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 Commission File
December 31, 1999 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 December 31, 1999, the issuer had 7,751,890 shares of Common Stock,
$.01 par value per share outstanding.
1
<PAGE>
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets; 2
December 31, 1999 and
September 30, 1999
Consolidated Statements 4
of Operations; three months ended
December 31, 1999 and 1998
Consolidated Statements 5
of Cash Flows; three months
ended December 31, 1999 and 1998
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 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
2
<PAGE>
PART I -Financial Information
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
December 31, September 30,
1999 1999
------------- -------------
Current Assets:
Cash and cash equivalents $ 415,076 $ 289,320
Accounts receivables, less allowance for
doubtful accounts of $373,000 at
December 31, 1999 and $368,000 at
September 30, 1999 1,984,648 1,877,016
Inventories 5,921,082 5,664,906
Prepaid expenses and other current assets 212,828 294,198
----------- ------------
Total current assets 8,533,634 8,125,440
Property and Equipment:
Fixed assets 8,091,300 7,889,216
Less accumulated depreciation 4,382,620 4,116,066
----------- ------------
3,708,680 3,773,150
Other assets 241,180 253,874
----------- ------------
$12,483,494 $12,152,464
=========== ===========
See Notes to Consolidated Financial Statements.
3
<PAGE>
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1999 1999
------------ --------------
Current Liabilities:
Accounts payable and accrued expenses $ 3,123,396 $ 2,836,551
Deferred revenue 75,443 84,374
Note payable 3,928,888 3,169,589
Subordinated note payable, net of
unamortized discount of $64,167 and
$86,870 at December and September
respectively 1,185,833 1,163,130
------------ -------------
Total current liabilities 8,313,560 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:
7,851,890 at both December and September 77,519 77,519
Additional paid-in capital 13,352,310 13,352,310
Accumulated deficit (9,253,895) (8,525,009)
------------ -------------
4,175,934 4,904,820
Receivable from stockholder (6,000) (6,000)
------------ -------------
4,169,934 4,898,820
------------ -------------
$ 12,483,494 $ 12,152,464
============ ============
See Notes to Consolidated Financial Statements.
4
<PAGE>
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
December 31,
----------------------------
1999 1998
----------- -------------
Revenues:
Product sales $ 2,659,576 $ 4,679,101
Costs and expenses:
Cost of product sales 2,115,913 2,773,640
Research and development 179,319 267,547
Selling, general and administrative 975,669 1,177,012
----------- ------------
3,270,901 4,218,199
----------- ------------
Operating Income (611,325) 460,902
Other income (expenses), net (117,561) (99,691)
----------- ------------
Income before income taxes (728,886) 361,211
Provision for income taxes (Note C) -- --
----------- ------------
Net income $ (728,886) $ 361,211
=========== ===========
Net income per share - basic (Note B) $ (0.09) $ 0.05
=========== ===========
Net income per share - assuming dilution (Note B) $ (0.09) $ 0.05
=========== ===========
See Notes to Consolidated Financial Statements.
5
<PAGE>
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) OF CASH AND CASH EQUIVALENTS
Three Months Ended
December 31,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income $ (728,886) $ 361,211
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 279,482 304,549
Amortization of debt discount 22,703 21,552
Changes in operating assets and liabilities:
Accounts and other receivables (107,632) 383,987
Prepaid expenses and other current assets 81,328 (148,502)
Inventories (256,176) (121,856)
Accounts payable and accrued expenses 286,845 392,436
Deferred revenue (8,931) (18,296)
----------- -----------
Net cash provided (used)
by operating activities (431,267) 1,175,081
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (202,276) (154,036)
Other assets -- (16,510)
----------- -----------
Net cash used by investing activities (202,276) (170,546)
Cash flows from financing activities:
Increase (repayment) of note payable 759,299 (1,248,074)
----------- -----------
Net cash provided (used) by
financing activities 759,299 (1,248,074)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 125,756 (243,539)
Cash and cash equivalents at
beginning of period 289,320 412,193
----------- -----------
Cash and cash equivalents at end of period $ 415,076 $ 168,654
=========== ===========
See Notes to Consolidated Financial Statements
6
<PAGE>
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, 1999.
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 period ended December 31,
1999. 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
December 31,
-----------------------
1999 1998
--------- ---------
Basic shares 7,751,890 7,851,890
Effect of dilutive securities
- options and warrants - -
Dilutive shares 7,751,890 7,851,890
7
<PAGE>
Options and warrants to purchase 2,206,364 and 2,999,781 shares of common
stock at prices ranging from $0.97 through $2.19 and $2.00 through $2.75 were
outstanding during the three month period ended December 31, 1999. Options and
warrants to purchase 3,903,123 and 3,844,107 shares of common stock at prices
ranging from $1.20 through $3.25 and $2.19 through $8.00 were outstanding for
the three month period ended December 31, 1998. These shares were not included
in the computation of diluted EPS because the options' and warrants' exercise
price was greater than the average market price of the common shares. These
options and warrants expire at various dates through 2009.
NOTE C - INCOME TAXES
No provision for income taxes has been accrued during fiscal 1999 or fiscal
1998 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 is effective for all fiscal years beginning after
June 15, 1999.
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.
8
<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 business 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 December 31, 1999
Compared to the Three Month Period Ended December 31, 1998
Revenues for the three month period ending December 31, 1999 decreased to
approximately $2,660,000 from approximately $4,679,000 (43%) for the same period
ending December 31,1998. This decrease is primarily due to a reduction in blood
bank product sales of $858,000 as shipments to the product line's primary
distributor, Olympus, terminated in January, 1999. In addition, sales of the
Analyst product line were $808,000 lower than the prior year. In the period
ended December 31, 1998, the Company made substantial one-time initial stocking
shipments to Carter Wallace, our North American distributor.
9
<PAGE>
Cost of product sales decreased to approximately $2,116,000 from
approximately $2,774,000 (24%). The decrease was primarily due to the decrease
in sales but was offset by costs incurred with the relocation of the Analyst
business to the Company's own facilities. The Company had entered into a
manufacturing agreement with Dade upon purchase of the Analyst. The nature of
the agreement required the Company to pay a significant six monthly payment
regardless of production volume. In the quarter ended December 31, 1998 the
production required by Dade was much higher than required in the quarter ended
December 31, 1999. Additionally, cost of product sales was impacted by
relocation expenses, duplicate manufacturing costs associated with the move of
the Analyst business and the loss of high-margin blood banking business.
Research and development expenses decreased to approximately $179,000 from
approximately $268,000 (33%), 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 including:
Autoimmune Diseases
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.
Clinical Chemistry Reagents
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.
Additionally, Roche has indicated a need for products that are not presently
offered by the Company. 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.
10
<PAGE>
The Company continues to develop additional assays and reagents to fill in
its clinical chemistry reagent product line sold under the RAICHEM label. Almost
all of the powdered clinical chemistry assays are now available in liquid
format, making RAICHEM one of the most complete clinical chemistry lines offered
worldwide. Continuing efforts are directed at increasing the line of Serum
Protein immunoassays ("SPIAs"), and the Company is attempting to modify them for
use in the Analyst system. Development of a kit to measure blood levels of
ferritin is almost complete and plans to produce several other assays are in
place.
The Company continues to develop additional consumables (rotors) for its
Analyst(R) instrument. In the second fiscal quarter ending March 31, 2000, the
Company expects to submit an application to the FDA to market its Panels Plus
Rotor. The Panels Plus Rotor was re-configured to satisfy the Healthcare Finance
Administration's (HCFA) guidelines for reimbursement in the Physicians Office
Lab (POL).
Selling, general and administrative ("SG&A") expenses decreased to
approximately $976,000 from approximately $1,177,000 (17%), due to reduced
spending at the Company's 51% - owned subsidiary in Brazil and reduced costs
associated with the sale of Cellular Products, Inc. in July 1999. In the three
month period ended December 31, 1999, the Company reduced its workforce by
approximately 20%. Separation expenses incurred as a result of this reduction
have offset the savings associated with this reduction in this period. The full
benefit of these reductions will be realized in the remainder of this fiscal
year.
Other expenses increased to approximately $118,000 from approximately
$100,000 (18%) This increase was the result of the increased borrowings that
were used to finance operations. (See "Liquidity and Capital Resources").
The net loss for the period was approximately $729,000 as compared to net
income of approximately $361,000 in the prior period. This loss is primarily due
to reduced sales, and increased costs associated with the relocation and interim
duplication of manufacturing costs for the Analyst business as described above.
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 February 7, 2000 the outstanding loan under the reducing revolving
credit line from BankBoston was $4,057,500. The stated maturity date of the
BankBoston agreement is August 31, 2001. The agreement requires compliance with
12
<PAGE>
various financial covenants including leverage ratio, debt service coverage,
minimum profitability and maximum capital expenditures. The Company was not in
compliance with certain of these covenants as of February 7, 2000. The Company
is current on all payments of principal and interest due under the BankBoston
agreement as of February 7, 2000. The Company is in discussion with BankBoston
regarding a waiver of covenant defaults to date, a reset of the financial
covenants and other modifications to the BankBoston agreement.
The Company is in discussion with an investment bank regarding a private
placement of common stock for a minimum of $1,500,000 expected to be completed
by April 2000. There can be no assurance that the Company will be able to
complete this private placement.
At December 31, 1999, the Company's working capital was approximately
$220,000 compared to approximately $872,000 at September 30, 1999. This decrease
was principally due to an increase in notes payable of approximately $759,000,
as a result of the cash used by operations.
Long term debt decreased from approximately $1,090,000 on December 31, 1998
to zero on December 31, 1999. The note payable to Dade, that has a due date of
September 1, 2000, is a current liability as of December 31, 1999. As of
December 31, 1999, the note payable to Dade was $1,186,000, net of unamortized
discount of $64, 000.
Capital expenditures have been financed principally through the revolving
line of credit provided from BankBoston. Capital expenditures for the three
months ended December 31, 1999 were $202,000 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 from an anticipated private placement, are sufficient to meet the
Company's cash needs for its ongoing business.
Certain Relationships and Related Party Transactions
- ----------------------------------------------------
On December 16, 1999, the Company's Board of Directors agreed to retain the
hourly services of directors Thomas A. Donelan and Christopher P. Hendy as
consultants on an as needed basis.
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.
13
<PAGE>
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.
14
<PAGE>
PART II - Other Information
Items 1 through 6: Not applicable
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Hemagen Diagnostics, Inc.
(Registrant)
February 11, 2000 /s/Jerry L. Ruyan
------------------------------------------
Jerry L. Ruyan
Chief Executive Officer
February 11, 2000 /s/Deborah F. Ricci
------------------------------------------
Deborah F. Ricci
Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
Exhibit
No. Title
- ------- -------------------------------------------------
11 Statement of Computation of per share net income.
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARY
STATEMENT OF PER SHARE NET INCOME
EXHIBIT 11
Three Months Ended
December 31,
----------------------------------
1999 1998
------------- -----------
Net income $ (728,886) $ 361,211
============ ============
Net income per share $ (0.09) $ 0.05
============ ============
Weighted average shares outstanding 7,751,890 7,851,890
============ ============