Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ERB > SEC Filings for ERB > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for ERBA DIAGNOSTICS, INC.

Form 10-Q for ERBA DIAGNOSTICS, INC.


15-May-2014

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 and the unaudited interim condensed consolidated financial statements and the related notes to unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

We have made forward-looking statements, which are subject to risks and uncertainties, in this Quarterly Report on Form 10-Q. Forward-looking statements may be preceded by, followed by or otherwise include the words "may," "will," "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "could," "would," "should," or similar expressions or statements that certain events or conditions may occur. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by these forward-looking statements. These forward-looking statements are based largely on our expectations and the beliefs and assumptions of our management and on the information currently available to it and are subject to a number of risks and uncertainties, including, but not limited to, the risks and uncertainties associated with:

our ability to generate positive cash flow or otherwise improve our liquidity, whether from existing operations, strategic initiatives or possible future sources of liquidity, including, without limitation, from the line of credit or the investment contemplated by the stock purchase agreement, issuing debt or equity securities, incurring indebtedness or curtailing or reducing our operations;

the remaining transactions contemplated by the investment under the stock purchase agreement may not be consummated on the contemplated terms, in the time frame anticipated, or at all;

the net proceeds of the investment contemplated by the stock purchase agreement may not provide adequate cash resources to fund our operations or liquidity needs for the reasonably foreseeable future;

our ability to achieve or sustain profitability from our operations or otherwise secure funds to provide the basis for our long-term liquidity;

our broad discretion in our use of the net proceeds from the investment contemplated by the stock purchase agreement;

the warrants may not be exercised, in whole or in part;

the decision to exercise the warrants will be made by ERBA Mannheim based upon considerations it deems appropriate, which may include, among other things, the future market price of our common stock, which is subject to volatility and a number of other factors, many of which are beyond our control, and, when making any such decision to exercise the warrants, ERBA Mannheim's interests may conflict with our interests;

our ability to pay when due the principal and interest on our outstanding indebtedness under the revolving line of credit;

our ability to operate our business under the restrictions imposed by the positive and negative covenants to which we are subject under the loan agreement in connection with the revolving line of credit;

our ability to remediate our material weakness relating to our internal control over financial reporting;

our ability to maintain compliance with the continued listing standards of the NYSE MKT, the failure of which could result in our common stock being delisted from the NYSE MKT;

economic, competitive, political, governmental and other factors affecting us and our operations, markets and products;

the success of technological, strategic and business initiatives, including our automation strategy;

our ability to successfully launch and market the LISA XL and Hb Vario instrument systems;

the impact on our financial condition and operating results of making or changing judgments and estimates as a result of future design changes to, or the development of improved instrument versions of, the LISA XL or Hb Vario instrument systems or as a result of future demand for the LISA XL or Hb Vario instrument systems;

the ability of the LISA XL or Hb Vario instrument systems to be a source of revenue growth for us;

our ability to receive financial benefits or achieve improved operating results as a result of the commercial release of the LISA XL or Hb Vario instrument systems;

the ability of the LISA XL or Hb Vario instrument systems to be a factor in our growth;

the ability of the LISA XL or Hb Vario instrument systems to expand the menu of test kits we offer;

our ability to successfully market the DSXTM and DS2TM instrument systems from Dynex Technologies in conjunction with our test kits on a worldwide basis;

our ability to successfully market the Ds5 instrument system for diabetes testing;

our ability to successfully market the Ds360 instrument system for diabetes testing;

our ability to successfully market the D3 instrument system for hematology testing;

our ability to successfully market the 2280 instrument system for hematology testing;

our ability to successfully market generic clinical chemistry reagents;

our ability to expand the menu of test kits that we offer to include other complementary infectious disease or autoimmune testing sectors or otherwise;

our ability to expand our portfolio of products;

our ability to expand geographically;

our ability to successfully execute market segmentation and market focus strategies;

the response of our current customer base to an expansion of our menu of test kits;

our ability to achieve organic growth;

our ability to identify or consummate acquisitions of businesses or products;

our ability to integrate acquired businesses or products, including, without limitation, our ability to continue integrating Drew Scientific and JAS Diagnostics;

acquisitions of business and products, and the integration of acquired businesses and products, may disrupt our business, distract our management and may not proceed as planned, including, without limitation, our acquisition of and our ability to continue integrating Drew Scientific and JAS Diagnostics;

our ability to achieve economies of scale or to maximize the utilization of our assets and facilities, after continued integration of Drew Scientific and JAS Diagnostics into our legacy operations;

our ability to enter into and exploit the diabetes market;

our ability to leverage the marketing and distribution infrastructure that ERBA Mannheim and its affiliates have established around the world;

our ability to enhance our position in laboratory automation;

our ability to expand our product offerings and/or market reach, including, without limitation, our ability to increase our presence in key countries in Europe, South America, Asia as well as other international markets, or become a leader in the diagnostics industry;

the impact the existing global economic conditions may have on our financial condition, operating results and cash flows;

the impact of healthcare regulatory reform;

constantly changing, and our compliance with, governmental regulation;

the impact of our adoption or implementation of new accounting statements and pronouncements on our financial condition and operating results;

our limited operating revenues and history of primarily operational losses;

our ability to collect our accounts receivable, particularly in Italy, and the impact of making or changing judgments and estimates regarding our allowances for doubtful accounts on our financial condition and operating results;

our ability to utilize our net operating losses, whether subject to limitations or not, and its impact on our financial condition and operating results;

the impact of any future limitations on our ability to utilize our net operating losses in the event of any future change in control or similar transaction;

the impact of making or changing judgments and estimates regarding our deferred tax liabilities and our valuation allowances and reserves against our deferred tax assets on our financial condition and operating results;

the impact of making or changing judgments and estimates regarding our goodwill, including the goodwill recorded at ImmunoVision and Drew Scientific, and other intangible assets, such as our hepatitis technology product license, on our financial condition and operating results;

our ability to achieve cost advantages from our own manufacture of instrument systems, reagents and test kits;

our ability to grow beyond the autoimmune and infectious disease markets and to expand into additional diagnostic test sectors;

our ability to derive revenue growth from our manufacture and sale of our own hepatitis products;

our production capacity at our facility in Miami Lakes, Florida;

our ability to successfully improve our facilities and upgrade or replace our equipment and information systems in the timeframe and utilizing the amount of funds anticipated or at all;

our dependence on agreements with ERBA Mannheim, third party distributors and key personnel;

consolidation of our customers affecting our operations, markets and products;

reimbursement policies of governmental and private third parties affecting our operations, markets and products;

price constraints imposed by our customers and governmental and private third parties;

our ability to increase the volume of our reagent production to meet increased demand;

protecting our intellectual property;

political and economic instability and foreign currency fluctuation affecting our foreign operations;

the effects of utilizing cash to assist Delta in maintaining its compliance with capital requirements established by Italian law;

the holding of a significant portion our cash and cash equivalents at a single brokerage firm, including risks relating to the bankruptcy or insolvency of such brokerage firm;

litigation regarding products, distribution rights, intellectual property rights, product liability and labor and employment matters;

voting control of our common stock by ERBA Mannheim;

conflicts of interest with ERBA Mannheim and its affiliates, including Suresh Vazirani, Sanjiv Suri and/or Kishore "Kris" Dudani, and with our officers, employees and other directors; and

other factors discussed elsewhere in this Quarterly Report on Form 10-Q.

See the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of certain risks and uncertainties that could materially and adversely affect our business, operating results or financial condition. Many of these factors are beyond our control.

MAJORITY STOCKHOLDER

ERBA Mannheim, an in vitro diagnostics company headquartered in Germany, the parent company of which is Transasia Bio-Medicals Ltd., or Transasia, is the beneficial owner, directly or indirectly, of approximately 82.4% of the outstanding shares of our common stock.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2014 COMPARED TO THREE MONTHS ENDED MARCH 31, 2013

Net income for the three months ended March 31, 2014 was $164,000 compared to a net loss of $247,000 for the three months ended March 31, 2013. The $411,000 increase was composed of the following:

Net revenues decreased by $337,000 to $6,371,000 in 2014 from $6,708,000 in 2013. This 5.0% decrease was primarily attributed to a decrease in instrument and reagents orders in the international market.

Cost of sales decreased by $236,000 to $3,425,000 in 2014 from $3,661,000 in 2013. This 6.4% decrease was directly related to the decrease in international sales mentioned above.

Gross profit decreased by $101,000 to $2,946,000 in 2014 from $3,047,000 in 2013. This 3.3% decrease was attributed to the decrease in international sales mentioned above. Gross profit margins increased to 46.2% in 2014 from 45.4% in 2013. This increase was a result of the decrease in our instrument sales, which have a lower gross profit margin than reagent sales.

Total operating expenses decreased by $286,000 to $2,697,000 in 2014 from $2,983,000 in 2013. The 9.6% decrease was a result of decreases in selling expenses of $207,000, or 15.9%, to $1,096,000 in 2014 from $1,303,000 in 2013 and in research and development expenses of $144,000, or 41.5%, to $203,000 in 2014 from $347,000 in 2013, offset by an increase in general and administrative expenses of $65,000, or 4.9%, to $1,398,000 in 2014 from $1,333,000 in 2013. The decrease in total operating expenses is primarily attributable to the decrease in headcount in our domestic operations and the billing to ERBA Mannheim of research and development costs at our Italy subsidiary.

Operating income was $249,000 in 2014 compared to an operating income of $64,000 in 2013. The increase is primarily related to the reversal of bad debt allowance at our Italy company of $153,000 and research and development costs that were billed to ERBA Mannheim of $190,000, offset by the decrease in gross profit of $101,000 from decreased revenues as discussed above.

NET REVENUES AND GROSS PROFIT



The following table presents comparative net revenues and gross profit for our
operations.



                                                                Increase/
                                  2014            2013         (Decrease)
               Net Revenues:
               Domestic        $ 4,905,000     $ 5,733,000     $  (828,000 )
               European          1,466,000         975,000         491,000
               Total             6,371,000       6,708,000        (337,000 )
               Cost of Sales     3,425,000       3,661,000        (236,000 )
               Gross Profit    $ 2,946,000     $ 3,047,000     $  (101,000 )
               % of Total          46.2%           45.4%

The decrease in net revenues was primarily attributed to a decrease in international sales in our domestic operations due to restructuring of the salesforce, offset by an increase in revenue at our Italy company, partially due to the billing of $190,000 of research and development costs to ERBA Mannheim.

The decrease in gross profit for 2014 as compared to 2013 was attributed to the decrease in revenue at our domestic operations as discussed above. Gross profit as a percentage of net revenues increased to 46.2% in 2014 from 45.4% in 2013, resulting principally from the decrease in instrument sales in Drew Scientific, which have a lower gross profit margin than reagent sales.

OPERATING EXPENSES



The following table presents our comparative operating expenses. The percentages
below are based on the net revenues in the above table.



                                                                                                     Increase/
                                 2014          % of Revenue         2013          % of Revenue      (Decrease)
Selling                       $ 1,096,000               17.2 %   $ 1,303,000               19.4 %   $  (207,000 )
General and Administrative      1,398,000               21.9 %     1,333,000               19.9 %        65,000
Research and Development          203,000                3.2 %       347,000                5.2 %      (144,000 )
Total Operating Expenses      $ 2,697,000               42.3 %   $ 2,983,000               44.5 %   $  (286,000 )

Total operating expenses decreased $286,000 from $2,983,000 in 2013 to $2,697,000 in 2014.

The 15.9% decrease of $207,000 in selling expenses in 2014 compared to 2013 was primarily due to the decrease of $230,000 from domestic operations which was due principally to a restructuring of the salesforce.

The 4.9% increase of $65,000 in general and administrative expenses in 2014 compared to 2013 was primarily additional expenses related to an enterprise resource planning implementation, and the renovation of and additional rent for Drew Scientific's expanded facility of approximately $190,000, offset by a reversal of bad debt allowance of $153,000.

The 41.5% decrease of $144,000 in research and development expenses in 2014 compared to 2013 was primarily due to research and development efforts of our European operations of approximately Euro 138,000 (equivalent to approximately $190,000) incurred in 2014 that were billed to ERBA Mannheim, offset by an increase in headcount of the research and development department in our Miami Lakes, Florida, facility.

INCOME (LOSS) FROM OPERATIONS

Income from operations totaled $249,000 in 2014 as compared to an operating income of $64,000 in 2013, primarily due to the reversal of bad debt allowance of our European operations of $153,000 and research and development costs that were billed to ERBA Mannheim of $190,000, offset by the decrease in gross profit of $101,000 from decreased international sales as discussed above.

OTHER INCOME (EXPENSE), NET

Other income (expense) totaled a net expense of $55,000 in 2014 as compared to a net expense of $270,000 in 2013. The decrease is primarily related to expenses of $211,000 related to the acquisition of Drew Scientific in 2013.

INCOME TAX PROVISION

We recorded income tax provisions of $30,000 for 2014 and $41,000 for 2013. The current portion of our tax provisions in both years relates to Italian local income taxes based upon applicable statutory rates effective in Italy. In addition, the domestic provision of $17,000 for 2014 and $33,000 for 2013 represent the deferred tax provisions in these years relating to domestic tax-deductible goodwill. No current tax benefit was recorded during the two years on our losses because we had a full valuation allowance against the net deferred income tax assets.

See also Note 8, Income Taxes, to the condensed consolidated financial statements regarding other tax matters.

NET INCOME (LOSS)

Net income for 2014 was $164,000, compared to a net loss of $247,000 in 2013. Basic and diluted net income per common share was $0.00 in 2014 as compared to a net loss per common share of $0.01 in 2013. The net income for 2014 and the net loss for 2013 resulted from the various factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2014, our working capital was $12,049,000 compared to $11,549,000 at December 31, 2013. Cash and cash equivalents totaled $2,863,000 at March 31, 2014 and $4,031,000 at December 31, 2013.

Operating activities

Net cash flows of $1,217,000 were used in operating activities during the three months ended March 31, 2014 as compared to $828,000 that was used in operating activities during the three months ended March 31, 2013.

Cash used in operating activities of $1,217,000 during 2014 was the result of changes in operating assets and liabilities of $1,486,000, partially offset by non-cash items of $105,000. The non-cash items include principally depreciation and amortization, reduction in the provision for doubtful accounts receivable, amortization of other assets and deferred income taxes. Cash provided by changes in operating assets and liabilities was due to changes in accounts receivable, inventories, other assets, accounts payable and accrued expenses and other long-term liabilities.

Cash provided by operating activities during 2013 was primarily the result of changes in operating assets and liabilities of $870,000. Cash provided by changes in operating assets and liabilities was due to changes in accounts receivable, inventories, other assets, accounts payable and accrued expenses and other long-term liabilities.

Investing activities

Net cash of $43,000 and $137,000 was used in investing activities during 2014 and 2013, respectively. The cash flows relating to investing activities in 2014 were primarily for acquisition of equipment on lease of $42,000. The cash flows relating to investing activities in 2013 were primarily for capital expenditures of $83,000 and acquisition of equipment on lease of $57,000.

Financing activities

Net cash of $94,000 and $447,000 was used in financing activities during 2014 and 2013, respectively. Financing activities during 2014 reflect proceeds from exercises of stock options of $106,000, offset by net payments of $12,000 under the revolving line of credit.

Financing activities during 2013 reflect net proceeds of $469,000 under the revolving line of credit and capital lease payments of $22,000.

Other matters

Liquidity is expected to be sufficient through the end of 2014 from the combination of the existing cash and cash equivalents at March 31, 2014, and the investment that ERBA Mannheim has contemplated to make under the Stock Purchase Agreement, including the Warrant, as described throughout this Quarterly Report on Form 10-Q.

A significant portion of our cash and cash equivalents is presently held at one international securities brokerage firm. Accordingly, we are subject to credit risk if this brokerage firm is unable to repay the balance in the account or deliver our securities or if the brokerage firm should become bankrupt or otherwise insolvent. We invest in only select money market instruments, United States treasury investments, municipal and other governmental agency securities and corporate issuers.

Our product research and development expenditures were $203,000 during 2014 and $347,000 for 2013. Delta Biologicals billed ERBA Mannheim for a total of Euro 138,000 (equivalent to approximately $190,000) for research and development costs incurred in the three months ended March 31, 2014. Actual expenditures will depend upon, among other things, the outcome of clinical testing of products under development, delays or changes in government required testing and approval procedures, technological and competitive developments, strategic marketing decisions and liquidity. There can be no assurance that these expenditures will result in the development of new products or product enhancements, which we will successfully complete products under development, that we will obtain regulatory approval or that any approved product will be produced in commercial quantities, at reasonable costs, and be successfully marketed.

In connection with our evaluation of our operating results, financial condition and cash position, and specifically considering our cash utilization during 2013, we continue to implement measures expected to improve future cash flow. To this end, we expect operating results to continue to improve from the operating results achieved during 2013, based principally upon increases in revenue as a result of new channels of distribution in the United States and international markets.

We maintain allowances for doubtful accounts, particularly in Italy where payment cycles are longer than in the United States, for estimated losses resulting from the inability of our customers to make required or timely payments. Additionally, we periodically receive payments based upon negotiated agreements with governmental regions in Italy, acting on behalf of hospitals located in the region, in satisfaction of previously outstanding accounts receivable balances. We may anticipate collection of these amounts through a payment as described above, and, therefore, not provide an allowance for doubtful accounts for these amounts. If contemplated payments are not received, if existing agreements are not complied with or cancelled, or if we require additional allowances, then our operating results could be materially adversely affected during the period in which we make the determination to increase the allowance for doubtful accounts.

We cannot guarantee that we can generate net income, increase revenues, improve our cash flow or successfully obtain debt or equity financing on acceptable terms, or at all, and, if we cannot do so, then we may not be able to survive and any investment in our company may be lost. For the long-term, we intend to utilize principally existing cash and cash equivalents, proceeds we expect to receive from ERBA Mannheim pursuant to the investment contemplated by the Stock Purchase Agreement, including the Warrant, as well as internally generated funds, which are anticipated to be derived primarily from the sale of existing diagnostic and instrumentation products and diagnostic and instrumentation products currently under development as well as possible sources of debt and equity financings. If we are not successful in improving our cash flows or if existing and possible future sources of liquidity described above are insufficient, then we may be required to curtail or reduce our operations.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, allowance for doubtful accounts, inventories, intangible assets, stock compensation, income and other tax accruals, the realization of long-lived assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our assumptions and estimates may, however, prove to have been incorrect and our actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and the judgments and estimates we make concerning their application have significant impact on our condensed consolidated financial statements.

The critical accounting policies discussed below are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.

REVENUE RECOGNITION

A principal source of revenue is our "reagent rental" program in which customers make reagent kit purchase commitments with us that will usually last for a period of three to five years. In exchange, we typically include an instrument system, which remains our property (or, in the case of a lease financing arrangement, that of the financing company). We also include any required instrument service. The customer, through these reagent kit purchases, pays for both the instrumentation and service over the life of the commitment. We recognize revenue from the reagent kit sales when title passes, which is generally at the time of shipment. If actual reagent kit or instrument failure rates significantly increase, then our future operating results could be negatively impacted by increased warranty obligations and service delivery costs.

We recognize milestone payments when earned, as evidenced by written acknowledgment from the collaborator, provided that the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, the milestone represents the culmination of an earnings process, the milestone payment is non-refundable and our past research and development services, as well as our ongoing commitment to provide research and development services under the collaboration, are charged at fees that are comparable to the fees that we customarily charge for similar research and development services.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We grant credit without collateral to our customers based on our evaluation of a . . .

  Add ERB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ERB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.