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, 2003.
[ ] 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: 72,108,143
AS OF May 9, 2003
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 22 pages
Exhibit Index appears on page 20
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
Item 3 Procedures and Controls 14
PART II: OTHER INFORMATION 15
Item 2 Changes in Securities 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 16
CERTIFICATIONS 18
EXHIBIT INDEX 20
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
03/31
(Unaudited)
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,012
Accounts receivable, net 813,934
Inventories 781,497
Prepaid expenses and other current assets 60,580
-----------
Total current assets 1,749,023
PROPERTY AND EQUIPMENT, net 337,296
GOODWILL, net 1,489,555
OTHER ASSETS 425,379
-----------
Total Assets $4,001,253
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 682,113
Accounts payable 1,477,807
Accrued expenses 1,235,172
Deferred income 65,500
Current portion of long-term debt 19,072
-----------
Total current liabilities 3,479,664
LONG TERM DEBT, LESS CURRENT PORTION 1,259,943
-----------
Total liabilities 4,739,607
-----------
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Series B, C and D convertible preferred stock, $.01 par
value; authorized 5,000,000 shares; 136,202 shares issued
and outstanding 1,361
Common Stock, $.01 par value; authorized 100,000,000 shares;
72,108,143 shares issued and outstanding 721,081
Additional paid-in capital 43,384,592
Accumulated deficit (44,845,388)
-----------
Total stockholders' deficit (738,354)
-----------
Total Liabilities and Stockholders' Deficit $4,001,253
===========
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,
---------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------------------------
SALES $1,415,473 $2,231,119 $3,289,272 $5,473,533
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 943,430 1,509,049 2,133,597 3,146,890
Selling, general and administrative expenses 1,190,048 1,599,040 2,534,296 3,107,958
Research and development expenses 236,683 275,035 509,811 667,190
Amortization of goodwill - 77,498 - 154,996
------------ ------------ ------------ ------------
Total operating expenses 2,370,161 3,460,622 5,177,704 7,077,034
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (954,688) (1,229,503) (1,888,432) (1,603,501)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (128,921) (19,218) (205,044) (39,793)
Other income (expense), net (223) 3,536 872 19,703
------------ ------------ ------------
------------
Total other expense, net (129,144) (15,682) (204,172) (20,090)
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (Note 7) (1,083,832) (1,245,185) (2,092,604) (1,623,591)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (650,000) - (650,000) -
------------ ------------ ------------ ------------
NET LOSS $(1,733,832) $(1,245,185) $(2,742,604) $(1,623,591)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $(0.02) $(0.03) $(0.04) $(0.04)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE AFTER
CUMMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $(0.03) $(0.03) $(0.05) $(0.04)
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 67,938,589 42,638,768 57,721,739 40,706,019
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Six Months Ended March 31, 2003
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Preferred Stock
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 1,775,330 $17,752 44,674,215 $446,742
Sale of common stock and warrants - - 662,364 6,624
Issuance of common stock for services - - 833,246 8,332
Issuance of common stock for interest on
long-term debt 490,627 4,906
Conversion of Series B and Series C
preferred stock into common stock (1,639,133) (16,391) 17,701,101 177,011
Payment of preferred stock dividend, Series
B preferred stock 5 - - -
Discount and beneficial conversion
related to issuance of common stock in
connection with convertible notes 5,730,000 57,300
Issuance of common stock and warrants
for settlement of financial consultant fees 2,016,590 20,166
Net loss - - - -
- ---------------------------------------------------------------- -------------- ---------------- -------------
Balance at March 31, 2003 136,202 $1,361 72,108,143 $721,081
- ---------------------------------------------------------------- -------------- ---------------- -------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Six Months Ended March 31, 2003
(Unaudited)
(Continued)
- ---------------------------------------------------------------------------------------
Common Stock
Additional Accumulated
paid-in capital deficit
- ---------------------------------------------------------------------------------------
Balance at September 30, 2002 $41,769,112 ($42,102,770)
Sale of common stock and warrants 125,680 -
Issuance of common stock for services 170,278 -
Issuance of common stock for interest on
long-term debt 82,594
Conversion of Series B and Series C
preferred stock into common stock (160,620) -
Payment of preferred stock dividend, Series
B preferred stock 14 (14)
Discount and beneficial conversion
related to issuance of common stock in
connection with convertible notes 897,700
Issuance of common stock and warrants
for settlement of financial consultant fees 499,834
Net loss - (2,742,604)
- ------------------------------------------------------------------- ------------------
Balance at March 31, 2003 $43,384,592 ($44,845,388)
- ------------------------------------------------------------------- ------------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,742,604) $(1,623,591)
Adjustments to reconcile net loss to
net cash used in operating activities:
Cumulative effect of a change in accounting principle 650,000 0
Depreciation and amortization 116,948 107,729
Amortization of goodwill 0 154,996
Gain from sale of equity investment and equipment 0 (18,943)
Common stock for services 60,000 26,900
Common stock for interest on long-term debt 87,500 0
Changes in operating assets and liabilities:
Accounts receivable 330,062 125,135
Inventories (259,063) (19,982)
Prepaid expenses and other current assets 113,182 1,535
Other assets 48,329 18,227
Accounts payable and accrued expenses 1,142 (181,558)
Deferred revenue 30,500 (385,000)
------------ ------------
Net cash used in operating activities (1,564,004) (1,794,552)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,459) (114,043)
Proceeds from sale of equity investment 0 24,391
Proceeds from sale of equipment 0 7,500
------------ ------------
Net cash used in investing activities (6,459) (82,152)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, preferred stock and warrants 132,304 1,306,000
Exercise of warrants and stock options 0 1,257,423
Stock subscription receivable 0 35,000
Proceeds from (repayment of) notes payable and long-term debt 1,027,967 (36,745)
------------ ------------
Net cash provided by financing activities 1,160,271 2,561,678
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (410,192) 684,974
CASH AND CASH EQUIVALENTS, beginning of the period 503,204 245,409
------------ ------------
CASH AND CASH EQUIVALENTS, end of the period $ 93,012 $ 930,383
============ ============
NON CASH TRANSACTIONS:
Common stock issued for deferred financing $118,610 $-
Common stock and warrants issued for settlement of
financial consultant fees $520,000 $-
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Interest $ 21,303 $ 12,734
See accompanying notes to consolidated financial statements.
AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
1. BASIS OF PRESENTATION
Avitar, Inc. (the "Company" or "Avitar") 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
the first half of Fiscal 2003, the Company continued the development and
marketing of innovative point of care oral fluid drugs of abuse tests, which use
the Company's foam as the means for collecting the oral fluid sample. United
States Drug Testing Laboratories, Inc. ("USDTL"), a wholly-owned subsidiary of
Avitar, operates a certified laboratory and provides specialized drug testing
services primarily utilizing hair and meconium as the samples. Through its
wholly-owned subsidiary, BJR Security, Inc. (`BJR"), the Company provides
specialized contraband detection and education services.
The accompanying consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting, the instructions to Form 10-QSB and Regulation S-B
(including Item 310(b) thereof). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company's management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the full fiscal year ending September
30, 2003. 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, 2002.
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 of $1,730,639 as of March 31, 2002. The Company raised net proceeds
aggregating approximately $2,590,000 during the fiscal year ended September 30,
2002 from the sale of stock and the exercise of options and warrants. In
addition, the Company received net proceeds of approximately $1,127,000 from a
long-term note payable. During the six months ended March 31, 2003, the Company
raised approximately $132,000 from the sale of common stock and received net
proceeds of approximately $817,000 from long-term notes payable. Based upon cash
flow projections, the Company believes the anticipated cash flow from operations
and most importantly, 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 March 31, 2003, inventories consist of the following:
Raw Materials $210,778
Work-in-Process 247,460
Finished Goods 323,259
---------
Total $781,497
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Customer A $183,332 $339,360 $513,697 *
Customer B * * * $1,977,910
Customer C * 263,165 418,790 *
* Customer was not in excess of 10% of total sales.
4. LONG-TERM DEBT
In February 2003, the Company executed notes payable with private
individuals in the principal amount of $955,000 which are payable at maturity in
February 2008. These notes are senior subordinated obligations of the Company
bearing interest at the rate of 15% per annum. Interest on the outstanding
principal amount at the rate of 10% is payable quarterly in cash. The balance of
5% per annum will accrue until maturity. Each note holder received 6 shares of
the Company's common stock for each dollar of principal in the note for a total
of 5,730,000 shares. These notes and any accrued and unpaid interest due
thereon, are convertible into the common stock of the Company at a conversion
price of $.207 per share, subject to adjustments. In conjunction with the
issuance of these notes, the Company paid a placement agent $87,000 in cash,
issued 573,000 shares of the Company's common stock and warrants to purchase
461,353 shares of the Company's common stock at an exercise price of $.207 per
share, subject to adjustments, which have been recorded as deferred financing
costs of deferred financing costs of approximately $162,400. The fair value of
the shares issued to the note holders and the beneficial conversion feature of
the convertible notes was accounted for in accordance with Emerging Issues Task
Force ("EITF") No. 00-27 which resulted in a discount of $955,000 and was
recorded as a discount on the notes. Accordingly, the face value of the notes
was discounted to $0. As of March 31, 2003, $19,767 of the discount has been
amortized and the carrying value of the debt was $19,967. The discount will be
amortized to interest expense over the five-year life of the debt. The shares
issuable upon conversion of the notes are subject to shareholder approval. If
shareholder approval is not obtained, the notes can be called requiring
immediate repayment with the remaining discount on the notes expensed in full.
Placement fees of approximately $251,000 incurred in connection with securing
these loans were recorded as a deferred financing charge.
5. SETTLEMENT AGREEMENT
As of September 30, 2002, the Company recorded a liability of $520,000 with
a corresponding charge to equity to reflect the fair value of the cost
associated with a Settlement Agreement for compensation to the Estate and
successors of a financial advisor who provided services to the Company from 1998
to 2001 directly related to the raising of capital through issuance of equity
instruments. On December 11, 2002, the Company settled this liability and issued
2,016,590 shares of common stock and warrants to purchase 1,176,679 shares of
common stock at exercise prices ranging from $0.23 to $0.35 per share with
expiration dates in October 2003 and December 2003. The Company recorded an
offsetting increase of $520,000 to stockholders' equity for the fair value of
the shares and warrants issued.
6. COMMON AND PREFERRED STOCK
During the six months ended March 31, 2003, the Company sold 662,364 shares
of the Company's common stock and received proceeds of approximately $132,000.
In connection with the sale of the common stock, the Company issued to the
holders of the common stock warrants to purchase 625,000 shares of the Company's
common stock at an exercise price of $.30 per share, which expire in three
years. For the six months ended March 31, 2003, the Company issued 2,849,836
shares of the Company's common stock for services, including the placement agent
services described in Note 4, and the settlement of the liability described in
Note 5. As payment of the $87,500 of interest due on the long-term note to
Global Capital Funding Group, LP, the Company issued 490,627 shares of the
Company's common stock. In addition, the Company issued common stock in
connection with the long-term notes discussed in Note 4.
For the six months ended March 31, 2003, holders of Series A, B and C
convertible preferred stock converted 1,639,133 shares of preferred stock into
17,701,101 shares of the Company's common stock thereby eliminating a majority
of the Series B preferred stock. Preferred stock dividends related to the Series
B convertible preferred stock for the six months ended March 31, 2003 amounted
to $14. As of March 31, 2003, the total amount of unpaid and undeclared
dividends was $1,940. The decrease was a result of the reduction of Series B
preferred stock from the conversion.
7. GOODWILL
Effective October 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, during Fiscal 2003. SFAS No. 142 requires among other
things, that companies no longer amortize goodwill, but test goodwill for
impairment at least annually. In addition, SFAS 142 requires that the Company
identify reporting units for the purpose of assessing potential future
impairments of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with an
indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with guidelines in SFAS 142. SFAS
142 is required to be applied to all goodwill and other intangible assets
regardless of when those assets were initially recognized. As of October 1,
2002, the Company's goodwill of $2,139,555 was composed of $1,901,435 associated
with the acquisition of USDTL in 1999 and $238,120 associated with the
acquisition of BJR in 2001. As a result of the transitional impairment tests,
the USDTL acquisition was determined to be impaired by an independent
evaluations which relied on present value of future cash flows contained in an
offer to purchase USDTL and market price comparisons of sales multiples for
companies engaged in a similar business to USDTL. The difference in value of
$650,000 is being reported as the cumulative effect of change in accounting
principle for the period ended March 31, 2003. No adjustment to the $238,120
balance of goodwill associated with the BJR acquisition was deemed necessary as
of March 31, 2003.
The effect on reported net loss due to the cumulative effect of change
in accounting principle and discontinuance of goodwill amortization is as
follows:
Six months ended March 31, 2003 2002
-------------------------------------------------------------------------------------------
Reported Net Loss $(2,742,604) $(1,623,591)
Cumulative effect of change in accounting
principle 650,000 -
Goodwill amortization - 154,996
------------- ----------
Adjusted net loss before cumulative effect
of change in accounting principle and
excluding 2002 goodwill amortization $(2,092,604) $(1,468,595)
============= =============
Basic and diluted earnings per share as reported $(.05) $(.04)
Cumulative effect of change in accounting
principle .01 -
Goodwill amortization - -
------------ ---------
Basic and diluted earnings per share before
cumulative effect of change in accounting
principle and excluding 2002 goodwill
amortization $(.04) $(.04)
======== ========
8. 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,
2003 2002 2003 2002
--------------------- ---------------- ---------------- ------------------
Net loss $(1,733,832) $(1,245,185) $(2,742,604) $(1,623,591)
Less:Preferred Stock
dividends ( 406) ( 92,475) ( 854) ( 186,091)
----------- ----------- ----------- ----------
Loss available to
common
stockholders used
in basic and
diluted EPS $(1,734,238) $(1,337,660) $(2,743,458) $(1,809,682)
=========== ============= ============= ============
Weighted average
number of
common shares
outstanding 67,938,589 42,638,768 57,721,739 40,706,019
========== =========== ============ ==========
9. STOCK OPTIONS
We account for our stock-based compensation plans using the intrinsic value
method in accordance with the provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and comply with the disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for
Stock-Based Compensation- Transition and Disclosure. No stock-based employee
compensation cost was reflected in net loss, as all options granted under those
plans had an exercise price equal to the fair market value of the underlying
common stock on the date of grant.
The following table illustrates, in accordance with the provisions of SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure,
the effect on net loss and loss per share if we had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Six Months Ended March 31,
2003 2002
- ------------------------------------------------------------ ---------------- ------------------------
Loss available to common shareholders $ (2,743,458) $ (1,809,682)
Add: stock based employee compensation expense
Included in reported net loss, net of tax - -
Deduct: total stock based employee compensation expense
determined under the fair value based method for
all awards, net of tax ( 591,914) ( 573,279)
Pro forma net loss $ (3,335,372) $(2,382,961)
Loss per share:
Basic - as reported $ (0.5) $ (.04)
Basic - pro forma (0.6) (.06)
Diluted - as reported (0.5) (.04)
Diluted - pro forma (0.6) (.06)
The fair value of the Company's stock-based option awards to employees was
estimated assuming no expected dividends and the following weighted-average
assumptions:
March 31, March 31,
2003 2002
------------------ ---------------
Risk free interest rate 3.3 - 5.3 % 3.3-5.3%
Expected dividend yield - -
Expected lives 3 - 10 years 3 - 10 years
Expected volatility 85% 85%
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. This report may contain forward-looking statements.
For a description of risks and uncertainties relating to such forward-looking
statements, see the Forward-Looking Statements and Associated Risks section
later in this Item.
RESULTS OF OPERATIONS
Revenues
Sales for the three months ended March 31, 2003 decreased $815,646, or
approximately 37%, to $1,415,473 from $2,231,119 for the corresponding period of
the prior year. For the six months ended March 31, 2003, sales decreased
$2,184,261, or approximately 40%, to $3,289,272 from $5,473,533. The reduction
for the three and six months ended March 31, 2003 primarily reflects the
decrease in sales of its ORALscreen(TM) products especially to one major
customer that purchased inventory during the quarter and six months ended March
31, 2002 of approximately $200,000 and $1,978,000, respectively.
Operating Expenses
Cost of sales for the three months ended March 31, 2003 were approximately
67% of sales which compares to the cost of sales of 68% for the three months
ended March 31, 2002. For the six months ended March 31, 2003, the cost of sales
were 65% compared to 57% of sales for the same period of Fiscal 2002. The change
for the six months ended March 31, 2003 is mainly the result of the decrease in
sales of the higher margin ORALscreen products.
Selling, general and administrative expenses for the three months ended
March 31, 2003 decreased $408,992, or approximately 26%, to $1,190,048 from
$1,599,040 for the corresponding period of the prior year. For the six months
ended March 31, 2003, selling, general and administrative expenses decreased
$573,662 or approximately 18%, to $2,534,296 from $3,107,958 for the six months
ended March 31, 2002. The decrease for the three and six months ended March 31,
2002 reflected an overall cost reduction effort to adjust to the decrease in
revenues described above.
Expenses for research and development for the three months ended March 31,
2003 amounted to $236,683 compared to $275,035 for the corresponding period of
the prior year. For the six months ended March 31, 2003, expenses for research
and development were $509,811 versus $667,190 for the six months ended March 31,
2002. The change for the three and six months ended March 31,2003 was primarily
attributable to the reduction in development costs of the reading instrument for
the Company's OralScreen products.
For the three months and six months ended March 31, 2003, no amortization
of goodwill was recorded compared to $77,498 and $154,996, for the three and six
months ended March 31, 2002, respectively. The Company implemented FAS 142 which
called for ceasing amortization on assets with indefinite lives. Assets
determined to have indefinite lives are subject to impairment test annually.
Refer to Note 7 for the cumulative effect of a change in accounting principle
for a description of impairment of goodwill.
Other Income and Expense
No interest income was earned for the three and six months ended March 31,
2003 or March 31, 2002.
Interest expense and financing costs were $128,921 for the three months
ended March 31, 2003 compared to $19,218 incurred during the three months ended
March 31, 2002. For the six months ended March 31, 2003, interest expense and
financing costs were $205,044 versus $39,793 for the same period in the prior
year. The change for the three and six months ended March 31, 2003 primarily
reflects the interest expense and financing costs associated with the short-term
note issued in June 2002, a long-term loan completed in August 2002 and the
long-term notes issued in February 2003.
For the three months ended March 31, 2003, other expense amounted to $223
as compared to other income of $3,536 for the three months ended March 31, 2002.
Other income for the six months ended March 31, 2003 was $872 versus other
income of $19,703 for the corresponding period of the prior year. The six months
ended March 31, 2002 included approximately $18,000 from the sale of excess
equipment and an equity investment.
Cumulative Effect of a Change in Accounting Principle
For the quarter ended March 31, 2003, the Company, in accordance with its
adoption of SFAS 142 on October 1, 2002, recorded a $650,000 impairment of
goodwill associated with the acquisition of USDTL in 1999. Refer to Note 7 of
the financial statements for a complete description of this adjustment to
goodwill.
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $1,733,832, $ .03 per basic and diluted share, for the quarter ended
March 31, 2003, as compared to a net loss of $1,245,185, $ .03 per basic and
diluted share, for the quarter ended March 31, 2002. For the six months ended
March 31, 2003, the Company had a net loss of $2,742,604, $.05 per basic and
diluted share, versus a net loss of $1,623,591, $.04 per basic and diluted
share, for the six months ended March 31, 2002.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2003, the Company had a working capital deficit of $1,730,639
and cash and cash equivalents of $93,012. Net cash used in operating activities
during the six months ended March 31, 2003 amounted to $1,564,004 resulting
primarily from a net loss of $2,742,604 and an increase in inventories of
$259,063; partially offset by depreciation and amortization of $116,948,
impairment of goodwill of $650,000, a payment of common stock for services of
$60,000, a payment of common stock for interest of $87,500, a decrease in
accounts receivable of $330,062, a decrease in prepaid expenses and other
current assets of $113,182 and a decrease in other assets of $48,329, an
increase in accounts payable and accrued expenses of $1,142 and an increase in
deferred income of $30,500. Net cash provided by financing and investing
activities during the six months ended March 31, 2003 amounted to $1,153,812
which included proceeds from the sale of common stock and warrants of $132,304,
proceeds from the notes payable and long-term debt of $1,027,967; offset in part
by purchases of property and equipment of $6,459.
Since October 2002, the Company received proceeds of approximately $132,000
from the sale of 662,364 shares of the Company's common stock and warrants to
purchase 625,000 shares of the Company's common stock at exercise prices of $.30
per share for a period of three years. In February 2003, the Company received
net proceeds of approximately $817,000 from the issuance of convertible notes.
These notes are senior subordinated obligations of the Company bearing interest
at the rate of 15% per annum. Interest on the outstanding principal amount at
the rate of 10% is payable quarterly in cash. The balance of 5% per annum will
accrue until maturity. Each note holder received 6 shares of the Company's
common stock for each dollar of principal in the note. These notes and any
accrued and unpaid interest due thereon, are convertible into the common stock
of the Company at a conversion price of $.207 per share, subject to adjustments.
In conjunction with the issuance of these notes, the Company paid a placement
agent $87,000 in cash, 573,000 shares of the Company's common stock and warrants
to purchase 461,353 shares of the Company's common stock at an exercise price of
$.207 per share, subject to adjustments. The value of the shares issued to the
note holders was approximately $955,000 and was recorded as a discount on the
notes. Placement fees of approximately $251,000 incurred in connection with
securing these loans were recorded as a deferred financing charge.
The Company is aggressively seeking additional capital and needs to raise
$1,000,000 immediately with plans to raise an additional $3,000,000 during the
remainder of 2003 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 drug screening systems
and to explore applications for its oral fluid technology in the in-vitro
diagnostic testing market. However, there can be no assurance that these
financings will be achieved.
For the balance of fiscal year 2003, 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 and
enhancement of the ORALscreen product line.
Operating revenues are expected to remain level during Fiscal 2003 due
primarily to current economic conditions. 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 2002 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 of the date of such report (November 26, 2002). The
Company's plans to address the situation are presented above. However, there are
no assurances that these endeavors will be successful or sufficient.
RECENT ACCOUNTING PRONOUNCEMENTS
At March 31, 2003, the Company has two stock based compensation plans (one
employee and one non-employee director's plan). The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net loss, as the options
granted under those plans had an exercise price equal to, or greater than, the
market value of the underlying common stock on the date of the grant. In
accordance with FASB Statement No. 148, Accounting for Stock-Based Compensation
- - Transition and Disclosure, beginning in the quarter ended March 31, 2003, the
Company adopted the disclosure requirements of FASB No. 148.
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.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this report on Form 10-QSB, our Chief
Executive Officer and the Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a - 14(c) and 15(d)
promulgated under the Securities Exchange Act of 1934) are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
PART II OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES
During the quarter ended March 31, 2003, the Company sold to accredited
investors notes in the principal amount of $955,000 which are payable at
maturity in February 2008. These notes are senior subordinated obligations of
the Company bearing interest at the rate of 15% per annum. Interest on the
outstanding principal amount at the rate of 10% is payable quarterly in cash.
The balance of 5% per annum will accrue until maturity. In conjunction with
these notes, the Company issued 6,303,000 shares of the Company's common stock
to the note holders and placement agent. The placement agent received a 7% cash
commission and a 2% unallocated expense allowance for a total cash payment of
$87,000. These notes and any accrued and unpaid interest due thereon, are
convertible into the common stock of the Company at a conversion price of $.207
per share, subject to adjustments. 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
4.1 Form of Senior Subordinated Promissory Note Issued in February 2003
4.2 Form of Subscription Agreement Dated February 6, 2003
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On March 3, 2003, the Company filed a current report on Form 8-K concerning
a press release issued in reliance on Rule 135c.
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 14, 2003 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 14, 2003 /S/ J.C. Leatherman, Jr.
---------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Peter P. Phildius, Chief Executive Officer, and Jay
C. Leatherman, Jr., Chief Financial Officer of Avitar, Inc each certify that:
1. We have reviewed this quarterly report on Form 10-QSB of Avitar, Inc.;
2. Based on our knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on our knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies, if any, in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ Peter P.Phildius
- ---------------------
Peter P. Phildius
Chief Executive Officer
/s/ Jay C. Leatherman, Jr
- --------------------------
Jay C. Leatherman, Jr.
Chief Financial Officer (Principal Financial and
Accounting Officer), Secretary