HMGN (Nasdaq) closed today at 1.37 up .03 on 153,000 vol:
HEMAGEN DIAGNOSTICS INC (HMGN)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains certain forward-looking statements that are subject to risks and uncertainties including, but not limited to
those risks set forth in the section entitled "Risk Factors" in the Prospectuses contained in the Company's Registration
Statements on Form S-3, Commission File Nos. 33-80009 and 333-6147 (which sections are hereby incorporated by
reference herein). These risks and uncertainties could cause the registrant's actual results in future periods to differ materially
from its historical results and from any opinions or statements expressed in such forward-looking statements. Forward-looking
statements speak only as of the date of this report, and the Company cautions readers not to place undue reliance on these
statements.
Overview
The Company has historically concentrated its efforts on developing, manufacturing and marketing medical diagnostic test kits
used to aid in the diagnosis of certain diseases. During the past several years the Company has focused its expansion efforts on
synergistic acquisitions of companies, product lines and assets. The Company and its subsidiaries offer approximately 135
different test kits that have been cleared by the United States Food and Drug Administration ("FDA"). Several additional test
kits and components are sold in foreign markets.
On September 1, 1998, Hemagen completed the acquisition of the Analyst automated system from Dade Behring, Inc.
("Dade"). The Analyst is a patent- protected, low cost, bench top clinical chemistry and reagent system. RAICHEM,
Hemagen's clinical chemistry division will produce most of the reagents for the Analyst, while Hemagen's facility in Maryland
will assemble the unit's rotors and ship completed products. This acquisition positions the Company for growth in the
multi-billion dollar point-of-care market as well as the physician office laboratory and veterinary diagnostic markets.
Results of Operations
The Three Month Period Ended December 31, 1998 Compared to the Three Month Period Ended December 31, 1997
Revenues for the three month period ending December 31, 1998 increased to approximately $4,679,000 from approximately
$2,844,000 (65%) for the same period ending December 31,1997. This increase was primarily due to the addition of sales
from the Analyst(R) Acquisition (See "Liquidity and Capital Resources") and an increase in sales of blood banking products.
Cost of product sales increased to approximately $2,774,000 from approximately $1,578,000 (76%), due to the increase in
sales and overhead costs associated with production of Analyst(R) products. Cost of products sales as a percentage of sales
increased to 59% from 55% during the period. The Company believes the costs of the Analyst products will decrease as a
percentage of sales as the Company: (a) reaches full production for the Analyst business, and (b) more of the Analyst business
production is shifted to the Company's own facilities later this fiscal year.
Research and development expenses decreased to approximately $268,000 from approximately $279,000 (4%), primarily due
to slightly less personnel costs allocated to research and development. During the period the Company received clearance from
the United States Food and Drug Administration ("FDA") to market an automated test for HDL-Cholesterol through it's
RAICHEM subsidiary.
The Company is currently working to complete several research and development programs including:
Autoimmune Diseases
The Company is continuing its development of products to aid in the diagnosis of autoimmune diseases. ELISA kits for the
detection of antibodies associated with Beta 2 glycoprotein are currently under development. These will be marketed with our
recently approved anti- cardiolipin kits. In addition, an ELISA Screen assay to detect total antinuclear antibodies (ANA) is
being developed. The Company believes that, barring any unforeseen regulatory hurdles, these assays will become
commercially available during fiscal 1999.
Infectious Diseases
The Company has recently completed the development of products known as a "ToRCH panel" which include assays for
toxoplasmosis, rubella, CMV, and herpes. Several of these products are being evaluated for submission to the FDA for
clearance.
The Company through it's Cellular Products, Inc. ("CPI") subsidiary has begun production of the viral lysates used in the
Company's infectious disease products, including HIV, herpes and CMV. It is expected more of these lysates will be
developed during the current year.
Clinical Chemistry Reagents
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 (see below). Development of a kit to measure blood levels of ferritin is almost complete and plans to produce several
other assays are in place.
Analyst Instrument System
Studies have begun to modify the contents (test panel) of the human Chem 14 rotor to ease reimbursement procedures and to
make the product more informative for the doctor and the patient. These modifications should be completed during the current
calendar year. As mentioned above, we are exploring the possibility of expanding the rotor technology to immunoassays of
serum protein, therapeutic drug monitoring and a thyroid panel.
New Analyst Instrument
The Analyst instrument will be updated to include increased memory capacity, user friendly calibration technology and a smaller
instrument footprint. The Company has entered into serious discussion with instrument manufacturers and it believes that a new
Analyst will be available in Fiscal Year 2000.
Vet Rotor
The Company with personnel at Dade have developed a prototype rotor for the veterinary market. It is denoted as the Vet 16
Rotor and it is expected to be introduced to the market by April, 1999. At present, it is being tested in the field at several sites.
Selling, general and administrative ("SG&A") expenses increased to approximately $1,177,000 from approximately $883,000
(33%), due to an increase in payroll, personnel and travel costs associated with the Company hiring a sales force and due to an
increase in royalties expense associated with the purchase of the Analyst(R) business line. Since inception the Company has
used telemarketing and sales literature as its primary selling tools. In June, 1998 the Company hired its first outside sales force
to enhance sales and marketing in the United States and Europe. The Company believes this additional selling resource will
increase sales and the Company's market share during the current fiscal year.
Other expenses, net increased to approximately $100,000 from approximately $34,000 (194%) This increase was the result of
the increased borrowings that were used to finance the Analyst purchase and estimated translation losses associated with the
devaluation of the Brazilian Real. (See "Liquidity and Capital Resources").
Net income increased to approximately $361,000 from approximately $69,000 (423%), primarily due to increase in sales. This
was partially offset by increases in cost of sales, SG&A expenses and other expenses.
Liquidity and Capital Resources
The Company has financed its capital expenditures, operating requirements and growth primarily from the initial public offering
of its common stock, lease financing arrangements, cash flow from operations, private placements completed in September
1995, and March 1996 and a $5,000,000 line of credit provided by BankBoston N.A. which was put in place on September
1, 1998.
On September 1, 1998 the Company purchased certain assets from Dade related to a product line sold under the tradename
Analyst. The Analyst product line consists of both the Analyst bench top clinical chemistry system and all the related
consumables which are used in that system. The assets included are accounts receivable, inventory, equipment, and certain
intellectual property. The Company agreed to assume certain of Dade's liabilities including accounts payable, service contracts
and warranty obligations. Pursuant to the purchase and the related agreements, Dade will continue to manufacture the products
under a separate manufacturing agreement for a period of up to thirty-six months while the Company transitions the
manufacturing operations to its facilities located in Columbia, Maryland and San Diego, California. The Company intends to
have the instruments manufactured by Dade or some other suitable third party for the foreseeable future.
Under the purchase agreement, at the closing, the Company paid $3,500,000 in cash and issued a non-interest bearing
promissory note (the "Note") to Dade in the amount of $1,250,000. The Company agreed to pay Dade in full on or before
September 1, 2000. The Note and the purchase price are subject to adjustment due to changes in working capital transferred
at the close of the purchase agreement. The Company has also agreed to pay Dade a royalty on the sale of certain
consumables for use with the Analyst instrument.
The Company financed the acquisition using $3,500,000 in proceeds from a $5,000,000 revolving credit line from
BankBoston, N.A., which is secured by all the assets of the Company and its subsidiaries.
The Analyst system uses a rotor based technology that is capable of producing results of up to 14 different clinical chemistry
tests in under ten minutes. The rotor contains dry prepackaged reagents in tablet form. Included tests include cholesterol,
triglycerides, glucose, and total protein. The Analyst is sold in point of care settings such as physician office laboratories and
veterinary office laboratories.
At December 31, 1998, the Company's working capital was approximately $5,963,000 compared to working capital of
approximately $5,446,000 at September 30, 1998. This increase was primarily the result of the net income for the period.
During the three months ended December 31, 1998, the Company generated approximately $1,175,000 in cash from
operating activities. This was the result of the net income for the period, depreciation and amortization expenses, a decrease in
accounts receivable and an increase in accounts payable and accrued expenses. This cash, along with existing cash balances,
was used to pay $1,248,000 of the Note to BankBoston (see above) and to purchase property and equipment and other
assets.
Inventory balances increased from approximately $6,212,000 at September 30, 1998 to approximately $6,334,000 at
December 31, 1998, in support of an anticipated increase in product sales due to the increased marketing efforts. The
Company has begun a review of inventory levels to systematically set them at appropriate levels.
Management believes its cash and cash equivalents and short-term investments, together with anticipated cash flow from
operations, are sufficient to meet the Company's cash needs for its ongoing business.
Year 2000 Systems
The Company has undertaken a review concerning the ability of its internal information systems, including its internal accounting
systems, to handle date information and to function appropriately from and after January 1, 2000, and does not believe that the
total cost to address any changes required as a result of the so-called "Year 2000 Problem" will be material. In addition, the
Company has evaluated the impact of possible Year 2000 problems encountered by its suppliers and customers upon the
Company and does not believe that any problems would have material effect upon the Company.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued two new disclosure standards.
Statement of Financial Accounting Standards Board No. 130, "Reporting Comprehensive Income",("SFAS No. 130")
establishes standards for reporting and display of comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas, and major customers. SFAS No. 131 defines operating segments as components of
an enterprise about which separate financial information is available that is evaluated by the chief operating decision maker in
deciding how to allocate resources and assessing performance.
Both of these new standards are effective for financial statements for the periods beginning after December 15, 1997 and
require comparative information for earlier years to be restated. Management does not expect implementation of these
standards to materially affect future financial statements and disclosures.
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 on October 1, 1999 to affect its financial statements.
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.
Stock Repurchase
The Company's Board of Directors has approved a program to repurchase up to 100,000 shares of its common stock. On
January 6, 1999 the Company began to purchase shares in open market transactions. As of the date of this report, all 100,000
shares authorized have been purchased.
|
