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, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act
for the transition period from
to
- --------------------------------- --------------------------------------
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 (I.R.S. Employer
incorporation or organization) 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 AUGUST 12, 1998
Transitional Small Business Disclosure Format
(Check One): [ ] Yes [x] No
Page 1 of 19 pages
Exhibit Index: is on page 17 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 14
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
2
PART I FINANCIAL INFORMATION
3
Item 1. Financial Statements
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 1998
(Unaudited)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,248
Accounts receivable, net 434,522
Notes receivable 9,100
Inventories 181,475
Prepaid expenses and other 121,105
----------------
Total current assets 772,450
PROPERTY AND EQUIPMENT, net 180,598
OTHER ASSETS 14,685
----------------
Total $ 967,733
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (including $19,665 to an affiliate) $ 652,749
Accounts payable 814,743
Accrued expenses 409,664
Current portion of long-term debt 125,238
----------------
Total current liabilities 2,002,394
LONG -TERM DEBT, LESS CURRENT PORTION 54,940
----------------
Total liabilities 2,057,334
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A and B convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 707,249 shares issued and outstanding 7,072
Common Stock, $.01 par value; authorized 25,000,000 shares;
17,469,768 shares issued and outstanding 174,697
Additional paid-in capital 15,380,437
Accumulated deficit (16,651,807)
----------------
Total stockholders' equity (1,089,601)
----------------
Total $ 967,733
================
See accompanying notes to consolidated financial statements.
4
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- ----------------- ---------------- -----------------
SALES $ 620,505 $ 226,559 $ 1,560,299 $ 692,875
OPERATING EXPENSES:
Direct cost of revenues 500,807 378,165 1,395,331 1,253,665
Selling, general and administrative expenses 372,506 453,480 1,111,951 1,327,120
Research and development expenses 134,434 132,201 411,744 323,259
Amortization of goodwill - 139,927 - 419,781
--------------- ----------------- ---------------- -----------------
Total operating expenses 1,007,747 1,103,773 2,919,026 3,323,825
--------------- ----------------- ---------------- -----------------
INCOME (LOSS) FROM OPERATIONS (387,242) (877,214) (1,358,727) (2,630,950)
--------------- ----------------- ---------------- -----------------
OTHER INCOME (EXPENSE):
Interest income - - 6,761 2,248
Interest expense and financing costs (32,614) (36,484) (94,173) (80,785)
Other income, net 4,372 3,561 9,417 5,100
--------------- ----------------- ---------------- -----------------
Total other income (expense) (28,242) (32,923) (77,995) (73,437)
--------------- ----------------- ---------------- -----------------
LOSS FROM CONTINUING OPERATIONS (415,484) (910,137) (1,436,722) (2,704,387)
DISCONTINUED OPERATIONS:
Gain from the Sale of MHB - - 1,208,084 -
Income (loss) from the operations of MHB - (15,468) (71,914) (10,484)
--------------- ----------------- ---------------- -----------------
NET LOSS $ (415,484) $ (925,605) $ (300,552) $ (2,714,871)
=============== ================= ================ =================
INCOME (LOSS) PER SHARE:
Loss per share from continuing operations $ (0.02) $ (0.07) $ (0.09) $ (0.27)
Income (loss) per share from discontinued
operations - (0.00) 0.07 (0.00)
--------------- ----------------- ---------------- -----------------
Net income (loss) per share $ (0.02) $ (0.07) $ (0.02) $ (0.27)
=============== ================= ================ =================
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 17,458,779 12,523,910 16,274,977 9,936,191
=============== ================= ================ =================
See accompanying notes to consolidated financial statements.
5
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended June, 1998
(Unaudited)
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Preferred Stock Common Stock
------------------------ ---------------------
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)
Sale of common stock and preferred stock 50,000 500 100,000 1,000 73,500
Issuance of common stock for services 42,530 425 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 loss (300,552)
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Balance at June 30, 1998 707,249 $ 7,072 17,469,768 $ 174,697 $ 15,380,437 $ (16,651,807)
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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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NINE MONTHS ENDED JUNE 30,
----------------------------------------
1998 1997
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (300,552) $ (2,714,871)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 109,626 152,394
Amortization of goodwill 419,781
Provision (recovery) for losses on accounts receivable (6,025) 2,161
Non-cash charges for employee salaries and consulting services 7,311 373,054
Non-cash recovery from settlement of note payable (58,126)
Gain from sale of subsidiary (1,208,084)
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable (265,640) 75,448
(Increase) Decrease in prepaid expenses and other current assets (8,488) 30,995
(Increase) Decrease in other assets 605 5,515
Increase (Decrease) in accounts payable, accrued expenses,
and consulting fees 88,107 64,877
Other (77,916)
----------------- ------------------
Net cash used in operating activities (1,719,182) (1,590,646)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,838) (594)
Proceeds from the sale of MHB 1,286,000 -
----------------- ------------------
Net cash provided by (used in) investing activities 1,279,162 (594)
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 662,597 603,020
Sales of common stock, preferred stock and warrants, net 75,000 888,117
Repayment of long-term debt (226,841) (207,281)
Repayment of notes payable (110,000) (4,483)
----------------- ------------------
Net cash provided by financing activities 400,756 1,279,373
----------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (39,264) (311,867)
CASH AND CASH EQUIVALENTS, beginning of the period 65,512 370,856
----------------- ------------------
CASH AND CASH EQUIVALENTS, end of the period $ 26,248 $ 58,989
================= ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ - $ 2,925
Interest $ 79,736 $ 72,705
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 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 nine month periods
ended June 30, 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 June 30,
1998 of $1,229,944 and $1,089,601, 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. During Fiscal
1998, the Company has raised net proceeds of approximately $75,000 from
the sale of stock and borrowed approximately $248,000 against a credit
line with the Silicon Valley Bank. 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 June 30, 1998, inventories consist of the following:
Raw Materials $ 88,433
Work-in-Process 36,933
Finished Goods 56,109
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Total $181,475
4. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Customer A $183,274 $ 35,717 $613,978 $111,595
Customer B 71,968 51,549 181,993 158,867
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 Chairman of the Board and the President of the Company
converted notes payable in the principal amount of approximately $369,000
plus accrued interest thereon of approximately $31,000 into 1,818,020
shares of the Company's common stock. In May and June 1998, the Company,
through a revolving line of credit, borrowed approximately $248,000 from
Silicon Valley Bank.
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
nine months ended June 30, 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 June 30, 1998 increased $393,946, or
approximately 174%, to $620,505 from $226,559 for the corresponding period
of the prior year. For the nine months ended June 30, 1998, sales
increased $867,424, or approximately 125%, to $1,560,299 from $692,875 for
the nine months ended June 30, 1997. The results for the three and nine
months ended June 30, 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 81% of sales for the three
months ended June 30, 1998, as compared to approximately 167% of sales for
the three months ended June 30, 1997. For the nine months ended June 30,
1998, direct costs of sales were 89% of sales compared to 181% of sales
for the same period of Fiscal 1997. The improvement for the three and nine
months ended June 30, 1998 was related primarily to the increase in sales
described above.
Selling, general and administrative expenses for the three months
ended June 30, 1998 decreased $80,974, or approximately 18%, to $372,506
from $453,480 for the corresponding period of the prior year. For the nine
months ended June 30, 1998, selling, general and administrative expenses
decreased $215,169, or approximately 16%, to $1,111,951 from $1,327,120.
The decrease for the three month period ended June 30, 1998 resulted
mainly from a reduction in consulting and legal expenses while the
decrease for the nine months ended June 30, 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 and legal
expenses of approximately $157,000.
Expenses for research and development and the amortization of goodwill
for the three months ended June 30, 1998 amounted to $134,434 compared to
$272,128 incurred for the corresponding period of the prior year. For the
nine months ended June 30, 1998, expenses for research and development and
the amortization of goodwill were $411,744 versus $743,040 for nine months
ended June 30, 1997. The change for the quarter ended June 30, 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. For
the nine months ended June 30, 1998, the decrease resulted from the
reduction in goodwill as explained above of approximately $420;000 offset
in part by an increase in research and development expense of
approximately $89,000 related to the Company's entry into the rapid
diagnostic test market.
10
Other Income and Expense
For the three months ended June 30, 1998, other expenses (net of other
income) amounted to $28,242 as compared to $32,923 for the three months
ended June 30, 1997. Other expenses (net of other income) for the nine
months ended June 30, 1998 were $77,995 compared to $73,437 for the
corresponding period of the prior fiscal year. The decrease for the
quarter ended June 30, 1998 resulted primarily from a decrease in interest
expense of approximately $3,900 while the change for the nine months ended
June 30, 1998 was mainly due to an increase in interest expense of
approximately $13,400 associated with the loans made to the Company during
the last half of Fiscal 1997; offset in part by increases in interest and
miscellaneous income of approximately $8,800.
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 June 30,
1998, no income or loss was incurred as compared to a loss from the
operations of MHB of $15,468 for the three months ended June 30, 1997.
Income from the operations and sale of MHB was $1,136,170 for the nine
months ended June 30, 1998 compared to a loss from operations of $10,484
for the same period of the prior fiscal year. The significant change for
the nine months ended June 30,1998 occurred as a result of 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 $415,484, $.02 per share, for the three months ended June
30, 1998 versus a net loss of $925,605, $.07 per share, for the three
months ended June 30, 1997. For the nine months ended June 30, 1998, the
Company had net loss of $300,552, $0.02 per share, as compared to a net
loss of $2,714,871, $0.27 per share, for the nine months ended June 30,
1997.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 1998 and September 30, 1997 the Company had working capital
deficiencies of ($1,229,944) and ($1,504,807), respectively, and cash and cash
equivalents of $26,248 and $65,512 respectively. Net cash used in operating
activities during the nine months ended June 30, 1998 amounted to $1,719,182
resulting primarily from a net loss of $300,552, an increase in accounts
receivable of $265,640, increases in prepaid expenses and other current assets
of $8,488, a recovery of a loss on accounts receivable of $6,025, 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 $77,311;
partially offset by depreciation and amortization of equipment of $109,626,
non-cash charges for consulting services of $7,311 and increases in accounts
payable and accrued expenses of $88,107. Net cash provided by financing and
investing activities during the nine months ended June 30, 1998 amounted to
$1,679,918 which included proceeds from the sale of MHB of $1,286,000, proceeds
from notes payable and warrants of $662,597 and proceeds from the sale of stock
of $75,000; offset in part by purchases of equipment of $6,838, the repayment
of notes payable of $110,000 and the repayment of long term debt of $226,841.
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 Chairman of the Board and
the President of the Company converted notes payable in the principal amount of
approximately $369,000 plus accrued interest thereon of approximately $31,000
into 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 May and June 1998, the Company
borrowed approximately $248,000 against a $250,000 Revolving Line of Credit
from Silicon Valley Bank ( original limit of the credit line was $350,000
offset by accounts receivable financing, but was modified in June changing the
maximum borrowing amount to $250,000 which is not reduced by accounts
receivable financing). In July 1998, the Company effected a reduction in rent
expense of $144,000 over the next two years by subleasing approximately 6,000
excess square feet in its facility to a major department store chain. During
the period of May through early August 1998, the Company received net proceeds
of approximately $175,000 from the sale of 118,493 shares of Series B
Convertible Preferred Stock (convertible at any time into 1,184,932 shares of
the Company's common stock) and warrants to purchase 350,000 shares of the
Company's common stock. In addition, the Company is actively attempting to
raise up to $2,000,000 from the sales of equity and/or debt securities. The
Company's current cash position is such that it must immediately raise part of
this capital to fund current operations. Proceeds from these proposed
financings are needed to provide 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
three quarters of Fiscal 1998 and are expected to continuing increasing during
the remainder of Fiscal 1998 and beyond 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 any or 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 the needed additional capital.
12
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.
13
PART II OTHER INFORMATION
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
----------- --------
27.4 Financial Data Schedule
(b) Reports on Form 8-K:
None.
15
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, 1998 /S/ Peter P. Phildius
---------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 12, 1998 /S/ J.C. Leatherman, Jr.
------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
16
EXHIBIT INDEX
===============================================================================
Exhibit No. Document Page
27.4 Financial Data Schedule 18
17
EXHIBIT 27.4
AVITAR, INC. FINANCIAL DATA SCHEDULE
18