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 June 30, 1997.
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
65 Dan Road, Canton, Massachusetts 02021
(Address of principal executive offices) (Zip Code)
(617)821-2440
(Issuer's telephone number)
____________________________________________________
(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: 14,402,578
AS OF AUGUST 8, 1997
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 18 pages
Exhibit Index: is on page 16 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 10
PART II: OTHER INFORMATION 13
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
PART I FINANCIAL INFORMATION
3
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,989
Accounts receivable, net 386,312
Notes receivable 9,100
Inventories 136,325
Prepaid expenses and other 87,490
------------
Total current assets 678,216
PROPERTY AND EQUIPMENT, net 330,038
GOODWILL, net of accumulated amortization of 1,186,506 4,410,609
OTHER ASSETS 23,573
------------
Total $ 5,442,436
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (including $347,000 to affiliates) $ 610,082
Accounts payable 595,783
Accrued expenses 455,991
Current portion of long-term debt 287,392
------------
Total current liabilities 1,949,248
LONG-TERM DEBT, LESS CURRENT PORTION 152,967
------------
Total liabilities 2,102,215
------------
COMMITMENTS -
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 657,249 shares issued
and outstanding 6,572
Common Stock, $.01 par value; authorized 25,000,000 shares;
13,526,449 shares issued and outstanding 135,264
Additional paid-in capital 14,428,841
Accumulated deficit (11,230,456)
------------
Total stockholders' equity 3,340,221
------------
Total $ 5,442,436
============
See accompanying notes to consolidated financial statements.
4
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
REVENUE:
Sales $ 523,582 $ 1,098,887 $ 1,615,388 $ 3,591,472
Other revenue 492,819 492,819
------------ ----------- ----------- -----------
Total Revenues 523,582 1,591,706 1,615,388 4,084,291
------------ ----------- ----------- -----------
OPERATING EXPENSES:
Direct cost of revenues 519,594 682,198 1,681,005 2,252,175
Selling, general and
administrative expenses 622,642 596,312 1,823,777 1,753,774
Research and development
expenses 132,101 91,238 323,259 260,778
Amortization of goodwill 139,927 139,926 419,781 419,782
------------ ----------- ----------- -----------
Total operating expenses 1,414,264 1,509,674 4,247,822 4,686,509
------------ ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (890,682) 82,032 (2,632,434) (602,218)
------------ ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income - - 2,248 137
Interest expense and
financing costs (36,484) (32,506) (80,785) (96,652)
Other income, net 3,561 5,100 2,943
------------ ----------- ----------- -----------
Total other income
(expense) (32,923) (32,506) (73,437) (93,572)
------------ ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (923,605) 49,526 (2,705,871) (695,790)
PROVISION FOR INCOME TAXES 2,000 8,456 9,000 13,500
------------ ----------- ----------- -----------
NET INCOME (LOSS) $ (925,605) $ 41,070 $(2,714,871) $ (709,290)
============ =========== =========== ===========
INCOME (LOSS) PER SHARE $ (0.07) $ 0.01 $ (0.27) $ (0.13)
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 12,523,910 5,785,495 9,936,191 5,379,828
============ =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 1997
(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)
Sales of Common Stock 2,677,304 26,773 642,367
Exercise of warrants 1,137,608 11,376 475,539
Issuance of common stock for services 541,397 5,414 212,853
Issuance of common stock to employees 349,220 3,492 151,508
Conversion of Preferred Stock (618,012) (6,180) 1,854,036 18,540 (12,360)
Net loss $ (2,714,871)
- -------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 657,249 $ 6,572 13,526,449 $135,264 $ 14,428,841 $(11,230,456)
===================================================================================================================
See accompanying notes to consolidated financial statements.
6
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JUNE 30,
--------------------------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,714,871) $ (709,290)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 152,394 144,423
Amortization of goodwill 419,781 419,782
Provision (recovery) for losses on accounts
receivable 2,161 5,297
Non-cash charges for employee salaries and
consulting services 373,054 12,675
Changes in operating assets and liabilities:
Increase in accounts receivable 75,448 (237,778)
Decrease (increase) in prepaid expenses and
other current assets 30,995 32,876
Increase in other assets 5,515 (63,668)
Increase (decrease) in account payable,
accrued expenses, and customer advances 64,877 (278,877)
----------- -----------
Net cash provided by (used in)
operating activities (1,590,646) (674,560)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (594) (44,069)
----------- -----------
Net cash provided by (used in)
investing activities (594) (44,069)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 603,020 216,964
Sales of common stock and exercise of warrants 888,117 1,459,878
Repayment of long-term debt (207,281) (61,344)
Repayment of notes payable (4,483) (122,294)
Other - (11,128)
----------- -----------
Net cash provided by (used in)
financing activities 1,279,373 1,482,076
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (311,867) 763,447
CASH AND CASH EQUIVALENTS, beginning of the period 370,856 155,409
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period 58,989 918,856
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ 2,925 $ 3,567
Interest 72,705 79,057
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 and nine month periods ended June 30, 1997 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 June 30, 1997 of $1,271,032. 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. During the nine months
ended June 30, 1997, the Company raised net proceeds of approximately
$219,000 from the exercise of warrants (redeemable warrants and certain other
warrants previously issued in connection with notes during fiscal years 1994
and 1995) and approximately $669,000 from the sale of common stock. The
Company was also successful in extinguishing debt payable to PKS in the
amount of $268,000 from PKS's exercise of the warrants described above. The
Company is attempting to obtain additional debt and/or 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 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 June 30, 1997, inventories consist of the following::
Raw Materials $ 57,506
Work-in-Process 1,663
Finished Goods 77,156
--------
Total $136,325
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- --------------------
1997 1996 1997 1996
------- -------- -------- --------
Customer A $50,000 $158,000 $171,000 $366,000
Customer B 51,000 46,000 187,000 177,000
4. NOTES PAYABLE
During the three months ended June 30, 1997, officers and affiliates of the
Company made loans to the company in the amount of $339,723, with interest
payable at 10% per annum. These loans and the accrued interest thereon are to
be repaid on or before September 30, 1997.
5. SUBSEQUENT EVENT
On July 21,1997, the Company initiated a private placement offering to raise
approximately $600,000 from the sale of its common stock. Under the terms of
this private placement, a unit consisting of 100,000 shares of common stock
and warrants to purchase 100,000 shares of common stock at an exercise price
of $0.375 per share for a period of 18 months can be purchased for $25,000.
As of July 31,1997, the Company had raised $100,000 from this offering.
During July 1997, officers and affiliates loaned an additional $29,000 to the
Company on the same terms as described above (see Notes Payable).
9
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
Sales for the three months ended June 30, 1997 decreased $575,305, or
approximately 52%, to $523,582 from $1,098,887 for the corresponding period
of the prior year. For the nine months ended June 30, 1997, sales decreased
$1,976,084, or approximately 55%, to $1,615,388 from $3,591,472 for the nine
months ended June 30, 1996. The decrease for the three months ended June 30,
1997 occurred mainly from the reductions of $254,000 from the sales of wound
dressing products and $321,000 from the sales of psychiatric review services.
For the nine months ended June 30, 1997, the results primarily reflect the
reductions of $74,000 from the sales of Medgate's OHS&E, $1,219,000 from the
sales of wound dressing products and $683,000 from the sales of psychiatric
review services.
No other revenue was recorded for the three and nine months ended June 30,
1997 compared to the non-recurring adjustment of $492,819 recorded in
connection with amendments to ATI's License and Supply Agreements with
Convatec during the corresponding periods of the prior year.
Operating Expenses
For the three months ended June 30, 1997, the direct costs of sales were
$519,594 or approximately 99% of sales, as compared to $682,198, or
approximately 62% of sales, for the three months ended June 30, 1996. The
direct cost of sales for the nine months ended June 30, 1997 were $1,681,005,
or approximately 104% of sales, as compared to $2,252,175, or approximately
63% of sales, for the corresponding period of the prior year. The change for
the three months and the nine months ended June 30, 1997 was related
primarily to the decrease in sales described above.
Selling, general and administrative expenses for the three months ended June
30, 1997 increased $26,330, or approximately 4%, to $622,642 from $596,312
for the corresponding period of the prior year. For the nine months ended
June 30, 1997, selling, general and administrative expenses increased
$70,003, or approximately 4%, to $1,823,777 from $1,753,774. The increase for
the three month period ended June 30, 1997 was primarily attributable to
staffing expense for ATI's new Senior Vice President of Sales and Marketing.
For the nine months ended June 30, 1997, the increase resulted mainly from
consulting expenses related to diagnostic products of $18,000 combined with
the staffing expense for ATI's new Senior Vice President of Sales and
Marketing and various other administrative and sales expenses of $52,000.
Expenses for research and development and the amortization of goodwill for
the three months ended June 30, 1997 amounted to $272,028 which represented
approximately an 18% increase over the $231,164 incurred for the
corresponding period of the prior year. For the nine months
10
ended June 30, 1997, expenses for research and development and the
amortization of goodwill were $743,040 compared to $680,560 for the nine
months ended June 30, 1996. The change for the three and nine months ended
June 30, 1997 resulted mainly from staffing expense for ATI's new Vice
President for Research and Development and increased research and development
activities related to saliva diagnostic products.
Other Income and Expense
For the three months ended June 30, 1997, other expenses (net of other
income) amounted to $32,923 as compared to $32,506 for the three months ended
June 30, 1996. Other expenses (net of other income) for the nine months ended
June 30, 1997 were $73,437 compared to $93,572 for the corresponding period
of the prior year. This decrease resulted primarily from the reduction in
interest expense on MHB's bridge loans and receivable financing, offset in
part by interest expense on loans received from affiliates beginning in April
1997.
Net Loss
Primarily as a result of the factors described above, the Company had net a
loss of $925,605 ($0.07 per share) for the three months ended June 30, 1997,
as compared to net income of $41,070 ($0.01 per share) for the three months
ended June 30, 1996. For the nine months ended June 30, 1997, the net loss
was $2,714,871 ($0.27 per share) versus a net loss of $709,290 ($0.13 per
share) for the corresponding period of the prior year.
Financial Condition and Liquidity
At June 30, 1997 and September 30, 1996 the Company had working capital
deficiencies of ($1,271,032) and ($496,067), respectively, and cash and cash
equivalents of $59,989 and $370,856 respectively. Net cash used in operating
activities during the nine months ended June 30, 1997 amounted to $1,590,646
resulting primarily from an operating loss of $2,714,871 offset in part by a
decrease in accounts receivable of $75,448, decreases in prepaid expenses and
other assets of $30,995, depreciation and amortization of equipment and
goodwill of $419,781, non-cash charges for employee salaries and consulting
services of $373,054 and increases in accounts payable and accrued expenses
of $64,877. Net cash provided by financing and investing activities during
the nine months ended June 30, 1997 amounted to $1,278,779 which included
sales of the Company's common stock and exercise of warrants of $888,117 and
proceeds from notes payable of $603,020; offset in part by repayment of notes
payable of $4,483 and repayment of long term debt of $207,281.
In 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.
During the period January-May 1997, the Company completed Regulation S
placements of 2,677,304 shares of its common stock to offshore investors
resulting in net proceeds of approximately $669,140. From April-July 1997,
officers and affiliates of the Company made loans to the Company totaling
$339,723 with interest payable at 10% per annum. These loans
11
and the accrued interest thereon are to be repaid on or before September 30,
1997. On July 21,1997, the Company initiated a private placement offering to
raise up to $600,000 under the terms of this private placement, a unit
consisting of 100,000 shares of common stock and warrants to purchase 100,000
shares of common stock at an exercise price of $0.375 per share for 18 months
can be purchased for $25,000. As of July 31, 1997, the Company had raised
$100,000 from this offering. Proceeds from these financings are expected to
be used to meet working capital needs and to pay outstanding payables.
In May 1997, the Company established the Avitar, Inc. Stock Based
Compensation Plan. Under the terms of this plan, the Company is able to issue
up to 1.4 million shares of its common stock to cover the salaries of certain
employees for ninety days and pay for services provided by certain
consultants. Through July 1997, the Company had issued approximately 989,000
shares of common stock for approximately $394,000 of salaries and services.
For the balance of fiscal year 1997, the Company's cash requirements are
expected to include primarily funding of working capital, 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
nine months of fiscal 1997, but are expected to gradually increase over the
balance of fiscal year 1997 as the Company begins to expand the use of 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 future 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.
12
PART II OTHER INFORMATION
13
ITEM 1 LEGAL PROCEEDINGS
Former attorneys for the Company commenced an action (and made a motion for
summary judgement) against the Company in New York Superior Court. This
proceeding is based on a note given by the Company in connection with such
former attorneys' claim for legal fees. Plaintiff seeks judgement in the
principal amount of $185,171.63. Plaintiff commenced the action on February 27,
1997 but, with extensions, the Company responded in opposition on June 13, 1997
and, after service of the plaintiff's reply, the motion was submitted to the
Court on June 26, 1997.
ITEM 2 CHANGES IN SECURITIES
(a) The Company's Redeemable Warrants (Nasdaq SmallCap Market: AVITW) were
extended from June 30, 1997 to July 31, 1997, on which date they expired.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits:
Exhibit No. Document
----------- --------
27.3 Financial Data Schedule
(B) Reports on Form 8-K:
On June 4, 1997, the Company filed with the Securities and Exchange
Commission a report on Form 8-K, Item 9.
14
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: August 12, 1997 /s/ Peter P. Phildius
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 12, 1997 /s/ J.C. Leatherman, Jr
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
15
EXHIBIT INDEX
Exhibit No. Document Page
----------- -------- ----
27.3 Financial Data Schedule 17
16