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, 2000 Commission File number 1-11700
HEMAGEN DIAGNOSTICS, INC.
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(Exact name of Small Business Issuer as
Specified in its Charter)
Delaware 04-2869857
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(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 June 30, 2000, the issuer had 9,592,662 shares of Common Stock, $.01
par value per share outstanding.
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets; 2
June 30, 2000 and
September 30, 1999
Consolidated Statements 4
of Operations; three months and nine months
ended June 30, 2000 and 1999
Consolidated Statements 5
of Cash Flows; nine months
ended June 30, 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. 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 12
1
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PART I -Financial Information
HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
June 30, September 30,
2000 1999
------------ -------------
Current Assets:
Cash and cash equivalents $ 1,523,917 $ 289,320
Accounts receivable, less allowance for
doubtful accounts of $465,656 at June 30,2000
and $368,000 at September 30, 1999 1,763,286 1,877,016
Inventories 4,711,580 5,664,906
Prepaid expenses and other current assets 281,824 294,198
----------- -----------
Total current assets 8,280,607 8,125,440
Property and Equipment:
Fixed assets 8,181,515 7,889,216
Less accumulated depreciation 4,906,323 4,116,066
----------- -----------
3,275,192 3,773,150
Other assets 317,045 253,874
----------- -----------
$11,872,844 $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
June 30, September 30,
2000 1999
------------ -------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,800,362 $ 2,836,551
Deferred revenue 99,169 84,374
Note payable - Bank -- 3,169,589
Subordinated note payable,
net of unamortized discount of $18,761
and $86,870 at June 30, 2000 and
September 30, 1999, respectively 1,031,239 1,163,130
------------ ------------
Total current liabilities 2,930,770 7,253,644
Long Term Liabilities:
Senior Subordinated Secured Convertible
Notes, net of unamortized discount of
$5,103,677 at June 30, 2000 1,211,323 --
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:
9,592,662 at June 30,2000 and 7,851,890
at September 30, 1999 95,926 78,519
Additional paid-in capital 19,231,714 13,440,947
Accumulated deficit (11,501,252) (8,525,009)
------------ ------------
7,826,388 4,994,457
Less Treasury Stock at cost; 100,000 shares (89,637) (89,637)
Receivable from stockholder (6,000) (6,000)
------------ ------------
Total Stockholders' Equity 7,730,751 4,898,820
------------ ------------
$ 11,872,844 $ 12,152,464
============ ============
See Notes to Consolidated Financial Statements.
3
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
Revenues:
Product sales $ 2,859,055 $3,698,853 $ 8,122,711 $11,956,355
----------- ---------- ----------- -----------
Costs and expenses:
Cost of product sales 2,786,003 2,156,769 7,331,348 7,257,487
Research and development 107,542 310,777 414,585 957,542
Selling, general and
administrative 1,003,656 1,116,681 2,875,372 3,368,359
3,897,201 3,584,227 10,621,305 11,583,388
----------- ---------- ----------- -----------
Operating income (loss) (1,038,146) 114,626 (2,498,594) 372,967
Other expenses, net (273,156) (70,002) (477,649) (320,950)
----------- ---------- ----------- -----------
Income (loss) before
income taxes (1,311,302) 44,624 (2,976,243) 52,017
Provision for income taxes
(Note C) -- -- -- --
----------- ---------- ----------- -----------
Net income (loss) $(1,311,302) $ 44,624 $(2,976,243) $ 52,017
=========== ========== =========== ===========
Net income (loss) per share-
basic (Note B) $ (0.14) $ 0.01 $ (0.36) $ 0.01
=========== ========== =========== ===========
Net income (loss) per share-
assuming dilution (Note B) $ (0.14) $ 0.01 $ (0.36) $ 0.01
=========== ========== =========== ===========
See Notes to Consolidated Financial Statements.
4
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HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
June 30,
-------------------------------
2000 1999
------------ -------------
Cash flows from operating activities:
Net income (loss) $(2,976,243) $ 52,017
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization 887,380 1,064,520
Amortization of fees and discount - Senior
subordinated note 86,268 --
Changes in operating assets and liabilities:
Accounts receivable 113,730 593,237
Prepaid expenses and other current assets 12,374 (135,837)
Inventories 953,326 (1,139,938)
Customer Deposits -- 453,526
Accounts payable and accrued expenses (1,073,999) 474,147
Deferred revenue 14,795 (61,835)
----------- -----------
Net cash provided (used) by operating
activities (1,982,369) 1,299,837
Cash flows from investing activities:
Purchase of property and equipment (283,232) (655,661)
Other assets -- (2,971)
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Net cash used by investing activities (283,232) (658,632)
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments)
of note payable (3,169,589) (923,386)
Exercise of stock options 607,422 --
Purchase of Treasury Stock -- (89,637)
Proceeds of Sale of Private
Placement Offerings 6,062,365 --
----------- -----------
Net Cash provided (used) by
financing activities 3,500,198 (1,013,023)
----------- -----------
Net increase (decrease)
in cash and cash equivalents 1,234,597 (371,818)
Cash and cash equivalents
at beginning of period 289,320 412,193
----------- -----------
Cash and cash equivalents at end of period $ 1,523,917 $ 40,375
=========== ===========
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 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 and nine month periods ended June
30, 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 (LOSS) 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 or
loss) is the same for basic and diluted computations.
Three months ended Nine Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Basic shares 9,241,900 7,751,890 8,270,696 7,790,004
Effect of dilutive securities
- options and warrants -- -- -- --
Dilutive shares 9,241,900 7,751,890 8,270,696 7,790,004
Options and warrants to purchase 2,303,364 and 2,595,755 shares of common
stock, respectively at prices ranging from $0.97 through $2.19 and $2.75,
respectively, were outstanding at June 30, 2000. In addition, in conjunction
with the private placement offering completed on May 24, 2000, warrants to
purchase 2,601,800 shares of common stock were issued with exercise prices of
$2.75 per share. These warrants can be exercised anytime on or after April 30,
2001, but before April 30, 2002. These shares are excluded from the calculation
of earnings per share for the three and six months ended June 30, 2000 because
they are anti-dilutive.
6
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NOTE C - PRIVATE PLACEMENT OFFERING
On May 24, 2000, the Company completed a private placement offering with
net proceeds of $6,062,365. The offering consisted of units of senior
subordinated convertible notes, common stock and warrants. Each unit was sold
for $500,000 and consisted of one $500,000 senior subordinated secured
convertible note, 200,000 warrants to purchase common stock and 93,750 shares of
common stock.
The senior subordinated secured convertible notes mature on April 30, 2005,
with no principal payments required until maturity. The notes provide for
quarterly interest payments at the annual rate of 8%. The effective interest
rates on these notes was calculated to be approximately 58% and an original
issue discount of approximately $5,185,000 is being amortized over the term of
the notes.
The new notes are convertible at $2.50 with a potential reset after six
months, based on the then stock price, but to not less than $2.00. The Company
may force the notes to be converted at any time after the common stock has
traded above $4.50 for ten consecutive business days. Additionally, the Company
may prepay the notes at any time at the full face value of the notes plus
accrued and unpaid interest.
The warrants issued allow the holder to purchase one share of common stock
at an exercise price of $2.75 at any time on or after April 30, 2001, until
April 30, 2002. In conjunction with the sale of the units, 2,526,000 warrants
were issued. Using the Black-Scholes option pricing model the estimated fair
value of the warrants was approximately $1.34 each or $3,384,840 in aggregate.
The Company may call the warrants for $.10 per warrant at any time after April
30, 2000 if the closing price of Hemagen's common stock exceeds $4.25 for ten
consecutive business days.
The offering provided for the issue of 1,184,063 shares of common stock to
the unit holders. These shares were valued at approximately $1.52 per share for
a total value of $1,799,776.
NOTE D - INCOME TAXES
No provision for income taxes has been accrued during the periods presented
due to the availability of net operating loss carry forwards.
NOTE E - RECLASSIFICATIONS
Certain reclassifications have been made to 1999 amounts to conform to the
2000 presentation.
7
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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, 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 June 30, 2000
Compared to the Three Month Period Ended June 30, 1999
Revenues for the three month period ending June 30, 2000 decreased to
approximately $2,859,000 from approximately $3,699,000 for the same period
ending June 30,1999. This decrease is primarily due to Analyst product line
sales that were lower than the prior year. Sales levels in 1999 were benefited
by initial stocking orders with the North American distributor. The sale of the
Company's Cellular Products, Inc. subsidiary in June 1999 resulted in reduced
sales of approximately $253,000. Offsetting these decreases was an increase in
sales at the Company's Raichem division.
8
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Cost of product sales increased from approximately $2,157,000 or 58% of
sales to approximately $2,786,000 or 97% of sales. This increase in cost of
product sales is mainly attributed to inefficiencies resulting from initial
startup costs after the relocation of the Analyst product line to the Company's
Maryland facility, combined with increased inventory reserves booked for excess
Analyst equipment and parts.
Research and development expenses decreased to approximately $108,000 from
approximately $311,000 (65%), 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.
The Company recently received clearance from the FDA to market the
Virgo(R)(beta)2 Glycoprotein I lgA Antibody Kit, the Virgo(R)(beta)2
Glycoprotein I lgG Antibody Kit and the VIRGO(R)(beta)2 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 are 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 $1,004,000 from approximately $1,117,000, 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 third fiscal
quarter.
Other expenses decreased to approximately $$273,000 from approximately
$70,000 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").
The net loss for the period was approximately $1,311,000 as compared to net
income of approximately $45,000 in the prior period. This loss is primarily due
to reduced sales, and increased costs associated with the inefficiencies of
relocating of Analyst production as described above.
9
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The Nine Month Period Ended June 30, 2000
Compared to the Nine Month Period Ended June 30, 1999
Revenues for the six month period ending June 30, 2000 decreased to
approximately $8,123,000 from approximately $11,956,000 for the same period
ending June 30, 1999. In the nine month period ended June 30, 1999, the Company
shipped initial stock to our North American distributor. Sales of the Company's
blood bank products were lower in the nine months ended June 30, 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. Additionally, reduced sales of
the Company's Virgo product line and reduced contract manufacturing sales to
Carter Wallace were also experienced in the nine months ended June 30, 2000.
Cost of product sales decreased from a result of reduced sales offset by
increased manufacturing costs experienced in the nine months ended June 30,
2000. As a percentage of sales, cost of product sales increased from 61% to 90%
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 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 June 30, 2000 and 1999 above.
Selling, general and administrative ("SG&A") expenses decreased due to
workforce reductions, reduced marketing expenditures, and cost savings programs
implemented during the nine months ended June 30, 2000.
Other expenses increased during the same period last year. This increase
resulted from increased interest expense and loan amortization associated with
the private placement offering completed on May 24, 2000. The increased interest
expense is attributable to higher borrowings and an increase in the interest
rate paid by the Company.
Net loss for the nine months ended June 30, 2000 was approximately
$2,976,000 as compared to income of $52,000 in the same last year. This loss is
attributed to lower sales offset by reduced SG&A expenses.
Liquidity and Capital Resources
The Company finances its operating requirements, capital expenditures and
growth primarily from cash flow from operations, a private placement offering
completed on May 24, 2000, an unsecured seller note and customer deposits.
On May 24, 2000, the Company closed on an offering of units consisting of
8% Senior Subordinated Secured Convertible Notes, Common Stock and Warrants, the
net proceeds of this offering were $6,062,365. The proceeds of this offering
were used to pay off the revolving line of credit with Bank of Boston in full on
April 20, 2000, and pay trade creditors.
10
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At June 30, 2000, the Company had a working capital of approximately
$5,350,000 compared to working capital of approximately $872,000 at September
30, 1999. This increase was principally due to the pay off of the revolving line
of credit with Bank of Boston and as a result of the cash provided by the
private placement offering.
Capital expenditures for the nine months ended June 30, 2000, were
approximately $283,000 and were related to the relocation of the Analyst
business to the Company's Columbia, MD facility.
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 not
quantified the costs and anticipated savings associated with this consolidation
at this time.
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.
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.
11
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PART II - Other Information
Item 2: Changes in Securities and Use of Proceeds
On April 20, May 20 and May 24, 2000 the registrant closed an offering of
$6,315,000 in Units consisting of 8% Senior Subordinated Convertible Notes,
Common Stock and Warrants. 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 filed 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. 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 $252,635 in aggregate underwriting commissions associated with
this offering.
The issuance of securities was exempt from registration under the
Securities Act of 1933 as they were issued pursuant to Rule 506 of Regulation D.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 25, 2000.
The following matters were voted upon by the Company's shareholders as indicated
below:
1. Election of the following two directors for terms expiring in 2003:
Alan S. Cohen - 6,323,490 votes for, 24,000 withheld
Jerry L. Ruyan - 6,323,490 votes for, 24,000 withheld
2. Approval of Directors' Stock Option Plan, 2,266,720 votes for, 257,546
votes against and 16,050 abstentions
Item 6: Exhibits and Reports on Form 8-K
Note applicable.
12
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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)
August 14, 2000 /s/Jerry L. Ruyan
----------------------------
Jerry L. Ruyan
Chief Executive Officer
August 14, 2000 /s/Deborah F. Ricci
----------------------------
Deborah F. Ricci
Chief Financial Officer
