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 March 31, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act for
the transition period from
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Commission File Number: 0-20316
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Avitar, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 06-1174053
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
65 Dan Road, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(781) 821-2440
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(Issuer's telephone number)
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(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: 17,469,768
As of May 12, 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
March 31 1998
(Unaudited)
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ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 52,716
Accounts receivable, net 329,486
Notes receivable 9,100
Inventories 138,245
Prepaid expenses and other 209,474
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Total current assets 739,021
PROPERTY AND EQUIPMENT, net 213,647
OTHER ASSETS 14,719
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Total $ 967,387
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable (including 7,063 to an affiliate) $ 300,698
Accounts payable 731,972
Accrued expenses 412,118
Current portion of long-term debt 193,433
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Total current liabilities 1,638,221
LONG TERM DEBT, LESS CURRENT PORTION 78,152
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Total liabilities 1,716,373
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; 17,369,768 shares issued and outstanding 173,698
Additional paid-in capital 15,306,937
Accumulated deficit (16,236,193)
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Total stockholders' equity (748,986)
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Total $ 967,387
================
See accompanying notes to consolidated financial statements.
4
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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---------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
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1998 1997 1998 1997
-------------- ----------------- ------------- ---------------
SALES $ 507,580 $ 200,375 $ 939,794 $ 466,316
OPERATING EXPENSES
Direct cost of revenues 473,052 465,167 894,454 875,500
Selling, general and administrative expenses 421,216 441,409 739,445 873,540
Research and development expenses 152,562 102,502 277,250 191,158
Amortization of goodwill 139,926 279,854
-------------- ----------------- ------------- ---------------
Total operating expenses 1,046,830 1,149,004 1,911,149 2,220,052
-------------- ----------------- ------------- ---------------
INCOME (LOSS) FROM OPERATIONS (539,250) (948,629) (971,355) (1,753,736)
-------------- ----------------- ------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 2,611 2,248 6,761 2,248
Interest expense and financing costs (21,123) (20,248) (61,559) (44,301)
Other income, net 5,045 1,539 5,045 1,539
-------------- ----------------- ------------- ---------------
Total other income (expense) (13,467) (16,461) (49,753) (40,514)
-------------- ----------------- ------------- ---------------
LOSS FROM CONTINUING OPERATIONS (552,717) (965,090) (1,021,108) (1,794,250)
DISCONTINUED OPERATIONS:
Gain from the Sale of MHB - - 1,208,084 -
Income (loss) from the operations of MHB - (39,137) (71,914) 4,984
-------------- ----------------- ------------- ---------------
NET INCOME (LOSS) $ (552,717) $ (1,004,227) $ 115,062 $ (1,789,266)
============== ================= ============= ===============
INCOME (LOSS) PER SHARE-BASIC:
Loss per share from continuing operations $ (0.03) $ (0.10) $ (0.06) $ (0.21)
Income (loss) per share from discontinued operations - - 0.07 -
-------------- ----------------- ------------- ---------------
Net income (loss) per share $ (0.03) $ (0.10) $ 0.01 $ (0.21)
============== ================= ============= ===============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 16,001,172 9,612,447 15,679,305 8,561,137
============== ================= ============= ===============
See accompanying notes to consolidated financial statements.
5
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended March 31, 1998
(Unaudited)
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Preferred Stock Common Stock
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Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
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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 42,530 426 6,886
Payment of note payable 275,000 2,750 52,250
Conversion of notes payable from affiliates 1,818,020 18,180 381,784
Net income 115,062
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Balance at March 31, 1998 657,249 $ 6,572 17,369,768 $ 173,698 $ 15,306,937 $(16,236,193)
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See accompanying notes to consolidated financial statements.
6
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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SIX MONTHS ENDED MARCH 31,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 152,062 $ (1,789,266)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 73,352 100,782
Amortization of goodwill - 279,854
Provision (recovery) for losses on accounts receivable (6,025) 671
Non-cash charges for services 7,311 100,383
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) Decrease in accounts receivable (168,582) 114,247
(Increase) Decrease in prepaid expenses and other current assets (53,627) 9,673
(Increase) Decrease in other assets 639 4,337
Increase (Decrease) in accounts payable, accrued expenses,
and consulting fees 8,090 132,440
Other (77,916) -
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Net cash used in operating activities (1,330,906) (1,046,879)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,647) -
Proceeds from the sale of MHB 1,286,000 -
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Net cash provided by (used in) investing activities 1,282,353 -
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 310,546 172,808
Sales of common stock and warrants, net - 755,417
Repayment of long-term debt (164,789) (153,107)
Repayment of notes payable (110,000) (3,798)
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Net cash provided by financing activities 35,757 771,320
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,796) (275,559)
CASH AND CASH EQUIVALENTS, beginning of the period 65,512 370,856
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of the period $ 52,716 $ 95,297
================= ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ - $ 500
Interest $ 49,879 $ 37,148
See accompanying notes to consolidated financial statements.
7
Avitar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
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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 and
six month periods ended March 31, 1998 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 March 31, 1998 of $899,200 and $748,986, 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 debt and/or 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 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 March 31, 1998, inventories consist of the following:
Raw Materials $ 81,388
Work-in-Process 47,888
Finished Goods 8,969
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Total $138,245
========
4. Major Customers
Customers in excess of 10% of total sales are:
Three Months Ended March 31, Six Months Ended March 31,
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1998 1997 1998 1997
---- ---- ---- ----
Customer A $210,963 $ 70,878 $430,704 $ 75,878
Customer B 54,662 46,175 110,025 107,318
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. During March
1998, the Company retired notes payable to the Chairman of the Board and
the President of the Company totaling approximately $369,000 plus accrued
interest thereon of approximately $31,000 for 1,818,020 shares of the
Company's common stock.
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 and
six months ended March 31, 1998 and 1997 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 March 31, 1998 increased $307,205,
or approximately 153%, to $507,580 from $200,375 for the corresponding
period of the prior year. For the six months ended March 31, 1998, sales
increased $473,478, or approximately 102%, to $939,794 from $466,316 for
the six months ended March 31, 1997. The results for the three and six
months ended March 31, 1998 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 93% of sales for the three
months ended March 31, 1998, as compared to approximately 232% of sales
for the three months ended December 31, 1997. For the six months ended
March 31, 1998, direct costs of sales were 95% of sales compared to 188%
of sales for the same period of Fiscal 1997. The improvement for the
three and six months ended March 31, 1998 was related primarily to the
increase in sales described above.
Selling, general and administrative expenses for the three months
ended March 31, 1998 decreased $20,193, or approximately 5%, to $421,216
from $441,409 for the corresponding period of the prior year. For the six
months ended March 31, 1998, selling, general and administrative expenses
decreased $134,095, or approximately 15%, to $739,445 from $873,540. The
decrease for the three month period ended March 31, 1998 resulted mainly
from a reduction in consulting expenses while the decrease for the six
months ended March 31, 1998 was due primarily to a reduction 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 $55,000.
Expenses for research and development and the amortization of
goodwill for the three months ended March 31, 1998 amounted to $152,562
compared to $242,430 incurred for the corresponding period of the prior
year. For the six months ended March 31, 1998, expenses for research and
development and the amortization of goodwill were $277,250 versus
$471,012 for six months ended March 31, 1997. The change for the quarter
ended March 31, 1998 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 in part by an increase in research and
development expense of approximately $50,000 for efforts undertaken by
the Company to enter the rapid diagnostic test market. For the six months
ended March 31, 1998, the decrease resulted from the reduction in
goodwill as explained above of approximately $280,000; offset in part by
an increase in research and development expense of approximately $86,000
related to the Company's entry into the rapid diagnostic test market.
10
Other Income and Expense
For the three months ended March 31, 1998, other expenses (net of
other income) amounted to $13,467 as compared to other expenses of
$16,461 for the three months ended March 31, 1997. Other expenses (net of
other income) for the six months ended March 31, 1998 were $49,753
compared to $40,514 for the corresponding period of the prior fiscal
year. The decrease for the quarter ended March 31, 1998 resulted
primarily from an increase in miscellaneous income of approximately
$3,500 while the change for the six months ended March 31, 1998 was
mainly due to an 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. For the three months ended March 31,
1998, no income or loss was incurred as compared to a loss from the
operations of MHB of $39,137 for the three months ended March 31, 1997.
Income from the operations and sale of MHB was $1,136,170 for the six
months ended March 31, 1998 compared to income of $4,984 for the same
period of the prior fiscal year. The significant change for the three and
six months ended March 31,1998 resulted mainly from the gain realized
from the sale of MHB.
Net Loss
Primarily as a result of the factors described above, the Company had
a net loss of $552,717, $.03 per share, for the three months ended March
31, 1998 versus a net loss of $1,004,227, $.10 per share, for the three
months ended March 31, 1997. For the six months ended March 31, 1998, the
Company had net income of $152,062, $0.01 per share, as compared to a net
loss of $1,794,250, $0.21 per share, for the six months ended March 31,
1997.
Financial Condition and Liquidity
At March 31, 1998 and September 30, 1997 the Company had working
capital deficiencies of ($899,200) and ($1,504,807), respectively, and cash
and cash equivalents of $52,716 and $65,512 respectively. Net cash used in
operating activities during the six months ended March 31, 1998 amounted to
$1,330,906 resulting primarily from an increase in accounts receivable of
$168,582, increases in prepaid expenses and other current assets of $53,627, a
recovery of a loss on accounts receivable of $6,027, a non-cash recovery from
the settlement of a note payable of $58,126, the gain from the sale of MHB of
$1,208,084 and a decrease in other and other assets of $77,277; partially
offset by net income of $152,062, depreciation and amortization of equipment
of $73,352, non-cash charges for consulting services of $7,311 and increases
in accounts payable and accrued expenses of $8,090. Net cash provided by
financing and investing activities during the six months ended March 31, 1998
amounted to $1,318,110 which included proceeds from the sale of MHB of
$1,286,000, proceeds from notes payable and warrants of $310,546; offset in
part by purchases of equipment of $3,647, the repayment of notes payable of
$110,000 and the repayment of long term debt of $164,789.
11
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. During March 1998, the Company
retired notes payable to the Chairman of the Board and the President of the
Company totaling approximately $369,000 plus accrued interest thereon of
approximately $31,000 for 1,818,020 shares of the Company's common stock.
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 early May 1998, the
Company obtained a Revolving Line of Credit from Silicon Valley Bank which
permits the Company to borrow up to $350,000. In addition, the Company is
attempting to raise up to $2,000,000 from the sales of equity and/or debt
securities. Proceeds from these proposed financings 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
half 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
polyurethane foam base 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 2. Change in Securities
On March 10, 1998, the Company retired notes payable to the Chairman
of the Board and the President of the Company totaling approximately $369,000
plus accrued interest thereon of approximately $31,000 for 1,818,020 shares of
the Company's Common Stock. The exemption from registration of these securities
is based upon Section 4(2) of the Securities Act.
In addition, on February 4, 1998, the Company canceled stock options
for its directors, officers and employees covering 1,006,972 shares of the
Company's Common Stock at exercise prices of $.38 to $1.19 per share and granted
new options to these same individuals for 1,006,972 shares of the Company's
Common Stock at exercise prices of $.20 to $.25 per share. Also, on this date,
the Company granted to its directors, officers and certain employees additional
stock options for 590,000 shares of the Company's Common Stock at exercise
prices of $.20 to $.25 per share.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Document
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27.3 Financial Data Schedule
(b) Reports on Form 8-K:
On March 23, 1998, the Company filed with Securities and Exchange
Commission a Current Report on Form 8K reporting on Item 5.
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: May 13, 1997 /S/ Peter P. Phildius
---------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 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
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27.3 Financial Data Schedule 17
16