Hemagen Diagnostics (HMGN) 10-Q 2010 Q1 Quarterly report

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 DECEMBER 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)

Delaware	04-2869857
State of Organization	IRS Employer I.D.

9033 Red Branch Road, Columbia, Maryland  21045-2105

(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 xNO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   

YES o  NO o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer oAccelerated filer o

Non-accelerated filer   oSmaller reporting company x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

As of December 31, 2009, the registrant had 15,550,281 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; December 31, 2009 (unaudited) and September 30, 2009	3
		Consolidated Statements of Operations; Three Months Ended December 31, 2009 and 2008 (unaudited)	5
		Consolidated Statements of Cash Flows; Three Months Ended December 31, 2009 and 2008 (unaudited)	6
		Notes to Consolidated Financial Statements (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
	Item 4.	Controls and Procedures	14
PART II.	OTHER INFORMATION
	Item 2.	Unregistered Sales of Equity Securities and Use Of Proceeds	15
	Item 4.	Submission of Matters to a Vote of Security Holders	15
	Item 5	Other Information	15
	Item 6.	Exhibits	16
SIGNATURES			17
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.

2 

PART I   -  Financial Information

Item 1.  -  Financial Statements

HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2009  (unaudited)		September 30, 2009
ASSETS
CURRENT ASSETS:
Cash	$	79,302	$	156,314
Accounts receivable, less allowance for doubtful accounts of $63,333 and $69,973 at December 31, 2009 and September 30, 2009, respectively		547,608		630,020
Inventories, net		1,730,751		1,703,226
Current portion of note receivable		210,000		210,000
Prepaid expenses and other current assets		127,035		120,464
Total current assets		2,694,696		2,820,024
PROPERTY AND EQUIPMENT; net of accumulated depreciation and amortization of $6,198,230 and $6,143,356 at December 31, 2009 and September 30, 2009, respectively		568,627		599,008
OTHER ASSETS:
Long term portion of note receivable		192,500		245,000
Other assets		54,068		54,300
Total other assets		246,568		299,300
Total Assets	$	3,509,891	$	3,718,332

3 

HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

	December 31, 2009 (unaudited)			September 30, 2009
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued liabilities	$	870,226		$	969,135
Revolving line of credit		424,000			400,000
Deferred revenue		33,829			51,830
Note Payable – Itau Bank		4,514			28,859
Total Current Liabilities		1,332,569			1,449,824
LONG TERM LIABILITIES:
Senior subordinated secured convertible notes		4,049,858			4,049,858
Total Long Term Liabilities		4,049,858			4,049,858
Total liabilities		5,382,427			5,499,682
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; 15,550,281 and 15,345,281 issued and outstanding  as of December 31, 2009 and September 30, 2009, respectively		155,502			153,452
Additional paid-in capital		22,933,537			22,919,932
Accumulated deficit		(24,868,142	)		(24,734,125	)
Accumulated other comprehensive loss-currency translation loss		(3,796	)		(30,972	)
Less treasury stock at cost; 100,000 shares at December 31, 2009  and September 30, 2009, respectively.		(89,637	)		(89,637	)
Total Stockholders’ Deficit		(1,872,536	)		(1,781,350	)
Total Liabilities and Stockholders’ Deficit	$	3,509,891		$	3,718,332

The accompanying notes are an integral part of the financial statements.

4 

HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	December 31, 2009			December 31, 2008
Net Sales	$	1,151,793		$	1,386,350
Cost of Sales		642,669			877,646
Gross Profit		509,124			508,704
Operating Expenses:
Selling, general and administrative		531,222			621,221
Research and development		16,880			22,957
Total operating expenses		548,102			644,178
Total operating loss		(38,978	)		(135,474	)
Other income (expenses):
Interest expense (net), includes $19,203 for the three months ended December 31, 2008  of debt discount amortization		(84,678	)		(99,846	)
Other expenses		(85	)		(49	)
Gain on sale of assets		--			43,117
Total other expense		(84,763	)		(56,778	)
Net loss before income taxes		(123,741	)		(192,252	)
Income Tax expense		10,276			16,248
Net loss:		(134,017	)		(208,500	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		27,176			(186,594	)
Comprehensive loss:	$	(106,841	)	$	(395,094	)
Loss per share - Basic	$	(0.01	)	$	(0.01	)
Loss per share - Diluted	$	(0.01	)	$	(0.01	)
Weighted average common shares used in calculation of earnings (loss) per share - Basic		15,436,966			15,225,281
Weighted average common shares used in calculation of earnings (loss) per share – Diluted		15,436,966			15,225,281

5 

HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended December 31,
Cash flows from operating activities:	2009			2008
Net loss	$	(134,017	)	$	(208,500	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		43,265			37,038
Amortization of debt discount		--			19,203
(Gain) on sale of assets		--			(43,118	)
Provision for Bad Debts		(7,904	)		21,340
Stock Based Compensation		15,655			2,731
Changes in operating assets and liabilities:
Accounts receivable		90,316			91,158
Prepaid expenses and other current assets		(6,571	)		164,111
Inventories		(27,525	)		163,380
Accounts payable and accrued expenses		(98,908	)		(169,805	)
Other assets		231			34,703
Deferred revenue		(18,001	)		21,489
Net cash (used in) provided by operating activities		(143,459	)		133,730
Cash flows from investing activities:
Purchase of property and equipment		(2,730	)		(95,259	)
Proceeds from sale of assets		--			51,805
Payments Received on Notes Receivable		52,500			52,500
Net cash provided by (used in) investing activities		49,770			9,046
Cash flows from financing activities:
Net borrowings on Line of Credit		24,000			--
Payments on Notes – Itau Bank		(24,345	)		(55,568	)
Net cash used in financing activities		(345	)		(55,568	)
Effects of foreign exchange rate		17,022			(38,241	)
Net (decrease) increase in cash and cash equivalents		(77,012	)		48,967
Cash and cash equivalents at beginning of period		156,314			98,799
Cash and cash equivalents at end of period	$	79,302		$	147,766
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	60,562		$	95,164

6 

HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

FOR THE THREE MONTHS ENDED DECEMBER 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 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation.  All such adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results of the entire year.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) became the single official source of authoritative, nongovernmental GAAP in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than rules and interpretative releases issued by the SEC.  Our accounting policies were not affected by the conversion to ASC during the period ended September 30, 2009.  However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of the ASC.

The Subsequent Events Topic of the FASB ASC establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This accounting standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements.  This standard also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This accounting standard is effective for interim or annual periods ending after June 15, 2009.  Our implementation of this standard did not have a material impact on our consolidated results of operations or financial position. The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through February 16, 2010. There were no subsequent events that required recognition or disclosure in our consolidated results of operations or financial position.  

In October 2009, the FASB issued authoritative guidance (ASC ASU No. 2009-13) for multiple-deliverable revenue arrangements, which amends previously issued guidance to require an entity to use and estimate selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement.  The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation.  This standard also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance.  This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption and retrospective application are also permitted.  We are in the process of evaluating when we will adopt this guidance and whether the adoption will have a material impact on our financial position, results of operations, or cash flow.

7 

NOTE 3 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share are computed based upon the weighted average number of common shares outstanding during the three months ended December 31, 2009 and 2008, respectively.  Diluted earnings per common share is computed based on common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents consisting of stock options and convertible debentures.  The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock and if-converted method based on the Company’s average stock price for the period.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended December 31, 2009 and 2008, respectively.

	Three Months Ended December 31,
	2009			2008
Numerator:
Net loss	$	(137,017	)	$	(208,500	)
Denominator:
Weighted –average shares outstanding		15,436,966			15,225,281
Effect of dilutive shares		--			--
Denominator for diluted earnings per share		15,436,966			15,225,281
Basic Earnings per share	$	(0.01	)	$	(0.01	)
Diluted Earnings per share	$	(0.01	)	$	(0.01	)

Diluted net income per share does not include the effect of the following common stock equivalents related to outstanding convertible debentures and stock purchase options as their effect would be antidilutive:

	Three Months Ended December 31,
	2009		2008
Convertible notes		11,571,000		5,399,800
Options to purchase common stock		1,007,208		2,464,014
Total antidilutive instruments		12,578,208		7,863,814

8 

NOTE 4 – STOCK BASED COMPENSATION

The following table summarizes the Company’s stock option activity for the three months ended December 31, 2009:

	Shares		Weighted average exercise price		Weighted average life
Options outstanding – October 1, 2009		1,007,208	$	0.23		6.96
Granted		--		--		--
Exercised		--		--		--
Forfeited, cancelled or expired		--		--		--
Options outstanding – December 31, 2009		1,007,208	$	0.23		6.96
Options exercisable – December 31, 2009		917,208	$	0.24		7.33

No options were granted during the three months ending December 31, 2009 or 2008.

The Company has 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 December 31, 2009, there was $10,557 of unrecognized compensation cost related to share-based compensation arrangements that we expect to vest. This cost will be fully incurred within 4 years.  The options exercisable as of December 31, 2009 have no intrinsic value.

NOTE 5 – INVENTORIES

Inventories at December 31, 2009 and September 30, 2009, respectively, consist of the following:

	December 31, 2009			September 30, 2009
Raw Materials	$	1,276,761		$	1,350,828
Work-in-process		115,622			164,183
Finished goods		1,065,222			938,703
		2,457,605			2,453,714
Less reserves		(726,854	)		(750,488	)
Inventories, net	$	1,730,751		$	1,703,226

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. The company expects to renew the line at that time, but no assurances can be made in this regard.  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 December 31, 2009, the outstanding balance on the line of credit was $424,000 with an effective interest rate of 5.50%. As of February 8, 2010 the outstanding balance on the line was $398,000.As of December 31, 2009, the Company was not in compliance with certain of its debt covenants and has received a waiver from Bay National Bank.

9 

NOTE 7 – SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES

During September 2009, the Company completed an Exchange Offer of its senior subordinated secured convertible notes due on September 30, 2009. The Company offered to exchange new, modified 8% Senior Subordinated Convertible Notes due 2014 for the outstanding 8% Senior Subordinated Secured Convertible Notes due 2009. The principal features of the Exchange Offer included $4,049,858 principal amount of Senior Subordinated Secured Convertible Notes, due September 30, 2014, which bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share. The Company can require the conversion of these Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.

The Company has accounted for the Exchange Offer as though the exchange of the entire amount of $4,049,858 of the Outstanding Notes was effective as of September 30, 2009, because at September 30, 2009 all of the terms and conditions for the consummation of the Exchange Offer had been satisfied.

The Modified Notes are secured by a first lien on all real, tangible and intangible property except that the terms of the Modified Notes provide that the Modified Notes are subordinate to the following: (i) a credit facility that is equal to or less than Three Million Dollars ($3,000,000), (ii) any secured financing that is greater than Two Million Dollars ($2,000,000), provided that (A) the Company provides the Holder twenty (20) business days’ written notice of such secured financing, and (B) all of the funds raised in connection with such secured financing shall be used to reduce, on a pro rata basis, the principal amount and accrued and unpaid interest owed on the Modified Notes, (iii) real estate financing that the Company may incur for the purchase of a corporate facility provided that the annual mortgage payments are less than the rent expense that the Company pays in the year of such purchase for its leased facilities, and (iv) secured financing not to exceed Four Million Dollars ($4,000,000) at any one time for the purpose of financing an acquisition by the Company of the business of another person or entity.

NOTE 8 – GEOGRAPHICAL INFORMATION

The Company considers its manufactured kits, tests and instruments as one operating segment, as defined under FASB ASC 280, Segment Reporting.

The following table sets forth revenue for the periods reported, from continuing operations, and assets by geographic location for the three months ended December 31, 2009 and 2008 respectively.

	United* States		Brazil		Consolidated
December 31, 2009:
Revenues		526,483		625,310		1,151,793
Long-lived assets		392,718		422,477		815,195
December 31, 2008:
Revenues		793,236		593,114		1,386,350
Long-lived assets		655,257		408,848		1,064,105

 *Includes export sales to countries other than Brazil.

10 

NOTE 9 – NOTE RECEIVABLE

The Company received an $840,000 Note during the period ending December 31, 2007 related to the sale of assets of the Company’s wholly owned subsidiary Reagents Applications Inc.  The Note is payable in forty-eight monthly installments of principal of $17,500 plus accrued interest at the rate of 8% beginning on December 31, 2007. For the three months ending December 31, 2009 and 2008, the Company has received $52,500 and $52,500, respectively, in principal payments against the Note. All payments that have been received on the Note have been made in accordance with the terms of the Note.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Refer to "Forward Looking Statements" following the Index in front of this Form 10-Q.

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 clinicalchemistry analyzer system, including consumables, that is used to measure important constituents in human and animal blood. The Company sells its products both directly and through distributors to reference labs, physicians, veterinarians, clinical laboratories and blood banks. The Company also sells its products on a private-label basis through multinational distributors. The Company was incorporated in 1985 and became a public company in 1993.

Hemagen’s principal office is located at 9033 Red Branch Road, Columbia, Maryland 21045 and the telephone number is (443) 367-5500.  Hemagen maintains a website at www.hemagen.com.  Investors can obtain copies of our filings with the Securities and Exchange Commission from this site free of charge as well as from the Securities and Exchange Commission website at www.sec.gov.

Critical Accounting Policies

We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009 filed with the Securities and Exchange Commission.

Results of Operations

The Three Month Period Ended December 31, 2009

Compared to the Three Month Period Ended December 31, 2008

Revenues for the three-month period ended December 31, 2009 decreased by approximately $234,000 (17%) to approximately $1,152,000 from approximately $1,386,000 for the same period ended December 31, 2008.  The decrease is due to a decline in sales of Analyst consumables of approximately $68,000, a decline in sales of Analyst ® equipment of approximately $76,000 and a decline in sales of Virgo ® products of approximately $78,000. Consumable sales can vary substantially from quarter to quarter based on distributor orders.  Brazil had an overall increase in sales for the quarter of approximately $32,000 which was attributable to the gain in the foreign currency translation during the first quarter of the year compared to the first quarter of 2009. Brazil sales in local currency actually declined by approximately R$266,000 or 19% during the first quarter of 2010.

11 

Cost of product sales decreased by approximately $235,000 (27%) to approximately $643,000 from approximately $878,000 for the same period last year.  Cost of product sales as a percentage of sales decreased to 56% from 63% from the same period last year. The decrease in cost of sales as a percentage of sales is predominately attributable to a reduction of scrap and handling expenses during the first quarter of 2010.

Research and development expenses decreased approximately $6,000 from the same quarter last year.  The decrease was the result of the departure of an employee.

The Company continues to work to complete several research and development programs including:

· Upgrading the Analyst instrument and product offerings such as evaluating and developing complimentary products for Hemagen’s Analyst product line to distribute to the veterinary market;

· Developing new ELISA kits and enhancing existing ELISA kits; and

· Developing and enhancing IFA kits.

Selling, general and administrative expenses decreased by approximately $90,000 (14%) for the quarter ended December 31, 2009 to approximately $531,000 from approximately $621,000 in the previous period.  Approximately $57,000 of this decrease was due to a reduction in travel and travel related expenses during the first quarter of 2010 as compared to the first quarter of 2009. The Company also had a reduction in payroll related expenses of approximately $ 44,000 due to the termination of several employees.

Total other expenses for the three months ended December 31, 2009 increased by $28,000 to approximately $85,000 from approximately $57,000 from the period ended December 31, 2008.

During the first quarter of 2009 there were two items included in total other expenses that were not present during the first quarter of 2010. The Company recognized a gain on the sale of assets of approximately $43,000 which reduced the total other expenses during that quarter along with recording approximately $19,000 of amortization expense related to the senior notes. During the first quarter of 2010 the Company did not sell any assets and no amortization was recorded.  Interest expense decreased by approximately $1,000 and interest income decreased by approximately $5,000 due to the declining balance on the note receivable during the first quarter of 2010 as compared to the first quarter of the prior year.  

Income tax expense for the quarter ended December 31, 2009 was approximately $10,000 as compared to approximately $16,000 for the quarter ended December 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 ended December 31, 2009 was approximately $76,000 compared to a net loss before tax of approximately $62,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 24% which includes the fact that there are net loss carry forwards being utilized from prior periods.

12 

Net loss for the period decreased by approximately $74,000 for the three months ended December 31, 2009 to approximately $134,000 compared to a net loss of approximately $208,000 in the prior year quarter. The reduction in net loss is attributable to higher margins and an overall reduction of SG&A expenses during the current fiscal quarter.

Liquidity and Capital Resources

At December 31, 2009, Hemagen had $79,302 of cash, working capital of $1,362,127 and a current ratio of .5 to 1.0.  At September 30, 2009, the Company had $156,314 of cash, working capital of $1,370,200 and a current ratio of 2.0 to 1.0.

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. The Company expects to renew the line at this time, but no assurances can be made in this regard. 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 December 31, 2009, the outstanding balance on the line of credit was $424,000 with an effective interest rate of 5.50%. As of February 8, 2010, the current outstanding balance on the line of credit was $398,000.As of December 31, 2009, the Company was not in compliance with certain of its debt covenants and has received a waiver from Bay National Bank.

The Company believes that cash flow from operations and cash on hand at December 31, 2009 will be sufficient to finance its operations for the remainder of fiscal 2010.  However, the Company can give no assurances that it will have sufficient cash to finance its operations.  The Company has no off-balance sheet financing arrangements.

On September 30, 2009, the Company successfully completed an Exchange Offer of $4,049,858 of Old Notes, for Modified Notes due September 30, 2014.  The Modified Notes bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share after September 30, 2009.  The Company can require the conversion of the Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.

Net cash used in operating activities during the three months ended December 31, 2009 was approximately $143,000 compared to cash provided by operating activities of approximately $134,000 during the three month period ended December 31, 2008.  Although during both quarters the Company sustained an operating loss, the Company had higher collections on accounts receivable and sold more inventory during the period ending December 31, 2008, most of which was attributable to the sale of the Company’s Raichem subsidiary and the inventory purchase agreement that was in place at the time.

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Approximately $50,000 of cash was provided from investing activities during the three month period ended December 31, 2009 as compared to approximately $9,000 of cash provided for investing activities during the three month period ended December 31, 2008.  The cash provided during the current quarter was generated by the payments made against the note receivable. The cash provided from investing activities during the three month period ended December 31, 2008 was generated from the sale of lab equipment and payments against the note receivable, offset by approximately $95,000 of equipment purchases.

In accordance with the terms on the Note with the purchaser of Raichem, the Company received payments in the amount of $52,500, for both three month periods ended December 31, 2009 and 2008.

Cash used by financing activities was approximately $500 during the three month period ended December 31, 2009, compared to cash used by financing activities of approximately $56,000 for the three month period ended December 31, 2008.  During fiscal 2008, the Company’s Brazilian subsidiary secured financing to purchase lab equipment for use with our products. During the three months ended December 31, 2009 and December 31, 2008 the Company made payments against these Notes in the amount of $24,345 and $55,568, respectively.

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 December 31, 2009. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of December 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 control that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Hemagen’s internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c)  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October 1-31, 2009	6,500	$0.09	6,500	-
November 1-30, 2009	-	-	-	-
December 1-31, 2009	2,620	$0.09	2,620	-
Total	9,120	$0.09	9,120	-

(1) Represents shares of the Company’s Common Stock purchased pursuant to the Company’s Employee Stock Ownership Plan (ESOP) that was established October 1, 2003 with no expiration.  The purpose of the plan is not to repurchase, but rather it is an employee benefit plan.

(2) There is no maximum number of shares that may be purchased under the Company’s Employee Stock Ownership Plan.

Item 4.    Submission of Matters to a Vote of Security Holders.

None

 Item 5.    Other Information.

None

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Item 6.    Exhibits.
 

   (a) Exhibits

Exhibit 31.1	Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
Exhibit 31.2	Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
Exhibit 32.1	Certification of Principal Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
Exhibit 32.2	Certification of Principal Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.

	Hemagen Diagnostics, Inc. (Registrant)
February 16, 2010	By:	/s/ William P. Hales
		William P. Hales
		President and Chief Executive Officer
		(Principal /Executive Officer)

February 16, 2010	By:	/s/ Catherine M. Davidson
		Catherine M. Davidson
		(Principal Financial Officer)

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