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, 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
incorporation or organization) Identification No.)
65 Dan Road, Canton, Massachusetts 02021
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781)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: 15,562,782
AS OF FEBRUARY 10, 1998
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 18 pages
Exhibit Index: is on page 16 hereof.
1
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 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
December 31 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 354,613
Accounts receivable, net of allowance for doubtful accounts of $9,000. 259,394
Notes receivable 9,100
Inventories 146,532
Prepaid expenses and other 186,093
---------------
Total current assets 955,732
PROPERTY AND EQUIPMENT, net 246,240
OTHER ASSETS 14,635
---------------
Total $1,216,607
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 556,588
Accounts payable 536,804
Accrued expenses 410,985
Current portion of long-term debt 202,814
---------------
Total current liabilities 1,707,191
LONG TERM DEBT, LESS CURRENT PORTION 98,421
---------------
Total liabilities 1,805,612
---------------
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;
15,562,782 shares issued and outstanding 155,627
Additional paid-in capital 14,932,272
Accumulated deficit (15,683,476)
----------------
Total stockholders' equity (589,005)
----------------
Total $1,216,607
===============
See accompanying notes to consolidated financial statements.
4
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------
1997 1996
------------------- -------------------
SALES $ 432,214 $ 265,941
OPERATING EXPENSES
Direct cost of sales 421,402 410,333
Selling, general and administrative expenses 318,229 433,131
Research and development expenses 124,688 88,656
Amortization of goodwill - 139,928
------------------- -------------------
Total operating expenses 864,319 1,072,048
------------------- -------------------
INCOME (LOSS) FROM OPERATIONS (432,105) (806,107)
------------------- -------------------
OTHER INCOME (EXPENSE)
Interest income
4,150 -
Interest expense and financing costs
(40,436) (24,053)
------------------- -------------------
Total other income (expense)
(36,286) (24,053)
------------------- -------------------
LOSS FROM CONTINUING OPERATIONS (468,391) (830,160)
DISCONTINUED OPERATIONS:
Gain from the sale of MHB 1,208,084
-
Income (loss) from the operations of MHB
(71,914) 44,121
------------------- -------------------
NET INCOME (LOSS) $ 667,779 (786,039)
=================== ===================
INCOME (LOSS) PER SHARE:
Loss per share from continuing operations $ (0.03) $ (0.11)
Income per share from discontinued operations 0.07 0.01
------------------- -------------------
Net income (loss) per share $ 0.04 $ (0.10)
=================== ===================
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 15,365,691 7,527,886
=================== ===================
See accompanying notes to consolidated financial statements.
5
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended December 31, 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
............................ ..............................
Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 657,249 $ 6,572 15,234,218 $152,342 $14,866,017 ($16,351,255)
Issuance of common stock
for services 53,564 535 14,005
Issuance of common stock for
payment of note payable 275,000 2,750 52,250
Net income 667,779
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 657,249 $6,572 15,562,782 $155,627 $14,932,272 ($15,683,476)
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31,
------------------------------------------------
1997 1996
---------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 667,779 ($786,039)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 36,393 50,391
Amortization of goodwill -- 139,928
Provision (recovery) for losses on accounts receivable -- 1,800
Non cash charges for consulting services 14,540 32,046
Non cash recovery from settlement of note payable (58,126) --
Gain from sale of MHB (1,208,084) --
Changes in operating assets and liabilities:
Increase in accounts receivable (87,948) (58,630)
Increase in prepaid expenses and other current assets (35,321) (42,787)
Decrease in other assets 723 --
Increase (Decrease) in accounts payable and accrued expenses (204,314) 171,112
Other (77,916) --
---------------- ----------------
Net cash provided by (used in) operating activities (952,274) (492,179)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of MHB 1,286,000 --
Purchases of property and equipment -- (593)
---------------- ----------------
Net cash provided by (used in) investing activities 1,286,000 (593)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 150,514 16,273
Sales of common stock -- 211,417
Repayment of long-term debt (135,139) (52,275)
Repayment of notes payable (60,000) (9,982)
---------------- ----------------
Net cash provided by (used in) financing activities (44,625) 165,433
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 289,101 (327,339)
CASH AND CASH EQUIVALENTS, beginning of the period 65,512 370,856
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of the period $ 354,613 $ 43,517
================ =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ -- $ 500
Interest 21,380 18,181
See accompanying notes to consolidated financial statements.
7
AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
INSERT FINANCIAL HERE
1. BASIS OF PRESENTATION
Avitar, Inc. ("Avitar" or the "Company"), through its wholly-owned
subsidiary, Avitar Technologies Inc. ("ATI") develops, manufactures,
markets and sells proprietary hydrophilic polyurethane foam disposables
fabricated for medical, diagnostics, dental and consumer use. The Company
is a leading independent fabricator of disposable medical and dental
products from medical grade hydrophilic polyurethane foam.
On October 27, 1997, the Company sold the business and assets of its
wholly-owned subsidiary, Managed Health Benefits Corporation ("MHB"), which
provided health care cost containment services. Therefore, MHB is
considered a discontinued operation and this report primarily reflects the
continuing operation of the Company.
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,
1997 are not necessarily indicative of the results that may be expected for
the full fiscal year ending September 30, 1998. 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, 1997.
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 and stockholders' deficit as of December 31, 1997
of $751,459 and $589,005, respectively. The Company raised net proceeds
aggregating approximately $2,600,000 during the fiscal years ended
September 30, 1997 and 1996 from the sale of stock. The Company is
attempting to obtain additional equity financing. Based upon current cash
flow projections, the Company believes the anticipated cash flow from
operations, proceeds from the sale of MHB and expected net proceeds from
future equity financings will be sufficient to finance the Company's
operating needs until the 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. DISCONTINUED OPERATIONS
On October 27, 1997, the Company sold the business and assets of MHB, its
wholly-owned subsidiary. The Company received $1,224,959, net of expenses,
and recorded a gain of $1,208,084. For the period of October 1, 1997
through the date of the sale on October 27, MHB incurred an operating loss
of $71,914.
3. INVENTORIES
At December 31, 1997, inventories consist of the following::
Raw Materials $ 93,925
Work-in-Process 35,929
Finished Goods 16,678
--------
Total $146,532
========
4. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended December 31,
-------------------------------
1997 1996
---- ----
Customer A $219,741 $ 5,000
Customer B 55,363 61,143
Customer C 38,867 84,644
Customer D 21,090 52,015
4. DEBT
In November 1997, the Company settled a note payable in the principal
amount of $203,126 with its former law firm, whereby the Company paid
$90,000 in cash and 275,000 shares of its common stock and recorded a
reduction in general and administrative expenses of $58,126.
5. EARNINGS PER SHARE
In the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share. The Company
has presented only the Basic Earning per Share for the three months ended
1997 and 1996 since the inclusion of all stock equivalents were
anti-dilutive .
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 December 31, 1997 increased $166,273,
or approximately 63%, to $432,214 from $265,941 for the corresponding
period of the prior year. The results for the three months ended December
31, 1997 primarily reflect the increase in sales of wound dressing
products, particularly sales to the Company's main customer.
Operating Expenses
Direct costs of sales were approximately 97% of sales, as compared to
approximately 154% of sales, for the three months ended December 31, 1996.
The improvement for the three months ended December 31, 1997 was related
primarily to the increase in sales described above.
Selling, general and administrative expenses for the three months ended
December 31, 1997 decreased $114,902, or approximately 27%, to $318,229
from $433,131 for the corresponding period of the prior year. The decrease
for the three month period ended December 31, 1997 resulted mainly from a
reduction in expenses of approximately $58,000 related to the settlement of
the note with the Company's former attorneys and a decrease in consulting
expenses of approximately $35,000.
Expenses for research and development and the amortization of goodwill
for the three months ended December 31, 1997 amounted to $124,688 compared
to $228,584 incurred for the corresponding period of the prior year. The
change for the quarter ended December 31, 1997 occurred primarily from the
reduction in goodwill amortization of approximately $140,000 as a result of
the Company's decision to write-off the remaining amount of goodwill in the
fourth quarter of Fiscal 1997; offset by an increase in research and
development expense of approximately $36,000 for efforts undertaken by the
Company to enter the rapid diagnostic test market.
Other Income and Expense
For the three months ended December 31, 1997, other expenses (net of
other income) amounted to $36,286 as compared to other expenses of $24,053
for the three months ended December 31, 1996. This change resulted
primarily from the increase in interest expense associated with the loans
made to the Company during the last half of Fiscal 1997.
Discontinued Operations
In October 1997, the Company consummated the sale of the net assets and
business of its MHB subsidiary. Income from the operations and sale of MHB
was $1,136,170 for the three months ended December 31, 1997 compared to
income of $44,121 for the three months ended
10
December 31, 1996. The significant change resulted from the gain of
$1,208,084 recorded for the sale of MHB.
Net Loss
Primarily as a result of the factors described above, the Company had
net income of $667,779, $0.04 per share, for the three months ended
December 31, 1997, as compared to a net loss of $786,039, $0.10 per share,
for the three months ended December 31, 1996.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 1997 and September 30, 1997 the Company had working
capital deficiencies of ($751,459) and ($1,504,807), respectively, and cash and
cash equivalents of $354,613 and $65,512 respectively. Net cash used in
operating activities during the three months ended December 31, 1997 amounted to
$952,274 resulting primarily from an increase in accounts receivable of $87,948,
increases in prepaid expenses and other current assets of $35,321, decreases in
accounts payable, accrued expenses and other of $282,230, a non-cash recovery
from the settlement of a note payable of $58,126 and the gain from the sale of
MHB of $1,208,084; partially offset by net income of $667,779, depreciation and
amortization of equipment of $36,393, non-cash charges for consulting services
of $14,540 and an increase in other assets of $723. Net cash provided by
financing and investing activities during the three months ended December 31,
1997 amounted to $1,241,375 which included proceeds from the sale of MHB of
$1,286,000, proceeds from notes payable and warrants of $150,514; offset in part
by the repayment of notes payable of $60,000 and the repayment of long term debt
of $135,139.
During October 1997, an affiliate of the Company and a private
individual made loans to the Company totaling $100,000 with interest payable at
10% per annum on $50,000 and 20% per annum on the other $50,000. These loans and
the accrued interest thereon, which were due on January 31, 1998, have been
repaid as of January 31, 1998. Also in October 1997, the Company paid $10,000
plus accrued interest to an affiliate of the Company as repayment of a loan made
to the Company during Fiscal 1997.
As indicated in Results of Operations above, the Company sold the net
assets and business of its MHB subsidiary in October 1997. From this sale the
Company received gross proceeds of $1,286,000 and recorded a gain of $1,208,084
in the quarter ended December 31, 1997. In addition, the Company is attempting
to raise up to $4,000,000 from the sales of equity and or debt securities.
Proceeds from these proposed financings are intended to enable the Company to
meet NASDAQ's new continued listing requirements and are anticipated to be used
primarily to provide the necessary working capital and capital equipment funding
to operate the Company and expand the Company's business. However, there can be
no assurance that these financings will be achieved.
For the balance of fiscal year 1998, the Company's cash requirements
are expected to include primarily the funding of operating losses, the payment
of outstanding accounts payable, the repayment of certain notes payable and the
funding of operating capital to grow the Company's rapid diagnostic testing and
other lines of business.
Operating revenues of the Company grew significantly during the first
quarter of Fiscal 1998 and are expected to increase substantially during the
remainder of Fiscal 1998 if the sales for the wound dressing products return to
previous levels and the Company continues to expand the use of its
11
polyurethane foam bases technology to produce and market products for the
diagnostic and other marketplaces. Based on current sales, expense and cash flow
projections, the Company believes that the current level of cash and short-term
investments on hand and, most significantly, a portion of the anticipated net
proceeds from the financing mentioned above would be sufficient to fund
operations until the Company achieves profitability. There can be no assurance
that the Company will consummate the above-mentioned financing, or that all of
the net proceeds sought thereby will be obtained. 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 the financings described above. 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 Fiscal 1997 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 (December
10, 1997). 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 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 30, 1997, the Company filed with Securities and Exchange
Commission a Current Report on Form 8K reporting on Item 2.
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: February 13, 1997 /S/ Peter P. Phildius
-----------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: February 13, 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
- ----------- -------- ----
27.2 Financial Data Schedule 17
16