U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended December 31, 2001.
[ ] 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 Identification No.)
incorporation or organization)
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: 42,097,150 AS OF FEBRUARY 8, 2001
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 16 pages
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
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2001
(Unaudited)
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 587,635
Accounts receivable 1,182,497
Inventories 441,078
Prepaid expenses and other 113,711
-------------
Total current assets 2,324,921
PROPERTY AND EQUIPMENT, net 438,020
GOODWILL, net 2,372,049
OTHER ASSETS 138,964
-------------
Total $ 5,273,954
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 206,866
Accounts payable 1,722,123
Accrued expenses 849,942
Deferred revenue 32,898
Current portion of long-term debt 56,588
-------------
Total current liabilities 2,868,417
LONG TERM DEBT, LESS CURRENT PORTION 15,828
-------------
Total liabilities 2,884,245
-------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A, B, C and D convertible preferred stock,
$.01 par value; authorized 5,000,000 shares;
1,978,528 shares issued and outstanding 19,785
Common Stock, $.01 par value; authorized
100,000,000 shares; 40,071,876 shares issued
and outstanding 400,719
Additional paid-in capital 40,014,002
Accumulated deficit (37,984,156)
-------------
2,450,350
Less preferred stock subscription receivable (60,641)
-------------
Total stockholders' equity 2,389,709
-------------
Total $ 5,273,954
=============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
-----------------------------------------
2001 2000
------------- -------------
SALES $ 3,242,414 $ 1,169,336
------------- -------------
OPERATING EXPENSES
Cost of sales 1,637,841 884,218
Selling, general and administrative 1,508,918 1,379,999
Research and development 392,155 434,713
Amortization of goodwill 77,498 70,424
------------- -------------
Total operating expenses 3,616,412 2,769,354
------------- -------------
LOSS FROM OPERATIONS (373,998) (1,600,018)
------------- -------------
OTHER INCOME (EXPENSE)
Interest income - 146
Interest expense and financing costs (20,575) (9,933)
Other income (expense) 16,167 (712)
------------- -------------
Total other expense (4,408) (10,499)
------------- -------------
NET LOSS $ (378,406) $ (1,610,517)
============= =============
BASIC AND DILUTED NET LOSS PER SHARE (Note 5):
Loss per share before cumulative effect of accounting change $ (0.01) $ (0.06)
Cumulative effect of accounting change - (0.03)
------------- -------------
Net loss per share $ (0.01) $ (0.09)
============= =============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 38,769,464 30,934,411
============= =============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended December 31, 2001
(Unaudited)
Preferred
Preferred Stock Common Stock Stock
..................... ....................
Additional Accumulated Subscription
Shares Amount Shares Amount paid-in capital deficit Receivable
- --------------------------------- ------------ --------- ---------- --------- --------------- ----------- ----------
Balance at September 30, 2001 2,203,690 $22,036 36,564,342 $365,643 $39,338,443 ($37,592,117) ($60,641)
Sale of common stock and warrants - - 974,390 9,744 651,257 - -
Exercise of stock options and warrants - - 464,664 4,647 29,103 - -
Conversion of Series B and Series C
preferred stock into common stoc( 226,557) (2,265) 2,068,480 20,685 (18,420) - -
Payment of preferred stock dividend,
Series B preferred stock 1,395 14 - - 13,619 (13,633) -
Net loss - - - - - (378,406) -
- ----------------------------------- ---------- --------- ---------- --------- ------------ ----------- ----------
Balance at December 31, 2001 1,978,528 $19,785 40,071,876 $400,719 $40,014,002 ($37,984,156) ($60,641)
- ----------------------------------- ---------- --------- ---------- --------- ------------ ----------- ----------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($378,406) ($1,610,517)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 47,020 38,336
Amortization of goodwill 77,498 70,424
Gain from sale of equity investment (13,391)
Changes in operating assets and liabilities:
Accounts receivable 134,261 (38,722)
Inventories (196,720) 222,123
Prepaid expenses and other current assets 46,611 49,535
Other assets 9,592 97,550
Accounts payable and accrued expenses 305,847 108,458
Deferred revenue (352,102) -
------------- --------------
Net cash used in operating activities (319,790) (1,062,813)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (41,286) (12,527)
Proceeds from sale of equity investment 24,391 -
------------ --------------
Net cash used in investing activities (16,895) (12,527)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (50,840) (21,777)
Sales of common stock, preferred stock and warrants 661,001 1,034,700
Stock subscription receivable 35,000 42,228
Exercise of stock options and warrants 33,750 -
------------ -------------
Net cash provided by financing activities 678,911 1,055,151
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 342,226 (20,189)
CASH AND CASH EQUIVALENTS, beginning of the period 245,409 82,313
------------ -------------
CASH AND CASH EQUIVALENTS, end of the period $587,635 $62,124
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ 5,308 $ -
Interest $ 7,302 $ 9,759
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
subsidiaries, Avitar Technologies Inc. ("ATI"), United States Drug Testing
Laboratories, Inc. ("USDTL") and BJR Security, Inc. designs, develops,
manufactures, markets and provides diagnostic test products and services as well
as contraband detection and education services. Avitar sells these products and
services to large medical supply companies, employers, diagnostic distributors,
schools and governmental agencies. During Fiscal Year 2001 and the first quarter
of Fiscal Year 2002, the Company continued the development and marketing of
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.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-QSB and Regulation S-B
(including Item 310(b) thereof). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended December 31, 2001 are not necessarily indicative of the
results that may be expected for the full fiscal year ending September 30, 2002.
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, 2001.
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 as of December 31, 2001 of $543,496. The Company raised net proceeds
aggregating approximately $5,288,000 during fiscal year ended September 30, 2001
from the sale of stock and the exercise of options and warrants. During the
three months ended December 31, 2001, the Company raised approximately $695,000
from the sale of common stock and warrants and the exercise of options and
warrants. Based upon cash flow projections, the Company believes the anticipated
cash flow from operations and proceeds from future equity financings will be
sufficient to finance the Company's operating needs until the operations achieve
profitability. There can be no assurances that forecasted results will be
achieved or that additional financing will be obtained. The financial statements
do not include any adjustments relating to the recoverability and classification
of asset amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
2. INVENTORIES
At December 31, 2001, inventories consist of the following:
Raw Materials $131,521
Work-in-Process 83,712
Finished Goods 225,845
---------
Total $441,078
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended December 31,
-------------------------------
2001 2000
----------- -------------
Customer A $ * $125,948
Customer B 1,590,820 *
*Customer was not in excess of 10% of total sales.
4. COMMON AND PREFERRED STOCK
During the quarter ended December 31, 2001, the Company sold 974,390 shares
of the Company's common stock and received proceeds of approximately $ 661,000.
In connection with the sale of the common stock, the Company issued to the
holders of the common stock warrants to purchase 974,390 shares of the Company's
common stock at exercise prices of $.68 to $1.60 per share which expire in three
years. Also during the first quarter of Fiscal 2002, the Company received
approximately $34,000 from the exercise of warrants to purchase 464,664 shares
of the Company's common stock. For the three months ended December 31, 2001,
holders of Series B and Series C convertible preferred stock converted 226,557
shares of preferred stock into 2,068,480 shares of the Company's common stock.
Preferred stock dividends related to the Series B convertible preferred
stock for the three months ended December 31, 2001 amounted to $13,633. As of
December 31, 2001, the total amount of unpaid and undeclared dividends was
$325,463.
5. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share:
2001 2000
-------------- -------------
Net loss $( 378,406) $(1,610,517)
Less:
Preferred Stock Dividends ( 93,616) ( 95,044)
------------- -------------
Loss available to common
stockholders used in basic and
diluted EPS before cumulative
accounting change ( 472,022) (1,705,561)
Cumulative effect of change in
accounting for original discount
related to prior years' preferred
stock issuances ( -) (1,078,205)
-------------- ------------
Net loss available to common
Shareholders used in basic and
diluted EPS $( 472,022) $(2,783,766)
================ ==============
Weighted average number of
common shares outstanding 38,769,464 30,934,411
================ ==============
6. SUBSEQUENT EVENTS
Since December 31, 2001 the Company sold 935,694 shares of the Company's
common stock and received proceeds of approximately $636,000. In connection with
the sale of the common stock, the Company issued to the holders of the common
stock warrants to purchase 935,294 shares of the Company's common stock at
exercise prices of $.85 per share which expire in 5 years. From January 1,2002
through February 8, 2002, holders of Series B and Series C convertible preferred
stock converted 170,685 shares of preferred stock into 1,034,755 shares of the
Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
- ---------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Revenues
Sales for the three months ended December 31, 2001 increased $2,073,078 or
approximately 177 %, to $3,242,414 from $1,169,336 for the corresponding period
of the prior year. The change for the three months ended December 31, 2001
primarily reflects the increase in sales of its OralScreen(TM) products which
included an increase in sales to one major customer of approximately $1,780,000.
Operating Expenses
Cost of sales for the three months ended December 31, 2001 were
approximately 51% of sales compared to the cost of sales of approximately 76% of
sales for the three months ended December 31, 2000. The improvement for the
first quarter of Fiscal 2002 is mainly the result of the increase in sales
described above and the shift in the product mix to ORALscreen.
Selling, general and administrative expenses for the three months ended
December 31,2001 increased $ 128,919, or approximately 9%, to $1,508,918 from
$1,379,999 for the corresponding period of the prior year. The increase for the
three-month period ended December 31, 2001 continued to reflect the expanded
sales, marketing and administrative efforts associated with the Company's
OralScreen and HAIRscreen products and services and BJR's selling and general
administrative expenses of approximately $64,000.
Expenses for research and development for the three months ended December
31, 2001 amounted to $392,155 compared to $434,713 for the corresponding period
of the prior year. The decrease of $42,558, or approximately 10%, primarily
reflects some minor adjustments to the research and development process for the
Company's OralScreen products.
For the three months ended December 31, 2001, amortization of goodwill was
$77,498 compared to $70,424 for the three months ended December 31, 2000. The
increase is a result of the amortization of goodwill associated with the
acquisition of BRJ which took place on March 1, 2001.
Other Income and Expense
No interest income was recorded for the quarter ended December 31, 2001
compared to $146 for the same period of the prior year. The decrease primarily
reflects the reduction in interest earned on cash management accounts.
Interest expense and financing costs were $20,575 for the three months
ended December 31, 2001 compared to $9,933 incurred during the three months
ended December 31, 2000. The increase resulted primarily from interest expense
on accounts receivable financing and loans from private parties.
For the three months ended December 31, 2001, other income amounted to
$16,167 compared to other expense of $712 for the three months ended December
31, 2000. This change mainly reflects the income from the sale of a small equity
investment held by the Company.
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $378,406 for the three months ended December 31, 2001, as compared to
net loss of $1,610,517 for the three months ended December 31, 2000. The loss
per share was $.01 per basic and diluted share for the three months ended
December 31, 2001. The loss per share before the cumulative effect of the change
in accounting included in the three months ended December 31 2000 was $.06 per
basic and diluted share and the loss per share after the cumulative effect of
the accounting change was $.09 per basic and diluted share for the three months
ended December 31, 2000.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2001 and September 30, 2001 the Company had working capital
deficiencies of $543,496 and $958,293, respectively, and cash and cash
equivalents of $587,635 and $245,409 respectively. Net cash used in operating
activities during the three months ended December 31, 2001 amounted to $319,790
resulting primarily from a net loss of $378,406, a gain from the sale on an
equity investment, an increase in inventories of $196,720 and a decrease in
deferred income of $352,102; partially offset by depreciation and amortization
of $47,020, amortization of goodwill of $77,498, a decrease in accounts
receivable of $134,261, a decrease in prepaid expenses and other current assets
of $46,611, a decrease in other assets of $9,592 and increases in accounts
payable and accrued expenses of $305,847. Net cash provided by financing and
investing activities during the three months ended December 31, 2001 amounted to
$662,016 which included proceeds from the sale of an equity investment of
$24,391, proceeds from the sale of common stock and warrants of $661,001, a
decrease in stock subscription receivable of $35,000 and proceeds from the
exercise of warrants of $33,750; offset in part by the repayment of notes
payable and long term debt of $50,840 and purchases of property and equipment of
$41,286.
Since October 2001, the Company received proceeds of approximately
$1,297,000 from the sale of 1,909,684 shares of the Company's common stock and
warrants to purchase 1,909,684 shares of the Company's common stock at exercise
prices of $.68 -$1.60 per share for a period of three to five years. The Company
plans 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 to
provide 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 and to pursue the development of in-vitro oral
fluid diagnostic testing products. However, there can be no assurance that these
financings will be achieved.
For the balance of fiscal year 2002, 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 and services, and the continued funding for the development of in-vitro
oral fluid diagnostic testing products.
Operating revenues of the Company (exclusive of revenues from BJR) grew
significantly in the first quarter of Fiscal 2002 and are expected to grow
during the remainder of Fiscal 2002 as the Company expands its shipments of new
and enhanced ORALscreen products and grows the business of USDTL and BJR. Based
on current sales, expense and cash flow projections, the Company believes that
the current level of cash and cash equivalents 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 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, expand the existing business and develop new products 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.
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 2001 contains an explanatory
paragraph stating substantial doubt about the Company's ability to continue as a
going concern. Such report states that the ultimate outcome of this matter could
not be determined as the date of such report (November 20, 2001). The Company's
plans to address the situation are presented above. However, there are no
assurances that these endeavors will be successful or sufficient.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Except for the historical information contained herein, the matters set
forth herein are "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. We intend that
such forward-looking statements be subject to the safe harbors created thereby.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievement expressed or implied by such forward-looking statements. Such
factors include, but are not limited to the following: product demand and market
acceptance risks, the effect of economic conditions, results of pending or
future litigation, the impact of competitive products and pricing, product
development and commercialization, technological difficulties, government
regulatory environment and actions, trade environment, capacity and supply
constraints or difficulties, the result of financing efforts, actual purchases
under agreements and the effect of the Company's accounting policies.
PART II OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2001, the Company sold to private
investors 974,390 shares of the Company's common stock and received cash
proceeds of approximately $661,000. In connection with the sale of this common
stock, the Company issued to the holders of the common stock warrants to
purchase 974,390 shares of the Company's common stock at an exercise price of
$.68 to $ 1.60 per share which expire in three years. 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:
None
(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: February 14, 2002 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: February 14, 2002 /S/ J.C. Leatherman, Jr.
---------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)