U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended December 31, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act for
the transition period from ________ to ________
Commission File Number: 0-20316
Avitar, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1174053
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
65 Dan Road, Canton, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
(617)821-2440
(Issuer's telephone number)
35 Thorpe Avenue, Suite 101, Wallingford, Connecticut 06492
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [x]Yes [ ]No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK: 8,681,976
AS OF FEBRUARY 10, 1997
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 17 pages
Exhibit Index: is on page 15 hereof.
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION 3
Item 1 Consolidated Financial Statements
Balance Sheet 4
Statements of Operations 5
Statement of Stockholders' Equity 6
Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 9
PART II: OTHER INFORMATION 12
Item 2 Changes in Securities 13
Item 6 Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
2
PART I FINANCIAL INFORMATION
3
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31 1996
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 43,517
Accounts receivable, net of allowance
for doubtful accounts of $9,000 567,330
Notes receivable 29,100
Inventories 213,506
Prepaid expenses and other 63,703
-----------
Total current assets 917,156
PROPERTY AND EQUIPMENT, net 416,540
GOODWILL, net of accumulated amortization of $906,653 4,690,463
OTHER ASSETS 26,317
-----------
Total $ 6,050,476
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 107,635
Accounts payable 655,429
Accrued expenses 501,037
Current portion of long-term debt 285,830
-----------
Total current liabilities 1,549,931
LONG TERM DEBT, LESS CURRENT PORTION 249,413
-----------
Total liabilities 1,799,344
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 1,275,261 shares issued
and outstanding 12,752
Common stock, $.01 par value; authorized 25,000,000
shares; 8,158,108 shares issued and outstanding 81,581
Additional paid-in capital 13,458,423
Accumulated deficit (9,301,624)
-----------
Total stockholders' equity 4,251,132
-----------
Total $ 6,050,476
===========
See accompanying notes to consolidated financial statements.
4
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1996 1995
---------- ----------
SALES $ 628,743 $1,267,040
OPERATING EXPENSES
Direct cost of sales 551,033 783,965
Selling, general and administrative
expenses 607,512 576,335
Research and development expenses 88,656 86,965
Amortization of goodwill 139,928 139,928
---------- ----------
Total operating expenses 1,387,129 1,587,193
---------- ----------
INCOME (LOSS) FROM OPERATIONS (758,386) (320,153)
---------- ----------
OTHER INCOME (EXPENSE)
Interest income - 137
Interest expense and financing costs (24,053) (32,877)
Other income, net - 2,904
---------- ----------
Total other income (expense) (24,053) (29,836)
---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (782,439) (349,989)
PROVISION FOR INCOME TAXES 2,600 2,161
---------- ----------
NET INCOME (LOSS) (786,039) (352,150)
========== ==========
INCOME (LOSS) PER SHARE $ (0.10) $ (0.07)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 7,527,886 5,177,450
========== ==========
See accompanying notes to consolidated financial statements.
5
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended December 31, 1996
(Unaudited)
Preferred Stock Common Stock
---------------- ---------------- Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
------ ------ ------ ------ --------------- -----------
Balance at
September
30, 1996 1,275,261 $12,752 6,966,884 $69,669 $12,958,934 ($8,515,585)
Exercise of
warrants 1,125,000 $11,250 468,105
Issuance of
common
stock for
services 66,224 $662 31,384
Net loss (786,039)
--------- ------- --------- ------- ----------- -----------
Balance at
December
31, 1995 1,275,261 $12,752 8,158,108 $81,581 $13,458,423 ($9,301,624)
========= ======= ========= ======= =========== ===========
See accompanying notes to consolidated financial statements.
6
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($786,039) ($352,150)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 50,391 46,575
Amortization of goodwill 139,928 139,928
Provision (recovery) for losses on accounts
receivable 1,800 2,500
Non cash charges for consulting services 32,046 -
Changes in operating assets and liabilities:
Increase in accounts receivable (58,630) (60,180)
Increase in prepaid expenses and other
current assets (42,787) (50,799)
Increase in other assets - (3,934)
Increase in account payable, accrued
expenses, consulting fees and customer
advances 171,112 291,297
--------- ---------
Net cash provided by (used in)
operating activities (492,179) 13,237
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (593) (9,688)
--------- ---------
Net cash provided by (used in)
investing activities (593) (9,688)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 16,273 -
Sales of common stock 211,417 50,000
Repayment of long-term debt (52,275) (42,294)
Repayment of notes payable (9,982) (74,207)
--------- ---------
Net cash provided by (used in)
financing activities 165,433 (66,501)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (327,339) (62,952)
CASH AND CASH EQUIVALENTS, beginning of period 370,856 155,409
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $43,517 $92,457
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $500 $3,567
Interest $18,161 $17,485
See accompanying notes to consolidated financial statements.
7
AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Avitar, Inc. ("Avitar" or the "Company"), through its two wholly-owned
subsidiaries, Avitar Technologies Inc. ("ATI") and Managed Health Benefits
Corporation ("MHB"), operates in two significant segments of the healthcare
industry. ATI produces disposable medical and dental products made from
polyurethane foam and has recently entered the rapid diagnostic screening test
market. MHB provides healthcare cost containment services to employers and other
third-party payers to assist them in controlling costs of group medical,
workers' compensation and disability benefits. ATI sells its products and
services primarily to large medical supply companies located both inside and
outside of the United States. Most of MHB's customers are located or
headquartered in the United States.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-QSB and Regulation S-B
(including Item 310(b) thereof). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended December 31, 1996 are not necessarily indicative of the
results that may be expected for the full fiscal year ending September 30, 1997.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements of the Company for the fiscal year ended
September 30, 1996.
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
suffered recurring losses from operations and has a working capital deficit as
of December 31, 1996 of $632,775. The Company raised net proceeds aggregating
approximately $1,500,000 during the fiscal years ended September 30, 1996 and
1995 from the sale of stock and approximately $212,000 from the exercise of
certain warrants (previously issued in connection with notes during fiscal years
1994 and 1995) during the three months ended December 31, 1996. The Company was
also successful in extinguishing debt payable to PKS in the amount of $268,000
from the exercise of these warrants by PK&S. The Company is attempting to obtain
additional equity financing. Based upon current revenues, expenses and cash flow
projections, the Company believes the current level of working capital,
anticipated cash flow from operations, and expected net proceeds from the debt
financing noted above will be sufficient to finance the Company's operating
needs until the combined operations achieve profitability. There can be no
assurances that forecasted results will be achieved or that additional financing
will be obtained. The financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
8
2. INVENTORIES
At December 31, 1996, inventories consist of the following:
Raw Materials $123,508
Work-in-Process 22,292
Finished Goods 67,706
--------
Total $213,506
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended December 31,
-------------------------------
1996 1995
------- --------
Customer A $67,000 $134,000
Customer B 85,000 54,000
Customer C 85,000 94,000
Customer D 78,000 70,000
4. SUBSEQUENT EVENT
During January 1997, the Company completed Regulation S Placements of 500,000
shares of its common stock to offshore investors resulting in net proceeds of
approximately $103,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended December 31, 1996 decreased $638,297, or
approximately 50%, to $628,743 from $1,267,040 for the corresponding period of
the prior year. The results for the three months ended December 31, 1996
primarily reflect the reductions in revenue of $74,000 from the sales of
Medgate's OHS&E, $495,000 from the sales of wound dressing products and $75,000
from the sales of psychiatric review services.
Operating Expenses
For the three months ended December 31, 1996, the direct costs of sales were
$551,033, or approximately 88% of sales, as compared to $783,965, or
approximately 62% of sales, for the
9
three months ended December 31, 1995. The change for the three months ended
December 31, 1996 was related primarily to the decrease in sales described
above.
Selling, general and administrative expenses for the three months ended December
31, 1996 increased $31,177, or approximately 5%, to $607,512 from $576,335 for
the corresponding period of the prior year. The increase for the three month
period ended December 31, 1996 was primarily attributable to consulting expenses
related to diagnostic products of $14,000 and to various other administrative
and sales expenses of $17,000.
Expenses for research and development and the amortization of goodwill for the
three months ended December 31, 1996 amounted to $228,584 which represented less
than a 2% increase over the $226,893 incurred for the corresponding period of
the prior year.
Other Income and Expense
For the three months ended December 31, 1996, other expenses amounted to $24,053
as compared to other expenses (net of other income) of $29,836 for the three
months ended December 31, 1995. This change resulted primarily from the
reduction in interest expense on MHB's bridge loans.
Net Loss
Primarily as a result of the factors described above, the Company had net a loss
of $786,039 ($0.10 per share) for the three months ended December 31, 1996, as
compared to a net loss of $352,150 ($0.07 per share) for the three months ended
December 31, 1995.
Financial Condition and Liquidity
At December 31, 1996 and September 30, 1996 the Company had working capital
deficiencies of ($632,775) and ($496,067), respectively, and cash and cash
equivalents of $43,517 and $370,856 respectively. Net cash used in operating
activities during the three months ended December 31, 1996 amounted to $492,179
resulting primarily from an operating loss of $786,039, an increase in accounts
receivable of $58,630, and increases in prepaid expenses and other current
assets of $42,787; partially offset by depreciation and amortization of
equipment and goodwill of $190,319, non-cash charges for consulting services of
$32,046 and increases in accounts payable and accrued expenses of $171,112. Net
cash provided by financing and investing activities during the three months
ended December 31, 1996 amounted to $165,433 which included sale of the
Company's common stock of $211,417 and proceeds from notes payable of $16,273;
offset in part by repayment of notes payable of $9,982 repayment of long term
debt of $52,275 and purchases of equipment of $593.
During November 1996, the Company lowered the exercise price of certain warrants
(previously issued in connection with notes during fiscal years 1994 and 1995)
with the intent of inducing warrant holders to exercise the warrants. As a
result, the Company issued 1,125,000 shares of its common stock for which it
received $212,000 and extinguished debt payable to PK&S in the amount of
$268,000.
10
In January 1997, the Company completed Regulation S placements of 500,000 shares
of its common stock to offshore investors resulting in net proceeds of
approximately $103,000. In addition, the Company is attempting to raise up to
$6,000,000 through private placement, possible exercise of its Redeemable
Warrants and/or a possible rights offering to existing shareholders. Proceeds
from these financings are expected to be used to finance any Company operating
losses, to meet working capital needs, to pay outstanding payables and to expand
the business.
For the balance of fiscal year 1997, the Company's cash requirements are
expected to include primarily funding of any operating losses, completing the
payment of accrued professional fees incurred in relation to the acquisition of
ATI and financing the development of products for the rapid diagnostic testing
market.
Operating revenues of the Company declined significantly during the first
quarter of fiscal 1997, but are expected to gradually increase over the balance
of fiscal year 1997 as the Company begins to expand the use its polyurethane
foam based technology to produce and market products for the diagnostic
marketplace. Based on current sales, expense and cash flow projections, the
Company believes that the current level of cash and short-term investments on
hand, the anticipated cash flow from operations, and, most significantly, the
proceeds from the financing mentioned above would be sufficient to fund
operations until the Company achieves profitability. There can be no assurances
that the Company will be able to obtain all of the proceeds sought from the
above mentioned financing. Once the Company achieves profitability, the
longer-term cash requirements of the Company to fund operating activities,
purchase capital equipment and expand the business are expected to be met by the
anticipated cash flow from operations and proceeds from any financings. However,
because there can be no assurances that sales will materialize as forecasted,
management will continue to closely monitor and attempt to control costs at the
Company and will continue to actively seek additional capital on favorable
terms.
As a result of the Company's recurring losses from operations and working
capital deficit, the report of its independent certified public accountants
relating to the financial statements for the fiscal year ended September 30,
1996 contains an explanatory paragraph stating substantial doubt about the
Company's ability to continue as a going concern. Such report also states that
the ultimate outcome of this matter could not be determined as of the date of
such report (November 15, 1996). The Company's plans to address the situation
are presented above. However, there are no assurances that these endeavors will
be successful or sufficient.
11
PART II OTHER INFORMATION
12
ITEM 2 CHANGES IN SECURITIES
(a) The Company has extended the expiration date of its Redeemable Warrants
(Nasdaq SmallCap Market: AVITW) from February 28, 1997 to April 30, 1997.
Further, the Company reduced the exercise price of the Redeemable Warrants
so that each Redeemable Warrant entitles the holder to purchase 4.0 shares
of Common Stock (subject to further adjustment) for $0.85 per share. This
offering will be made only by means of a prospectus.
The Company has approximately 2.7 million Redeemable Warrants outstanding.
If all of these warrants were exercised, approximately 11 million shares of
Common Stock would be issued in exchange for the aggregate exercise price of
approximately $9.3 million. To the extent that any Redeemable Warrants are
exercised, the funds would be used to provide working capital and to expand
the Company's business.
There can be no assurance that any or all of the Redeemable Warrants will be
exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
----------- --------
27.2 Financial Data Schedule
(b) Reports on Form 8-K:
On October 21, 1996, the Company filed with the Securities and Exchange
Commission a report on Form 8K, Item 5.
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVITAR, INC.
(Registrant)
Dated: February 12, 1997 /s/ Peter P. Phildius
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: February 12, 1997 /s/ J.C. Leatherman, Jr.
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
14
EXHIBIT INDEX
Exhibit No. Document Page
----------- -------- ----
27.2 Financial Data Schedule 16
15