FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File Number 1-14798
IVAX DIAGNOSTICS, INC.
Delaware 11-3500746
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2140 North Miami Avenue, Miami, Florida 33127
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(305) 324-2300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
28,647,652 shares of Common Stock, $ .01 par value, outstanding as of
May 1, 2002.
IVAX DIAGNOSTICS, INC.
----------------------
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 2
Consolidated Statements of Operations
for the three months ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2002 2001
-------------- --------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 20,538,945 $ 23,282,155
Marketable securities 2,050,000 -
Accounts receivable, net of allowances for doubtful
accounts of $1,905,227 in 2002 and $1,911,395 in 2001 3,469,469 3,192,782
Inventories 2,673,631 2,857,289
Other current assets 1,335,378 1,428,493
--------------- --------------
Total current assets 30,067,423 30,760,719
Property, plant and equipment, net 1,418,482 1,458,702
Goodwill, net 6,887,569 6,878,199
Equipment on lease 921,610 856,439
Other assets 91,317 192,469
-------------- --------------
Total assets $ 39,386,401 $ 40,146,528
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 521,070 $ 801,392
Accrued expenses and other current liabilities 2,331,291 2,147,559
--------------- --------------
Total current liabilities 2,852,361 2,948,951
-------------- --------------
Other long-term liabilities 397,419 397,674
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, authorized 50,000,000 shares,
issued and outstanding 28,635,652 in 2002 and 2001 286,356 286,356
Capital in excess of par value 44,679,112 44,530,462
Accumulated deficit (6,311,050) (5,596,778)
Accumulated other comprehensive loss (2,517,797) (2,420,137)
--------------- --------------
Total shareholders' equity 36,136,621 36,799,903
--------------- --------------
Total liabilities and shareholders' equity $ 39,386,401 $ 40,146,528
=============== ================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
2
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, 2002 2001
-------------- --------------
Net revenues $ 2,506,288 $ 3,287,845
Cost of sales 1,249,445 1,401,891
-------------- --------------
Gross profit 1,256,843 1,885,954
-------------- --------------
Operating expenses:
Selling 794,093 766,839
General and administrative 936,933 1,852,848
Research and development 358,495 281,549
Goodwill amortization - 63,837
-------------- --------------
Total operating expenses 2,089,521 2,965,073
-------------- --------------
Loss from operations (832,678) (1,079,119)
-------------- --------------
Other income:
Interest income 166,806 79,224
Interest expense - related party - (93,455)
Other income (expense), net (15,078) 62,031
-------------- --------------
Total other income, net 151,728 47,800
-------------- --------------
Loss from continuing operations before income taxes (680,950) (1,031,319)
Provision for income taxes 33,322 288,800
-------------- --------------
Net loss $ (714,272) $ (1,320,119)
============== ==============
Basic and diluted loss per common share $ (.02) $ (.05)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic and diluted 28,635,652 28,621,643
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
IVAX DIAGNOSTICS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, 2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (714,272) $ (1,320,119)
Adjustments to reconcile net loss to net cash
flows provided by (used in) operating activities:
Depreciation and amortization 186,374 247,265
Provision for losses on accounts receivable 29,691 12,275
Stock option compensation expense 148,650 1,040,534
Changes in operating assets and liabilities:
Accounts receivable (359,986) 311,021
Inventories 158,887 101,354
Other current assets 70,338 (196,271)
Other assets 1,051 (20,084)
Accounts payable and accrued expenses (68,338) (155,496)
Other long-term liabilities 7,749 9,599
-------------- --------------
Net cash flows provided by (used in) operating activities (539,856) 30,078
-------------- --------------
Cash flows from investing activities:
Capital expenditures (23,389) (48,551)
Acquisitions of marketable securities (2,050,000) -
Acquisitions of equipment on lease (179,006) (180,545)
-------------- --------------
Net cash flows used in investing activities (2,252,395) (229,096)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock - 22,255,111
Change in balance due to IVAX Corporation 82,000 1,793,946
-------------- --------------
Net cash flows provided by financing activities 82,000 24,049,057
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (32,959) (372,825)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (2,743,210) 23,477,214
Cash and cash equivalents at the beginning of the year 23,282,155 1,262,888
-------------- --------------
Cash and cash equivalents at the end of the period $ 20,538,945 $ 24,740,102
============== ==============
Supplemental disclosures:
Interest paid $ - $ -
============== ==============
Income tax payments (refunds) $ - $ (44,162)
============== ==============
Supplemental disclosure of non-cash activities:
Contribution to capital of balance due to IVAX Corp $ - $ 9,659,615
============== ==============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
IVAX DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) GENERAL:
- -----------
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q and, therefore, do not include all
information normally included in audited financial statements. However, in the
opinion of management, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the results of operations, financial
position and cash flows have been made. The results of operations and cash flows
for the three months ended March 31, 2002 are not necessarily indicative of the
results of operations and cash flows which may be reported for the remainder of
2002. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes to
consolidated financial statements included in the IVAX Diagnostics, Inc. (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2001.
(2) MERGER
- -----------
On March 14, 2001, b2bstores.com Inc. ("b2bstores.com"), IVAX Corporation
("IVAX" or the "Parent") and IVAX Diagnostics, Inc., a wholly-owned subsidiary
of IVAX at that date, consummated a merger (the "Merger") of the pre-merger
Diagnostics into b2bstores.com pursuant to which all of the issued and
outstanding shares of the pre-merger Diagnostics were converted into 20,000,000
shares of b2bstores.com stock and b2bstores.com's name was changed to IVAX
Diagnostics, Inc. Prior to the Merger, b2bstores.com was an internet business
services company that was a non-operating public shell. Net assets of
b2bstores.com on the date of Merger were $22,255,111, consisting primarily of
cash of $22,285,064. Additionally, as a condition of the Merger, intercompany
indebtedness of $9,581,110 existing between IVAX and the pre-merger Diagnostics
was contributed to capital. For accounting purposes, the Merger was accounted
for as sale of stock for cash. The historical financial statements prior to the
acquisition are those of the pre-merger Diagnostics with retroactive
restatement, as if a stock split occurred, to reflect the 20,000,000 shares of
b2bstores.com common stock that IVAX received in the Merger as outstanding for
all periods presented. Following the Merger, IVAX' 20,000,000 shares of the
Company represents approximately 70% of the issued and outstanding shares of the
Company.
(3) CASH EQUIVALENTS AND SHORT-TERM MARKETABLE SECURITIES:
- ---------------------------------------------------------
The Company owns certain short-term investments in marketable debt securities
with original maturities of three months or less that are classified as cash
equivalents. The Company also owns certain other short term investments in
marketable debt securities with maturities greater than three months but less
than one year. These cash equivalents and other short-term marketable securities
consist primarily of taxable municipal bonds, commercial paper and money market
funds. All securities are deemed short term, classified as available for sale
securities and are recorded at market value using the specific identification
method. Unrealized gains and losses, net of tax, are reflected in other
comprehensive income in the accompanying balance sheets. Realized gains and
losses are included in earnings using the specific identification method.
Substantially all cash, cash equivalents and marketable securities are presently
held at one national securities brokerage firm. Accordingly, the Company is
subject to credit risk if this brokerage firm is unable to repay the balance in
the account or deliver the Company's securities or if the brokerage firm
5
should become bankrupt or otherwise insolvent. The Company only invests in
select money market instruments, municipal securities and corporate issuers.
(4) INVENTORIES:
- ---------------
Inventories consist of the following:
March 31, December 31,
2002 2001
------------- -------------
Raw materials $ 1,179,573 $ 1,044,346
Work-in-process 463,127 478,860
Finished goods 1,030,931 1,334,083
------------- -------------
Total inventories $ 2,673,631 $ 2,857,289
============= ==============
(5) CONCENTRATION OF CREDIT RISK:
- --------------------------------
The Company performs periodic credit evaluations of its customers' financial
condition and provides allowances for doubtful accounts as required. One
customer (Sigma Diagnostics, Inc., a wholly-owned subsidiary of Sigma-Aldrich
Corporation) accounted for 7.0% and 42.6% of the Company's net revenues for
three months ended March 31, 2002 and 2001, respectively. The customer and the
Company entered into a contract in April 1999, pursuant to which the customer
agreed to purchase minimum levels of the Company's instrumentation products
during the three-year period beginning May 1, 1999. Twice during the year 2000
the Company's largest customer suspended its purchases of instruments while
representatives of the Company and the customer resolved certain product issues.
The first suspension lasted for a period of approximately four months. The
second suspension began in October 2000 and ended in January 2001. Beginning in
the third quarter of 2001 and continuing through the three months ended March
31, 2002 the customer has made no purchases of instruments based upon its
determination that it had an adequate level of instruments in inventory.
In addition, in October 2000, the customer and the Company entered into a three
year contract pursuant to which the Company agreed to sell certain infectious
disease diagnostic kits under a private-label arrangement. The customer is not
required to make a minimum level of purchases under this private-label
arrangement.
On March 21, 2002, the Company announced that it had signed a non-binding letter
of intent with Sigma Diagnostics, pursuant to which the Company would acquire
Sigma Diagnostics' global enzyme immunoassay product line (See Note 12). Under
previous agreements with Sigma Diagnostics the Company sold enzyme immunoassay
instrumentation and reagents to Sigma Diagnostics which they marketed throughout
the world. Upon the consummation of the transaction with Sigma Diagnostics,
reagents and instrumentation would no longer be sold by the Company to Sigma
Diagnostics, which had been the Company's largest customer for the past three
years. Instead, the Company intends to sell enzyme immunoassay instrumentation
and reagents directly to Sigma Diagnostics' enzyme immunoassay customer base.
Upon the consummation of the transaction with Sigma Diagnostics, the previous
agreements with Sigma Diagnostics would be terminated. There can be no assurance
that the Company will be able to replace its largest customer or sucessfully
integrate the acquired assets into the Company's business.
6
Any failure to do so could have a material adverse effect on the Company's
business, prospects, operating results, and financial condition.
The Company's accounts receivables are generated from sales made from both the
United States and Italy. As of March 31, 2002 and December 31, 2001, $2,902,765
and $2,561,948, respectively, of the Company's net accounts receivable were due
in Italy. Of the total net accounts receivable, 69.1% at March 31, 2002 and
66.8% at December 31, 2001 were due from hospitals and laboratories controlled
by the Italian government.
(6) LOSS PER SHARE:
- ------------------
A reconciliation of the denominator of the basic and diluted loss per share
computation for loss from continuing operations is as follows:
Three Months Ended March 31, 2002 2001
---------- ----------
Basic and diluted weighted average shares outstanding 28,635,652 28,621,643
Not included in the calculation of diluted loss per
share because their impact is antidilutive:
Stock options outstanding 2,134,128 2,779,676
(7) INCOME TAXES:
- ----------------
Through March 14, 2001, the Company reported its income taxes as part of a
consolidated group with IVAX. For financial statement purposes, the Company
accounted for income taxes on a stand-alone basis as though the Company had
filed its own income tax returns in the first quarter of 2001. Effective March
14, 2001 as a result of the Merger, the Company is no longer included in the
consolidated income tax returns of IVAX.
The provision for income taxes consists of the following:
Three Months Ended March 31, 2002 2001
---------- ----------
Current:
Foreign $ 33,322 $ 288,800
========== ==========
The Company's income tax provisions for the three months ended March 31, 2002
and 2001 were different from the amount computed on the loss before provision
for income taxes at the statutory rate of 35% primarily due to the
non-recognition of the benefits of domestic taxable losses. Included in the loss
before provision for income taxes was nondeductible stock option compensation
expense of $148,650 and $1,040,534 in the three months ended March 31, 2002 and
2001, respectively.
The Company has established a full valuation allowance on its net domestic
deferred tax assets, which are primarily comprised of net operating loss
carryforwards. The portion of these domestic net operating loss carryforwards
generated prior to March 14, 2001 were utilized by IVAX. On a separate return
basis, no recognition of that utilization is reflected in the accompanying
consolidated financial statements. Net operating losses generated by the Company
after March 14, 2001 are approximately $4,657,000 and $4,010,000 at March 31,
2002 and December 31, 2001, respectively and are available for use prior to
their expiration in 2021. Foreign deferred tax assets totaled $612,000 and
$624,770 at March 31, 2002 and December 31, 2001, respectively. Realization of
the net deferred tax asset is dependent upon generating
7
sufficient future taxable income. Although realization is not assured,
management believes that it is more likely than not that the net deferred tax
asset will be realized.
(8) COMPREHENSIVE LOSS:
- ----------------------
The components of the Company's comprehensive loss are as follows:
Three Months Ended March 31, 2002 2001
---------- ------------
Net income $ (714,272) $ (1,320,119)
Foreign currency translations adjustments (97,660) (343,635)
---------- ------------
Comprehensive loss $ (811,932) $ (1,663,754)
========== ============
(9) SEGMENT INFORMATION:
- -----------------------
The Company's management reviews financial information, allocates resources and
manages its business by geographic region. The Domestic region, which includes
corporate expenditures, contains the Company's subsidiaries in the United
States. The Italian region contains subsidiaries located in Italy. The
information provided is based on internal reports and was developed and utilized
by management for the sole purpose of tracking trends and changes in the results
of the regions. The information, including the allocations of expense and
overhead, was calculated based on a management approach and may not reflect the
actual economic costs, contributions or results of operations of the regions as
stand-alone businesses. If a different basis of presentation or allocation were
utilized, the relative contributions of the regions might differ but the
relative trends would, in management's view, likely not be materially impacted.
The table below sets forth net revenue, income from operations and assets by
region.
Net Revenues by Region
Period Ended March 31, Three months
2002 2001
------------ ------------
Domestic
External net revenues $ 1,317,495 $ 1,214,062
Intercompany revenues 174,085 176,783
------------ ------------
1,491,580 1,390,845
------------ ------------
Italian
External net revenues 1,188,793 2,073,783
Intercompany revenues 291,625 118,293
------------ ------------
1,480,418 2,192,076
------------ ------------
Elimination (465,710) (295,076)
------------ ------------
Consolidated net revenues $ 2,506,288 $ 3,287,845
============ ============
Income (Loss) from Operations by Region
Period Ended March 31, Three months
2002 2001
------------ ------------
Domestic $ (844,421) $ (1,577,084)
Italian 59,360 492,211
Elimination (47,617) 5,754
------------ ------------
Loss from operations $ (832,678) $ (1,079,119)
============ ============
8
Income (Loss) from Operations by Region
Period Ended March 31, Three months
March 31,
Total Assets 2002 2001
------------ -------------
Domestic $ 27,855,329 $ 29,497,479
Italian 11,763,867 12,263,954
Elimination (232,795) (42,364)
------------ -------------
Total assets $ 39,386,401 $ 41,719,069
============ =============
(10) COMMITMENTS AND CONTIGENCIES:
- ---------------------------------
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger described in Note
2. The suit seeks the court's determination of declaratory relief as to whether
(i) the proxy statement materials sent to shareholders should be considered
null, void and unenforceable, (ii) the Merger, if accomplished based on the use
of the proxy materials, should be set aside, and (iii) the termination fee of
$1.0 million, as defined in the Merger Agreement, shall be found void. The
directors and officers of the Company deny the allegations and intend to
vigorously defend such claims, but the ultimate outcome of any such legal
proceeding cannot be determined.
The Company is involved in various legal claims and actions and regulatory
matters, and other notices and demand proceedings arising in the ordinary course
of business. While it is not feasible to predict or determine the outcome of
these proceedings, in the opinion of management, based on a review with legal
counsel, any losses resulting from such legal proceedings would not have a
material adverse impact on the financial position, results of operations or cash
flows of the Company.
(11) RECENTLY ISSUED ACCOUNTING STANDARDS:
- -----------------------------------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. It supersedes APB Opinion No. 17, Intangible Assets. SFAS 142
addresses accounting for intangible assets that are acquired individually or
with a group of other assets (other than a business combination) upon
acquisition. It also addresses accounting for goodwill and other intangible
assets after they have been initially recognized in the financial statements.
Intangible assets that have indefinite lives and goodwill are no longer
amortized; rather, they must be tested at least annually for impairment using
fair values. This will increase net income by approximately $255,000 per year.
Intangible assets that have finite useful lives continue to be amortized over
their useful lives. However, management is currently evaluating the extent of
impairment, if any, of goodwill as of January 1, 2002, that may need to be
recorded. The initial impairment test is expected to be completed by June 30,
2002. The final impairment test, if any, is expected to be completed by December
31, 2002.
SFAS 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or normal
operation of a long-lived asset,
9
except for certain obligations of lessees. It requires that the fair value of an
asset retirement obligation be recognized as a liability in the period in which
it is incurred if a reasonable estimate can be made and that the associated
retirement costs be capitalized as part of the carrying amount of the long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002.
Management believes that the impact of adoption of this statement will not have
a material impact on the Company's consolidated financial statements.
Effective January 1, 2002, the Company adopted SFAS 144, Accounting for the
Impairment or Disposal of Long-lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. It
supersedes SFAS 121, Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed of, and certain provisions of APB Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. It also amends ARB No. 51, Consolidated
Financial Statements. SFAS 144 establishes a single accounting model for the
accounting for a segment of a business accounted for as a discontinued operation
that was not addressed by SFAS 121 and resolves other implementation issues
related to SFAS 121. The impact of adoption of this statement did not have a
material impact on the Company's consolidated financial statements.
(12) Subsequent Event
- ---------------------
On May 15, 2002 the Company announced it had consummated the acquisition of the
assets of the global enzyme immunoassay (EIA) product line of Sigma Diagnostics
(See Note 5) for approximately $2,250,000 and the assumption of certain
liabilities. The acquired assets include reagent and instrumentation inventory
as well as EIA instrumentation placed at customer locations. As a result of the
consummation of the transaction with Sigma Diagnostics, the Company will no
longer sell reagents or instrumentation to Sigma Diagnostics, which had been the
Company's largest customer for the past three years. Instead, the Company
intends to sell EIA instrumentation and reagents directly to Sigma Diagnostics'
customer base. Selected employees previously affiliated with Sigma Diagnostics,
primarily in the field sales, instrument service and technical support areas,
are expected to join the Company. As a result of the consummation of the
transaction with Sigma Diagnostics, previous agreements with Sigma Diagnostics
have been terminated. There can be no assurance that the Company will be able to
replace its largest customer or that the acquired assets will be successfully
integrated into the Company's business. Any failure to do so could have a
material adverse effect on the Company's business, prospects, operating results
and financial condition.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes to consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 and the unaudited interim consolidated
financial statements and the related notes to unaudited interim consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
We have made forward-looking statements, which are subject to risks and
uncertainties, in this quarterly report on Form 10-Q. These statements are based
on the beliefs and assumptions of our management and on the information
currently available to it. Forward-looking statements may be preceded by,
followed by, or otherwise include the words "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "projects," "would," "should,"
or similar expressions or statements that certain events or conditions "may"
occur. Actual results, performance or achievements could differ materially from
those contemplated, expressed or implied by these forward-looking statements.
These forward-looking statements are based largely on our expectations and the
beliefs and assumptions of our management and on the information currently
available to it and are subject to a number of risks and uncertainties,
including, but not limited to, the risks and uncertainties associated with:
economic, competitive, political, governmental and other factors affecting us
and our operations, markets and products; the success of technological,
strategic and business initiatives; our limited operating revenues and history
of operational losses; our agreements with IVAX, third party distributors and
key personnel; consolidation of our customers and reimbursement policies of
governmental and private third parties affecting our operations, markets and
products; price constraints imposed by our customers, governmental and private
third parties; our ability to replace our largest customer; our ability to
consummate potential acquisitions of businesses or products; our ability to
integrate acquired assets, businesses or products; political and economic
instability and foreign currency fluctuation affecting our foreign operations;
the holding of substantially all of our cash and cash equivalents at a single
brokerage firm, including risks relating to the bankruptcy or insolvency of such
brokerage firm; litigation regarding intellectual property rights and product
liability; voting control of our common stock by IVAX; conflicts of interest
with IVAX and with our officers, directors and employees; and other factors
discussed elsewhere in this quarterly report on Form 10-Q. Many of these factors
are beyond our control.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2001
NET REVENUES AND GROSS PROFIT
Net revenue for the three months ended March 31, 2002 totaled $2,506,000, a
decrease of $782,000, or 23.8%, from the $3,288,000 reported in the prior year
comparable period. This decrease was comprised of a decrease of $885,000 in
external net revenue from Italian operations partially offset by an increase in
external net revenue of $103,000 from domestic operations. External net revenue
from Italian operations totaled $1,189,000 for the three months ended March 31,
2002, compared to $2,074,000 for the three months ended March 31, 2001. This
42.7% decrease was primarily attributable to decreased sales volume of
11
instrumentation products from our largest customer, Sigma Diagnostics, as
further discussed in Note 5. Domestic operations generated external net revenue
of $1,317,000 for the three months ended March 31, 2002, compared to $1,214,000
for the three months ended March 31, 2001. The $103,000, or 8.5% increase, was
primarily due to volume increases in revenue from instrumentation placements
partially offset by decreased volume of instrument component and raw material
antigen sales. Gross profit for the three months ended March 31, 2002 decreased
$629,000, or 33.4%, to $1,257,000 (50.2% of net revenue) from $1,886,000 (57.4%
of net revenue) for the three months ended March 31, 2001. This decrease in
gross profit was primarily attributable to decreased revenue from sales of
instrumentation products. The decrease in gross profit as a percentage of net
revenue of 7.2% was also due to lower revenue from sales of instrumentation
products, which are generally sold at a higher gross margin.
OPERATING EXPENSES
Selling expenses of $794,000 (31.7% of net revenue) for the three months ended
March 31, 2002 were composed of domestic expenses of $452,000 and $342,000 from
Italian operations. For the three months ended March 31, 2001, domestic selling
expenses were $394,000 while $373,000 was incurred in Italy, totaling $767,000
(23.3% of net revenue). This increase in consolidated selling expenses of
$27,000 was primarily due to greater payroll and travel costs related to
increased domestic instrument system sales efforts, partially offset by a
decrease in selling expenses in Italy due to the effect of foreign exchange rate
differences. General and administrative expenses totaled $937,000 (37.4% of net
revenue) for the three months ended March 31, 2002, a decrease of $916,000, from
$1,853,000 (56.4% of net revenue) for the three months ended March 31, 2001.
This decrease was primarily the result of a decrease of $892,000 in stock option
compensation expense recognized in accordance with Accounting Principles Board
Opinion No. 25, from the conversion of outstanding options under our 1999 Stock
Option Plan to non-qualified stock options as a result of the Merger. The
remaining $743,000 non-cash compensation cost resulting from such conversion
will be expensed over the remaining vesting term of the options through June 30,
2003. This decrease compared to the prior period was also due to professional
fees incurred in 2001 associated with the completion of the Merger, partially
offset by expenses incurred in the three months ended March 31, 2002 now
necessary due to our independent public company structure. Research and
development expenses totaled $358,000 for the three months ended March 31, 2002
compared to $282,000 for the three months ended March 31, 2001, representing
14.3% and 8.6% of net revenues, respectively. The increase of $76,000 was
partially the result of an increase in domestic research and development
expenses to $292,000 in the three months ended March 31, 2002 from $249,000 in
the three months ended March 31, 2001 as well as an increase in Italian research
and development expenses to $66,000 in the three months ended March 31, 2002
from $33,000 in the three months ended March 31, 2001. This increase was the
result of increased research related to instrumentation products. The future
level of research and development expenditures will depend on, among other
things, the outcome of ongoing testing of products and instrumentation under
development, delays or changes in government required testing and approval
procedures, technological and competitive developments, strategic marketing
decisions and liquidity. Goodwill amortization, which totaled $64,000 in the
three months ended March 31, 2001, was not recorded in the three months ended
March 31, 2002 due to the adoption of SFAS 142 (See Note 11).
OPERATING LOSS
Operating loss was $833,000 for the three months ended March 31, 2002 compared
to operating loss of $1,079,000 in the three months ended March 31, 2001.
Exclusive of intersegment elimination adjustments that increased consolidated
operating loss by $48,000, operating loss in the three months ended March 31,
2002 was composed of an operating loss of $844,000 for domestic operations and
operating income of $59,000 from Italian operations. Excluding intersegment
elimination adjustments that reduced consolidated operating loss by $6,000 in
the three months ended March 31, 2001, domestic
12
operations incurred an operating loss of $1,577,000 while Italian operations
generated operating income of $492,000.
OTHER INCOME (EXPENSE)
Interest income increased to $167,000 for the three months ended March 31, 2002
from $79,000 for the three months ended March 31, 2001. The increase was
primarily due to interest earned on cash received in the Merger for the full
three months ended March 31, 2002 compared to the prior year period that began
with the Merger date and ending March 31, 2001. This increase was partially
offset by lower interest rates in 2002 as well as a reduction in cash, cash
equivalents and marketable securities. Interest expense - related party was $0
in the three months ended March 31, 2002 compared to $93,000 for the three
months ended March 31, 2001. The related party interest expense was incurred on
intercompany advances from IVAX. As a result of the Merger, intercompany
advances from IVAX were contributed to capital. Other expense, net, totaled
$15,000 during the three months ended March 31, 2002, compared to other income,
net, of $62,000 during the three months ended March 31, 2001, a decrease of
$77,000. This decrease was due to larger net foreign currency gains recognized
in 2001 on transactions by our Italian subsidiary, which were denominated in
currencies other than its functional currency.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, our working capital was $27,215,000 compared to $27,812,000
at December 31, 2001. Cash and cash equivalents totaled $20,539,000 at March 31,
2002, as compared to $23,282,000 at December 31, 2001. Additionally, our
investment in marketable securities totaled $2,050,000 at March 31, 2002.
Substantially all cash, cash equivalents and marketable securities are presently
held at one national securities brokerage firm. Accordingly, we are subject to
credit risk if this brokerage firm is unable to repay the balance in the account
or deliver our securities or if the brokerage firm should become bankrupt or
otherwise insolvent. We only invest in select money market instruments,
municipal securities and corporate issuers.
Net cash flows of $540,000 were used in operating activities during the three
months ended March 31, 2002, compared to $30,000 that was provided from
operating activities during the three months ended March 31, 2001. The increase
in cash used in operating activities during the three months ended March 31,
2002 compared to the same period of the prior year was primarily the result of a
decrease in cash received from accounts receivable collections and reduced
operating results adjusted for non-cash items, partially offset by a reduction
in other current assets.
Net cash flows of $2,252,000 were used in investing activities during the three
months ended March 31, 2002, as compared to $229,000 used during the same period
of the prior year. The increase in cash used was primarily the result of the
investment in marketable securities.
Net cash flows of $82,000 were provided by financing activities during the three
months ended March 31, 2002, compared to $24,049,000 provided during the same
period of 2001. The decrease in cash provided was primarily due to cash of
$22,285,000 that was included in net assets acquired in the Merger. Other
differences in net cash flows provided by financing activities is primarily due
to a decrease in funds received from IVAX.
Our product research and development expenditures are expected to be
approximately $1,600,000 during 2002, subject to adjustment as a result of the
consummation of our transaction with Sigma Diagnostics, as described
13
below. Actual expenditures will depend on, among other things, the outcome of
clinical testing of products under development, delays or changes in government
required testing and approval procedures, technological and competitive
developments, strategic marketing decisions and liquidity. There can be no
assurance that we will successfully complete products under development, that we
will be able to obtain regulatory approval for any such products, or that any
approved product will be produced in commercial quantities, at reasonable costs,
and be successfully marketed. In addition, we expect to spend approximately
$350,000 in fiscal 2002 to improve and expand our equipment and facilities,
subject to adjustment as a result of the consummation of our transaction with
Sigma Diagnostics.
Our principal source of short term liquidity is existing cash, cash equivalents
and marketable securities received as a result of the completion of the Merger,
which we believe will be sufficient to meet our operating needs and anticipated
capital expenditures over the short term. For the long term, we intend to
utilize principally existing cash and cash equivalents as well as internally
generated funds, which are anticipated to be derived primarily from the sale of
existing diagnostic and instrumentation products and diagnostic and
instrumentation products currently under development. To the extent that the
aforementioned sources of liquidity are insufficient, we may consider issuing
debt or equity securities or curtailing or reducing our operations.
In April 1999, we entered into a three year contract with Sigma Diagnostics,
pursuant to which Sigma Diagnostics agreed to purchase from us a minimum number
of scientific instruments per year. Twice during the year 2000, Sigma
Diagnostics notified us that it desired to suspend shipments of instruments
while our representatives and Sigma Diagnostics' representatives resolved
certain product issues. The first suspension lasted for a period of
approximately four months. The second suspension began in October 2000 and ended
in January 2001. During the last six months of 2001 and to date in 2002, Sigma
Diagnostics made no purchases of instruments based upon its determination that
it had an adequate level of instruments in inventory. In addition, in October
2000, we entered into a three year contract with Sigma Diagnostics pursuant to
which we agreed to sell to Sigma Diagnostics certain infectious disease
diagnostic kits under a private-label arrangement. Sigma Diagnostics was not
required to make a minimum level of purchases under this private-label
arrangement. During the three months ended March 31, 2002 and 2001 our net
revenues from such sales of instruments, replacement parts and diagnostic kits
represented 7.0% and 42.6%, respectively, of our total net revenues for such
periods.
On March 21, 2002, we announced that we had signed a non-binding letter of
intent with Sigma Diagnostics pursuant to which we would acquire Sigma
Diagnostics' global enzyme immunoassay product line (See Note 12). Under
previous agreements with Sigma Diagnostics, which are described above, we sold
enzyme immunoassay instrumentation and reagents to Sigma Diagnostics which they
marketed throughout the world. Upon the consummation of the transaction with
Sigma Diagnostics, we will no longer sell reagents or instrumentation to Sigma
Diagnostics, which had been our largest customer for the past three years.
Instead, we intend to sell enzyme immunoassay instrumentation and reagents
directly to Sigma Diagnostics' enzyme immunoassay customer base. Upon the
consummation of the transaction with Sigma Diagnostics, our previous agreements
with Sigma Diagnostics would be terminated. There can be no assurance that we
will be able to replace our largest customer or successfully integrate the
acquired assets into our business. Any failure
14
to do so could have a material adverse effect on our business, prospects,
operating results, and financial condition.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to product returns, allowance for doubtful accounts, inventories,
intangible assets, income and other tax accruals, warranty obligations, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Our assumptions and estimates may, however, prove to have been
incorrect and our actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
and the judgments and estimates we make concerning their application have
significant impact on our consolidated financial statements.
A principal source of revenue is our "reagent rental" program in which customers
make reagent kit purchase commitments with us that typically last for a period
of three to five years. In exchange, we provide at no cost a Mago(R) instrument
and any required instrument service, which are paid for by the customer through
these reagent kit purchases over the life of the commitment. We recognize
revenue from the reagent kit sales only at the time of shipment and passage of
title. Should actual reagent kit or instrument failure rates significantly
increase, our future operating results could be negatively impacted by increased
warranty obligations and service delivery costs.
We maintain allowances for doubtful accounts, particularly in Italy for the
operations of our Italian subsidiary, for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, then we may be required to make additional allowances
which would adversely affect our operating results during the period in which
the determination or reserve is or was made.
We regularly review inventory quantities on hand and, if necessary, record a
provision for excess and obsolete inventory based primarily on our estimates of
product demand and production requirements. These estimates of future product
demand may prove to be inaccurate, in which case any resulting adjustments to
the value of inventory would be recognized in our cost of goods sold at the time
of such determination.
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," we are
required to analyze our goodwill for impairment issues during the first six
months of fiscal 2002, and on a periodic basis thereafter. In assessing the
recoverability of our goodwill and other intangibles, we must make assumptions
regarding estimated future cash flows, including current and projected levels of
income, business trends, prospects and market conditions, to determine the fair
value of the respected assets. If these estimates or their related assumptions
change in the future, we may be required to record impairment charges for these
assets not previously recorded. Any resulting impairment loss would be recorded
as a charge against our earnings and could have a material adverse impact of our
financial condition and results of operations.
15
We accounted for income taxes on our consolidated financial statements on a
stand-alone basis as if we had filed our own income tax returns. However, the
pre-merger Diagnostics reported its income taxes until the Merger as part of a
consolidated group. Therefore, all domestic net operating losses generated prior
to the Merger were utilized by IVAX. Since the Merger, we have experienced
domestic losses from operations. Accounting principles generally accepted in the
United States require that we record a valuation allowance against the deferred
tax asset associated with these losses if it is "more likely than not" that we
will not be able to utilize the net operating loss to offset future taxes. Due
to the losses from the operations of our domestic operations since the Merger,
we have provided full valuation reserves against domestic deferred tax assets
and currently provide for only foreign income taxes. Over time we may reach
levels of profitability which could cause our management to conclude that it is
more likely than not that we will realize all or a portion of the net operating
loss carryforward. Upon reaching such a conclusion, and upon such time as we
reversed the entire valuation against the deferred tax asset, we would then
provide for income taxes at a rate equal to our combined federal and state
effective rates. This and subsequent revisions to the estimated net realizable
value of the deferred tax asset could cause our provision for income taxes to
vary significantly from period to period.
The critical accounting policies discussed are not intended to be a
comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
accounting principles generally accepted in the United States, with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2002 we adopted Statement of Financial Accounting Standards
("SFAS") 142, Goodwill and Other Intangible Assets, which addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. SFAS 142 addresses accounting
for intangible assets that are acquired individually or with a group of other
assets (other than a business combination) upon acquisition. It also addresses
accounting for goodwill and other intangible assets after they have been
initially recognized in the financial statements. Intangible assets that have
indefinite lives and goodwill will no longer be amortized; rather, they must be
tested at least annually for impairment using fair values. Intangible assets
that have finite useful lives will be amortized over their useful lives. On
January 1, 2002 amortization of goodwill acquired prior to June 30, 2001 ceased.
This will increase net income by approximately $255,000 per year. However,
management is currently evaluating the extent of impairment, if any, of
intangible assets with indefinite lives and goodwill as of January 1, 2002, that
may need to be recorded. The initial impairment test is expected to be completed
by June 30, 2002. The final impairment test, if any, is expected to be completed
by December 31, 2002.
SFAS 143, Accounting for Asset Retirement Obligations, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS 143
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and/or normal
operation of a long-lived asset, except for certain obligations of lessees. It
requires that the fair value of an asset retirement obligation be recognized as
a liability in the period in which it is incurred if a reasonable estimate can
be made and that the associated retirement costs be capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. Our management believes that the impact of
adoption of this statement will not have a material impact on the Company's
consolidated financial statements.
16
Effective January 1, 2002 we adopted SFAS 144, Accounting for the Impairment or
Disposal of Long-lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It supersedes
SFAS 121, Accounting for the Impairment of Long Lived Assets and for Long Lived
Assets to be Disposed of, and certain provisions of APB Opinion No. 30,
Reporting the Effects of Disposal of a Segment of a Business and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business. It also amends ARB No. 51, Consolidated Financial
Statements. SFAS 144 establishes a single accounting model for the accounting
for a segment of a business accounted for as a discontinued operation that was
not addressed by SFAS 121 and resolves other implementation issues related to
SFAS 121. The impact of adoption of this statement did not have a material
impact on the Company's consolidated financial statements.
CURRENCY FLUCTUATIONS
For the three months ended March 31, 2002 and 2001, approximately 46.5% and
29.1%, respectively, of our net revenues were generated in currencies other than
the United States dollar. Fluctuations in the value of foreign currencies
relative to the United States dollar affect our reported results of operations.
If the United States dollar weakens relative to the foreign currency, then our
earnings generated in the foreign currency will, in effect, increase when
converted into United States dollars and vice versa. Exchange rate differences
resulting from the strength of the United States dollar against the Euro
resulted in a decline of approximately $77,000 in net revenues for the three
months ended March 31, 2002 compared to the same period of the prior year.
During the three months ended March 31, 2002 and 2001, none of our subsidiaries
were domiciled in highly inflationary environments. The effects of inflation on
consolidated net revenues and operating income were not significant.
For the three months ended March 31, 2002, Delta represented 47.4% of our net
revenues. Conducting an international business inherently involves a number of
difficulties, risks, and uncertainties, such as export and trade restrictions,
inconsistent and changing regulatory requirements, tariffs and other trade
barriers, cultural issues, longer payment cycles, problems in collecting
accounts receivable, political instability, local economic downturns, seasonal
reductions in business activity in Europe during the traditional summer vacation
months, and potentially adverse tax consequences.
On January 1, 1999, members of the European Union, including Italy, introduced a
single currency, the Euro. During the transition period which ended January 1,
2002, European Monetary Union, or EMU, countries had the option of settling
transactions in local currencies or in the Euro. We have completed our
conversion to the Euro. The conversion to the Euro has resulted in increased
costs to us related to updating operating systems, reviewing the effect of the
Euro on our contracts and updating catalogues and sales materials for our
products. The adoption of the Euro will limit the ability of an individual EMU
country to manage fluctuations in the business cycles through monetary policy.
INCOME TAXES
We recognized a tax provision of $33,000 and $289,000 for the three months ended
March 31, 2002 and 2001, respectively, which related to foreign operations.
Through March 14, 2001, we reported our domestic income taxes as part of a
consolidated group with IVAX. All domestic taxable losses generated prior to
that date were utilized by IVAX. Effective March 14, 2001, as a result of the
merger, we are no longer included in the consolidated income tax returns of
IVAX.
For financial statement purposes, we accounted for income taxes on a stand-alone
basis as though we had filed our own income tax returns. Our income tax
provisions for the three months ended March 31, 2002 and 2001 were different
from the amount computed on the loss before provision for income taxes at the
17
United States federal statutory rate of 35% primarily due to the non-recognition
of the benefits of domestic taxable losses which include the previously
discussed non-deductible stock option compensation expense.
As of March 31, 2002, we had no net domestic deferred tax asset, as domestic net
operating losses generated prior to the Merger were utilized by IVAX and a full
valuation allowance has been established against domestic deferred tax assets
generated subsequent to March 14, 2001. The foreign net deferred tax asset was
$612,000 at March 31, 2002 and is included in other current assets in the
accompanying consolidated balance sheet. Realization of the net deferred tax
asset is dependent upon generating sufficient future foreign taxable income.
Although realization is not assured, over time we believe we will reach levels
of profitability which will permit the net deferred tax asset to be realized.
RISK OF PRODUCT LIABILITY CLAIMS
Developing, manufacturing and marketing diagnostic test kits, reagents and
instruments subject us to the risk of product liability claims. We believe that
we continue to maintain an adequate amount of product liability insurance, but
there can be no assurance that our insurance will cover all existing and future
claims. There can be no assurance that claims arising under any pending or
future product liability cases, whether or not covered by insurance, will not
have a material adverse effect on our business, results of operations or
financial condition. Our current products liability insurance is a "claims made"
policy.
18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company.
The Company, in the normal course of doing business, is exposed to the
risks associated with foreign currency exchange rates and changes in interest
rates.
Foreign Currency Exchange Rate Risk - The Company is exposed to exchange rate
- -----------------------------------
risk when its Italian subsidiary enters into transactions denominated in
currencies other than its functional currency
Interest Rate Risk - The Company does not have debt obligations. The Company
- ------------------
believes that its exposure to market risk relating to interest rate risk is not
material.
Commodity Price Risk - The Company does not believe it is subject to any
- --------------------
material risk associated with commodity prices.
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
On March 2, 2001, b2bstores.com received notice that a shareholder of
b2bstores.com filed a lawsuit against b2bstores.com and two of its directors.
The lawsuit alleges that b2bstores.com violated certain aspects of Section 14(a)
of the Securities Exchange Act of 1934, as amended, and that certain directors
breached their fiduciary duties in connection with the Merger. The suit seeks
the court's determination of declaratory relief as to whether (i) the proxy
statement materials sent to shareholders should be considered null, void and
unenforceable, (ii) the Merger, if accomplished based on the use of the proxy
materials, should be set aside, and (iii) the termination fee of $1.0 million,
as defined in the Merger Agreement, shall be found void. The directors and
officers of the Company deny the allegations and intend to vigorously defend
such claims, but the ultimate outcome of any such legal proceeding cannot be
determined.
The Company is involved in various legal claims and actions and regulatory
matters, and other notices and demand proceedings arising in the ordinary course
of business. While it is not feasible to predict or determine the outcome of
these proceedings, in the opinion of management, based on a review with legal
counsel, any losses resulting from such legal proceedings would not have a
material adverse impact on the financial position, results of operations or cash
flows of the Company.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
20
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 by the
undersigned thereunto duly authorized.
IVAX Diagnostics, Inc.
Date: May 15, 2002 By: /s/ Mark Deutsch
-----------------------------
Mark Deutsch
Vice President-Finance
Chief Financial Officer
21