Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 5, 2015)
  • 10-Q (Jun 26, 2015)
  • 10-Q (Nov 10, 2014)
  • 10-Q (Aug 12, 2014)
  • 10-Q (May 15, 2014)
  • 10-Q (Nov 12, 2013)

 
8-K

 
Other

ERBA Diagnostics, Inc. 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
Commission File Number 1-14798
 
ERBA Diagnostics, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
11-3500746
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
14100 NW 57th Court, Miami Lakes, Florida     33014
    (Address of principal executive offices)         (Zip Code)
 
(305) 324-2300
(Registrant’s telephone number, including area code)
 
Indicate by check mark 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 (or for such shorter period that the registrant was required to file such reports), 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Yes  x      No  ¨
 
Indicate by check mark 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 ¨
(Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨     No  x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
 
43,658,221 shares of Common Stock, $.01 par value, outstanding as of November 5, 2013.
 
 
 
ERBA Diagnostics, Inc. and Subsidiaries
 
 
PAGE NO.
 
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1 - Financial Statements
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited)  and December 31, 2012
1
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) for the three and nine months ended September 30, 2013 and 2012
2
 
 
Condensed Consolidated Statement of Shareholders’ Equity (unaudited) for the nine months ended September 30, 2013
3
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2013 and 2012
4
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
5
 
 
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
 
 
Item 4 - Controls and Procedures
31
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1 - Legal Proceedings
32
 
 
Item 6 - Exhibits
32
   
 
 
ERBA Diagnostics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
(Unaudited)
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,270,017
 
$
4,125,818
 
Accounts receivable, net
 
 
7,147,031
 
 
6,369,165
 
Inventories, net
 
 
6,702,313
 
 
5,838,150
 
Other current assets
 
 
869,665
 
 
219,636
 
Total current assets
 
 
17,989,026
 
 
16,552,769
 
 
 
 
 
 
 
 
 
PROPERTY, PLANT AND EQUIPMENT:
 
 
 
 
 
 
 
Land
 
 
352,957
 
 
352,957
 
Buildings and improvements
 
 
3,128,230
 
 
3,068,607
 
Machinery and equipment
 
 
3,694,202
 
 
3,731,139
 
Furniture and fixtures
 
 
2,201,489
 
 
2,050,241
 
 
 
 
9,376,878
 
 
9,202,944
 
Less: accumulated depreciation
 
 
(7,862,969)
 
 
(7,605,984)
 
 
 
 
1,513,909
 
 
1,596,960
 
OTHER ASSETS:
 
 
 
 
 
 
 
Intangible assets, net
 
 
1,561,902
 
 
1,812,048
 
Goodwill
 
 
3,494,619
 
 
3,494,619
 
Equipment on lease, net
 
 
536,121
 
 
585,321
 
Product license
 
 
282,936
 
 
282,936
 
Restricted deposits
 
 
194,828
 
 
148,040
 
Other assets
 
 
70,870
 
 
81,075
 
 
 
 
6,141,276
 
 
6,404,039
 
Total assets
 
$
25,644,211
 
$
24,553,768
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
Accounts payable
 
$
2,791,682
 
$
3,064,516
 
Capital lease obligation, current
 
 
-
 
 
21,947
 
Deferred revenue
 
 
268,199
 
 
368,838
 
Revolving line of credit
 
 
1,839,661
 
 
822,635
 
Other accrued expenses
 
 
2,571,026
 
 
2,440,609
 
Total current liabilities
 
 
7,470,568
 
 
6,718,545
 
 
 
 
 
 
 
 
 
LONG-TERM LIABILITIES:
 
 
 
 
 
 
 
Deferred tax liabilities
 
 
560,956
 
 
509,365
 
Other long-term liabilities
 
 
988,424
 
 
993,980
 
Total long-term liabilities
 
 
1,549,380
 
 
1,503,345
 
 
 
 
 
 
 
 
 
COMMITMENTS AND CONTINGENCIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
 
 
 
 
Common stock, par value $0.01, authorized
    100,000,000 shares, issued and outstanding 43,658,221
    as of September 30, 2013 and December 31, 2012
 
 
436,582
 
 
436,582
 
Additional paid-in capital
 
 
53,081,370
 
 
52,947,370
 
Accumulated deficit
 
 
(36,567,661)
 
 
(36,537,171)
 
Accumulated other comprehensive loss
 
 
(326,028)
 
 
(514,903)
 
Total shareholders’ equity
 
 
16,624,263
 
 
16,331,878
 
Total liabilities and shareholders’ equity
 
$
25,644,211
 
$
24,553,768
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
1

 
ERBA Diagnostics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
 
Period Ended September 30,
 
Three months
 
Nine months
 
 
 
2013
 
2012
 
2013
 
2012
 
Net revenues
 
$
6,940,713
 
$
3,788,821
 
$
20,538,079
 
$
12,372,980
 
Cost of sales
 
 
3,925,819
 
 
1,726,815
 
 
11,033,411
 
 
5,984,181
 
Gross profit
 
 
3,014,894
 
 
2,062,006
 
 
9,504,668
 
 
6,388,799
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and marketing
 
 
1,327,460
 
 
1,042,469
 
 
4,009,650
 
 
3,022,096
 
General and administrative
 
 
1,403,495
 
 
866,284
 
 
4,331,719
 
 
3,031,027
 
Research and development
 
 
205,398
 
 
195,493
 
 
933,375
 
 
633,340
 
Total operating expenses
 
 
2,936,353
 
 
2,104,246
 
 
9,274,744
 
 
6,686,463
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
 
78,541
 
 
(42,240)
 
 
229,924
 
 
(297,664)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest (expense)
 
 
(29,264)
 
 
(8,702)
 
 
(67,177)
 
 
(30,698)
 
Gain (loss) on foreign currency transactions
 
 
112,909
 
 
65,072
 
 
138,164
 
 
(38,122)
 
Acquisition and integration expenses
 
 
 
 
(84,699)
 
 
(211,045)
 
 
(84,699)
 
Other (expense), net
 
 
(5,663)
 
 
(6,539)
 
 
(40,368)
 
 
(7,956)
 
Total other income (expense), net
 
 
77,982
 
 
(34,868)
 
 
(180,426)
 
 
(161,475)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
 
156,523
 
 
(77,108)
 
 
49,498
 
 
(459,139)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
 
27,294
 
 
19,508
 
 
79,988
 
 
74,612
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
129,229
 
 
(96,616)
 
 
(30,490)
 
 
(533,751)
 
Other comprehensive income (loss) foreign currency translation adjustments
 
 
420,765
 
 
(147,808)
 
 
188,875
 
 
(181,430)
 
Comprehensive income (loss)
 
$
549,994
 
$
(244,424)
 
$
158,385
 
$
(715,181)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share-basic and diluted
 
$
0.00
 
$
(0.01)
 
$
0.00
 
$
(0.02)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
43,658,221
 
 
34,991,554
 
 
43,658,221
 
 
34,759,437
 
Diluted
 
 
46,937,852
 
 
34,991,554
 
 
43,658,221
 
 
34,759,437
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
2

 
ERBA Diagnostics, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2013
  (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
Total
 
 
 
 
Common Stock
 
Additional
 
Accumulated
 
Other
 
Shareholders’
 
 
 
 
Shares
 
Amount
 
Paid-in Capital
 
Deficit
 
Comprehensive Loss
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2012
 
 
43,658,221
 
$
436,582
 
$
52,947,370
 
$
(36,537,171)
 
$
(514,903)
 
$
16,331,878
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss)
 
 
-
 
 
-
 
 
-
 
 
(30,490)
 
 
-
 
 
(30,490)
 
Stock compensation expense
 
 
-
 
 
-
 
 
134,000
 
 
-
 
 
-
 
 
134,000
 
Foreign currency translation adjustment
 
 
-
 
 
-
 
 
-
 
 
-
 
 
188,875
 
 
188,875
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2013
 
 
43,658,221
 
$
436,582
 
$
53,081,370
 
$
(36,567,661)
 
$
(326,028)
 
$
16,624,263
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
3

 
ERBA Diagnostics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2013 and 2012
(Unaudited)
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net (loss)
 
$
(30,490)
 
$
(533,751)
 
Adjustments to reconcile net (loss) to net cash flows (used in) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
636,494
 
 
467,989
 
Net provision (recovery) for doubtful accounts receivable
 
 
107,917
 
 
(28,089)
 
Net (recovery) for inventory obsolescence
 
 
(6,011)
 
 
(70,630)
 
Amortization of other assets
 
 
-
 
 
64,022
 
Non-cash stock-based compensation
 
 
134,000
 
 
55,000
 
Deferred income taxes
 
 
34,494
 
 
47,619
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
 
(800,695)
 
 
25,816
 
Inventories
 
 
(825,862)
 
 
93,480
 
Other current assets
 
 
(728,968)
 
 
(70,720)
 
Other assets
 
 
-
 
 
18,452
 
Accounts payable and accrued expenses
 
 
(308,488)
 
 
(428,682)
 
Other long-term liabilities
 
 
(111,456)
 
 
229
 
Net cash (used in) operating activities
 
 
(1,899,065)
 
 
(359,265)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
 
 
(141,967)
 
 
(100,686)
 
Acquisition of equipment on lease
 
 
(122,266)
 
 
(110,494)
 
Net cash ( used in) investing activities
 
 
(264,233)
 
 
(211,180)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds of share offering
 
 
-
 
 
450,000
 
Advance from stockholder
 
 
-
 
 
6,500,000
 
Net borrowings (repayments) under revolving line of credit
 
 
1,103,698
 
 
(736,566)
 
Capital lease payments
 
 
(21,947)
 
 
(58,233)
 
Net cash provided by financing activities
 
 
1,081,751
 
 
6,155,201
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
 
225,745
 
 
(181,430)
 
Net change in cash and cash equivalents
 
 
(855,802)
 
 
5,403,326
 
Cash and cash equivalents beginning of period
 
 
4,125,819
 
 
3,653,244
 
Cash and cash equivalents end of period
 
$
3,270,017
 
$
9,056,570
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest paid
 
$
67,177
 
$
21,996
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
 
 
4

 
ERBA Diagnostics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
 
(1) ORGANIZATION AND OPERATIONS:
 
General Information
 
The accompanying unaudited interim condensed consolidated financial statements of ERBA Diagnostics, Inc. (the “Company,” “ERBA Diagnostics,” “we,” “us” or “our”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q and, therefore, do not include all information normally included in audited financial statements. However, in the opinion of management, all adjustments necessary to state fairly the results of operations, financial position, changes in stockholders’ equity and cash flows have been made. The results of operations, financial position, changes in stockholders’ equity and cash flows for the nine months ended September 30, 2013 are not necessarily indicative of the results of operations, financial position, changes in stockholders’ equity and cash flows which may be reported for the remainder of 2013. The consolidated balance sheet as of December 31, 2012 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
 
As approved by the Company’s stockholders at the Company’s Annual Meeting of Stockholders held on June 15, 2012, and as previously approved by the Company’s Board of Directors, the Company’s name was changed from IVAX Diagnostics, Inc. to ERBA Diagnostics, Inc. The Company is a Delaware corporation and, through its subsidiaries, is engaged in developing, manufacturing and marketing diagnostic test kits, reagents and instruments for use in hospitals, reference laboratories, clinical laboratories, research laboratories, doctors' offices and other commercial companies. The Company’s products and instrumentation are sold primarily to customers in the United States and Italy.
 
On September 1, 2010, ERBA Diagnostics Mannheim GmbH, an in vitro diagnostics company headquartered in Germany (“ERBA Mannheim”), the parent company of which is Transasia Bio-Medicals Ltd. (“Transasia”), purchased all of the approximately 72.4% of the outstanding shares of the Company’s common stock then owned by the Debregeas-Kennedy Group for an aggregate purchase price of approximately $15,000,000, or $0.75 per share. As a result of this share acquisition, the consummation of the various transactions contemplated by the investment made by ERBA Mannheim pursuant to that certain Stock Purchase Agreement, as further described below, including ERBA Mannheim’s purchase from the Company, and the Company’s issuance to ERBA Mannheim, of an aggregate of 15,333,334 shares of the Company’s common stock, and ERBA Mannheim’s exercise, in part, of the Warrant, as further described below, for 600,000 shares of the Company’s common stock, ERBA Mannheim now beneficially owns, directly or indirectly, approximately 82.4% of the outstanding shares of the Company’s common stock.
 
Reclassifications
 
Certain amounts in the prior period’s condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.
 
 
5

 
(2) LIQUIDITY:
 
The Company incurred a net loss of approximately $30,000 during the nine months ended September 30, 2013 and a net loss of approximately $534,000 during the nine months ended September 30, 2012 and had cash used in operations of approximately $1,899,000 and approximately $359,000 for those respective periods.
 
The Company continues to evaluate opportunities to reduce expenses to improve operating results.  Additionally, the Company expects sales to increase as a result of the acquisition of Drew Scientific, Inc. and its subsidiaries which has given the Company an expanded product base and access to new distribution channels both domestic and international. Management believes that with the combination of the above and the Company’s continued effort to market the Mago® 4S, it will generate sufficient resources to meet its obligations for the foreseeable future.
 
As discussed in Note 13, Revolving Line of Credit, on March 1, 2013, Diamedix Corporation (“Diamedix”), a wholly-owned subsidiary of the Company, closed down the previously existing line of credit from City National Bank of Florida and the Company entered into a new loan agreement with Citibank, N.A., which provides for a secured, revolving credit facility of up to $2,000,000.

(3) STOCK-BASED COMPENSATION:
 
Valuations are based upon highly subjective assumptions about the future, including stock price volatility and exercise patterns. The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee terminations. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
 
The Company has historically granted options under the Company’s option plans with an option exercise price equal to the closing market value of the stock on the date of the grant and with vesting, primarily for Company employees, ranging from all at once to equal annual amounts over a four year period, and, primarily for non-employee directors, immediately.
 
On September 12, 2013, the Company granted to its non-employee directors stock options to purchase 100,000 shares of the Company’s common stock at an exercise price of $1.52 per share. The stock options vested immediately and expire September 11, 2023. The fair market value of such stock option was $1.34 per stock option based on the Black-Scholes validation model.
 
Assumptions used in the Black-Scholes valuation model for options granted during the nine months ended September 30, 2013 were as follows:
 
Average Risk-Free Interest Rate
 
0.30%
 
Dividend Yield
 
0.00%
 
Average Volatility Factor
 
100.386%
 
Average Option Life
 
10 years
 
 
 
6

 
At September 30, 2013, there were stock options outstanding under the Company’s option plan to purchase 1,220,870 of the Company’s common stock at a weighted average exercise price of $1.30. The Company recognized non-cash stock-based compensation expense for its share-based awards of approximately $134,000 during the three and nine months ended September 30, 2013. The Company recognized non-cash stock-based compensation expense for its shared-based awards of approximately $55,000 during the nine months ended September 30, 2012.

(4) CASH AND CASH EQUIVALENTS:
 
The Company considers certain short-term investments in money market accounts with original maturities of three months or less to be cash equivalents. 

(5) INVENTORIES, NET:
 
Inventories, net consist of the following:
 
 
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Raw materials
 
$
3,004,789
 
$
1,712,199
 
Work-in-process
 
 
999,779
 
 
664,880
 
Finished goods
 
 
2,697,745
 
 
3,461,071
 
Total inventories, net
 
$
6,702,313
 
$
5,838,150
 

(6) PRODUCT LICENSE:
 
In September 2004, the Company entered into a license agreement with an Italian diagnostics company to obtain a perpetual, worldwide, royalty-free license of product technology used by the Italian diagnostics company. This licensed hepatitis product technology is existing technology, which the Italian diagnostics company had developed and successfully commercialized to manufacture hepatitis products sold by them and for which it had already received “CE Marking” approval from the European Union. Through the acquisition of this existing technology in its current form, the Company expects to be able to derive revenue from the manufacture and sale of new hepatitis products. In exchange for the Italian diagnostics company’s assistance in transferring the know-how of the manufacturing technology, the Company agreed to pay a total of 1,000,000 Euro in the form of four milestone payments upon the Italian diagnostics company’s achievement of certain enumerated performance objectives related to the transfer of such existing technology. Three of the four milestone payments, totaling 900,000 Euro, were made in prior years. During the year ended December 31, 2012, the balance of 100,000 Euro (equivalent to approximately $132,000) was offset against the accounts receivable owed to the Company from the Italian diagnostics company. In October 2011, the Company received “CE Marking” granting approval for the remaining products covered under the license agreement. Sales are expected to commence in 2013, at which time the Company will commence amortizing this balance.
 
During the fourth quarter of 2009, the Company determined that the carrying amount of the product license was in excess of its fair value and recorded a non-cash impairment charge to operations totaling $400,000, reducing the value of the product license to $282,936 as of December 31, 2009. Fair value was determined based upon the income approach, which estimates fair value based upon future discounted cash flows. Based upon this methodology, and utilizing significant assumptions in the income approach that included a forecasted cash flow period of five years and revenue and gross margin estimates beginning in 2012, estimated future cash flows generated by the technology granted by the product license was calculated using a discount rate of 23%, reflecting the Company’s best estimate of fair value. If further product approval delays beyond the product launch assumptions included in the Company’s discounted cash flow computations occur, then the Company may be required to record an additional impairment charge with respect to all or a portion of the remaining $282,936 intangible product license of hepatitis technology asset.
 
 
7

 
While the license is perpetual, the Company believes that the expected economic useful life of the license will be five years after the Company begins to utilize the licensed technology for its intended purpose. Amortization of the product license will begin following the initial sale of the hepatitis products manufactured by the Company.

(7) INCOME (LOSS) PER SHARE:
 
Basic income (loss) per share excludes any dilution. It is based upon the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. During the three and nine months ended September 30, 2013, 12,674,573 and 15,854,204, respectively, shares of common stock underlying stock options and warrants were not included in computing diluted earnings per share because their effects would be antidilutive.

(8) INCOME TAXES
 
The provision for income taxes consists of the following for the three months and nine months ended September 30, 2013 and 2012:
 
 
 
Three months
 
Nine months
 
Period Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
$
 
$
 
$
 
$
 
Foreign
 
 
10,017
 
 
3,635
 
 
33,688
 
 
26,993
 
Deferred:
 
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
17,277
 
 
15,873
 
 
46,300
 
 
47,619
 
Foreign
 
 
 
 
 
 
 
 
 
Total provision for income taxes
 
$
27,294
 
$
19,508
 
$
79,988
 
$
74,612
 
 
The Company is susceptible to large fluctuations in its effective tax rate and has thereby recognized income tax expense on a discrete pro-rata basis for the nine months ended September 30, 2013 and 2012. In addition, no current domestic income tax provision was recorded during the period ended September 30, 2013, due to the increase in the valuation allowance to offset the benefit of domestic losses of approximately $496,000.  The foreign current income tax provisions for the nine months ended September 30, 2013 and 2012 were the result of Italian local income taxes based upon applicable statutory rates effective in Italy.
 
As of September 30, 2013 and December 31, 2012, the Company has established a full valuation allowance on both its domestic and foreign net deferred tax assets, which are primarily comprised of net operating loss carry forwards. Due to the cumulative net losses from the operations of both domestic and foreign operations, the Company had no net deferred tax asset as of September 30, 2013 or December 31, 2012. As of September 30, 2013 and December 31, 2012, the Company had net deferred tax liabilities relating to tax deductible goodwill of $555,665 and $509,365, respectively. Subsequent revisions to the estimated net realizable value of the deferred tax asset or deferred tax liability could cause the provision for income taxes to vary significantly from period to period.
 
 
8

 
Domestic net operating losses generated by the Company total $18,000,000 as of December 31, 2012 and are subject to any applicable limitations as described below. The net operating losses included in the domestic net deferred tax asset will begin to expire in 2022. Under Section 382 of the Internal Revenue Code, the Company’s use of its net operating loss carry forwards will be limited in the future as a result of the September 1, 2010 acquisition by ERBA Mannheim of the approximately 72.33% of the then outstanding shares of the Company’s common stock previously owned by the Debregeas-Kennedy Group. As a result of that acquisition, the Company’s ability to utilize net operating loss carry forwards to offset any future taxable income is currently limited to approximately $827,000 per year, plus both any limitation unused since the acquisition and any unused net operating losses generated after the September 1, 2010 acquisition date. The amount of the annual limitation will be adjusted upwards for any recognized built-in gains on certain assets sold during the five year period commencing with the ownership change. The limitations of these net operating loss carry forwards did not impact the Company’s results for the nine months ended September 30, 2013 or 2012.
 
United States income taxes have not been provided on undistributed earnings of foreign subsidiaries, as such earnings are being retained indefinitely by such subsidiaries for reinvestment. The distribution of these earnings would first reduce the domestic valuation allowance before resulting in additional United States income taxes.
 
In January 2013, one of the Company’s wholly-owned subsidiaries, ImmunoVision, Inc., received three Notices of Final Assessments from the State of Arkansas Department of Finance & Administration for the tax years ended December 31, 2005, 2006 and 2008 for a total of $361,940 (including penalties and interest). Based on discussions with a representative of the state of Arkansas taxing authority, the Company was informed that the assessments related to unfiled tax returns for those years. The Company has located file copies of the returns for the years 2005 and 2006, which reflect zero taxable income and zero tax liability. Since the Company has been unable to locate a file copy of the 2008 return, a return for that year has been prepared resulting in total tax, penalties and interest of approximately $10,500. This amount was recorded as an expense in the consolidated statement of operations and comprehensive loss during the year ended December 31, 2012.
 
In conjunction with the above referenced matter, the Company has been requested to provide the separate entity federal and Arkansas state corporate income tax returns for the tax years ended December 31, 2001 through December 31,  2011.  The Company has provided all of the items that had been requested by the state of Arkansas taxing authority. While the Company has not yet received expressed written notification of the elimination of the various assessments discussed above, the Company believes that this matter will be resolved without any material impact on these and future financial statements.

(9) CONCENTRATION OF CREDIT RISK:
 
The Company performs periodic credit evaluations of its customers’ financial condition and provides allowances for doubtful accounts as required. The Company maintains allowances for doubtful accounts, particularly in Italy where payment cycles are longer than in the United States, for potential credit losses based on the age of the accounts receivable and the results of the Company’s periodic credit evaluations of its customers’ financial condition. Additionally, the Company periodically receives 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.
 
 
9

 
A substantial portion of the Company’s accounts receivable and revenues are derived from Delta Biologicals, S.r.l., the Company’s subsidiary located in Italy (“Delta Biologicals”), and its operations may be affected by the recent fiscal and debt crisis the Italian government is facing. As of September 30, 2013 and December 31, 2012, Delta Biologicals’ gross accounts receivable, primarily due from Italian companies, were approximately $3,592,000 and $4,394,000, respectively. Amounts due from hospitals and laboratories controlled by the Italian government as of September 30, 2013 and December 31, 2012 were approximately $1,914,000 and $1,719,000, respectively, which accounted for approximately 27% and 27%, respectively, of the Company’s consolidated net accounts receivable. Delta Biologicals recognized revenues during the nine months ended September 30, 2013 and 2012 in the amount of approximately $3,505,000 and $4,037,000, respectively, which represented approximately 17% and 33%, respectively, of the Company’s consolidated net revenues.
 
In recent years, the Italian government has been experiencing severe fiscal and debt crises and a recession, including its increasingly uncertain ability to service its sovereign debt obligations, caused in part by the declining global markets and economic conditions. Accordingly, the Company is subject to certain economic, business and, in particular, credit risk if its customers located in Italy, which are hospitals or laboratories controlled by the Italian government, do not pay amounts owed to the Company, extend payment cycles even further or ask the Company to accept a lower payment amount than is owed to the Company. The Company’s current allowances for doubtful accounts, although currently believed by management to be adequate, may not be adequate and the Company may be required to make additional allowances, which would adversely affect, and could materially adversely affect, the Company’s operating results in the period in which the determination or allowance is or was made. Any of these factors could materially and adversely affect the Company’s business, prospects, operating results, financial condition and cash flows in the near term. 
 
The Company’s cash management and investment policies restrict investments to low-risk, highly liquid securities, and the Company performs periodic evaluations of the credit standing of the financial institutions with which it deals. A significant portion of the Company’s cash and cash equivalents are presently held at one international securities brokerage firm. Accordingly, the Company is subject to credit risk if this brokerage firm is unable to repay the balance in the account or deliver the Company’s securities or if the brokerage firm should become bankrupt or otherwise insolvent. From time to time cash balances exceed federally insured limits.
 
 
10

 
(10) SEGMENT INFORMATION:
 
The Company’s management reviews financial information, allocates resources and manages its business by geographic region. The domestic region, which includes corporate expenditures, contains the Company’s subsidiaries in the United States, including from and after the acquisition date of October 3, 2012, Drew Scientific and its subsidiaries. The European region contains Delta Biologicals and, from and after the acquisition date of October 3, 2012, Drew Scientific Limited Co. The information provided is based on internal reports and was developed and utilized by management to track trends and changes in the results of the regions. The information, including the allocations of expense and overhead, was calculated based on a management approach and may not reflect the actual economic costs, contributions or results of operations of the regions as stand-alone businesses. If a different basis of presentation or allocation were utilized, the relative contributions of the regions might differ but the relative trends would, in management's view, likely not be materially impacted. The table below sets forth net revenues, loss from operations, total assets and goodwill by region for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended
 
Domestic
 
European
 
Eliminations
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
External net sales
 
$
5,711,672
 
$
1,229,041
 
$
-
 
$
6,940,713
 
Intercompany sales
 
 
60,167
 
 
3,075
 
 
(63,242)
 
 
-
 
Net revenue
 
$
5,771,839
 
$
1,232,116
 
$
(63,242)
 
$
6,940,713
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from
operations
 
$
219,149
 
$
(140,608)
 
$
-
 
$
78,541
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
External net sales
 
$
2,727,282
 
$
1,061,539
 
$
-
 
$
3,788,821
 
Intercompany sales
 
 
155,111
 
 
17,677
 
 
(172,788)
 
 
-
 
Net revenue
 
$
2,882,393
 
$
1,079,216
 
$
(172,788)
 
$
3,788,821
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from
operations
 
$
52,911
 
$
(95,151)
 
$
-
 
$
(42,240)
 
 
Nine Months Ended
 
 
Domestic
 
 
European
 
 
Eliminations
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
External net sales
 
$
17,049,329
 
$
3,488,750
 
$
-
 
$
20,538,079
 
Intercompany sales
 
 
296,457
 
 
16,529
 
 
(312,986)
 
 
-
 
Net revenue
 
$
17,345,786
 
$
3,505,279
 
$
(312,986)
 
$
20,538,079
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from
operations
 
$
721,528
 
$
(491,604)
 
$
-
 
$
229,924
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
$
40,493,671
 
$
5,610,765
 
$
(20,460,225)
 
$
25,644,211
 
Goodwill
 
$
3,494,619
 
$
-
 
$
-
 
$
3,494,619
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
External net sales
 
$
8,441,341
 
$
3,931,639
 
$
-
 
$
12,372,980
 
Intercompany sales
 
 
463,312
 
 
105,764
 
 
(569,076)
 
 
-
 
Net revenue
 
$
8,904,653
 
$
4,037,403
 
$
(569,076)
 
$
12,372,980
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from
operations
 
$
(243,602)
 
$
(54,062)
 
$
-
 
$
(297,664)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
$
16,104,200
 
$
6,216,870
 
$
-
 
$
22,321,070
 
Goodwill
 
$
870,290
 
$
-
 
$
-
 
$
870,290
 

(11) COMMITMENTS AND CONTINGENCIES:
 
The Company is involved in various legal claims and actions and regulatory matters, and other notices and demand proceedings arising in the ordinary course of business. While it is not possible to predict or determine the outcome of these proceedings, in the opinion of management, based on a review with legal counsel, any losses resulting from such legal proceedings would not have a material adverse impact on the financial position, results of operations or cash flows of the Company.

(12) RELATED PARTY TRANSACTIONS:
 
Certain Relationships and Related Transactions
 
During the three and nine months ended September 30, 2013, the Company sold products to Transasia and a subsidiary of ERBA Mannheim for a total amount of Euro 18,000 and 53,000, respectively, equivalent to approximately $24,000 and $70,000, respectively. During the three and nine months ended September 30, 2012, the comparable sale amounts aggregated Euro 236,000 and 358,000, respectively, equivalent to approximately $309,000 and $461,000, respectively.
 
 
11

 
In the fourth quarter of 2011, Delta Biologicals entered into a contract research and development agreement with ERBA Mannheim, as amended, for a total of Euro 754,700, pursuant to which ERBA Mannheim has agreed to pay the subsidiary a total amount of Euro 133,000, equivalent to approximately $186,000, during the fourth quarter of 2011 and an additional Euro 621,700, equivalent to approximately $799,000, during the year ended December 31, 2012 for the results of certain research and development. For the three and nine months ended September 30, 2012, contract research and development revenue under this agreement approximated Euro 185,000 (equivalent to approximately $147,000) and Euro 455,000 (equivalent to approximately $338,000), respectively. For both the three and nine months ended September 30, 2013, contract research and development revenue under this agreement approximated Euro 258,000 (equivalent to approximately $342,000).
 
The Company had total net accounts receivable from ERBA Mannheim and Transasia of approximately $375,000 and $644,000 as of September 30, 2013 and December 31, 2012, respectively, related to the above transactions. As of September 30, 2013 and December 31, 2012, the Company had a net payable of $80,000 and a net receivable of $65,441, respectively, for the reimbursement of various expenditures on behalf of ERBA Mannheim; both of these amounts are included in other current assets in the accompanying consolidated balance sheet.
 
On June 15, 2012, the Company entered into a use of name license agreement with ERBA Mannheim granting a royalty-free, non-exclusive license to use the name “ERBA” for an annual fee of one dollar. The license agreement will be terminated upon the earlier of (a) the transfer by ERBA Mannheim to the Company of all of ERBA Mannheim’s rights, title and interest in and to the use of the name and any stylized logos or marks associated with the name (the date that such transfer becomes effective, the “Transfer Date”) and (b) such time, if any, as ERBA Mannheim no longer owns, directly or indirectly, shares of the Company’s common stock representing more than 50% of the issued and outstanding shares of such stock (the “Share Threshold Date”). Furthermore, ERBA Mannheim may terminate the license agreement at any time after June 15, 2013 and prior to the earlier of the Transfer Date and the Share Threshold Date: (a) upon providing the Company 180 days prior written notice of its intent to terminate and the date upon which the license agreement shall terminate; or (b) upon providing the Company 30 days prior written notice of any breach of the license agreement by the Company, which breach remains uncured at the end of such 30 day period.
 
In December 2012, JAS Diagnostics entered into a Research and Development Outsourcing Agreement with Erba Diagnostics France SARL (“Erba Diagnostics France”), pursuant to which JAS Diagnostics has agreed to pay Erba Diagnostics France a total amount of Euro 350,000 (equivalent to approximately $462,500), in seven monthly installments of Euro 50,000 from December 2012 through June 2013, for certain research and development endeavors.
 
On July 24, 2013, JAS Diagnostics and Erba Diagnostics France mutually terminated the agreement above and Erba Diagnostics France has agreed to refund to JAS Diagnostics all amounts paid under the agreement within 90 days. The Company incurred total research and development cost in amount of approximately $739,000 from the inception of the agreement through September 30, 2013 which Erba Diagnostics France has agreed to reimburse the Company and has been included in other current assets in the accompanying condensed consolidated balance sheet as of September 30, 2013.
 
 
12

 
Common Stock and Equity Transactions
 
The Company entered into the Stock Purchase Agreement with ERBA Mannheim, on April 8, 2011, pursuant to which the Company agreed to sell and issue to ERBA Mannheim an aggregate of 20,000,000 shares of the Company’s common stock for an aggregate purchase price of $15,000,000, or $0.75 per share of the Company’s common stock, and warrants to purchase an additional 20,000,000 shares of the Company’s common stock.  The consummation of the investment contemplated by the Stock Purchase Agreement was subject to, among other things, the approval of holders of at least 66-2/3% of the issued and outstanding shares of the Company’s common stock (excluding any shares beneficially owned, directly or indirectly, by ERBA Mannheim).  At the 2011 Annual Meeting of Stockholders held on June 10, 2011, the required approval of the Company’s stockholders was achieved.
 
On June 30, 2011, ERBA Mannheim paid the Company $5,000,000 in order to consummate the initial transactions contemplated by the Stock Purchase Agreement (the “Initial Closing”). As a result, at the Initial Closing, the Company issued to ERBA Mannheim 6,666,667 shares of common stock and, in connection with the consummation of the initial transactions contemplated by the Stock Purchase Agreement, a warrant to purchase an additional 20,000,000 shares of common stock (the “Warrant”). After giving effect to transaction costs of $399,700 relating to the Stock Purchase Agreement, the Company received net proceeds of $4,600,300 at the consummation of the initial transactions contemplated by the Stock Purchase Agreement. The Warrant has a five year term and an exercise price per share of the Company’s common stock of $0.75 and is exercisable only to the extent that shares of the Company’s common stock have been purchased under the Stock Purchase Agreement. 
 
On April 16, 2012, ERBA Mannheim exercised, in part, the Warrant by paying an aggregate exercise price of $450,000 and, in connection therewith, the Company issued to ERBA Mannheim 600,000 shares of the Company’s common stock. A total of 19,400,000 warrants remain unexercised as of September 30, 2013. As of September 30, 2013, the Warrant was exercisable for 14,733,334 shares of the Company’s common stock. 
 
Pursuant to amendments to the Stock Purchase Agreement on December 29, 2011 and October 3, 2012, each of which was unanimously approved by the independent directors on the Board of Directors, the Company and ERBA Mannheim agreed that the Company would sell and issue to ERBA Mannheim, and ERBA Mannheim would purchase from the Company, 8,666,667 shares of common stock at the second closing of the transactions contemplated by the Stock Purchase Agreement (the “Second Closing”) for an aggregate purchase price of $6,500,000, or $0.75 per share, and 4,666,666 shares of common stock at the final closing of the transactions contemplated by the Stock Purchase Agreement (the “Final Closing”) for an aggregate purchase price of $3,500,000, or $0.75 per share. In addition, pursuant to the amendments to the Stock Purchase Agreement, the Company and ERBA Mannheim agreed to hold the Second Closing as promptly as practicable on or after October 3, 2012 and to hold the Final Closing on the date that is 60 days after the date on which a majority of the independent directors on the Board of Directors determines by vote or written consent that such issuance, sale and purchase shall occur and causes notice thereof to be delivered to ERBA Mannheim.
 
The Second Closing was held on October 3, 2012, at which time ERBA Mannheim paid the $6,500,000 aggregate purchase price to the Company, and, in connection therewith, the Company issued to ERBA Mannheim 8,666,667 shares of the Company’s common stock. The Company used all of the proceeds of the Second Closing to consummate the October 3, 2012 acquisition of Drew Scientific.
 
Other Transactions
 
During the three and nine months ended September 30, 2013 and 2012, ImmunoVision paid $6,000 and $18,000 respectively, to John B. Harley, M.D., Ph.D., a member of the Board of Directors, under that certain oral consulting agreement between Dr. Harley and ImmunoVision pursuant to which Dr. Harley is paid $2,000 per month in consideration for his provision of technical guidance and business assistance to the subsidiary on an as-needed basis. 
 
 
13

 
Pursuant to a license agreement between the Company and Dr. Harley, he has granted an exclusive worldwide license to the Company for certain patents, rights and technology relating to monoclonal antibodies against autoimmune RNA proteins developed by him in exchange for specified royalty payments, including an annual minimum royalty of $10,000 for each licensed product utilized by the Company. For the three and nine months ended September 30, 2013, the Company has expensed $0 and $5,000, respectively, and $2,500 and $7,500 for the three and nine months ended September 30, 2012, respectively, under such agreement.
 
The amounts paid to Dr. Harley were in addition to the amounts he received for his service as member of the Company’s Board of Directors and the committees of the Board of Directors on which he served.

(13) REVOLVING LINE OF CREDIT:
 
On March 1, 2013, the Company entered into that certain Business Loan Agreement and that certain Promissory Note with Citibank, N.A. (“Citibank”), which provides for a secured, revolving credit facility of up to $2,000,000 (the “New Line of Credit”). Amounts outstanding under the New Line of Credit will accrue interest at an annual rate equal to the 30-day LIBOR plus 1.75% and will become due and payable on December 31, 2013, subject to acceleration upon the occurrence of certain specified events of default that the Company believes are customary for transactions of this type. Pursuant to the business loan agreement, the Company will be subject to certain specified positive and negative covenants (including, without limitation, the requirements to maintain a specified capital base of not less than $8,500,000 and a specified leverage ratio, as defined, of not less than 2.0-to-1.0) that the Company believes are customary for transactions of this type. 
 
Amounts outstanding under the New Line of Credit have been collateralized by all of the assets of the Company and its wholly-owned subsidiaries located in the United States – Diamedix, ImmunoVision, and Drew Scientific. In addition, each of Diamedix, ImmunoVision and Drew Scientific has guaranteed the repayment of amounts drawn on the New Line of Credit. Further, Transasia, the indirect parent company of the Company, has also guaranteed the repayment of amounts drawn on the New Line of Credit.
 
In connection with establishing the New Line of Credit, Diamedix contemporaneously closed down its former line of credit with City National Bank of Florida; the payoff amount at closing was $975,000.
 
As of September 30, 2013, $1,839,661 was outstanding under the New Line of Credit.
 
 
14

 
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, 2012 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 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 line of credit;
 
our ability to remediate our material weakness relating to our internal controls over financial reporting;
 
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;
 
the ability of the Mago® 4S to perform as expected;
 
 
15

 
 
the impact of the commercial release of the Mago® 4S on the judgments and estimates we have made with respect to our financial condition, operating results and cash flows;
 
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 Mago® 4 or Mago® 4S or as a result of future demand for the Mago® 4 or Mago® 4S;
 
the ability of the Mago® 4 or Mago® 4S 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 Mago® 4 or the Mago® 4S;
 
the ability of the Mago® 4 or Mago® 4S to be a factor in our growth;
 
the ability of the Mago® 4 or Mago® 4S to expand the menu of test kits we offer;
 
making derivations of and upgrades to the Mago® our primary platforms for marketing our kits;
 
our ability to successfully market the Mago® 4 or Mago® 4S;
 
our customers’ integration of the Mago® 4 or Mago® 4S into their operations;
 
our ability to successfully market the DSX™ and DS2™ instrument systems from Dynex Technologies in conjunction with our test kits on a worldwide basis;
 
the success of our comprehensive review of our business plans and operations and the initiatives that we have implemented or may implement based on the results of such review;
 
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 improve our competitive position to the extent anticipated, or at all, as a result of our comprehensive review of our business plans and operations and the initiatives that we have implemented or may implement based on the results of such review;
 
our ability to expand the menu of test kits that we offer to include other complementary infectious disease or autoimmune testing sectors or otherwise;
 
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 integrate the businesses commonly known as 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 integrate the businesses commonly known as Drew Scientific and JAS Diagnostics;
 
our ability to achieve economies of scale or to maximize the utilization of our assets and facilities, after any integration of the businesses commonly known as 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;
 
the timing of the closing of our Drew Scientific facility in Dallas, Texas;
 
our ability to enhance our position in laboratory automation;
 
 
16

 
 
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 remaining goodwill recorded at ImmunoVision, 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 obtain product technology from the Italian diagnostics company that would enable us to manufacture our own hepatitis products;
 
our ability to introduce and market our own hepatitis products in the European Union when expected, or at all, including the potential that any further delays may require us to record an additional impairment charge with respect to the value of our hepatitis technology product license or pay all or a portion of our accrued payables relating to the product license;
 
our ability to internally manufacture our own hepatitis products and raw materials for these products and to become competitive in markets outside of the United States;
 
our ability to derive revenue from our manufacture and sale of our own hepatitis products;
 
the impact of the anticipated timing of the commercial launch of our own hepatitis products on the judgments and estimates we have made with respect to our financial condition, operating results and cash flows;
 
our production capacity at our facility in Miami, Florida;
 
the success of the move of our headquarters from our Miami, Florida facility to our Miami Lakes, Florida facility;
 
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;
 
 
17

 
 
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, 2012 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.
 
 
On September 1, 2010, ERBA Mannheim purchased all of the approximately 72.4% of the then outstanding shares of our common stock then owned by the Debregeas-Kennedy Group for an aggregate purchase price of approximately $15,000,000, or $0.75 per share. As a result of this share acquisition, the consummation of the various transactions contemplated by the investment made by ERBA Mannheim pursuant to that certain Stock Purchase Agreement, as further described throughout this Quarterly Report on Form 10-Q, including ERBA Mannheim’s purchase from us, and our issuance to ERBA Mannheim, of an aggregate of 15,333,334 shares of our common stock, and ERBA Mannheim’s exercise, in part, of the Warrant, as further described throughout this Quarterly Report on Form 10-Q, for 600,000 shares of our common stock, ERBA Mannheim now beneficially owns, directly or indirectly, approximately 82.4% of the outstanding shares of our common stock.
 
ACQUISITION OF DREW SCIENTIFIC, INC.
 
On October 3, 2012, we acquired all of the issued and outstanding shares of capital stock of Drew Scientific from a subsidiary of Escalon Medical Corp. pursuant to a Stock Purchase Agreement between, among others, us and Escalon. Included in the acquired businesses were Drew Scientific’s wholly-owned subsidiaries – JAS Diagnostics, Inc. and Drew Scientific Limited Co. 
 
The acquired businesses, collectively referred to as Drew Scientific, were acquired with the purpose of integrating Drew Scientific’s manufacturing and distribution capabilities with our legacy operations in an effort to achieve economies of scale and maximize the utilization of our assets and facilities. We paid $6,500,000 for all of the issued and outstanding shares of capital stock of Drew Scientific, which purchase price was funded through the purchase by ERBA Mannheim from us of 8,666,667 shares of our common stock at a purchase price of $0.75 per share, for an aggregate purchase price of $6,500,000.
 
 
18

 
Prior to the October 3, 2012 acquisition date, our management decided to cease the operations of the Dallas, Texas, and the United Kingdom facilities of Drew Scientific and its subsidiaries. As a result, we have accrued on the opening balance sheet as of October 3, 2012 estimated plant closing costs, including lease buy-out and severance costs, of $160,000 and $118,000, respectively. Regarding the Dallas, Texas facility, in May 2013, our management announced that the closing would be effective in late September 2013, but the closing date has subsequently been extended to late December 2013. With respect to the United Kingdom facility, the closing was effective in late March 2013.
 
RESULTS OF OPERATIONS
 
NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2012
 
 
Net loss totaled approximately $30,000 for the nine months ended September 30, 2013 compared to a net loss of approximately $534,000 for the nine months ended September 30, 2012. Operating income was approximately $230,000 for 2013 compared to an operating loss of $298,000 for 2012. The operating income in 2013 compared to the operating loss in 2012 resulted primarily from the operating income of $1,263,000 for Drew Scientific for 2013, offset by a decrease from operating income in 2012 to a loss in 2013 in our European operations of $438,000. The decrease in net loss in 2013 compared to 2012 resulted primarily from improved operating results, mentioned above, offset by acquisition and integration expenses of $211,000 in 2013.
 
Net revenues increased by approximately $8,165,000 to $20,538,000 in 2013 from $12,373,000 in 2012. This net increase was attributed to the net revenues of $10,007,000 for Drew Scientific for 2013 offset by other factors from recurring operations resulting in a decrease of $1,842,000. This decrease of $1,842,000 consisted of a decrease in net revenues from legacy domestic operations of $1,399,000, to $7,042,000 in 2013 from $8,441,000 in 2012, and a decrease in net revenues from European operations of $443,000, including the effect of exchange rate fluctuations of the United States dollar relative to the Euro, to $3,489,000 in 2013 from $3,932,000 in 2012.  
 
Gross profit increased by $3,115,000 to $9,504,000 in 2013 from $6,389,000 in 2012. This net increase was attributed to the gross profit of $4,200,000 for Drew Scientific for 2013 offset by other factors from recurring operations resulting in a decrease of $1,085,000. This decrease of $1,085,000 from recurring operations was primarily the result of lower domestic and European revenues.
 
Total operating expenses increased by $2,589,000 to $9,275,000 in 2013 from $6,686,000 in 2012. This increase was primarily attributed to the expenses of $2,936,000 for Drew Scientific for 2013. This increase of $2,589,000 was a result of increases in all three expense categories. Comparing 2013 to 2012, selling and marketing expenses increased by $988,000 general and administrative expenses increased by $1,301,000 and research and development expenses increased by $300,000.
 
 
The following table presents comparative net revenues and gross profit for our operations, including the operations of Drew Scientific (net revenues of $10,007,000, cost of sales of $5,807,000 and gross profit of $4,200,000 for the nine months ended September 30, 2013), for the nine months ended September 30, 2013 and 2012.
 
 
19

 
 
 
 
 
 
 
 
Period over Period
 
 
2013
 
2012
 
Increase (Decrease)
 
Net Revenues:
 
 
 
 
 
 
 
 
 
Domestic
$
17,049,000
 
$
8,441,000
 
$
8,608,000
 
European
 
3,489,000
 
 
3,932,000
 
 
(443,000)
 
Total
 
20,538,000
 
 
12,373,000
 
 
8,165,000
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
11,033,000
 
 
5,984,000
 
 
5,049,000
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
$
9,505,000
 
$
6,389,000
 
$
3,116,000
 
% of Total Net Revenue
 
46.3
%
 
51.6
%
 
 
 
 
 
The net increase in revenues for 2013 compared to 2012 was attributed to the post-acquisition net revenues of $10,007,000 for Drew Scientific, a decrease of $1,399,000 in net revenues from our legacy domestic operations and a decrease of $443,000 in net revenues from European operations. Exchange rate differences resulting from the strength or weakness of the United States dollar against the Euro resulted in a decrease of approximately $55,000 in net revenues in 2013 as compared to 2012, as further discussed in “Currency Fluctuations” below.  As measured in Euros, net revenues from European operations in 2013 decreased by Euro 443,000, or 11.3%, as compared to 2012. The decrease in net revenues from European operations (as measured by the Euro) was mainly due to lower contract research and development revenue in 2013 as compared to 2012 as well as the declines in reagent sales in Italy and other international markets. The decrease in net revenues from legacy domestic operations of $1,399,000, or 16.6%, was principally due to a decline in sales to international customers of approximately $165,000, principally from two major customers in Latin America and Japan, a decrease in reagent sales of approximately $1,074,000, and a decrease in equipment sales of approximately $160,000.
 
The net increase in gross profit of approximately $3,116,000 for 2013 compared to 2012 was attributed to the gross profit of $4,200,000 for Drew Scientific for 2013 offset by a decrease in gross profit of $1,084,000 for our legacy operations. Gross profit as a percentage of net revenues decreased from 51.6% in 2012 to 46.3% in 2013, resulting principally from the lower gross profit percentage of 42.0% for the operations of Drew Scientific.
 
 
The following table presents comparative operating expenses for us, including the amounts for Drew Scientific of $2,936,000 (selling and marketing expenses of $1,793,000 general and administrative expenses of $1,081,000 and research and development expenses of $62,000 for the nine months ended September 30, 2013), for the nine-month periods ended September 30, 2013 and 2012. The percentages in the table below are based on the total net revenues in the above table.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period over
 
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
Period
 
 
 
2013
 
Revenue
 
 
2012
 
Revenue
 
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and Marketing
 
$
4,010,000
 
 
19.5
%
 
$
3,022,000
 
 
24.4
%
 
$
988,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and Administrative
 
 
4,332,000
 
 
21.0
%
 
 
3,031,000
 
 
24.5
%
 
 
1,301,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and Development
 
 
933,000
 
 
4.5
%
 
 
633,000
 
 
5.1
%
 
 
300,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Operating Expenses
 
$
9,275,000
 
 
45.0
%
 
$
6,686,000
 
 
54.0
%
 
$
2,589,000
 
 
The increase in total operating expenses from $6,686,000 in 2012 to $9,275,000 in 2013 was primarily attributed to the expenses of $2,936,000 for Drew Scientific for 2013, due to the factors noted below.
 
 
20

 
The net increase of $988,000 in selling and marketing expenses in 2013 compared to 2012 was due to the amounts for Drew Scientific for 2013 of $1,792,000 and a decrease of $804,000 in our recurring operations. This decrease was due principally to open sales positions in the United States and, in Italy, reduction in workforce and lower commissions from lower sales in various commissionable categories. 
 
The net increase of $1,301,000 in general and administrative expenses for 2013 compared to 2012 was primarily due to the amounts for Drew Scientific for 2013 of $1,081,000.
 
The net increase of $300,000 in research and development expenses for 2013 compared to 2012 was due the increase of $238,000 in our recurring operations. This increase was due principally to the research and development agreement of our European operations as further discussed in Note 12 to the condensed consolidated financial statements– “Related Party Transactions.”
 
Income from operations totaled $230,000 in 2013 as compared to an operating loss of $298,000 in 2012. Income from operations in 2013 was composed of operating income of $1,263,000 for Drew Scientific, an operating loss of $542,000 from the legacy domestic operations and an operating loss of $491,000 from our European operations. Loss from operations in 2012 was composed of a $244,000 loss from domestic operations and a $54,000 loss from European operations. Our domestic operations include corporate expenditures, including costs required to maintain our status as a public company.
 
 
Other income (expense) totaled an other expense, net of $180,000 in 2013 as compared to an other income, net of $162,000 in 2012. The decrease in other income to loss from 2012 to 2013 was primarily the result of acquisition and integration costs of $211,000 incurred in 2013 as compared to $85,000 in 2012, offset by a gain from foreign currency transactions of $138,000 in 2013 as compared to a loss of $38,000 in 2012.
 
 
We recorded recurring income tax provisions of $80,000 for 2013 and $75,000 for 2012. The current portion of our tax benefit and provisions, respectively, in both years relates to Italian local income taxes based upon applicable statutory rates effective in Italy. The deferred tax provisions in these years relate 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.
 
 
We generated a consolidated net loss of approximately $30,000 in 2013 (including the net income of $1,172,000 for Drew Scientific) as compared to a net loss of $534,000 in 2012. Basic and diluted net loss per common share was $0.00 in 2013 as compared to $0.02 in 2012. The net loss for both years resulted from the various factors discussed above.
 
 
21

 
THREE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2012
 
 
Net income totaled $129,000 for the three months ended September 30, 2013 compared to a net loss of $97,000 for the three months ended September 30, 2012. Operating income was $79,000 for 2013 compared to an operating loss of $42,000 for 2012. The decrease in operating loss in 2013 compared to 2012 resulted primarily from the operating income of $353,000 for Drew Scientific for 2013, offset by an increase in operating loss in our European operations of $45,000. The change to net income in 2013 compared to net loss in 2012 resulted primarily from the net income of Drew Scientific of $359,000 for 2013, and to a lesser extent from a decrease in net loss in our European operations of $35,000.
 
Net revenues increased by $3,152,000 to $6,941,000 in 2013 from $3,789,000 in 2012. This net increase was attributed to the net revenues of $3,489,000 for Drew Scientific for 2013 offset by other factors from recurring operations resulting in a decrease of $337,000. This decrease of $337,000 consisted of a decrease in net revenues from legacy domestic operations of $504,000, to $2,223,000 in 2013 from $2,727,000 in 2012, offset by an increase in net revenues from European operations of $167,000, including the effect of exchange rate fluctuations of the United States dollar relative to the Euro, to $1,229,000 in 2013 from $1,062,000 in 2012.  
 
Gross profit increased by $953,000 to $3,015,000 in 2013 from $2,062,000 in 2012. This net increase was attributed to the gross profit of $1,494,000 for Drew Scientific for 2013 offset by other factors from recurring operations resulting in a decrease of $541,000. This decrease of $541,000 from recurring operations was primarily the result of lower domestic and European revenues.
 
Total operating expenses increased by $832,000 to $2,937,000 in 2013 from $2,104,000 in 2012. Comparing 2013 to 2012, selling and marketing expenses increased by $284,000, general and administrative expenses increased by $538,000 and research and development expenses increased by $10,000.This increase was primarily attributed to the expenses of $1,024,000 for Drew Scientific for 2013. This increase was offset by a decrease of $385,000 in selling and marketing expenses, an increase of $207,000 in general and administrative expenses, and a decrease of $13,000 in our legacy operations.
 
 
The following table presents comparative net revenues and gross profit for our operations, including the operations of Drew Scientific (net revenues of $3,489,000, cost of sales of $1,996,000 and gross profit of $1,494,000 for the threee months ended September 30, 2013), for the three-month periods ended September 30, 2013 and 2012.
 
 
 
 
 
 
 
 
 
 
 
Period over Period
 
 
 
2013
 
2012
 
Increase
 
Net Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
$
5,712,000
 
 
$
2,727,000
 
 
$
2,985,000
 
European
 
 
1,229,000
 
 
 
1,062,000
 
 
 
167,000
 
Total
 
 
6,941,000
 
 
 
3,789,000
 
 
 
3,152,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
3,926,000
 
 
 
1,727,000
 
 
 
2,199,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
$
3,015,000
 
 
$
2,062,000
 
 
$
953,000
 
% of Total Net Revenue
 
 
43.4
%
 
 
54.4
%
 
 
 
 
 
 
22

 
The net increase in revenues for 2013 compared to 2012 was attributed to the post-acquisition net revenues of $3,489,000 for Drew Scientific, a decrease of $504,000 in net revenues from our legacy domestic operations and an increase of $167,000 in net revenues from European operations. Exchange rate differences resulting from the strength or weakness of the United States dollar against the Euro resulted in a decrease of approximately $55,000 in net revenues in 2013 as compared to 2012, as further discussed in “Currency Fluctuations” below. As measured in Euros, net revenues from European operations in 2013 increased by Euro 103,000, or 12.5%, as compared to 2012. The increase in net revenues from European operations (as measured by the Euro) was mainly due to contract research and development revenue partially offset by the declines in reagent sales in Italy and other international markets. The decrease in net revenues from legacy domestic operations of $504,000, or 18.5%, was principally due to a decrease in the reagent sales of approximately $510,000.
 
The net increase in gross profit of approximately $953,000 for 2013 compared to 2012 was attributed to the gross profit of $1,494,000 for Drew Scientific for 2013 offset by a decrease in gross profit of $541,000 for our legacy operations. Gross profit as a percentage of net revenues decreased from 54.4% in 2012 to 43.4% in 2013, resulting principally from the lower gross profit percentage of 42.8% for the operations of Drew Scientific.
 
 
The following table presents comparative operating expenses for us, including the amounts for Drew Scientific of $1,024,000 (selling and marketing expenses of $670,000, general and administrative expenses of $331,000 and research and development expenses of $23,000 for the three months ended September 30, 2013), for the three-month periods ended September 30, 2013 and 2012. The percentages in the table below are based on the total net revenues in the above table.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Period over
 
 
 
 
 
 
% of
 
 
 
 
 
% of
 
 
Period
 
 
 
2013
 
Revenue
 
 
2012
 
Revenue
 
 
Increase
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and Marketing
 
$
1,327,000
 
 
19.1
%
 
$
1,043,000
 
 
27.5
%
 
$
284,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and Administrative
 
 
1,404,000
 
 
20.0
%
 
 
866,000
 
 
22.9
%
 
 
538,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and Development
 
 
205,000
 
 
3.0
%
 
 
195,000
 
 
5.1
%
 
 
10,000