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, 2000.
[ ] 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)
(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: 28,764,367
AS OF MAY 12, 2000
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
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 11
PART II: OTHER INFORMATION 14
Item 2 Changes in Securities and Use of Proceeds 15
Item 6 Exhibits and Reports on Form 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 2000
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,488,213
Accounts receivable, net 716,685
Inventories 425,358
Prepaid expenses and other current assets 107,202
------------
Total current assets 2,737,458
PROPERTY AND EQUIPMENT, net 345,350
GOODWILL, net 2,605,681
OTHER ASSETS 293,665
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Total $5,982,154
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $335,699
Accounts payable 756,358
Accrued expenses 486,570
Current portion of long-term debt 109,317
------------
Total current liabilities 1,687,944
LONG TERM DEBT, LESS CURRENT PORTION 115,248
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Total liabilities 1,803,192
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COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A, B and C convertible preferred stock,
$.01 par value; authorized 5,000,000 shares;
2,063,348 shares issued and outstanding 20,634
Common Stock, $.01 par value; authorized 75,000,000 shares;
28,032,187 shares issued and outstanding 280,322
Additional paid-in capital 29,190,675
Accumulated deficit (24,956,201)
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4,535,430
Less preferred stock subscription receivable (356,468)
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Total stockholders' equity 4,178,962
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Total $5,982,154
============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
------------------------------ ----------------------------
2000 1999 2000 1999
------------------------------ ----------------------------
SALES $812,545 $481,419 $1,620,209 $965,516
------------ --------- ----------- ---------
OPERATING EXPENSES
Cost of sales 719,526 364,957 1,344,976 833,226
Selling, general and administrative expenses 1,492,196 428,359 2,484,123 769,099
Research and development expenses 316,999 157,986 643,208 282,716
Amortization of goodwill 70,424 -- 140,848 --
------------ ------------ ------------- ------------
Total operating expenses 2,599,145 951,302 4,613,155 1,885,041
------------ ------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS (1,786,600) -469,883 (2,992,946) -919,525
------------ ------------ ------------- ------------
OTHER INCOME (EXPENSE)
Interest income 1,669 0 8,399 0
Interest expense and financing costs (13,693) -48,278 (42,425) (90,141)
Other income, net 9,516 30,756 27,516 54,766
------------ ------------- -------------
Total other income (expense) (2,508) -17,522 (6,510) (35,375)
------------ ------------ ------------- -------------
NET LOSS $(1,789,108) $(487,405) $(2,999,456) $(954,900)
============ ============ ============= =============
BASIC AND DILUTED NET LOSS PER SHARE (Note 6) $(0.08) ($0.03) $(0.13) $(0.06)
============ ============ ============= =============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 26,423,839 18,558,353 25,581,927 18,028,977
============ ============ ============= =============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended March 31, 2000
(Unaudited)
Preferred Stock Common Stock
Additional
Shares Amount Shares Amount paid-in capital
- --------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 1,720,095 $17,201 24,498,642 $244,987 $24,450,661
Exercise of warrants and stock options 2,462,225 24,622 1,843,562
Sales of Series C preferred stock 445,334 4,453 2,667,547
Conversion of Series B preferred stock
into common stock (107,132) (1,071) 1,071,320 10,713 (9,642)
Collection of preferred stock
subscription receivable
Payment of preferred stock dividend 5,051 51 195,909
Value of warrants issued in connection
with Series C preferred stock 42,638
Net loss
------------- ----------- -------------- ------------ ------------------
Balance at March 31, 2000 2,063,348 $20,634 28,032,187 $280,322 $29,190,675
============= =========== ============== ============ ==================
(Continued on next page)
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(continued)
Six Months Ended March 31, 2000
(Unaudited)
Preferred
Stock
Accumulated Subscription
deficit Receivable
- --------------------------------------------------------------------------------
Balance at September 30, 1999 ($21,718,147) ($456,468)
Exercise of warrants and stock options
Sales of Series C preferred stock
Conversion of Series B preferred stock
into common stock
Collection of preferred stock
subscription receivable 100,000
Payment of preferred stock dividend (195,960)
Value of warrants issued in connection
with Series C preferred stock (42,638)
Net loss (2,999,456)
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Balance at March 31, 2000 ($24,956,201) ($356,468)
============== ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited
SIX MONTHS ENDED MARCH 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,999,456) $(954,900)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 83,367 64,680
Amortization of goodwill 140,848 --
Provision for losses on accounts receivable 55,000 --
Non-cash charges for services -- 18,746
Changes in operating assets and liabilities:
Accounts receivable (312,826) (70,772)
Prepaid expenses and other current assets 75,629 (9,266)
Other assets 72,406 --
Accounts payable and accrued expenses (231,650) (206,341)
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Net cash used in operating activities (3,116,682) (1,157,853)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (114,498) (13,936)
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Net cash used in investing activities (114,498) (13,936)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of preferred stock and warrants 2,772,000 1,278,500
Exercise of warrants and stock options 1,868,184 296,850
Repayment of notes payable and long term debt (201,549) (80,125)
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Net cash provided by financing activities 4,438,635 1,495,225
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NET INCREASE IN CASH AND CASH EQUIVALENTS 1,207,455 323,436
CASH AND CASH EQUIVALENTS, beginning of the period 280,758 12,483
------------ ------------
CASH AND CASH EQUIVALENTS, end of the period $1,488,213 $335,919
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $0 $2,456
Interest $63,851 $89,787
See accompanying notes to consolidated financial statements.
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 diagnostic test products and proprietary hydrophilic
polyurethane foam disposables fabricated for medical, diagnostics, dental
and consumer use. During Fiscal Year 1999, the Company completed the
development and began marketing OralScreen(TM), innovative point of care
oral fluid drugs of abuse tests that use the Company's foam as the means
for collecting the oral fluid sample.
On July 9, 1999, the Company completed its acquisition of United States
Drug Testing Laboratories, Inc. (`USDTL"), which became a wholly-owned
subsidiary of Avitar. USDTL operates a certified laboratory and provides
specialized drug testing services primarily utilizing hair as the sample.
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 months ended March 31,
2000 are not necessarily indicative of the results that may be expected for
the full fiscal year ending September 30, 2000. 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, 1999.
2. INVENTORIES
At March 31, 2000, inventories consist of the following:
Raw Materials $145,529
Work-in-Process 78,079
Finished Goods 201,750
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Total $425,358
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3. 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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2000 1999 2000 1999
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Customer A $253,346 * $253,346 *
Customer B ** $141,293 ** $275,827
Customer C ** 72,678 ** 188,032
Customer D ** 77,993 ** 103,035
Customer E ** 61,073 ** 99,380
* Customer was not in excess of 10% of total sales in 1999.
**Customer was not in excess of 10% of total sales in 2000.
4. PREFERRED STOCK AND WARRANTS
During the six months ended March 31, 2000, the Company sold 445,334 shares
of Series C convertible preferred stock and received proceeds of
approximately $2,672,000. In connection with the sale of the preferred
stock, the Company issued to the holders of the preferred stock warrants to
purchase 445,334 shares of the Company's common stock at exercise prices
based on the fair market value of the Company's common stock on the date of
purchase ranging from $2.45 to $6.05 per share and expire in three years.
The value of the warrants issued amounted to approximately $42,600. On the
anniversary dates of their investment, the holders of the Series C
convertible preferred stock may convert their investment into shares of the
Company's common stock based on the average closing price of the Company's
common stock for the five trading days immediately prior to the date of the
conversion. The holders of the Series C convertible preferred stock are
entitled to receive royalty payments which are based on 5% of the revenues
received by the Company for disease testing products that are developed
pursuant to an oral fluid disease testing development program to be
undertaken by the Company.
For the six months ended March 31, 2000 holders of the Series B convertible
preferred stock converted 107,132 shares of their preferred stock into
1,071,320 shares of the Company's common stock. Preferred stock dividends
related to the Series B convertible preferred stock for the six months
ended March 31, 2000 amounted to $264,662. As of March 31, 2000, the total
amount of unpaid and undeclared dividends was $237,104.
5. EXERCISE OF WARRANTS
During the six-month period ended March 31, 2000, the Company received
approximately $1,868,000 from the exercise of stock options and warrants to
purchase 2,462,225 shares of the Company's common stock.
6. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share:
Three Months Ended March 31, Six Months Ended March 31,
2000 1999 2000 1999
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Net loss $(1,789,108) $(487,405) $(2,999,456) $(954,900)
Less:
Preferred stock dividends (198,367) (46,449) (264,662) (46,449)
Accreted dividends - (152,875) - (152,875)
Value of warrants issued in
connection with Series C
preferred stock sales (30,638) - (42,638) -
------------ ---------- ----------- ----------
Loss available to common
stockholders used in basic and
diluted EPS $(2,018,113) $(686,729) $(3,306,756) $(1,154,224)
============ ========== ============ =============
Weighted average number of
common shares outstanding 26,423,839 18,558,353 25,581,927 18,028,977
============ =========== ============ =============
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, 2000 increased $331,126 or
approximately 69 %, to $812,545 from $481,419 for the corresponding period of
the prior year. For the six months ended March 31, 2000, sales increased
$654,693, or approximately 68%, to $1,620,209 from $965,516. The change for the
three and six months ended March 31, 2000 primarily reflect the increase in
sales of its OralScreen(TM) and wound dressing products and the sales of USDTL
of $280,517 and $568,450, respectively.
Operating Expenses
Cost of sales for the three months ended March 31, 2000 were approximately
89% of sales which compares to the cost of sales of 76% for the three months
ended March 31, 1999. For the six months ended March 31, 2000, the cost of sales
were 83% compared to 86% of sales for the same period of Fiscal 1999. The
decline for the quarter ended March 31, 2000 resulted mainly from higher initial
costs associated with the start-up production of wound dressing products for a
new customer and the costs related to some changes performed for certain lots of
the OralScreen products. For the six months ended March 31, 2000, the
improvement in the ratio of cost to sales was primarily due to the increase in
sales described above.
Selling, general and administrative expenses for the three months ended
March 31, 2000 increased $1,063,837, or approximately 248%, to $1,492,196 from
$428,359 for the corresponding period of the prior year. For the six months
ended March 31, 2000, selling, general and administrative expenses increased
$1,715,024, or approximately 223%, to $2,484,123 from $769,099 for the six
months ended March 31, 1999. The increase for the three and six months ended
March 31, 2000 reflected the expanded sales, marketing and administrative
efforts associated with the Company's OralScreen and HairScreen products, the
selling, general and administrative expenses of USDTL of $252,107 and increases
in provision for losses on accounts receivable of $55,000.
Expenses for research and development for the three months ended March 31,
2000 amounted to $316,999 compared to $157,986 for the corresponding period of
the prior year. For the six months ended March 31, 2000, expenses for research
and development were $643,208 versus $282,716 for the six months ended March 31,
1999. The change for the three and six months ended March 31,2000 was primarily
attributable to the increased research and development activities related to the
Company's OralScreen products and oral fluid disease testing applications.
For the three months and six months ended March 31, 2000, amortization of
goodwill which resulted from the Company's acquisition of USDTL was $70,424 and
$140,848, respectively. No amortization of goodwill occurred during the
corresponding periods of Fiscal 1999.
Other Income and Expense
Interest income for the three and six months ended March 31, 2000 amounted
to $1,669 and $8,399, respectively. No interest income was recorded for the same
periods of the prior year. The increase resulted primarily from the interest
earned on cash management accounts.
Interest expense and financing costs were $13,693 for the three months
ended March 31, 2000 compared to $48,278 incurred during the three months ended
March 31, 1999. For the six months ended March 31, 2000, interest expense and
financing costs decreased $47,716 to $42,425 from $90,141 for the same periods
in the prior year. These decreases were mainly the result of reduced interest
expense on bank advances and loans from related parties.
For the three months ended March 31, 2000, other income amounted to $9,516
as compared to other income of $30,756 for the three months ended March 31,
2000. Other income for the six months ended March 31, 2000 was $27,516 versus
$54,766 for the corresponding period of the prior year. The decrease for the
three and six months ended March 31, 2000 is mainly a result of lower rental
income from the lease of excess square feet in the Company's facility and
royalty expenses associated with the sales of OralScreen products.
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $1,789,108, $ .08 per basic and diluted share, for the quarter ended
March 31, 2000, as compared to net loss of $487,405, $ .03 per basic and diluted
share, for the quarter ended March 31, 1999. For the six months ended March 31,
2000, the Company has a net loss of $2,999,456, $.13 per basic and diluted
share, versus a net loss of $954,900, $.06 per basic and diluted share for the
six months ended March 31, 1999.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2000 and September 30, 1999 the Company had working capital
(deficit) of $1,049,514 and ($738,755), respectively, and cash and cash
equivalents of $1,488,213 and $280,758 respectively. Net cash used in operating
activities during the six months ended March 31, 2000 amounted to $3,116,682
resulting primarily from a net loss of $2,999,456, an increase in accounts
receivable of $312,826 and a decrease in accounts payable and accrued expenses
of $231,650; partially offset by depreciation and amortization of $83,367,
amortization of goodwill of $140,848,a provision for losses on accounts
receivable of $55,000, a decrease in prepaid expenses and other current assets
of $75,629 and a decrease in other assets of $72,406. Net cash provided by
financing and investing activities during the six months ended March 31, 2000
amounted to $4,324,137 which included proceeds from the sale of preferred stock
and warrants (including the collection of subscription receivable) of $2,772,000
and proceeds from the exercise of stock options and warrants of $1,868,184;
offset in part by the repayment of notes payable and long term debt of $201,549
and purchases of property and equipment of $114,498.
Since October 1999, the Company received proceeds of approximately
$2,672,000 from the sale of 445,334 shares of Series C Convertible Preferred
Stock and of warrants to purchase 445,334 shares of the Company's common stock
at exercise prices of $2.45 -$6.05 per share for a period of three years. During
the same period the Company received proceeds of approximately $1,868,000 from
the exercise of stock options and warrants to purchase 2,462,225 shares of the
Company's common stock. By the end of May 2000, the Company expects proceeds of
approximately $1,000,000 to $1,500,000 from the exercise of the remaining
warrants issued in connection with the Series B convertible preferred stock.
Currently, all such warrants are in the money. In the future, the Company
intends to raise up to $10,000,000 from the sales of equity securities. The
Company plans to use the proceeds from these financings and warrant exercises to
provide the working capital and capital equipment funding to operate the
Company, to expand the Company's business, to fund strategic acquisitions and to
pursue the development of oral fluid diagnostic testing for diseases. However,
there can be no assurance that these financings will be achieved or that the
remaining warrants will be exercised.
For the balance of fiscal year 2000, 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, the
funding of operating capital to grow the Company's drugs of abuse testing
products, the initial funding for the development of oral fluid diagnostic
testing products for diseases and the exploration and funding of acquisitions
that accelerate the expansion of the Company.
Operating revenues of the Company (exclusive of revenues from USDTL) grew
9% during the first half of Fiscal 2000 and are expected to grow at a more rapid
pace during the remainder of Fiscal 2000 as the Company begins shipments of new
and enhanced OralScreen(TM) products and grows the business of USDTL. 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 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 proceeds expected from the financing or exercise of warrants
will be obtained. Once the Company achieves profitability, the longer-term cash
requirements of the Company to fund operating activities, purchase capital
equipment, expand the existing business and develop new products are expected to
be met by the anticipated cash flow from operations and proceeds from the
financing and warrant exercises 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 as necessary.
Year 2000 Impact
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
The Company has completed its review concerning the ability of its internal
information systems, including its internal accounting systems, to handle date
information and function appropriately from and after January 1, 2000. The final
step to become Year 2000 compliant, which involves the implementation of new
software at USDTL, is underway and is expected to be complete by June 30, 2000.
PART II OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the quarter ended March 31, 2000, the Company sold to private
investors 320,001 shares of Series C Convertible Preferred Stock and received
cash proceeds of approximately $1,920,000. In connection with the sale of this
preferred stock, the Company issued to the holders of the preferred stock
warrants to purchase 320,001 shares of the Company's common stock at an exercise
price of $4.50 to $6.05 per share for a period of three years. On the
anniversary dates of their investment, the holders of the Series C convertible
preferred stock may convert their investment into shares of the Company's common
stock based on the average closing price of the Company's common stock for the
five trading days immediately prior to the date of the conversion. The holders
of the Series C convertible preferred stock are entitled to receive royalty
payments which are based on 5% of the revenues received by the Company for
disease testing products that are developed pursuant to an oral fluid disease
testing development program to be undertaken by the Company. In addition the
Company issued 1,962,225 shares of common stock in connection with the exercise
of warrants for which it received proceeds of approximately $1,672,280. The
exemption for registration of these securities is based upon Section 4(2) of the
Securities Act.
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:
None
EXHIBIT INDEX
===============================================================================
Exhibit No. Document Page
- ----------- --------
27.3 Financial Data Schedule 18
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 15, 2000 /S/ Peter P. Phildius
---------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 15, 2000 /S/ J.C. Leatherman, Jr.
------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)