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 JUNE 30, 2012. |
| 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 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 [ ] Accelerated filer [ ]
Non-accelerated filer [ ] 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 August 14, 2012, the registrant had 15,500,281 shares of Common Stock $.01 par value per share outstanding.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION | PAGE NUMBER |
PART II. OTHER INFORMATION | |||||
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 | ||||||||
| June 30, | ||||||||
| 2012 | September 30, | |||||||
| ASSETS | (unaudited) | 2011 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 107,308 | $ | 213,611 | ||||
| Accounts receivable, less allowance for doubtful accounts of | ||||||||
| $60,332 and $67,286 at June 30, 2012 and September 30, 2011, | ||||||||
| respectively | 585,335 | 580,240 | ||||||
| Inventories, net | 1,366,796 | 1,460,780 | ||||||
| Current portion of note receivable | -- | 35,000 | ||||||
| Prepaid expenses and other current assets | 84,718 | 159,493 | ||||||
| Total current assets | 2,144,157 | 2,449,124 | ||||||
PROPERTY AND EQUIPMENT; net of accumulated depreciation | ||||||||
| and amortization of $6,456,041 and $6,431,680 at | ||||||||
| June 30, 2012 and September 30, 2011, respectively | 312,190 | 386,520 | ||||||
| OTHER ASSETS: | ||||||||
| Other assets | 65,140 | 52,658 | ||||||
| Total Assets | $ | 2,521,487 | $ | 2,888,302 | ||||
The accompanying notes are an integral part of the financial statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | June 30, | |||||||
| 2012 | September 30, | |||||||
| (unaudited) | 2011 | |||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued liabilities | $ | 898,962 | $ | 818,875 | ||||
| Revolving line of credit | -- | 669,413 | ||||||
| Revolving line of credit – related party | 976,868 | -- | ||||||
| Deferred revenue | 29,891 | 37,226 | ||||||
| Total Current Liabilities | 1,905,721 | 1,525,514 | ||||||
| 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 | 5,955,579 | 5,575,372 | ||||||
STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $0.01 par value - 1,000,000 shares authorized; none issued | -- | -- | ||||||
| Common stock, $.01 par value - 45,000,000 shares authorized; 15,600,281 and 15,585,281 issued and outstanding as of June 30, 2012 and September 30, 2011, respectively | 156,002 | 155,852 | ||||||
| Additional paid-in capital | 23,109,834 | 23,038,217 | ||||||
| Accumulated deficit | (26,515,248 | ) | (25,770,916 | ) | ||||
Accumulated other comprehensive loss - currency translation loss | (95,044 | ) | (20,587 | ) | ||||
| Less treasury stock at cost; 100,000 shares at June 30, 2012 and September 30, 2011, respectively. | (89,636 | ) | (89,636 | ) | ||||
Total Stockholders’ Deficit | (3,434,092 | ) | (2,687,070 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 2,521,487 | $ | 2,888,302 | ||||
The accompanying notes are an integral part of the financial statements.
HEMAGEN DIAGNOSTICS, INC. (unaudited) | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Net Sales | $ | 947,807 | $ | 1,400,678 | $ | 3,166,182 | $ | 3,995,056 | ||||||||
| Cost of Sales | 494,352 | 733,108 | 1,954,866 | 2,502,148 | ||||||||||||
| Gross Profit | 453,455 | 667,570 | 1,211,316 | 1,492,908 | ||||||||||||
| Operating Expenses: | ||||||||||||||||
Selling, general and administrative | 465,275 | 605,997 | 1,578,998 | 1,792,277 | ||||||||||||
| Research and development | 483 | 1,366 | 26,527 | 3,895 | ||||||||||||
| Total operating expenses | 465,758 | 607,363 | 1,605,525 | 1,796,172 | ||||||||||||
| Total operating (loss) income | (12,303 | ) | 60,207 | (394,209 | ) | (303,264 | ) | |||||||||
| Other income (expenses): | ||||||||||||||||
| Interest expense, net | (119,813 | ) | (108,489 | ) | (348,779 | ) | (294,129 | ) | ||||||||
Other income (expense) | (16 | ) | 198 | 1,009 | 128 | |||||||||||
| (Loss) gain on sale of assets | -- | -- | (2,353 | ) | 2,800 | |||||||||||
| Total other expense | (119,829 | ) | (108,291 | ) | (350,123 | ) | (291,201 | ) | ||||||||
| Loss before income taxes | (132,132 | ) | (48,084 | ) | (744,332 | ) | (594,465 | ) | ||||||||
| Income tax (benefit) expense | -- | -- | -- | 4,132 | ||||||||||||
| Net income (loss): | $ | (132,132 | ) | $ | (48,084 | ) | $ | (744,332 | ) | $ | (598,597 | ) | ||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Foreign currency translation adjustments | (81,306 | ) | 54,813 | (74,456 | ) | 93,596 | ||||||||||
| Comprehensive income (loss): | $ | (213,438 | ) | 6,729 | $ | (818,788 | ) | $ | (505,001 | ) | ||||||
| Earnings (loss) per share – Basic | $ | (0.01 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.04 | ) | |||||
| Earnings (loss) per share – Diluted | $ | (0.01 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.04 | ) | |||||
| Weighted average common shares used in calculation of earnings (loss) per share - Basic | 15,498,962 | 15,478,907 | 15,494,880 | 15,473,743 | ||||||||||||
| Weighted average common shares used in calculation of earnings (loss) per share – Diluted | 15,498,962 | 15,478,907 | 15,494,880 | 15,473,743 | ||||||||||||
The accompanying notes are an integral part of the financial statements.
| HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES | ||||||||
| (Unaudited) | ||||||||
| Nine Months Ended | ||||||||
| June 30, | ||||||||
| Cash flows from operating activities: | 2012 | 2011 | ||||||
| Net loss | $ | (744,332 | ) | $ | (598,597 | ) | ||
Adjustments to reconcile net cash provided by (used in) operating activities: | ||||||||
| Depreciation | 127,688 | 141,422 | ||||||
| Non-cash interest expense – warrants | 35,863 | 19,924 | ||||||
| Loss (Gain) on sale of assets | 2,353 | (2,800 | ) | |||||
| Provision for bad debts | 198 | 8,624 | ||||||
| Stock based compensation | 35,504 | 34,410 | ||||||
| Shares issued for compensation | 400 | 800 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (5,294 | ) | 25,766 | |||||
| Prepaid expenses and other current assets | 74,776 | 117,070 | ||||||
| Inventories | 104,726 | (92,714 | ) | |||||
| Other assets | (12,483 | ) | (25,746 | ) | ||||
| Accounts payable and accrued expenses | 80,086 | (33,680 | ) | |||||
| Deferred revenue | (7,334 | ) | 3,311 | |||||
| Net cash (used in) operating activities | (307,849 | ) | (402,210 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (87,473 | ) | (39,350 | ) | ||||
| Proceeds from sale of assets | -- | 2,800 | ||||||
| Payments received on notes receivable | 35,000 | 157,500 | ||||||
| Net cash (used in) provided by investing activities | (52,473 | ) | 120,950 | |||||
| Cash flows from financing activities: | ||||||||
| Net borrowings on line of credit | 307,455 | 271,413 | ||||||
| Net cash provided by financing activities | 307,455 | 271,413 | ||||||
| Effects of foreign exchange rate | (53,436 | ) | 68,037 | |||||
| Net (decrease) increase in cash and cash equivalents | (106,303 | ) | 58,190 | |||||
| Cash and cash equivalents at beginning of period | 213,611 | 151,743 | ||||||
| Cash and cash equivalents at end of period | $ | 107,308 | $ | 209,933 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for period for interest | $ | 179,141 | 288,769 | |||||
| Cash payments for period for income taxes | $ | -- | 3,011 | |||||
The accompanying notes are an integral part of the financial statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
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 2011 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
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 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 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 its 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 nine months ended June 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 three and nine-month periods ended June 30, 2012 and 2011, respectively.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net loss | $ | (132,132 | ) | $ | (48,084 | ) | $ | (744,332 | ) | $ | (598,597 | ) | ||||
| Denominator: | ||||||||||||||||
| Weighted –average shares outstanding | 15,498,962 | 15,478,907 | 15,494,880 | 15,473,743 | ||||||||||||
| Effect of dilutive shares | -- | -- | -- | -- | ||||||||||||
| Denominator for diluted earnings per share | 15,498,962 | 15,478,907 | 15,494,880 | 15,473,743 | ||||||||||||
| Basic Earnings (loss) per share | $ | (0.01 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.04 | ) | |||||
| Diluted Earnings (loss) per share | $ | (0.01 | ) | $ | 0.00 | $ | (0.05 | ) | $ | (0.04 | ) | |||||
Diluted net loss 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 June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Convertible notes | 11,571,022 | 11,571,022 | 11,571,022 | 11,571,022 | ||||||||||||
| Warrants | 5,000,000 | 5,000,000 | 5,000,000 | 5,000,000 | ||||||||||||
| Options to purchase common stock | 3,142,208 | 3,102,208 | 3,142,208 | 3,102,208 | ||||||||||||
| Total antidilutive instruments | 19,713,230 | 19,673,230 | 19,713,230 | 19,673,230 | ||||||||||||
NOTE 4 – COMMON STOCK EQUIVALENTS
The following table summarizes the Company’s stock option activity for the nine months ended June 30, 2012:
Shares | Weighted average exercise price | Weighted average life | ||||||||||
| Options outstanding – October 1, 2011 | 3,142,208 | $ | 0.14 | 7.43 | ||||||||
| Granted | 40,000 | 0.08 | 9.61 | |||||||||
| Exercised | -- | -- | -- | |||||||||
| Forfeited, cancelled or expired | (40,000 | ) | 0.14 | -- | ||||||||
| Options outstanding – June 30, 2012 | 3,142,208 | $ | 0.14 | 6.77 | ||||||||
| Options exercisable – June 30, 2012 | 1,755,208 | $ | 0.17 | 6.12 | ||||||||
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 June 30, | Nine Months Ended June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Dividend yield | - | -- | - | -- | ||||||||||||
| Expected volatility | 132.47% - 133.33 | % | _ | 131.48%-133.33 | % | 136.27% - 137.95 | % | |||||||||
| Risk-free interest rate | 1.60% - 1.95 | % | _ | 1.60% - 1.97 | % | 1.47% - 3.48 | % | |||||||||
| Expected life in years | 10 | _ | 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 valuation model. The risk-free rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of the grant.
The Company incurs stock-based compensation expense over the requisite service period. We have estimated forfeitures and incur expense on shares we expect to vest.
As of June 30, 2012, there was $45,868 of unrecognized compensation cost related to share-based compensation arrangements that we expect to vest. This cost will be fully incurred within 5 years. The options exercisable as of June 30, 2012 have no intrinsic value.
The following table summarizes the Company’s warrant activity for the nine months ended June 30, 2012:
Shares | Weighted average exercise price | Weighted average life (in years) | ||||||||||
| Warrants outstanding – October 1, 2011 | 5,000,000 | $ | 0.20 | 4.36 | ||||||||
| Granted | -- | -- | -- | |||||||||
| Exercised | -- | -- | -- | |||||||||
| Forfeited, cancelled or expired | -- | -- | -- | |||||||||
| Options outstanding – June 30, 2012 | 5,000,000 | $ | 0.20 | 3.61 | ||||||||
| Options exercisable – June 30, 2012 | 5,000,000 | $ | 0.20 | 3.61 | ||||||||
As of June 30, 2012, there was $171,348 of unrecognized interest expense related to warrant compensation that we expect to vest. This cost will be fully incurred over the next 4 years. The warrants exercisable as of June 30, 2012 have no intrinsic value.
NOTE 5 - INVENTORIES
Inventories at June 30, 2012 and September 30, 2011, respectively consist of the following:
| June 30, | September 30, | |||||||
| 2012 | 2011 | |||||||
| Raw Materials | $ | 1,159,292 | $ | 1,039,604 | ||||
| Work-in-process | 24,818 | 48,049 | ||||||
| Finished goods | 780,095 | 914,285 | ||||||
| 1,964,205 | 2,001,938 | |||||||
| Less reserves | (597,409 | ) | (541,158 | ) | ||||
| Inventories, net | $ | 1,366,796 | $ | 1,460,780 | ||||
NOTE 6 - LINE OF CREDIT
TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, provides a line of credit facility to the Company for the purpose of financing working capital needs. TiFunding acquired this facility on February 7, 2011 from Bay Bank, FSB for approximately $360,000.
The facility’s term expires on October 1, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility not to exceed $1,000,000 are based on certain receivables and inventory of the Company. The facility is secured by a first lien on all assets of the Company. In connection with the facility, the Company issued to TiFunding warrants to purchase $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. As of June 30, 2012, the outstanding balance on the facility was $976,686. The Company is in compliance with all of the covenants in the facility as of the date of this report.
NOTE 7 – SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES
In 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 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.
On July 6, 2012, the Company requested that the holders of the Modified Notes forgo 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 August 14, 2012, holders of $2,664,248 principal amount of Modified Notes had agreed to forgo the rights to receive the above-referenced interest payments. The Company will continue to seek such agreement from other holders.
NOTE 8 – GEOGRAPHICAL INFORMATION
The Company considers its manufactured kits, tests and instruments as one operating segment.
The following table sets forth revenue for the periods reported and assets by geographic location for the nine months ended June 30, 2012 and 2011, respectively.
| United States | Brazil | Consolidated | ||||||||
| June 30, 2012: | ||||||||||
| Revenues | $ | 1,990,289 | $ | 1,175,893 | $ | 3,166,182 | ||||
| Long-lived assets | $ | 189,269 | $ | 188,061 | $ | 377,330 | ||||
| June 30, 2011: | ||||||||||
| Revenues | $ | 2,179,081 | $ | 1,815,975 | $ | 3,995,056 | ||||
| Long-lived assets | $ | 177,014 | $ | 338,127 | $ | 515,141 | ||||
* Includes export sales to countries other than Brazil.
NOTE 9 – NOTE RECEIVABLE
The Company received an $840,000 Note during the period ended 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. The Company received $35,000 and $157,500 in principal payments against the Note for the nine month periods ending June 30, 2012 and June 30, 2011, respectively. This Note was paid in full as of November 30, 2011.
Refer to "Forward Looking Statements" following the Index in front of this Form 10-Q.
Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the Company’s financial condition and results of operations. This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.
Overview
Hemagen Diagnostics, Inc. is a biotechnology company that develops, manufactures, and markets approximately 68 FDA-cleared proprietary medical diagnostic test kits. Hemagen has two different product lines. The Virgo® product line of diagnostic test kits is used to aid in the diagnosis of certain autoimmune and infectious diseases, using ELISA, Immunoflourescence, and hemagglutination technology. The Analyst® product line is an FDA-cleared clinical chemistry analyzer system, including consumables, that is used to measure important constituents in human and animal blood. The Company sells its products both directly and through distributors to reference labs, physicians, veterinarians, clinical laboratories and blood banks. The Company also sells its products on a private-label basis through multinational distributors. The Company was incorporated in 1985 and became a public company in 1993.
Hemagen’s principal office is located at 9033 Red Branch Road, Columbia, Maryland 21045 and the telephone number is (443) 367-5500. Hemagen maintains a website at www.hemagen.com. Investors can obtain copies of our filings with the Securities and Exchange Commission from this site free of charge as well as from the Securities and Exchange Commission website at www.sec.gov.
Critical Accounting Policies
We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed with the Securities and Exchange Commission.
Results of Operations
The Three Month Period Ended June 30, 2012
Compared to the Three Month Period Ended June 30, 2011
Revenues for the three-month period ended June 30, 2012 decreased by approximately $453,000 (32%) to approximately $948,000 from approximately $1,401,000 for the three-month period ended June 30, 2011. The decrease in revenues is attributable to a decrease in sales in Brazil of approximately $174,000 and a decrease in sales in the Analyst division of approximately $267,000
for the current three-month period. The decrease in sales in Brazil is due to the loss of business from several large customers, as well as, price reductions to several large customers that have merged and implemented several vendor consolidation programs. Sales in Brazil local currency were down approximately R$136,000 or 15% from the prior year quarter. The Real to Dollar exchange rate averaged 1.96 during this current quarter as compared to 1.59 for the prior year quarter, resulting in a 19% decrease in the selling prices in Brazil when converted to USD. Sales in the Analyst division were down as the result of lower rotor sales during the current year compared to the same period last year. During the third quarter of 2011 there were several large rotor orders that were placed that did not reoccur during the current quarter.
Cost of product sales decreased by approximately $239,000 (33%) to approximately $494,000 from approximately $733,000 for the prior year quarter. Cost of product sales as a percentage of sales remained steady at 52%. The company implemented various cost saving measures during the quarter which resulted in the lower cost of sales, which helped in sustaining the gross margin despite the reduction in sales.
Research and development expenses decreased by approximately $883 (65%) to approximately $483 during the third quarter of 2012 as compared to approximately $1,366 of expenses in the third quarter of 2011.
The Company continues to work toward completing several research and development programs including:
| · | Improvements to the Analyst product line. |
| · | Developments and enhancement of several of the Virgo® test kits. |
Selling, general and administrative expenses decreased by approximately $141,000 (23%) for the quarter ended June 30, 2012 as compared to the prior year quarter, to approximately $465,000 from approximately $606,000 for the prior year quarter. These decreases in expenses related to payroll, travel, facilities and legal costs during the current quarter as compared to the prior year quarter. In March 2012, the company implemented various cost saving measures and expects to continue to see a decrease in expenses for the remainder of the year, which started to be fully realized in June 2012.
Total other expenses for the quarter ended June 30, 2012 increased by approximately $12,000 to approximately $120,000 from approximately $108,000 from the period ended June 30, 2011. The increase in total other expenses was due to a reduction of interest income received on the Note and an increase in interest expense associated with the line of credit.
There was no income tax expense recognized for the quarter ended June 30, 2012 or June 30, 2011.
Net loss for the period increased by approximately $84,000 for the three months ended June 30, 2012 to a net loss of approximately $132,000 compared to a net loss of approximately $48,000 in the same quarter of the prior year. The increase in net loss is the result of lower sales during the current quarter.
The Nine-month Period Ended June 30, 2012
Compared to the Nine-month Period Ended June 30, 2011
Revenues for the nine-month period ended June 30, 2012 decreased by approximately $829,000 (21%) to approximately $3,166,000 from approximately $3,995,000 for the same nine-month period ended June 30, 2011. Brazil sales decreased approximately $640,000 as compared to the same period last year. The decrease in sales in Brazil was due to the loss of business in several large customers and price reductions to several large customers that have merged, and implemented vendor consolidation programs. Sales in Brazil local currency were down approximately R$845,000 or 28% from the prior year. The Real to Dollar exchange rate averaged 1.84 for the current nine month period as compared to 1.66 for the prior year, resulting in a 11% decrease in the selling prices in Brazil when converted to USD. Sales in the Analyst division were also down by approximately $265,000 as the result of lower rotor sales during the current year compared to the same period last year. During the third quarter of 2011 there were several large rotor orders that were placed that did not reoccur during the current quarter. These decreases were offset by slight increases in sales of the Virgo® product line to non-Brazil customers during this year compared to the prior year and price increases for certain products which took effect in April 2012..
Cost of sales decreased by approximately $547,000 (22%) to approximately $1,955,000 from approximately $2,502,000 for the prior nine-month period ended June 30. Cost of sales as a percentage of sales decreased to approximately 62% compared to 63% for the same period last year. This decrease was attributable to a reduction in costs during the current nine-month period. The company implemented various cost saving measures during the current quarter which resulted in the lower cost of sales, which helped in sustaining the gross margin despite the reduction in sales.
Research and development expenses increased by approximately $23,000 (575%) during the nine months ended June 30, 2012 to approximately $27,000 from $4,000 in 2011. This increase was the result of additional expenses incurred related to improvements made to certain Virgo® test kits.
Selling, general and administrative expenses decreased by approximately $213,000 (12%) for the nine months ended June 30, 2012 to approximately $1,579,000 from approximately $1,792,000 in the previous period ended June 30, 2011. The decreases in expenses for the current year was attributable mainly to lower payroll related, travel, facility and legal expenses during the current nine month period. In March 2012 the Company implemented various costs saving measures and expects to see a decrease in expenses for the remainder of the year which started to be fully realized in June 2012.
Total other expenses for the nine months ended June 30, 2012 increased by approximately $59,000 to approximately $350,000 from approximately $291,000 from the nine month period ended June 30, 2011. The increase in total other expenses was due to a reduction of interest income received on the Note of approximately $10,000 and an increase in interest expense related to the line of credit and issuance of warrants. There was also an increase in expenses related to the sale of assets. During the current nine-month period there was a loss recorded compared to a gain that was recorded during the prior year nine month period.
There was no income tax expense recorded for the nine months ended June 30, 2012 as compared to $4,000 that was recorded for the nine months ended June 30, 2011. This tax expense resulted from income realized at the Company’s Brazilian subsidiary.
Net loss increased by approximately $145,000 for the nine months ended June 30, 2012 to a net loss of approximately $744,000 compared to a net loss of approximately $599,000 in the nine month period ended June 30, 2011. The increase in net loss was attributable to overall lower sales during the nine months ended June 30, 2012. The costs savings and overall reduction in selling and general and administrative expenses more than offset the increase in net interest expense for the current year. During the third quarter of the current year, Hemagen had implemented substantial expense reduction initiatives that began to reduce overall costs during the current quarter and into the remainder of this fiscal year.
Liquidity and Capital Resources
At June 30, 2012 the Company had approximately $107,000 of cash, working capital of $238,436 and a current ratio of 1.13 to 1.0. At September 30, 2011, the Company had $213,611 of cash, working capital of $923,610 and a current ratio of 1.61 to 1.0.
The Company currently has a revolving senior secured line of credit with TiFunding for the purpose of financing working capital needs as required. The line of credit provides for borrowings up to $1,000,000 at an annual interest rate of 9%. As of June 30, 2012 and August 14, 2012, the outstanding balance on the line was $976,868. 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 matures on October 1, 2012 and is renewable annually. The Company has received assurances from TiFunding that TiFunding will increase the amount available on the line of credit, if necessary.
The Company believes that cash flow from operations, the availability of the line of credit, and cash on hand at June 30, 2012 will be sufficient to finance its operations for the remainder of fiscal 2012. During the beginning of the third quarter, the Company implemented substantial cost reduction initiatives that should reduce expenses in future periods. 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.
Net cash used in operating activities during the nine months ended June 30, 2012 was approximately $308,000 compared to cash used in operating activities of approximately $402,000 during the nine month period ended June 30, 2011. The decrease in cash used by operating activities was principally attributable to changes in operating assets and liabilities.
Approximately $52,000 of cash was used by investing activities during the nine-month period ended June 30, 2012 compared to approximately $121,000 of cash provided from investing activities during the nine-month period ended June 30, 2011. The net cash used in investing activities during the current nine-month period ended June 30, 2012 was for the purchases of property and equipment of approximately $87,000 during the current year offset by payments received against the note payable of approximately $35,000. The cash provided from investing activities during the nine month period ended June 30, 2011 was generated from payments received against the Note of approximately $158,000 and was offset by purchases of property and equipment of approximately $39,000 during the year. Cash received as proceeds from the sale of Company assets compared to the same period last year declined approximately $2,800.
In accordance with the terms on the Note with the purchaser of Raichem, the Company received payments in the amount of $35,000 and $157,500, for each of the nine-month periods ended June 30, 2012 and 2011, respectively. The Note was paid in full in November of 2011.
Net cash provided by financing activities during the nine month period ended June 30, 2012 was approximately $307,000 compared to cash provided by financing activities of approximately $271,000 in the nine-month period ended June 30, 2011. The Company borrowed funds on the line of credit to fund operations during each of the nine-month periods ended June 30, 2012 and June 30, 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer (Principal Executive Officer), William P. Hales and Principal Financial Officer, Catherine Davidson have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of June 30, 2012 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 independent registered accounting firm, has informed the Company that these limitations represent a material weakness in internal controls. Management will continue to evaluate this segregation of duties issue. Over the past several months, management has documented the Company’s critical control procedures and will continue to review and update such procedures as changes occur.
There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Hemagen’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
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 |
| 101.INS | XBRL Instance |
| 101.XSD | XBRL Schema |
| 101.CAL | XBRL Calculation |
| 101.DEF | XBRL Definition |
| 101.LAB | XBRL Label |
| 101.PRE | XBRL Presentation |
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) | ||
| August 14, 2012 | /s/William P. Hales | |
| William P. Hal | ||
| President and | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| August 14, 2012 | /s/Catherine M. Davidson | |
| Catherine M. Davidson | ||
| Principal Financial Officer |