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, 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
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: 29,335,260
AS OF AUGUST 11, 2000
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 11
PART II: OTHER INFORMATION 14
Item 2 Changes in Securities and Use of Proceeds 15
Item 4 Submission of Matters to a Vote of Security Holders 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
June 30, 2000
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 526,355
Accounts receivable, net 1,037,697
Inventories 401,788
Prepaid expenses and other current assets 90,645
-----------
Total current assets 2,056,485
PROPERTY AND EQUIPMENT, net 367,279
GOODWILL, net 2,535,257
OTHER ASSETS 283,085
------------
Total $ 5,242,106
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 246,960
Accounts payable 981,713
Accrued expenses 646,826
Current portion of long-term debt 101,508
-----------
Total current liabilities 1,977,007
LONG TERM DEBT, LESS CURRENT PORTION 92,765
-----------
Total liabilities 2,069,772
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A, B and C convertible preferred stock, $.01
par value; authorized 5,000,000 shares; 2,054,936
shares issued and outstanding 20,549
Common Stock, $.01 par value; authorized 75,000,000 shares;
29,332,260 shares issued and outstanding 293,323
Additional paid-in capital 30,048,720
Accumulated deficit (26,789,395)
------------
3,573,197
Less preferred stock subscription receivable (400,863)
------------
Total stockholders' equity 3,172,334
------------
Total $ 5,242,106
============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2000 1999 2000 1999
--------- ---------- --------- -----------
SALES $ 1,306,039 $ 621,105 $ 2,926,248 $ 1,586,621
OPERATING EXPENSES
Cost of sales 1,016,864 501,181 2,361,840 1,334,407
Selling, general and
administrative expenses 1,471,762 661,287 3,955,885 1,430,386
Research and development expenses 449,943 214,818 1,093,151 497,534
Amortization of goodwill 70,423 0 211,271 0
----------- ---------- ---------- ---------
Total operating expenses 3,008,992 1,377,286 7,622,147 3,262,327
----------- ---------- ---------- ---------
LOSS FROM OPERATIONS (1,702,953) 756,181 (4,695,899) (1,675,706)
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 6,710 26,430 15,109 26,430
Interest expense and financing costs (13,940) (27,659) (56,365) (117,800)
Other income, net 8,319 11,978 35,835 66,744
----------- ----------- ----------- -----------
Total other income (expense) 1,089 10,749 (5,421) (24,626)
----------- ----------- ----------- -----------
NET LOSS $ (1,701,864) $ (745,432) $ (4,701,320) $ (1,700,332)
=========== =========== ============ ============
BASIC AND DILUTED NET LOSS
PER SHARE (Note 6) $ (0.06) $ (0.05) $ (0.19) $ (0.12)
=========== =========== ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 28,850,406 21,089,191 26,667,432 19,064,941
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 2000
(Unaudited)
- ------------------------------------------------------------------------------
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount
- -------------------------------------------------- -----------------------------------------------------------------------------
Balance at September 30, 1999 1,720,095 $17,201 24,498,642 $244,987
Exercise of warrants and stock options 3,623,118 36,231
Sales of Series C preferred stock 445,334 4,453
Conversion of Series B preferred stock into
common stock (121,050) (1,211) 1,210,500 12,105
Collection of preferred stock
subscription receivable
Payment of preferred stock dividend 10,557 106
Value of warrants issued in connection with
with Series C preferred stock
Net loss
---------------- --------------- ------------------ ------------------
alance at June 30, 2000 2,054,936 $20,549 29,332,260 $293,323
================ =============== ================== ==================
(Continued)
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 2000
(Unaudited)
(Continued)
- -------------------------------------------------------------------------------
Preferred
Common Stock Stock
Additional Accumulated Subscription
paid-in capital deficit Receivable
- -------------------------------------------------- ------------------------------------------------------
Balance at September 30, 1999 $24,450,661 ($21,718,147) ($456,468)
Exercise of warrants and stock options 2,618,744 (44,395)
Sales of Series C preferred stock 2,620,387
Conversion of Series B preferred stock into
common stock (10,894)
Collection of preferred stock
subscription receivable 100,000
Payment of preferred stock dividend 327,184 (327,290)
Value of warrants issued in connection with
with Series C preferred stock 42,638 (42,638)
Net loss (4,701,320)
------------- ------------------- ------------------
Balance at June 30, 2000 $30,048,720 ($26,789,395) ($400,863)
============= =================== ==================
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JUNE 30,
2000 1999
----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (4,701,320) $ (1,700,332)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 130,631 97,020
Amortization of goodwill 211,271 0
Provision for losses on accounts receivable 55,000 0
Non-cash charges for services 0 18,746
Changes in operating assets and liabilities:
Accounts receivable (633,838) (73,635)
Inventories, prepaid expenses and other
current assets 115,756 (133,268)
Other assets 82,986 (952)
Accounts payable and accrued expenses 153,961 (298,753)
---------- ----------
Net cash used in operating activities (4,585,553) (2,091,174)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (183,690) (51,383)
---------- ----------
Net cash used in investing activities (183,690) (51,383)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of preferred stock and warrants 2,624,840 2,658,300
Exercise of warrants and stock options 2,610,580 789,991
Repayment of notes payable and long term debt (320,580) (83,690)
Collection of preferred stock subscription
receivable 100,000 0
---------- ----------
Net cash provided by financing activities 5,014,840 3,364,601
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 245,597 1,222,044
CASH AND CASH EQUIVALENTS, beginning of the period 280,758 12,483
---------- ------------
CASH AND CASH EQUIVALENTS, end of the period $ 526,355 $ 1,234,527
========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ 2,303 $2,456
Interest $ 55,835 $ 117,280
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. In 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. During this fiscal year, the Company
has added significant new tests and enhancements to its OralScreen line of
products.
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 June 30,
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 June 30, 2000, inventories consist of the following:
Raw Materials $164,445
Work-in-Process 75,877
Finished Goods 161,466
---------
Total $401,788
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended June 30, Nine Months Ended June 30,
---------------------------------- ---------------------------
2000 1999 ` 2000 1999
-------------- ----------------- ------------- ------------
Customer A $299,298 * $552,644 *
Customer B ** $280,491 ** $556,318
Customer C ** 127,764 ** 230,799
Customer D ** 67,676 ** 255,708
* 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 nine months ended June 30, 2000, the Company sold 445,334 shares
of Series C convertible preferred stock and received net proceeds of
approximately $2,625,000. 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 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 nine months ended June 30, 2000, holders of the Series B
convertible preferred stock converted 121,050 shares of their preferred
stock into 1,210,500 shares of the Company's common stock. Preferred stock
dividends related to the Series B convertible preferred stock
for the nine months ended June 30, 2000 amounted to $244,960. As of June
30, 2000, the total amount of unpaid and undeclared dividends was $196,797.
5. EXERCISE OF WARRANTS
During the nine-month period ended June 30, 2000, the Company received
$2,654,975 (cash of $2,610,583 and note receivable of $44,395 with a
maturity date of August 31, 2000) from the exercise of stock options and
warrants to purchase 3,623,118 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 June 30, Nine Months Ended June 30,
2000 1999 2000 1999
------------ ---------- ------------ -----------
Net loss $(1,701,864) $(745,432) $(4,701,320) $(1,700,332)
Less:
Preferred stock dividends (91,023) (135,643) ( 244,960) (182,312)
Accreted dividends - (182,517) - (335,392)
Value of warrants issued in
connection with Series C
preferred stock sales - - ( 42,638) -
------------ --------- ------------ ------------
Loss available to common
stockholders used in basic
and diluted EPS $(1,792,887) $(1,063,592) $(4,988,918) $(2,218,036)
============ =========== =========== ============
Weighted average number of
common shares outstanding 28,850,406 21,089,191 26,667,432 19,064,941
============ =========== =========== ============
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, 2000 increased $684,934 or
approximately 110 %, to $1,306,039 from $621,105 for the corresponding period of
the prior year. For the nine months ended June 30, 2000, sales increased
$1,339,627, or approximately 84%, to $2,926,248 from $1,586,621. The change for
the three and nine months ended June 30, 2000 primarily reflect the increase in
sales of its OralScreen(TM) and wound dressing products and the sales of USDTL
of $311,516 and $879,966, respectively.
Operating Expenses
Cost of sales for the three months ended June 30, 2000 were
approximately 78% of sales which compares to the cost of sales of 81% for the
three months ended June 30, 1999. For the nine months ended June 30, 2000, the
cost of sales were 81% compared to 84% of sales for the same period of Fiscal
1999. The changes for the quarter and nine months ended June 30, 2000 resulted
mainly from improved sales volume described above; offset in part by 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.
Selling, general and administrative expenses for the three months
ended June 30, 2000 increased $810,475, or approximately 123%, to $1,471,762
from $661,287 for the corresponding period of the prior year. For the nine
months ended June 30, 2000, selling, general and administrative expenses
increased $2,525,499, or approximately 177%, to $3,955,885 from $1,430,386 for
the nine months ended June 30, 1999. The increases for the three and nine months
ended June 30, 2000 reflected the expanded sales, marketing, laboratory and
product certification and administrative efforts associated with the Company's
OralScreen and HairScreen products and the selling, general and administrative
expenses of USDTL of $155,529 and $407,636, respectively.
Expenses for research and development for the three months ended June
30, 2000 amounted to $449,943 compared to $214,818 for the corresponding period
of the prior year. For the nine months ended June 30, 2000, expenses for
research and development were $1,093,151 versus $497,534 for the nine months
ended June 30, 1999. The changes for the three and nine months ended June 30,
2000 were 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 nine months ended June 30, 2000, amortization
of goodwill resulting from the Company's acquisition of USDTL was $70,423 and
$211,271, respectively. No amortization of goodwill occurred during the
corresponding periods of Fiscal 1999.
Other Income and Expense
Interest income for the three and nine months ended June 30, 2000
amounted to $6,710 and $15,109, respectively, compared to interest income of
$26,430 for the three and nine months ended June 30, 1999. The change resulted
primarily from the decrease in interest earned on cash management accounts.
Interest expense and financing costs were $13,940 for the three months
ended June 30, 2000 compared to $27,659 incurred during the three months ended
June 30, 1999. For the nine months ended June 30, 2000, interest expense and
financing costs decreased $61,435 to $56,365 from $117,800 for the same period
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 June 30, 2000, other income amounted to
$8,319 as compared to other income of $11,978 for the three months ended June
30, 1999. Other income for the nine months ended June 30, 2000 was $35,835
versus $66,744 for the corresponding period of the prior year. The decreases for
the three and nine months ended June 30, 2000 were mainly a result of lower
rental income from the lease of excess square feet in the Company's facility.
Net Loss
Primarily as a result of the factors described above, the Company had a
net loss of $1,701,864, $ .06 per basic and diluted share, for the quarter ended
June 30, 2000, as compared to net loss of $745,432, $ .05 per basic and diluted
share, for the quarter ended June 30, 1999. For the nine months ended June 30,
2000, the Company has a net loss of $4,701,320, $.19 per basic and diluted
share, versus a net loss of $1,700,332, $.12 per basic and diluted share, for
the nine months ended June 30, 1999.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2000 and September 30, 1999 the Company had working
capital (deficit) of $79,478 and ($738,755), respectively, and cash and cash
equivalents of $526,355 and $280,758, respectively. Net cash used in operating
activities during the nine months ended June 30, 2000 amounted to $4,585,553
resulting primarily from a net loss of $4,701,320 and an increase in accounts
receivable of $633,838; partially offset by depreciation and amortization of
$130,631, amortization of goodwill of $211,271, a provision for losses on
accounts receivable of $55,000, a decrease in prepaid expenses and other current
assets of $115,756, a decrease in other assets of $82,986 and an increase in
accounts payable and accrued expenses of $153,961. Net cash provided by
financing and investing activities during the nine months ended June 30, 2000
amounted to $4,831,150 which included proceeds from the sale of preferred stock
and warrants (including the collection of subscription receivable) of $2,724,840
and proceeds from the exercise of stock options and warrants of $2,610,580;
offset in part by the repayment of notes payable and long term debt of $320,580
and purchases of property and equipment of $183,690.
Since October 1999, the Company received proceeds of approximately
$2,625,000 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 $2,655,000 (cash
of $2,611,000 and note receivable of $44,000 with a maturity date of August 31,
2000) from the exercise of stock options and warrants to purchase 3,623,118
shares of the Company's common stock. By the end of August 2000, the Company
expects proceeds of approximately $1,000,000 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 and/or debt
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 further develop and
enhance the OralScreen and HairScreen drug screening systems, 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 approximately 29% during the first nine months of Fiscal 2000 and are
expected to grow at a more rapid pace during the remainder of Fiscal 2000 as the
Company expands its 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, most importantly, 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 September 30, 2000.
PART IIOTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2000, the Company issued 1,160,893 shares of
common stock in connection with the exercise of warrants for which it received
proceeds of $786,794. The exemption for registration of these securities is
based upon Section 4(2) of the Securities Act.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
At the Annual meeting held on June 14, 2000, the entire Board of
Directors was re-elected and the selection of BDO Seidman LLP as independent
auditors was ratified. All the Board members received at least 23,768,616 votes,
while 26,614 votes were against or withheld and there were 2,150 abstentions and
broker non-votes. The ratification of auditors received 23,719,015 votes, 21,145
votes against or withheld and 55,070 abstentions and broker non-votes.
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
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 14, 2000 /S/ Peter P. Phildius
---------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 14, 2000 /S/ J.C. Leatherman, Jr.
------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
EXHIBIT INDEX
Exhibit No. Document Page
- ----------- --------
27.4 Financial Data Schedule 18