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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q


 
   X   
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011.

 
____  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO ________________.
 
 
Commission File No. 1-11700

HEMAGEN DIAGNOSTICS, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
 
04-2869857
State of Organization
 
IRS Employer I.D.
 
 
9033 Red Branch Road, Columbia, Maryland  21045-2105
(Address of principal executive offices)

(443) 367-5500
(Registrant’s telephone number, including area code)


Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES    X     NO ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES    X    NO ____

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [    ]                                                                   Accelerated filer [    ]

Non-accelerated filer [    ]                                                                   Smaller reporting company [ X ]

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ____  No     X   
As of July 13, 2011, the registrant had 15,485,281 shares of Common Stock $.01 par value per share outstanding.
 
 
 
 

 

 
 
 
INDEX
PART I.  FINANCIAL INFORMATION
PAGE NUMBER
   
 
     
 
     
 
     
 
     
 
     
     
     
   
PART II.  OTHER INFORMATION                                                                                                    
 
   
     
     
   
   
CERTIFICATIONS                                                                                                           
 
 
 
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995
 
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. Forward looking statements may be identified by words such as “estimates”, “anticipates”, “projects”, “plans”, “expects”, “intends”, “believes”, “should” and similar expressions or the negative versions thereof and by the context in which they are used. Such statements, whether express or implied, are based on current expectations of the company and speak only as of the date made. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Hemagen undertakes no obligation to update any forward-looking statements as a result of new information or to reflect events or circumstances after the date on which they are made or otherwise.
 
Statements concerning the establishments of reserves and adjustments for dated and obsolete products, expected financial performance, on-going business strategies and possible future action which Hemagen intends to pursue to achieve strategic objectives constitute forward-looking information. All forward looking statements, including those relating to the sufficiency of such charges, implementation of strategies and the achievement of financial performance are each subject to numerous conditions, uncertainties, risks and other factors. Factors which could cause actual performance to differ materially from these forward-looking statements, include, without limitation, management’s analysis of Hemagen’s assets, liabilities and operations, the failure to sell date–sensitive inventory prior to its expiration, 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, recessionary pressures on the economy and the markets in which our customers operate, costs and difficulties in complying with the laws and regulations administered by the United States Food and  Drug Administration, changes in the relative strength of the U.S. Dollar and Brazilian Reals, unfavorable political or economic developments in Brazilian operations, the ability to assimilate successfully product acquisitions and other factors disclosed in our reports on Forms 10-K, 10-Q and 8-K filed with the SEC.
 
 

PART I - Financial Information
 
Item 1. - Financial Statements
 
CONSOLIDATED BALANCE SHEETS
(unaudited)
 
   
June 30,
   
September 30,
 
   
2011
   
2010
 
ASSETS
           
             
CURRENT ASSETS:
           
Cash
  $ 209,933     $ 151,743  
Accounts receivable, less allowance for doubtful accounts  of
               
    $72,750 and $60,016 at June 30, 2011 and September 30, 2010,
               
     respectively
    635,502       669,892  
Inventories, net
    1,479,031       1,386,317  
Current portion of note receivable
    87,500       210,000  
Prepaid expenses and other current assets
    235,464       352,534  
                 
             Total current assets
    2,647,430       2,770,486  
                 
PROPERTY AND EQUIPMENT; net of accumulated depreciation
               
         and amortization of $6,497,273 and $6,297,906 at
               
         June 30, 2011 and September 30, 2010, respectively
    449,146       525,658  
                 
OTHER ASSETS:
               
                 
Long term portion of note receivable
    --       35,000  
Other assets
    65,995       40,250  
             Total other assets
    65,995       75,250  
                 
Total Assets
  $ 3,162,571     $ 3,371,394  

 


HEMAGEN DIAGNOSTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
 
             
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
June 30,
   
September 30,
 
   
2011
   
2010
 
CURRENT LIABILITIES:
           
Accounts payable and accrued liabilities
  $ 709,490     $ 743,170  
Revolving line of credit
    --       398,000  
Revolving line of credit – Related Party
    669,413       --  
Deferred revenue
    30,648       27,337  
     Total Current Liabilities
    1,409,551       1,168,507  
                 
LONG TERM LIABILITIES:
               
Senior subordinated secured convertible notes
    4,049,858       4,049,858  
        Total liabilities
    5,459,409       5,218,365  
                 
 
STOCKHOLDERS’ DEFICIT
               
                 
Preferred stock, $0.01 par value - 1,000,000 shares authorized; none issued
    --       --  
Common stock, $.01 par value - 45,000,000 shares authorized; 15,580,281 and 15,565,281 issued and outstanding  as of June 30, 2011 and September 30, 2010, respectively
    155,802       155,652  
Additional paid-in capital
    23,014,523       22,959,539  
Accumulated deficit
    (25,489,036 )     (24,890,439 )
Accumulated other comprehensive gain-
               
    currency translation gain
    111,510       17,914  
 
Less treasury stock at cost; 100,000 shares
    (89,637 )     (89,637 )
 
 
Total Stockholders’ Deficit
    (2,296,838 )     (1,846,971 )
Total Liabilities and Stockholders’ Deficit
  $ 3,162,571     $ 3,371,394  
                 
The accompanying notes are an integral part of the financial statements.
 



CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
Three Months Ended
   
Nine months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net Sales
  $ 1,400,678     $ 1,317,712     $ 3,995,056     $ 3,890,879  
Cost of Sales
    733,108       702,850       2,502,148       2,111,945  
Gross Profit
    667,570       614,862       1,492,908       1,778,934  
Operating Expenses:
                               
       Selling, general and administrative
    605,997       506,443       1,792,277       1,533,364  
       Research and development
    1,366       (2,157 )     3,895       19,955  
                Total operating expenses
    607,363       504,286       1,796,172       1,553,319  
                Total operating income (loss)
    60,207       110,576       (303,264 )     225,615  
Other income (expenses):
                               
       Interest expense, net
    (108,489 )     (83,870 )     (294,129 )     (251,694 )
       Other income (expense)
    198       47       128       3,191  
       Gain on sale of assets
    --       --       2,800       25,291  
                Total other expense
    (108,291 )     (83,823 )     (291,201 )     (223,212 )
                                 
      Net (loss) income, before income taxes
    (48,084 )     26,753       (594,465 )     2,403  
                                 
      Income tax expense (benefit)
    --       34,766       4,132       81,594  
                                 
Net income (loss):
  $ (48,084 )   $ (8,013 )   $ (598,597 )   $ (79,191 )
Other comprehensive income (loss), net of tax:
                               
Foreign currency translation adjustments
    54,813       (959 )     93,596       (1,080 )
Comprehensive income (loss):
  $ 6,729     $ (8,972 )   $ (505,001 )   $ (80,271 )
                                 
Earnings (loss) per share - Basic
  $ 0.00     $ 0.00     $ (0.04 )   $ (0.01 )
Earnings (loss) per share - Diluted
  $ 0.00     $ 0.00     $ (0.04 )   $ (0.01 )
Weighed average common shares used in calculation of earnings (loss) per share - Basic
    15,478,907       15,459,567       15,473,743       15,450,446  
Weighed average common shares used in calculation of earnings (loss) per share – Diluted
    15,478,907       15,459,567       15,473,743       15,450,446  
 



 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
   
Nine Months Ended
 
   
June 30,
 
Cash flows from operating activities:
 
2011
   
2010
 
Net loss                                                               
  $ (598,597 )   $ (79,191 )
     Adjustments to reconcile net cash provided by (used in)
     operating activities:
               
Cash provided by operating activities:
               
    Depreciation
    141,422       122,259  
    Non-cash interest expense – warrants
    19,924       --  
    Gain on sale of assets
    (2,800 )     (25,291 )
    Provision for (recovery of) bad debts
    8,624       (9,720 )
    Stock based compensation
    35,210       29,669  
Changes in operating assets and liabilities:
               
    Accounts receivable
    25,766       (5,330 )
    Prepaid expenses and other current assets
    117,070       (82,870 )
    Inventories
    (92,714 )     237,658  
    Other assets
    (25,746 )     12,411  
    Accounts payable and accrued expenses
    (33,680 )     (261,273 )
    Deferred revenue
    3,311       (20,505 )
       Net cash used in operating activities
    (402,210 )     (82,183 )
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (39,350 )     (17,946 )
Proceeds from sale of assets
    2,800       39,912  
Payments received on notes receivable
    157,500       157,500  
      Net cash provided by investing activities
    120,950       179,466  
                 
Cash flows from financing activities:
               
Borrowings (payments) on lines of credit
    271,413       (2,000 )
Payments on Notes Payable
    --       (28,859 )
      Net cash provided by (used in) financing activities
    271,413       (30,859 )
                 
Effects of foreign exchange rate
    68,037       (1,098 )
                 
            Net change in cash and cash equivalents
    58,190       65,326  
                 
Cash and cash equivalents at beginning of period
    151,743       156,314  
                 
Cash and cash equivalents at end of period                                 
  $ 209,933     $ 221,640  
Supplemental disclosure of cash flow information:
               
                 
Cash payments for period for interest                                           
  $ 288,769     $ 276,604  
Cash payments for period for income taxes                                
  $ 3,011     $ 70,238  
 


 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2011 AND 2010
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

Hemagen Diagnostics, Inc.  (“Hemagen” or the “Company”) has prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission instructions to Form 10-Q.  These financial statements should be read together with the financial statements and notes in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  The accompanying financial statements reflect all adjustments and disclosures, which, in the Company’s opinion, are necessary for fair presentation.  All such adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results of the entire year.

NOTE 2- RECENT ACCOUNTING PRONOUNCEMENTS

The Subsequent Events Topic of the FASB ASC establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This accounting standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements.  This standard also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This accounting standard is effective for interim or annual periods ending after June 15, 2009.  In February 2010, the FASB issued ASU No. 2010-09 which amended ASC 855. This amendment, which was effective upon issuance, removed the requirement for SEC registrants to disclose the date through which such registrants have evaluated subsequent events.

ASU No. 2010-28, “Intangibles - Goodwill and Other (Topic 350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist such as if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASU 2010-28 became effective for the Company on January 1, 2011 and did not have an impact on the Company’s financial statements.

In May 2011, the FASB issued new guidance which changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS.  This new guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs.  This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard in the first quarter of 2012 will not materially expand its consolidated footnote disclosures.

In June 2011, the FASB issued new guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in equity.  This new guidance requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  This new guidance is to be applied retrospectively.  The Company anticipates that the adoption of this standard in the first quarter of 2012 will not materially change the presentation of its consolidated financial statements.




NOTE 3- EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per common share are computed based upon the weighted average number of common shares outstanding during the three and nine months ended June 30, 2011 and 2010, respectively.  Diluted earnings per common share is computed based on common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents consisting of stock options and convertible debentures.  The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock and if-converted method based on the Company’s average stock price for the period.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine-month periods ended June 30, 2011 and 2010, respectively.

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Numerator:
                       
        Net loss
  $ (48,084 )   $ (8,013 )   $ (598,597 )   $ (79,191 )
                                 
Denominator:
                               
        Weighted –average shares outstanding
    15,478,907       15,459,567       15,473,743       15,450,446  
        Effect of dilutive shares
    --       --       --       --  
        Denominator for diluted earnings per share
    15,478,907       15,459,567       15,473,743       15,450,446  
                                 
Basic Earnings per share
  $ 0.00     $ 0.00     $ (0.04 )   $ (0.01 )
Diluted Earnings per share
  $ 0.00     $ 0.00     $ (0.04 )   $ (0.01 )

 

 
Diluted net income per share does not include the effect of the following common stock equivalents related to outstanding convertible debentures and stock purchase options as their effect would be antidilutive:
 
   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Convertible notes
    11,571,022       11,571,000       11,571,022       11,571,000  
Warrants
    5,000,000       --       2,637,363       --  
Options to purchase common stock
    3,102,208       2,962,208       3,031,805       2,962,208  
Total antidilutive instruments
    19,673,230       14,533,208       17,240,190       14,533,208  





NOTE 4 – COMMON STOCK EQUIVALENTS

The following table summarizes the Company’s stock option activity for the nine months ended June 30, 2011:
   
 
Shares
   
Weighted average exercise price
   
Weighted average
life in years
 
                   
Options outstanding – October 1, 2010
    2,932,208     $ 0.15       7.81  
       Granted
    190,000       0.10       4.56  
       Exercised
    --       --       --  
       Forfeited, cancelled or expired
    (20,000 )     0.17       --  
Options outstanding – June 30, 2011
    3,102,208     $ 0.15       7.65  
Options exercisable – June 30, 2011
    1,689,375     $ 0.18       7.09  
                         

We use the Black-Scholes option pricing model to determine the fair value of our awards on the date of grant. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing formula that uses the assumptions noted in the table and discussion that follows:

 
Nine Months Ended
June 30, 2011
 
   
Dividend yield
--
Expected volatility
136.27% - 137.95%
Risk-free interest rate
1.47% - 3.48%
Expected life in years
5 -10

The Company incurs stock-based compensation expense over the requisite service period.  We have estimated forfeitures and incurred expense on shares we expect to vest.

As of June 30, 2011, there was $90,276 of unrecognized compensation cost related to stock-based compensation arrangements that we expect to vest. This cost will be fully incurred within 5 years.  The options exercisable as of June 30, 2011 have no intrinsic value.

 
 
 
The following table summarizes the Company’s warrant activity for the nine months ended June 30, 2011:
   
 
Shares
   
Weighted
average
exercise price
   
Weighted
 average life
(in years)
 
                   
Warrants outstanding – October 1, 2010
    --     $ --       --  
       Granted
    5,000,000       0.20       4.61  
       Exercised
    --       --       --  
       Forfeited, cancelled or expired
    --       --       --  
Warrants outstanding – June 30, 2011
    5,000,000     $ 0.20       4.61  
Warrants exercisable – June 30, 2011
    5,000,000     $ 0.20       4.61  

As of June 30, 2011, there was $219,166 of unrecognized interest expense related to warrants outstanding that will be fully expensed within 5 years.  The warrants exercisable as of June 30, 2011 have no intrinsic value.

NOTE 5 - INVENTORIES

Inventories at June 30, 2011 and September 30, 2010, respectively consist of the following:

   
June 30,
   
September 30,
 
   
2011
   
2010
 
                   Raw Materials
  $ 1,076,204     $ 1,171,982  
                   Work-in-process
    49,750       137,035  
                   Finished goods
    940,628       816,272  
      2,066,582       2,125,289  
                   Less reserves
    (587,551 )     (738,972 )
                   Inventories, net
  $ 1,479,031     $ 1,386,317  

NOTE 6 - LINE OF CREDIT

TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, provides a line of credit facility to the Company for the purpose of financing working capital needs.  TiFunding acquired this facility on February 7, 2011 from Bay Bank, FSB for approximately $360,000.

The facility’s term expires on February 28, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility not to exceed $1,000,000 are based on certain receivables and inventory of the Company.  The facility is secured by a first lien on all assets of the Company.  In connection with the facility, the Company issued to TiFunding warrants to purchase for $1,000,000 shares of the Company’s common stock at an exercise price of $0.20 per share.  These warrants are exercisable at any time until February 7, 2016 and have certain demand registration rights. The expense related to the warrants is being amortized over the life of the warrants and is included as interest expense in the accompanying financial statements.   As of June 30, 2011, the outstanding balance on the facility was $669,413.  The Company is in compliance with all of the covenants in the facility as of the date of this report.




NOTE 7 – SENIOR SUBORDINATED SECURED CONVERTIBLE NOTES

During September 2009, the Company completed an Exchange Offer of its senior subordinated secured convertible notes due on September 30, 2009. The Company offered to exchange new, modified 8% Senior Subordinated Convertible Notes due 2014 for the outstanding 8% Senior Subordinated Secured Convertible Notes due 2009. The principal features of the Exchange Offer included $4,049,858 principal amount of Senior Subordinated Secured Convertible Notes, due September 30, 2014, which bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share. The Company can require the conversion of these Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.

The Company has accounted for the Exchange Offer as though the exchange of the entire amount of $4,049,858 of the Outstanding Notes was effective as of September 30, 2009, because at September 30, 2009 all of the terms and conditions for the consummation of the Exchange Offer had been satisfied.

The Modified Notes are secured by a first lien on all real, tangible and intangible property except that the terms of the Modified Notes provide that the Modified Notes are subordinate to the following: (i) a credit facility that is equal to or less than Three Million Dollars ($3,000,000), (ii) any secured financing that is greater than Two Million Dollars ($2,000,000), provided that (A) the Company provides the Holder twenty (20) business days’ written notice of such secured financing, and (B) all of the funds raised in connection with such secured financing shall be used to reduce, on a pro rata basis, the principal amount and accrued and unpaid interest owed on the Modified Notes, (iii) real estate financing that the Company may incur for the purchase of a corporate facility provided that the annual mortgage payments are less than the rent expense that the Company pays in the year of such purchase for its leased facilities, and (iv) secured financing not to exceed Four Million Dollars ($4,000,000) at any one time for the purpose of financing an acquisition by the Company of the business of another person or entity.

NOTE 8 – GEOGRAPHICAL INFORMATION

The Company considers its manufactured kits, tests and instruments as one operating segment.

The following table sets forth revenue for the periods reported and assets by geographic location for the nine months ended June 30, 2011 and 2010, respectively.

   
United*
States
   
Brazil
   
Consolidated
 
June 30, 2011:
                 
     Revenues
  $ 2,179,081     $ 1,815,975     $ 3,995,056  
     Long-lived assets
  $ 177,014     $ 338,127     $ 515,141  
                         
June 30, 2010:
                       
     Revenues
  $ 1,973,358     $ 1,917,521     $ 3,890,879  
     Long-lived assets
  $ 263,326     $ 346,155     $ 609,481  
 
* Includes export sales to countries other than Brazil.

NOTE 9 – NOTE RECEIVABLE

The Company received an $840,000 Note Receivable during the period ending December 31, 2007 related to the sale of assets of the Company’s wholly owned subsidiary Reagents Applications Inc.  The Note is payable in forty-eight monthly installments of principal of $17,500 plus accrued interest at the rate of 8% beginning on December 31, 2007. For each of the nine month periods ended June 30, 2011 and 2010 the Company has received $157,500 in principal payments against the Note. All payments that have been received on the Note have been made in accordance with the terms of the Note Receivable. As of June 30, 2011, there are five remaining principal payments due on the Note Receivable totaling $87,500, with the final payment due on November 30, 2011.



 

Refer to "Forward Looking Statements" following the Index in front of this Form 10-Q.

Following is a discussion and analysis of the financial statements and other statistical data that management believes will enhance the understanding of the Company’s financial condition and results of operations.  This discussion should be read in conjunction with the financial statements and notes thereto beginning on page 1.

Overview

Hemagen Diagnostics, Inc. is a biotechnology company that develops, manufactures, and markets approximately 68 FDA-cleared proprietary medical diagnostic test kits.  Hemagen has two different product lines.  The Virgo® product line of diagnostic test kits is used to aid in the diagnosis of certain autoimmune and infectious diseases, using ELISA, Immunoflourescence, and hemagglutination technology.  The Analyst® product line is an FDA-cleared clinical chemistry analyzer system, including consumables, that is used to measure important constituents in human and animal blood. The Company sells its products both directly and through distributors to reference labs, physicians, veterinarians, clinical laboratories and blood banks. The Company also sells its products on a private-label basis through multinational distributors. The Company was incorporated in 1985 and became a public company in 1993.

Hemagen’s principal office is located at 9033 Red Branch Road, Columbia, Maryland 21045 and the telephone number is (443) 367-5500.  Hemagen maintains a website at www.hemagen.com.  Investors can obtain copies of our filings with the Securities and Exchange Commission from this site free of charge as well as from the Securities and Exchange Commission website at www.sec.gov.
 

Critical Accounting Policies
We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 filed with the Securities and Exchange Commission.

Results of Operations

The Three Month Period Ended June 30, 2011
Compared to the Three Month Period Ended June 30, 2010

Revenues for the three-month period ended June 30, 2011 increased by approximately $83,000 (6%) to approximately $1,401,000 from approximately $1,318,000 for the three-month period ended June 30, 2010.  The overall increase in revenues is mainly attributable to an increase in sales in the Analyst ® division of approximately $103,000, an increase in non-Brazil sales in the autoimmune line of approximately $67,000 and a decrease in sales from our Brazilian subsidiary of approximately $90,000 during the current year versus the same period last year. Sales in Brazil local currency were down approximately 23% from the same quarter last year. The Brazilian Real to U.S. Dollar exchange rate averaged 1.60 during the current quarter as compared to 1.80 for the same quarter a year ago which offset the decrease in revenues in US currency to approximately 13%.
 
 

 
Cost of product sales increased approximately $30,000 (4%) to approximately $733,000 from approximately $703,000 for the same period a year ago.  Cost of product sales as a percentage of sales remained relatively constant at approximately 53% for the periods ended June 30, 2011 and 2010. This increase in cost of sales Dollars is attributed to an increase in sales for the current period.

Selling, general and administrative expenses increased by approximately $100,000 (20%) for the quarter ended June 30, 2011 to approximately $606,000 from approximately $506,000 in the previous period.  The Company incurred increases in legal, facility, travel related, audit and outside consulting expenses compared to the same period last year which combined increased the overall SG&A expenses for the period.

Research and development expenses increased by approximately $3,000 during the three month period ended June 30, 2011 to approximately $1,000 from a credit of approximately $2,000 during the three month period ended June 30, 2010.  The credit balance in 2010 was due to the adjustment of an invoice for consulting services during the three month period ended June 30, 2010.

Total other expenses for the three months ending June 30, 2011 increased approximately $24,000 to approximately $108,000 from approximately $84,000 from the period ending June 30, 2010.  The increase in net other expense is primarily attributed to the following: a reduction in interest income recognized due to the declining balance on the note receivable, and increase in interest expense related to the line of credit which is due to an increase in the actual Dollars borrowed against the line, as well as in increase in the interest rate on the line and interest expense related to the issuance of warrants in conjunction with the line of credit renewal which occurred in February 2011.

There was no income tax expense recognized for the quarter ended June 30, 2011 as compared to approximately $35,000 of expense for the quarter ended June 30, 2010.  The tax expense for 2010 resulted from income realized at the Company’s Brazilian subsidiary.  The Company’s Brazilian subsidiary incurred a pre-tax net loss of approximately $75,000 for the period ended June 30, 2011 compared to net income before tax of approximately $98,000 for the prior year. The Brazilian income tax is calculated at an effective rate of approximately 24% year to date which includes the fact that there are net loss carry forwards being utilized from prior periods.

Net income for the period decreased by approximately $40,000 for the three months ended June 30, 2011 to a net loss of approximately $48,000 compared to a net loss of approximately $8,000 in the same quarter of the prior year. The decrease in net income is attributable to an increase in interest expense and an increase in selling and general administrative expenses, offset by an increase in overall gross margin, which was the result of higher revenues at a slightly higher margin compared to the same period last year.

The Nine Month Period Ended June 30, 2011
Compared to the Nine Month Period Ended June30, 2010

Revenues for the nine-month period ended June 30, 2011 increased by approximately $104,000 (3%) to approximately $3,995,000 from approximately $3,891,000 for the same nine-month period ended June 30, 2010. The increase in revenues is attributed to an increase in sales to non-Brazil customers in the autoimmune and infections disease line by approximately $164,000, an overall increase in revenues in the Analyst® division during the nine-month period ending June 30, 2011 of approximately $36,000 verses the prior year, offset by an overall decrease in revenues in Brazil.  Revenues in local Brazilian currency were approximately R$411,000 lower from that of the prior year, but the stabilization of the Brazilian Real resulted in only a decrease of approximately $102,000 for Brazil revenues in US dollars. The average exchange rates for the nine-month periods ended June 30, 2011 and 2010 were 1.66 and 1.79, respectively.
 
 

 
Cost of product sales increased by approximately $390,000 (18 %) to approximately $2,502,000 from approximately $2,112,000 for the same period last year.  Cost of product sales as a percentage of sales increased to approximately 63% compared to 54% for the same period last year. The increase in cost of sales as a percentage of sales is predominately attributable to an increase in raw material costs from one supplier who increased its prices for certain orders during the current year and an increase in expenses related to outside consulting services.

Selling, general and administrative expenses increased by approximately $259,000 (17%) for the nine-month period ended June 30, 2011 to approximately $1,792,000 from approximately $1,533,000 in the previous nine-month period ended June 30, 2010.  The increase in expenses for the current year was attributable to an increase in legal, travel, facility and outside services expenses, along with expenses related to an audit for the Brazilian subsidiary that took place during the current year.

Research and development expenses decreased by approximately $16,000 (80%) during the nine months ended June 30, 2011 to approximately $4,000 from $20,000 in 2010.  This decrease was the result of an employee termination and a reduction of certain outside consulting expenses.

Selling, general and administrative expenses increased by approximately $259,000 (17%) for the nine-month period ended June 30, 2011 to approximately $1,792,000 from approximately $1,533,000 in the nine-month period ended June 30, 2010.  The increase in expenses for the current year was attributable to an increase in legal, travel, facility and outside services expenses, along with expenses related to an audit for the Brazilian subsidiary that took place during the current year.

Total other expenses for the nine months ended June 30, 2011 increased by approximately $68,000 to approximately $291,000 from approximately $223,000 from the nine-month period ended June 30, 2010.  An increase of approximately $30,000 was due to an increase in interest-related expenses. During the nine-month period ended June 30, 2011, the overall balance on the line of credit was higher than compared to the same period last year along with an increase in the overall interest rate which went from 5.5% to 9% in February of 2011.  In addition, interest expense for the nine-month period ended June 30, 2011 included approximately $20,000 of expense related to the warrants issued in conjunction with the new line of credit obtained in February 2011. Interest income was approximately $13,000 less than the same period last year due to the declining balance on the Note Receivable. There was also a net decrease of approximately $22,000 in the amounts recorded as gains on the sale of assets between the current and prior year periods.

Income tax expense for the nine months ended June 30, 2011 was approximately $4,000 as compared to approximately $82,000 for the nine months ended June 30, 2010.  This tax expense resulted from income realized at the Company’s Brazilian subsidiary.  The income before tax for the Company’s Brazilian subsidiary for the nine-month period ended June 30, 2011 was approximately $40,000 compared to net income before tax of approximately $255,000 in the prior year. The Brazilian income tax is calculated at an effective rate of approximately 24% for the current year which takes into consideration our use of net loss carry forwards from prior periods.
 
 

 
Net loss increased by approximately $519,000 for the nine months ended June 30, 2011 to a net loss of approximately $598,000 compared to a net loss of approximately $79,000 in the nine-month period ended June 30, 2010.  The increase in net loss was attributable to an increase in raw material costs which resulted in lower overall margins and an increase in expenses related to legal, travel, facility and audit related fees during the current year.
 
Liquidity and Capital Resources

At June 30, 2011 Hemagen had $209,933 of cash, working capital of $1,237,879 and a current ratio of 1.88 to 1.0.  At September 30, 2010, the Company had $151,743 of cash, working capital of $1,601,979 and a current ratio of 2.37 to 1.0.

On December 31, 2010, the Company had a loan outstanding in the amount of $398,000 with Bay Bank, FSB.  On February 7, 2011, TiFunding, LLC, a Delaware limited liability company owned by William P. Hales, the Company’s Chief Executive Officer and President, and his father, purchased the loan from Bay Bank, FSB for approximately $360,000 and agreed to provide a $1 million line of credit facility to the Company for the purpose of financing working capital needs.

The facility’s term expires on February 28, 2012, is renewable annually and provides for borrowings at an annual interest rate of 9%. Maximum borrowings under the facility are for up to $1,000,000  based on certain receivables and inventory of the Company.  The facility is secured by a first lien on all assets of the Company.  In connection with the facility, the Company issued to TiFunding a warrant to purchase for $1,000,000 shares of Company Common Stock at an exercise price of $0.20 per share.  The warrant is exercisable at any time until February 7, 2016 and has certain demand registration rights.  As of June 30, 2011, the outstanding balance on the facility was $669,413.  The Company is in compliance with all of the covenants in the facility as of the date of this report.

The Company believes that cash flow from operations and cash on hand at June 30, 2011 will be sufficient to finance its operations for the remainder of fiscal 2011.  However, the Company can give no assurances that it will have sufficient cash to finance its operations.  The Company has no off-balance sheet financing arrangements.

On September 30, 2009, the Company successfully completed an Exchange Offer of $4,049,858 of Old Notes, for Modified Notes due September 30, 2014.  The Modified Notes bear interest at the rate of 8% per annum, paid quarterly, convertible by holders into Common Stock at $0.35 per share after September 30, 2009.  The Company can require the conversion of the Modified Notes to Common Stock at any time after the Common Stock trades at or above $0.70 for fifteen consecutive trading days.
 
Net cash used in operating activities during the nine months ended June 30, 2011 was approximately $402,000 compared to cash used by operating activities of approximately $82,000 during the nine-month period ended June 30, 2010. The increase in cash used was due primarily to an overall decrease in net income which resulted from overall lower margins and increased selling, general and administrative expenses.  A decrease in accounts payable and an increase in the inventory and other assets also contributed to the increased cash requirements, which were almost completely offset by a reduction in prepaid expenses and collections on accounts receivable.

Approximately $121,000 of cash was provided from investing activities during the nine-month period ended June 30, 2011 as compared to approximately $179,000 of cash provided from investing activities during the nine-month period ended June 30, 2010.  The cash provided during the current nine-month period was generated by the payments received against the Note Receivable and was offset by purchases of property and equipment of approximately $39,000. The cash provided from investing activities during the nine-month period ended June 30, 2010 was generated from payments received against the Note and was offset by purchases of property and equipment of approximately $18,000 during that quarter. Cash received as proceeds from the sale of Company assets compared to the same period last year declined approximately $37,000.
 
 

 
In accordance with the terms on the Note Receivable with the purchaser of Raichem, the Company received payments in the amount of $157,500 for each of the nine-month periods ended June 30, 2011 and 2010.

Net cash provided by financing activities during the nine-month period ended June 30, 2011 was approximately $271,000 compared to cash used in financing activities of approximately $31,000 in the nine-month period ended June 30, 2010. The Company borrowed additional funds on the line of credit to fund operations during the current nine-month period. During the nine-month period ended June 30, 2010 the Company paid $2,000 against the line of credit and paid approximately $29,000 towards the Brazil notes.


Not applicable.


The Company’s Chief Executive Officer, William P. Hales and Principal Financial Officer, Catherine Davidson have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011. Based upon this evaluation, Mr. Hales and Ms. Davidson believe that the Company’s disclosure controls and procedures were effective as of June 30, 2011 except for the matters described below.

Management is aware that there is a lack of segregation of duties due to the small number of employees within the financial and administrative functions of the Company. As a result of the limitations of the resources and segregation of duties, Stegman and Company, the Company’s current auditor, has informed the company that these limitations represent a material weakness in internal controls. Management continues to evaluate this segregation of duties issue. Management has documented the Company’s critical control procedures and will continue to review and update such procedures as changes occur.

There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation of internal control that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Hemagen’s internal control over financial reporting.
 
 

 
 
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.
 
Period
(a)
Total Number of Shares Purchased
 
(b)
Average
Price Paid per Share
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1-30, 2011
-
-
-
-
May 1-31, 2011
23,455
$0.05
23,455
-
June1-30, 2011
16,250
$0.05
16,250
-
Total
39,705
$0.05
39,705
-

(1)  
Represents shares of the Company’s Common Stock purchased pursuant to the Company’s Employee Stock Ownership Plan (ESOP) that was established October 1, 2003 with no expiration.  The purpose of the plan is not to repurchase, but rather it is an employee benefit plan.
(2)  
There is no maximum number of shares that may be purchased under the Company’s Employee Stock Ownership Plan.
 
 



The Registrant’s Annual Shareholders’ Meeting was held on April 28, 2011 at Hemagen’s corporate office located at 9033 Red Branch Road, Columbia, MD 21045. At the meeting the following items were up for vote.

Item # 1. William P. Hales was elected a director for the term expiring in 2014 by a vote of 6,032,624 shares “For” and 275,255 shares “Withheld”.
 
Item # 2. Ratification of Stegman and Company as the Independent Public Accounts for fiscal 2011 was approved by a vote of 11,196,096 shares “For”, 18,500 shares “Against” and 38,565 shares “Abstained”.
 


 
 
 
 (a)    Exhibits

Exhibit 31.1
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
   
Exhibit 31.2
Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
   
Exhibit 32.1
Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
   
Exhibit 32.2
 
Certification of Principal Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code
   
101.INS
XBRL Instance
 
     
101.XSD
XBRL Schema
 
     
101.CAL
XBRL Calculation
 
     
101.DEF
XBRL Definition
 
     
101.LAB
XBRL Label
 
     
101.PRE
XBRL Presentation
 
 
                      



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 15, 2011
By:
/s/ William P. Hales  
   
William P. Hales
 
   
President and
 
   
Chief Executive Officer
 
   
(Principal Executive Officer)
 
       
       
August 15, 2011
By:
/s/ Catherine M. Davidson  
    Catherine M. Davidson  
    Principal Financial Officer  
       
 

 
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