continue to review and update such procedures as changes occur.
There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation of internal controls that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to affect, Hemagen’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
| Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | | | (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2) | |
| January 1-31, 2009 | | | 11,227 | | | $ | 0.15 | | | | 11,227 | | | | - | |
| February 1-28, 2009 | | | -- | | | | -- | | | | -- | | | | - | |
| March 1-31, 2009 | | | -- | | | | -- | | | | -- | | | | - | |
| Total | | | 11,227 | | | $ | 0.15 | | | | 11,227 | | | | - | |
| | (1) | Represents shares of Company’s Common Stock purchased pursuant to the Company’s Employee Stock Ownership Plan (ESOP) that was established October 1, 2003 with no expiration. The purpose of the plan is not to repurchase, but rather it is an employee benefit plan. |
| | (2) | There is no maximum number of shares that may be purchased under the Company’s Employee Stock Ownership Plan. |
Item 6. Exhibits.
(a) Exhibits
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) |
| Exhibit 31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) |
| Exhibit 32.1 | Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code |
| Exhibit 32.2 | Certification of Principal Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.
| | | Hemagen Diagnostics, Inc. (Registrant) | |
| May 14, 2009 | | /s/ William P. Hales | |
| | | William P. Hales | |
| | | President and Chief Executive Officer | |
| | | | |
| | | | |
| May 14, 2009 | | /s/Catherine M. Davidson | |
| | | Catherine M. Davidson | |
| | | Principal Financial Officer | |
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