SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998 Commission File number 1-11700
HEMAGEN DIAGNOSTICS, INC.
(Exact name of Small Business Issuer as
Specified in its Charter)
Delaware 04-2869857
(State of Organization) (I.R.S. Employer Identification Number)
34-40 Bear Hill Road, Waltham, Massachusetts 02451
(Address of principal executive offices, Zip Code)
(781) 890-3766
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities and 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 [ ]
As of June 30, 1998, the issuer had 7,851,890 shares of Common Stock,
$.01 par value per share outstanding.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets; June 30, 1998 and
September 30, 1997 2
Consolidated Statements of Operations; three
months and nine months ended June 30, 1998 and 1997 4
Consolidated of Cash Flows; nine months ended
June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
</TABLE>
PART I - Financial Information
Item 1. Financial Statements
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 920,639 $ 294,086
Restricted cash (Note C) 96,050 --
Short-term investments -- 730,827
Accounts and other receivables, less allowance for doubtful
accounts of $42,000 at June and $55,500 at September 1,931,676 2,288,793
Inventories 4,750,994 3,953,601
Prepaid expenses and other current assets 242,379 221,646
--------------------------
Total current assets 7,941,738 7,488,953
Property and Equipment:
Fixed assets 4,964,578 4,728,344
Less accumulated depreciation 2,705,244 2,182,874
--------------------------
2,259,334 2,545,470
Other assets 1,478,283 1,512,227
--------------------------
$11,679,355 $11,546,650
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
----------- -------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses $ 772,549 $ 785,135
Customer deposits 109,410 --
Note payable -- 198,983
Current portion of long-term debt 282,680 347,388
---------------------------
Total current liabilities 1,164,639 1,331,506
---------------------------
Long-term debt, less current portion -- 189,281
---------------------------
Stockholders' Equity:
Preferred stock, no par value - 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value - 30,000,000 shares
authorized; issued and outstanding: 7,851,890 at
June and 7,776,890 at September 78,519 77,769
Additional paid-in capital 13,440,946 13,329,197
Accumulated deficit (2,998,749) (3,375,103)
---------------------------
10,520,716 10,031,863
Receivable from stockholder (6,000) (6,000)
---------------------------
10,514,716 10,025,863
---------------------------
$11,679,355 $11,546,650
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $3,453,112 $3,253,751 $9,037,276 $9,435,742
Costs and expenses:
Cost of product sales 2,002,234 1,880,163 5,111,675 5,680,884
Research and development 251,142 267,163 802,891 729,424
Selling, general and administrative 935,619 965,650 2,726,387 2,745,742
----------------------------------------------------
3,188,995 3,112,976 8,640,953 9,156,050
----------------------------------------------------
Operating Income 264,117 140,775 396,323 279,692
Other income (expenses), net 12,230 (21,845) (19,969) (59,310)
----------------------------------------------------
Income before income taxes 276,347 118,930 376,354 220,382
Provision for income taxes (Note D) -- -- -- --
----------------------------------------------------
Net income $ 276,347 $ 118,930 $ 376,354 $ 220,382
----------------------------------------------------
Net income per share - basic (Note B) $ 0.04 $ 0.02 $ 0.05 $ 0.03
----------------------------------------------------
Net income per share - assuming dilution (Note B) $ 0.04 $ 0.02 $ 0.05 $ 0.03
----------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 376,354 $ 220,382
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 604,146 541,410
Changes in assets and liabilities net of effect of business
acquisition in 1997:
Restricted cash (96,050)
Accounts and other receivables 357,117 (66,450)
Prepaid expenses and other current assets (27,968) (13,687)
Inventories (797,394) (567,836)
Customer deposits 109,410
Accounts payable and accrued expenses 2,574 (824,311)
-----------------------
Net cash provided (used) by operating activities 528,189 (710,492)
-----------------------
Cash flows from investing activities:
Purchase of property and equipment (236,235) (127,054)
Other assets (40,592) 79,132
CPI purchase, net of cash -- (395,480)
Proceeds from short-term investments, net 730,827 639,991
-----------------------
Net cash provided by investing activities 454,000 196,589
-----------------------
Cash flows from financing activities:
Payments of long-term debt, net (269,153) (302,858)
Repayment of note payable (198,983) --
Proceeds from issuances of common stock 112,500 198,000
-----------------------
Net cash used by financing activities (355,636) (104,858)
-----------------------
Net increase (decrease) in cash and cash equivalents 626,553 (618,761)
Cash and cash equivalents at beginning of year 294,086 756,919
-----------------------
Cash and cash equivalents at end of period $ 920,639 $ 138,158
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Reference should be made to the financial
statements and related notes included in the Company's Form 10-KSB which was
filed with the Securities and Exchange Commission on or about December 29,
1997.
In the opinion of the management of the Company, the accompanying
financial statements reflect all adjustments which were of a normal recurring
nature necessary for a fair presentation of the Company's results of operations
and changes in financial position for the three month and nine month periods
ended June 30, 1998. Operating results for these periods are not necessarily
indicative of the results that may be expected for the year ending September
30, 1998.
NOTE B - NET INCOME PER SHARE
In the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS
128 requires the presentation of both basic and diluted earnings per share and
replaces previously required standards for computing and presenting earnings
per share. Earnings per share amounts for all periods have been presented and
where appropriate restated to conform to the requirements of SFAS 128.
The following is a reconciliation of the denominator (number of shares)
used in the computation of earnings per share. The numerator (net income) is
the same for basic and diluted computations.
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic shares 7,851,890 7,677,989 7,831,341 7,648,993
Effect of dilutive securities
- options and warrants 17,181 33,442 22,049 72,328
Dilutive shares 7,869,071 7,711,431 7,853,390 7,721,321
</TABLE>
In addition to the dilutive securities included in the calculation above,
options and warrants to purchase 3,640,173 shares of common stock at prices
ranging from $1.75 through $5.00 were outstanding during the three and nine
month periods ended June 30, 1998. Options and warrants to purchase 3,699,307
and 3,935,408 shares of common stock at prices ranging from $2.50 through $8.00
and $2.00 through $8.00 were outstanding during both the three and nine month
periods ended June 30, 1997 respectively. These shares were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares. These options and warrants
expire at various dates from 1997 through 2001.
NOTE C - RESTRICTED CASH
A customer deposit of $560,900 was made during the three month period
ended March 31, 1998. This deposit was placed in an escrow account and is
released as shipments are made to the customer. The restricted balance in
the escrow account as of June 30, 1998 was $96,050.
NOTE D - INCOME TAXES
No provision for income taxes has been accrued during fiscal 1997 or
fiscal 1998 due to the availability of net operating loss carryforwards.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements that are subject
to risks and uncertainties including, but not limited to those risks set forth
in the section entitled "Risk Factors" in the Prospectuses contained in the
Company's Registration Statements on Form S-3, Commission File Nos. 33-80009
and 333-6147 (which sections are hereby incorporated by reference herein).
These risks and uncertainties could cause the registrant's actual results in
future periods to differ materially from its historical results and from any
opinions or statements expressed in such forward-looking statements.
Forward-looking statements speak only as of the date of this report, and the
Company cautions readers not to place undue reliance on these statements.
Overview
The Company has historically concentrated its efforts on developing,
manufacturing and marketing medical diagnostic test kits used to aid in the
diagnosis of certain diseases. In the past three years the Company has focused
its expansion efforts on synergistic acquisitions of companies, product lines
and assets. The Company and its subsidiaries offer approximately 110 different
test kits that have been cleared by the United States Food and Drug
Administration ("FDA"). Several additional test kits are sold in foreign
markets.
Results of Operations
The Three Month Period Ended June 30, 1998 Compared to the Three Month Period
Ended June 30, 1997
Revenues for the three month period ending June 30, 1998 increased to
approximately $3,453,000 from approximately $3,254,000 (6%) for the same period
ending June 30,1997. This increase was realized despite a significant decrease
in revenues from the Company's Carter Wallace manufacturing contract when
compared to the same quarter the previous year. Excluding the Carter Wallace
revenues, product sales from Hemagen's own products increased approximately
12% for the period compared to same period last year. The increase is largely
due to increases in sales of blood banking products and increases in sales
from the Company's San Diego, CA (RAICHEM) and Brazil operations. Sales at
RAICHEM have increased significantly during the three month period ending
June 30, 1998 due primarily to increased sales in Latin America, Russia and
the Far East. The increases in Brazil are due in a large part to substantial
increases in sales of the Virgo product line produced in the Company's
Maryland and Massachusetts facilities.
Cost of product sales increased to approximately $2,002,000 from
approximately $1,880,000 (6%), due to the increase in sales. Cost of products
sales as a percentage of sales were 58% during both periods.
Research and development expenses decreased to approximately $251,000
from approximately $267,000 (6%), primarily due to a decrease in personnel
costs allocated to research and development.
The Company is currently working to complete several research and
development programs including:
Ferritin: An addition to RAICHEM's line of Specific Protein Immunoassay kits
(SPIAs) to measure iron deficiencies related to anemia and iron overload
related to several types of liver disease.
Measles IgG and IgM and Herpes I & II: To complement the Company's existing
line of ELISA assays to diagnose infectious diseases.
Anti Thyroglobulin (Anti TG) and Anti Thyroid Peroxidase (Anti TPO): ELISA
formatted kits used to diagnose Hashimato's Thyroditis and Grave's disease.
Both are automimmune related diseases affecting thyroid function.
Anti Beta 2 Glycoprotein 1 (Apolipoprotein H): A series of ELISA tests to
complement the Company's Cardiolipin kits as an important measure of
cardiovascular health.
Cardiolipin kit: A new generation Cardiolipin ELISA kit which will add
calibrators and liquid stable ready to use conjugate which will make the
present kit more sensitive and easier to use.
Inducible nitric oxide synthase (iNOS): An early marker for septic shock being
developed in both ELISA and rapid point of care device formats.
Tests for both bovine and human tuberculosis ("TB"): The TB tests are being
developed in both ELISA and rapid point of care device formats.
Selling, general and administrative ("SG&A") expenses decreased to
approximately $936,000 from approximately $966,000 (3%), primarily due to a
decrease in payroll and personnel costs. Since inception the Company has used
telemarketing and sales literature as its primary selling tools. In May, 1998
the Company hired its first outside sales force to enhance sales and marketing
in the United States and Europe. The Company believes this additional selling
resource will increase the Company's sales and market share.
Other income and expense changed to approximately $12,000 of income,
net for the three months ended June 30, 1998, representing an increase of
approximately $34,000 from a net expense of approximately $22,000 for the
three months ended June 30, 1997. This change was due to a decrease in
interest expense resulting from a reduction in long term debt.
Net income was approximately $276,000 compared to $119,000 (132%),
primarily due to higher sales, and lower R&D and SG&A expenses.
The Nine Month Period Ended June 30, 1998 Compared to the Nine Month Period
Ended June 30, 1997
Revenues decreased to approximately $9,037,000 from approximately
$9,436,000 (4%). This decrease can be primarily attributed to an approximate
$742,000 decrease in contract manufacturing sales to Carter Wallace when
compared to revenues from Carter Wallace for the same period for the prior
fiscal year, offset in part by an increase in sales by other products offered
by the Company. Hemagen is not involved in the sale of the Carter Wallace
products to the end-user and therefore does not control the sales volume of
these products. Excluding the Carter Wallace contract revenues, revenues from
Hemagen's own products for the nine month period ended June 30, 1998 increased
approximately 4% when compared to revenues for Hemagen's products from the
equivalent period during the previous fiscal year. This sales increase was the
result of an approximately $502,000 increase for the Hemagen/Virgo product
lines produced at the Company's Massachusetts and Maryland sites, and an
approximately $205,000 increase of Hemagen/Virgo products by Hemagen's
Brazilian operation. These increases were partially offset by decreases at
the Company's RAICHEM and Buffalo, NY operations. Although sales are slightly
down at RAICHEM for the nine month period, sales at RAICHEM have increased
significantly during the three months ending June 30, 1998 due primarily to
increased sales in Latin America, Russia and the Far East.
Cost of product sales decreased to approximately $5,112,000 from
approximately $5,681,000 (10%) due in part to the decrease in sales, and in
part due to an increase in gross profit margins from 40% to 43%. This increase
in gross profit margins is due to increased sales of Hemagen's Virgo and blood
banking lines and the decreased sales to Carter Wallace whose revenues
represent significantly lower gross profit margins for Hemagen.
Research and development expenses increased to approximately $803,000
from approximately $729,000 (10%), primarily due to increased personnel costs
in support of the Company's program to develop and complete several research
projects outlined in the discussion of the three month period ended June 30,
1998.
During the nine month period ended June 30, 1998, the Company received
FDA clearance to market three new products, Virgo ANCA Screen, Virgo cANCA, and
Virgo pANCA which are used to aid in the diagnosis of patients with Wegener's
disease. Wegener's disease is an autoimmune disease characterized by lesions in
the upper and lower respiratory tract and kidney which is often misdiagnosed.
Selling, general and administrative expenses decreased to approximately
$2,726,000 from approximately $2,746,000 (1%), primarily due to lower public
relations expenses. This was partially offset by increased advertising
expenses. The Company has added an outside sales force to cover the United
States and European markets in order to increase its sales. Additionally, the
Company is conducting a significant advertising campaign to launch the products
that were cleared for sale by the FDA during the prior fiscal year.
Other expense, net decreased to approximately $20,000 from approximately
$59,000 due to a decrease in interest expense resulting from a reduction in
long term debt.
Net income was approximately $376,000 compared to $220,000 (71%),
primarily due to lower cost of sales, which was partially offset by higher
research and development.
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating requirements
and growth primarily from the initial public offering of its common stock,
lease financing arrangements, cash flow from operations and private placements
completed in September 1995, and March 1996.
On January 13, 1998 the Company announced that is has signed a letter of
intent to acquire the Analyst instrument business from Dade Behring Inc. The
Analyst is a versatile bench top clinical chemistry analyzer that the Company
believes is well positioned for the point of care market, which includes both
the physician office laboratory and the veterinary office laboratory. The
machine is easy to use, very reliable and can provide results of a panel of
clinical chemistries in ten minutes. The proprietary technology used to produce
the reagent rotor provides the Analyst with a cost effective, highly accurate
consumable.
The consummation of the acquisition is subject to Hemagen's completing
its due diligence investigation of the Analyst business, the financing of the
acquisition and the negotiation and execution of a definitive written agreement
with Dade Behring. The Company presently anticipates completing the transaction
on or about August 31, 1998. The Company anticipates financing the acquisition
with line of credit which has been committed by a major international bank
based in Boston, MA.
At June 30, 1998, the Company's working capital was approximately
$6,777,000 compared to working capital of approximately $6,157,000 at September
30, 1997. Cash and cash equivalents increased by approximately $627,000 for the
nine months ended June 30, 1998. This increase was a result of net cash
provided by operating and investing activities amounting to approximately
$528,000 and $454,000 respectively, offset by net cash used by financing
activities of approximately $356,000.
Inventory balances increased from approximately $3,954,000 on September
30, 1997 to approximately $4,751,000 on June 30, 1998, in support of an
anticipated increase in product sales due to the increased marketing efforts.
The Company has begun a review of inventory levels to systematically set them
at appropriate levels.
At August 1, 1998 the Company had a capital finance arrangement with a
company totaling approximately $273,000. The Company is required to pay an
average of $34,000 per month in the aggregate (including interest) under this
arrangement during fiscal 1998. The arrangement ends during fiscal 1999. The
Company anticipates pre-paying this debt using the line of credit mentioned
above.
Management believes its cash and cash equivalents and short-term
investments, together with anticipated cash flow from operations, are
sufficient to meet the Company's cash needs for its ongoing business.
Impact of Inflation
Domestic inflation during the last three fiscal years has not had a
significant effect on the Company's business activities. Translation and
transaction gains and losses between the Company and its subsidiary in Brazil
are expensed each period.
PART II - Other Information
Items 1 through 5: Not applicable
Item 6. Exhibits and Reports on Form 8-K
b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Hemagen Diagnostics, Inc.
(Registrant)
August 12, 1998 /s/ Carl Franzblau
- ----------------------------- -----------------------------
Carl Franzblau
Chief Executive Officer
August 12, 1998 /s/ William Franzblau
- ----------------------------- -----------------------------
William Franzblau
Chief Financial Officer
EXHIBIT INDEX
Exhibit
No. Title
- ------- -----
11 Statement of Computation of per share net income.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 920,639
<SECURITIES> 0
<RECEIVABLES> 1,931,676
<ALLOWANCES> 42,000
<INVENTORY> 4,750,994
<CURRENT-ASSETS> 7,941,738
<PP&E> 4,964,578
<DEPRECIATION> 2,705,244
<TOTAL-ASSETS> 11,679,355
<CURRENT-LIABILITIES> 1,164,639
<BONDS> 0
0
0
<COMMON> 78,519
<OTHER-SE> 10,436,197
<TOTAL-LIABILITY-AND-EQUITY> 11,679,355
<SALES> 3,453,112
<TOTAL-REVENUES> 3,453,112
<CGS> 2,002,234
<TOTAL-COSTS> 2,002,234
<OTHER-EXPENSES> 1,186,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,510
<INCOME-PRETAX> 276,347
<INCOME-TAX> 0
<INCOME-CONTINUING> 276,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 276,347
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
