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 March 31, 2000 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
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(Address of principal executive offices, Zip Code)
(781) 890-3766
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(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 March 31, 2000, the issuer had 8,143,290 shares of Common Stock, $.01
par value per share outstanding.
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets; 2
March 31, 2000 and
September 30, 1999
Consolidated Statements 4
of Operations; three months and six months
ended March 31, 2000 and 1999
Consolidated Statements 5
of Cash Flows; six months
ended March 31, 2000 and 1999
Notes to Consolidated 6
Financial Statements
Item 2. Management's Discussion and 8
Analysis of Financial
Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 1. Other Information. 13
1
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PART I -Financial Information
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
March 31, September 30,
2000 1999
------------ -------------
Current Assets:
Cash and cash equivalents $ 392,554 $ 289,320
Accounts receivables,
less allowance for
doubtful accounts of $371,000
at March 31, 2000 and
$368,000 at September 30, 1999 2,046,959 1,877,016
Inventories 5,461,147 5,664,906
Prepaid expenses and other
current assets 308,980 294,198
----------- -----------
Total current assets 8,209,640 8,125,440
Property and Equipment:
Fixed assets 8,163,756 7,889,216
Less accumulated depreciation 4,640,023 4,116,066
----------- -----------
3,523,733 3,773,150
Other assets 230,676 253,874
----------- -----------
$11,964,049 $12,152,464
=========== ===========
See Notes to Consolidated Financial Statements.
2
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
2000 1999
------------- -------------
Current Liabilities:
Accounts payable and accrued expenses $ 3,097,322 $ 2,836,551
Deferred revenue 102,262 84,374
Note payable - Bank 3,843,999 3,169,589
Subordinated note payable, net of
unamortized discount of $41,464 and
$86,870 at March 31, 2000 and
September 30, 1999, respectively 1,208,536 1,163,130
------------ -------------
Total current liabilities 8,252,119 7,253,644
------------ -------------
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:
8,243,290 at March 31, 2000
and 7,851,890 at September 30, 1999 82,433 78,519
Additional paid-in capital 13,932,482 13,440,947
Accumulated deficit (10,207,348) (8,525,009)
------------ -------------
Less Treasury Stock at cost;
100,000 shares 3,807,567 4,994,457
(89,637) (89,637)
Receivable from stockholder (6,000) (6,000)
------------ -------------
3,711,930 4,898,820
------------ -------------
$ 11,964,049 $ 12,152,464
============ ============
See Notes to Consolidated Financial Statements.
3
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 2,604,080 $ 3,578,401 $ 5,263,656 $ 8,257,502
Costs and expenses:
Cost of product sales 2,429,432 2,327,078 4,545,345 5,100,718
Research and development 127,724 379,218 307,043 646,765
Selling, general and
administrative 896,047 1,074,666 1,871,716 2,251,678
------------ ----------- ----------- -----------
3,453,203 3,780,962 6,724,104 7,999,161
------------ ----------- ----------- -----------
Operating Income (Loss) (849,123) (202,561) (1,460,448) 258,341
Other expenses, net (104,330) (151,258) (221,891) (250,948)
------------ ----------- ----------- -----------
Income (Loss) before income taxes (953,453) (353,819) (1,682,339) 7,393
Provision for income taxes (Note C) -- -- -- --
------------ ----------- ----------- -----------
Net income (loss) $ (953,453) $ (353,819) $(1,682,339) $ 7,393
=========== =========== =========== ===========
Net income (loss) per share -
basic (Note B) $ (0.12) $ (0.05) $ (0.22) $ 0.00
=========== =========== =========== ===========
Net income (loss) per share -
assuming dilution (Note B) $ (0.12) $ (0.05) $ (0.22) $ 0.00
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
March 31,
----------------------------
2000 1999
------------ -------------
Cash flows from operating activities:
Net income (loss) $(1,682,339) $ 7,393
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 592,561 679,356
Changes in operating assets
and liabilities:
Accounts and other receivables (169,943) 549,818
Prepaid expenses and other current assets (14,782) (320,249)
Inventories 203,759 (632,893)
Customer Deposits -- 752,121
Accounts payable and accrued expenses 484,908 271,046
Deferred revenue 17,888 (48,277)
----------- ----------
Net cash provided (used)
by operating activities (567,948) 1,258,315
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (274,540) (198,632)
Other assets -- (8,838)
----------- ----------
Net cash used by investing activities (274,540) (207,470)
----------- ----------
Cash flows from financing activities:
Net Borrowings (Repayments) of note payable 674,410 (1,279,915)
Exercise of stock options 271,312 --
Purchase of Treasury Stock -- (89,637)
----------- ----------
Net cash provided (used)
by financing activities 945,722 (1,369,552)
----------- ----------
Net increase (decrease)
in cash and cash equivalents 103,234 (318,707)
Cash and cash equivalents at beginning of period 289,320 412,193
----------- ----------
Cash and cash equivalents at end of period $ 392,554 $ 93,486
=========== ===========
See Notes to Consolidated Financial Statements
5
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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 December 29, 1999.
In the opinion of the management of the Company, the accompanying financial
statements reflect all adjustme nts 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 and six month periods ended March
31,2000. Operating results for these periods are not necessarily indicative of
the results that may be expected for the year ending September 30, 2000.
NOTE B - NET INCOME PER SHARE
Earnings per share information is presented in accordance with the
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share".
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.
Three months ended Six Months Ended
March 31, March 31,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Basic shares 7,813,162 7,765,279 7,785,093 7,809,060
Effect of dilutive securities
- options and warrants -- -- -- --
Dilutive shares 7,813,162 7,765,279 7,785,093 7,809,060
Options and warrants to purchase 2,024,664 and 2,999,781 shares of common
stock, respectively at prices ranging from $0.97 through $2.19 and $2.00 through
$2.75, respectively, were outstanding at March 31, 2000. These shares are
excluded from the calculation of earnings per share for the three and six months
ended March 31, 2000 because they are anti-dilutive.
6
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NOTE C - INCOME TAXES
No provision for income taxes has been accrued during the periods presented
due to the availability of net operating loss carryforwards.
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
companies to recognize all derivatives contracts as either assets or liabilities
in the balance sheet and to measure them at fair value. If certain conditions
are met a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (I) the changes in the fair value of the
hedged asset or liability that are attributed to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS 133, as amended by SFAS 137, is effective for all
fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to affect financial statements.
NOTE E - RECLASSIFICATIONS
Certain reclassifications have been made to 1999 amounts to conform to the
2000 presentation.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Reliance should not be placed on forward
looking statements because they involve unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to differ
materially from those expressed or implied. Any forward-looking statement speaks
only as of the date made. The Company undertakes no obligation to update any
forward-looking statements to reflect events or circumstances after the date on
which they are made.
Statements concerning the establishments of reserves and adjustments for
dated and obsolete products, write-offs of goodwill, relocation expenses,
expected financial performance, on-going busines strategies and possible future
action which the Company intends to pursue to achieve strategic objectives
constitute forward-looking information. The sufficiency of such charges,
implementation of strategies and the achievement of financial performance are
each subject to numerous conditions, uncertainties and risk factors. Factors
which could cause actual performance to differ materially from these
forward-looking statements, include, without limitation, new management's
analysis of the Company's assets, liabilities and operation, the failure to sell
date-sensitive inventory prior to its expiration, the inability of particular
products to support goodwill allocated to them, competition, new product
development by competitors which could render particular products obsolete,
material failures in the Company's information systems to adjust to the Year
2000 problem, the inability to develop or acquire and successfully introduce new
products or improvements of existing products and the ability to assimilate
successfully product acquisitions.
Overview
Hemagen Diagnostics, Inc. (the "Company") is a biotechnology company which
develops, manufactures, and markets medical diagnostic test kits used to aid in
the diagnosis of certain autoimmune and infectious diseases. In the United
States, the Company sells its products directly to physicians, veterinarians,
clinical laboratories and blood banks and on a private-label basis through
multinational distributors of medical supplies. Internationally, the Company
sells its products primarily through distributors. The Company also manufactures
and sells an FDA-cleared clinical chemistry analyzer ("The Analyst") used to
measure important constituents in human and animal blood. The Company sells The
Analyst both directly and through distributors servicing both the physicians'
office laboratory and veterinary markets. The Company was incorporated in the
Commonwealth of Massachusetts in 1985 and reincorporated in the state of
Delaware in 1992.
Results of Operations
The Three Month Period Ended March 31, 2000
Compared to the Three Month Period Ended March 31, 1999
Revenues for the three month period ending March 31, 2000 decreased to
approximately $2,604,000 from approximately $3,578,000 (27%) for the same period
ending March 31,1999. This decrease is primarily due to Analyst product line
sales that were $495,000 lower than the prior year. In the period ended March
31, 1999, the Company was shipping initial stock to our North American
distributor. The sale of the Company's Cellular Products, Inc. subsidiary in
July 1999 resulted in reduced sales of $240,000. In addition, sales of the
Company's Virgo product line were $175,000 lower than the prior year and blood
bank product sales were $125,000 lower than the prior year. Offsetting these
decreases was an increase in sales at the Company's Raichem division.
Cost of product sales increased to approximately $2,429,000 from
approximately $2,327,000 (4%). This increase in cost of product sales is mainly
attributed to inefficiencies resulting from the move of the Analyst product line
to the Company's Maryland facility. Also, as a result of reduced sales volume
the Company has been producing less of its diagnostic test kits resulting in
higher unit costs of product.
Research and development expenses decreased to approximately $128,000 from
approximately $379,000 (66%), due to workforce reductions and reduced facility
costs allocated to research and development. The Company is currently working to
complete several research and development programs.
8
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The Company recently received clearance from the FDA to market the
Virgo(R)B2 Glycoprotein I lgA Antibody Kit, the Virgo(R)B2 Glycoprotein I lgG
Antibody Kit and the VIRGO(R)B2 Glycoprotein I lgM Antibody Kit. These ELISA
kits aid in the diagnosis of Primary and Secondary Antiphospholipid Syndrome.
This Syndrome is characterized by unusual thrombotic events (coagulation) and
poses a significant threat to several organ systems. This assay alerts the
physician to the autoimmune disease and allows him/her to treat the patient
accordingly. In addition to these products, Hemagen is developing several other
complementary assays to our already significant portfolio of autoimmune disease
products. To date, Hemagen has more than 15 FDA cleared products to aid in the
differential diagnosis of autoimmune disease.
On February 1, 2000, the Company announced that it signed a long-term
agreement to provide reagents and diagnostic kits to Roche Diagnostics
Corporation. The extent of the agreement encompasses thirty products
manufactured by the Company's Raichem division which is expected to generate
revenues in excess of seven million dollars over the next three years. The
Company will submit several products for FDA clearance in conjunction with this
agreement in order to market those specific products for use on the Roche Cobas
Mira Clinical Chemistry Analyzer.
Selling, general and administrative ("SG&A") expenses decreased to
approximately $896,000 from approximately $1,075,000 (17%), due to reduced
spending at all of the Company's divisions. In the first quarter of fiscal 2000,
the Company reduced its workforce by 20% providing savings in the second
quarter.
Other expenses decreased to approximately $104,000 from approximately
$151,000 (31%) due to foreign exchange losses experienced in 1999 offset by
increased interest expense. This increase in interest expense was the result of
the increased borrowings that were used to finance operations and a higher rate
of interest in 2000. (See "Liquidity and Capital Resources").
9
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The net loss for the period was approximately $953,000 as compared to a net
loss of approximately $354,000 in the prior period. This increased loss is
primarily due to reduced sales, and increased costs associated with the
relocation of Analyst production as described above.
The Six Month Period Ended March 31, 2000
Compared to the Six Month Period Ended March 31, 1999
Revenues for the six month period ending March 31, 2000 decreased to
approximately $5,264,000 from approximately $8,258,000 (36%) for the same period
ending March 31, 1999. This reduction in sales is attributed to $1,087,000 of
lower sales of the Analyst product line in the six month period ended March 31,
2000. In the six month period ended March 31, 1999, the Company shipped initial
stock to our North American distributor. Sales of the Company's blood bank
products were $976,000 lower in the six months ended March 31, 2000 as shipments
to the product lines primary distributor, Olympus, terminated in January 1999.
The effect of the sale of the Company's Cellular Products, Inc. division in July
1999 resulted in reduced sales of $427,000. Additionally, reduced sales of the
Company's Virgo product line of $274,000 and reduced contract manufacturing
sales to Carter Wallace of $237,000 were also experienced in the six months
ended March 31, 2000.
Cost of product sales decreased to $4,545,000 from $5,101,000 (11%), as a
result of reduced sales offset by increased manufacturing costs experienced in
the six months ended March 31, 2000. As a percentage of sales, cost of product
sales increased from 62% to 86% percent of sales. This increase is attributed to
the relocation of the Analyst business to the Company's own facilities. The cost
of product sales was impacted by relocation expenses, duplicate manufacturing
costs associated with the relocation, and the loss of the high margin blood
banking business.
Research and development expenses decreased to $307,000 from $647,000 (53%)
as a result of work force reductions and lower facility costs in this area. For
a detail of current research and development projects see the comparison of
three month periods ended March 31, 2000 and 1999 above.
Selling, general and administrative ("SG&A") expenses decreased to
approximately $1,872,000 from approximately $2,252,000 (17%), due to workforce
reductions, reduced marketing expenditures, and cost savings programs
implemented the six months ended March 31, 2000.
Other expenses decreased to approximately $222,000 from approximately
$251,000 during the same period last year (12%). This decrease resulted from
translation losses associated with the devaluation of the Brazilian Real that
were experienced in 1999 but not in 2000. Offsetting these savings was increased
interest expense of $75,000. The increased interest expense is attributable to
higher borrowings and an increase in the interest rate paid by the Company.
Net loss for the six months ended March 31, 2000 was $1,682,000 as compared
to income of $7,000 in the same period last year. This loss is attributed to
lower sales offset by reduced SG&A expenses.
10
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Liquidity and Capital Resources
The Company finances its operating requirements, capital expenditures and
growth primarily from cash flow from operations, a revolving line of credit at
BankBoston, an unsecured seller note and customer deposits.
As of March 31, 2000 the outstanding loan under the revolving credit line
from BankBoston was $3,844,000.. The Company was not in compliance with certain
of the loans covenants as of March 31, 2000. On April 20, 2000, the Company
closed on an offering of $4,250,000 in units consisting of 8% Senior
Subordinated Secured Convertible Notes, Common Stock and Warrants (see
"Subsequent Events" below). The proceeds of this offering were used to pay off
the revolving line of credit with BankBoston in full on April 20, 2000 and pay
trade creditors.
At March 31, 2000, the Company had a working capital deficiency of
approximately $(42,000) compared to working capital of approximately $872,000 at
September 30, 1999. This decrease was principally due to an increase in notes
payable of approximately $674,000, as a result of the cash used by operations.
Capital expenditures have been financed principally through the revolving
line of credit provided from BankBoston. Capital expenditures for the six months
ended March 31, 2000 were approximately $275,000 and related to the relocation
of the Analyst business to the Company's Columbia, MD facility.
After consideration of the expense reduction measures implemented,
management believes its cash together with anticipated cash flow from operations
and proceeds the offering described below, are sufficient to meet the Company's
cash needs for its ongoing business during fiscal 2000.
Subsequent Events
On April 20, 2000 and May 11, 2000, the Company raised $4,226,500 and
$1,301,000, respectively, in an offering of units consisting of 8% Senior
Subordinated Secured Convertible Notes, Common Stock and Warrants.closed on an
offering of $4,250,000 and $1,301,000, respectively, in units consisting of 8%
Senior Subordinate Secured Convertible Notes, Common Stock and Warrants.
Proceeds of this offering were used to pay off the revolving line of credit with
BankBoston and to provide working capital. See "Part II Other Information" for a
further description of this transaction.
On April 19, 2000, the Company announced its decision to consolidate its
operations and close its Waltham, Massachusetts facility by December 31, 2000. A
plan is currently being developed to relocate products currently produced in the
Massachusetts facility to the Company's facilities in Maryland and Brazil. Other
products that are not profitable will be discontinued. The Company has nto
quantified the costs and anticipated savings associated with this consolidation
at this time.
Year 2000 Systems
Prior to December 31, 1999, the Company had implemented its plans to
prepare its internal information systems, including its internal accounting
systems, to handle date information and to function appropriately after January
1, 2000. It has encountered no Year 2000 problems to date and is not aware of
any encountered by its suppliers and customers.
11
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Impact of Inflation
Domestic inflation during the last two 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.
12
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PART II - Other Information
Item 2: Changes in Securities and Use of Proceeds
On April 20 and May 20, 2000 the registrant closed an offering of
$5,551,000 in Units consisting of 8% Senior Subordinated Convertable Notes,
Common Stock and War rants. The offering price for each Unit was $500,000. Each
Unit consists of one $500,000 Senior Subordinated Secured Convertible Note,
200,000 Warrants to purchase Common Stock and 93,750 shares of Common Stock. The
notes are convertible at $2.50 with a potential reset after six months, based on
the then stock price, of not less than $2.00. The registrant has agreed to file
a registration statement with respect to the Common Stock, the shares underlying
the Notes, the Warrants and for the exercise of the Warrants. The Notes are
convertible at the option of the holder at any time after the effectiveness of
the registration statement covering the Common Stock and the Common Stock
underlying the Notes. The registrant may require the Notes to be converted at
any time after effectiveness of the registration statement if the Common Stock
trades above $4.50 for ten consecutive trading days. Each Warrant is exercisable
for one share of Common Stock at $2.75 at any time from April 30, 2001 until
April 30, 2002. The Warrants can be called by the registrant at any time after
April 30, 2001 so long as the closing bid price of the registrant's Common Stock
has exceeded $4.25 for ten consecutive trading days.
The offer was placed by Jesup & Lamont Securities Corporation. Jesup &
Lamont received $205,385 in aggregate underwriting commissions associated with
this offering.
"These securities were exempt from registration under the Securities Act of
1933 as they were issued pursuant to Rule 506 of Regulation D.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Hemagen Diagnostics, Inc.
(Registrant)
March 15, 2000 /s/Jerry L. Ruyan
---------------------------------------------
Jerry L. Ruyan
Chief Executive Officer
March 15, 2000 /s/Deborah F. Ricci
---------------------------------------------
Deborah F. Ricci
Chief Financial Officer
