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, 2003.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act for
the transition period from to
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Commission File Number: 1-15695
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Avitar, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
(781) 821-2440
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(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [x]Yes [ ]No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK: 85,470,264
AS OF AUGUST 12, 2003
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 33 pages
Exhibit Index is on Page 23
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION 3
Item 1 Consolidated Financial Statements
Balance Sheet 4
Statements of Operations 5
Statement of Stockholders' Deficit 6
Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 14
Item 3 Controls and Procedures 17
PART II: OTHER INFORMATION 20
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 4 Submission of Matters to Vote of Security Holders 21
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2003
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 181,094
Accounts receivable, net 453,747
Inventories 337,960
Prepaid expenses and other current assets 126,247
---------
Total current assets 1,099,048
PROPERTY AND EQUIPMENT, net 317,128
GOODWILL, net 1,489,555
OTHER ASSETS 410,483
---------
Total Assets $ 3,316,214
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $465,607
Accounts payable 1,690,235
Accrued expenses 1,035,429
Deferred income 222,400
Current portion of long-term debt 14,469
---------
Total current liabilities 3,428,140
LONG TERM DEBT, LESS CURRENT PORTION 1,306,517
---------
Total liabilities 4,734,657
---------
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;
75,851,754 shares issued and outstanding 758,518
Additional paid-in capital 43,727,595
Accumulated deficit (45,905,917)
------------
Total stockholders' deficit (1,418,443)
------------
Total Liabilities and Stockholders' Deficit $3,316,214
============
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,
-------------------------------------------------------------------------
2003 2002 2003 2002
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SALES $1,424,534 $2,233,320 $4,713,806 $7,706,853
------------- ------------- -------------- -------------
OPERATING EXPENSES
Cost of sales 1,163,359 1,274,229 3,296,956 4,421,119
Selling, general and administrative expenses 984,897 1,691,567 3,519,193 4,799,525
Research and development expenses 154,088 333,930 663,899 1,001,120
Amortization of goodwill - 77,498 - 232,494
------------- -------------- -------------
-------------
Total operating expenses 2,302,344 3,377,224 7,480,048 10,454,258
------------- ------------- -------------- -------------
LOSS FROM OPERATIONS (877,810) (1,143,904) (2,766,242) (2,747,405)
------------- ------------- -------------- -------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (197,065) (9,481) (402,109) (49,274)
Other income, net 14,346 85 15,218 19,788
------------- -------------- -------------
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Total other expense, net (182,719) (9,396) (386,891) (29,486)
------------- ------------- -------------- -------------
LOSS BFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE (Note 7) (1,060,529) (1,153,300) (3,153,133) (2,776,891)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE - - (650,000) -
------------- ------------- -------------- -------------
NET LOSS $(1,060,529) $(1,153,300) $(3,803,133) $(2,776,891)
============= ============= ============== =============
BASIC AND DILUTED LOSS PER SHARE BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $(0.01) $(0.03) $(0.05) $(0.07)
============= ============= ============== =============
BASIC AND DILUTED LOSS PER SHARE AFTER
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $(0.01) $(0.03) $(0.06) $(0.07)
============= ============= ============== =============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 73,130,567 44,605,933 63,228,778 42,006,575
============= ============= ============== =============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Nine Months Ended June 30, 2003
(Unaudited)
Preferred Stock Common Stock
Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 1,775,330 $17,752 44,674,215 $446,742 $41,769,112 ($42,102,770)
Sale of common stock and warrants - - 2,714,310 27,143 313,037 -
Exercise of warrants 1,431,243 14,313 114,500
Issuance of common stock for services - - 833,246 8,333 170,278 -
Issuance of common stock for interest on
long-term debt 751,049 7,510 123,740
Conversion of Series B and Series C
preferred stock into common stock (1,639,133) (16,391) 17,701,101 177,011 (160,620) -
Payment of preferred stock dividend, Series
B preferred stock 5 - - - 14 (14)
Discount and beneficial conversion related
to issuance of common stock in
connection with convertible notes 5,730,000 57,300 897,700
Issuance of common stock and warrants
for settlement of financial consultant fees 2,016,590 20,166 499,834
Net loss - - - - - (3,803,133)
- ------------------------------------------------------ ---------- ------------- ------------- --------------- ---------------
Balance at June 30, 2003 136,202 $1,361 75,851,754 $758,518 $43,727,595 ($45,905,917)
- ------------------------------------------------------ ---------- ------------- ------------- --------------- ---------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JUNE 30,
-------------------------------------
2003 2002
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,803,133) $(2,776,891)
Adjustments to reconcile net loss to
net cash used in operating activities:
Cumulative effect of a change in accounting principle 650,000 -
Depreciation and amortization 143,432 190,339
Amortization of goodwill - 232,494
Gain from sale of equity investment and equipment - (18,943)
Common stock for services 60,000 26,900
Common stock for interest on long-term debt 131,250 -
Changes in operating assets and liabilities:
Accounts receivable 690,249 (101,636)
Inventories 184,474 (267,547)
Prepaid expenses and other current assets 47,515 84,579
Other assets (35,181) 18,069
Accounts payable and accrued expenses 13,827 355,709
Deferred revenue 187,400 (385,000)
----------- ------------
Net cash used in operating activities (1,730,167) (2,641,927)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,559) (142,853)
Proceeds from sale of equity investment - 24,391
Proceeds from sale of equipment - 7,500
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Net cash used in investing activities (8,559) (110,962)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, preferred stock and warrants 340,180 1,306,000
Exercise of warrants and stock options 128,813 1,257,423
Stock subscription receivable - 35,000
Net proceeds from notes payable and long-term debt 947,623 159,377
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Net cash provided by financing activities 1,416,616 2,757,800
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (322,110) 4,911
CASH AND CASH EQUIVALENTS, beginning of the period 503,204 245,409
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CASH AND CASH EQUIVALENTS, end of the period $181,094 $250,320
============== ==================
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:
Income taxes $- $-
Interest $33,786 $15,101
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 nine months 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 nine month periods ended June
30, 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 $2,329,092 as of June 30, 2003. 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 nine
months ended June 30, 2003, the Company raised approximately $469,000 from
the sale of common stock and exercise of warrants 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 June 30, 2003, inventories consist of the following:
Raw Materials $160,696
Work-in-Process 98,719
Finished Goods 78,545
----------
Total $337,960
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended June 30, Nine Months Ended June 30,
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2003 2002 2003 2002
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Customer A $221,226 * $734,923 *
Customer B * $500,000 * $2,477,910
Customer C * * 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 $.09 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 $.09 per share, subject to
adjustments, which have been recorded as deferred financing costs totaling
approximately $251,000. 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 June 30, 2003, $63,688 of the discount has been
amortized and the carrying value of the debt was $63,688. 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.
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 nine months ended June 30, 2003, the Company sold 2,714,310
shares of the Company's common stock and received proceeds of approximately
$340,000. In connection with the sale of the common stock, the Company
issued to the holders of the common stock warrants to purchase 2,376,946
shares of the Company's common stock at exercise prices from $.20 to $.30
per share, which expire in three years. In addition, the Company received
proceeds of approximately $129,000 from the exercise of warrants to
purchase 1,431,243 shares of common stock. For the nine months ended June
30, 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
$131,250 of interest due on the long-term note to Global Capital Funding
Group, LP, the Company issued 751,049 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 nine months ended June 30, 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 nine months ended June
30, 2003 amounted to $14. As of June 30, 2003, the total amount of unpaid
and undeclared dividends was $2,416. 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 evaluation 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 was reported
as the cumulative effect of change in accounting principle for the nine
months ended June 30, 2003. No adjustment to the $238,120 balance of
goodwill associated with the BJR acquisition was deemed necessary as of
June 30, 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:
Nine months ended June 30, 2003 2002
--------------------------------------------------------------------------------------------
Reported Net Loss $(3,803,133) $(2,776,891)
Cumulative effect of change in accounting
principle 650,000 -
Goodwill amortization - 232,494
------------- ----------
Adjusted net loss before cumulative effect
of change in accounting principle and
excluding 2002 goodwill amortization $(3,153,133) $(2,544,397)
============= =============
Basic and diluted earnings per share as reported $(.06) $(.07)
Cumulative effect of change in accounting
principle .01 -
Goodwill amortization - .01
------------ -----------
Basic and diluted earnings per share before
cumulative effect of change in accounting
principle and excluding 2002 goodwill
amortization $(.05) $(.06)
======== ========
8. 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,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss $(1,060,529) $(1,153,300) $(3,803,133) $(2,776,891)
Less:Preferred Stock
dividends (476) (97,035) (1,330) (283,126)
------------ ----------- ----------- ---------
Loss available to
common
stockholders used
in basic and
diluted EPS $(1,061,005) $(1,250,335) $(3,804,463) $(3,060,017)
=========== ============ ============ ============
Weighted average
number of
common shares
outstanding 73,130,567 44,605,933 63,228,778 42,006,575
========== =========== =========== ==========
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.
Three Months Ended June 30, Nine Months Ended June 30,
2003 2002 2003 2002
---------------- ----------------- ------------------ -----------------
Loss available to common shareholders $(1,061,005) $(1,250,335) $ (3,804,463) $ (3,060,017)
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 (295,957) (286,640) (887,871) (859,919)
------------- ------------ ------------ ------------
Pro forma net loss $(1,356,962) $(1,536,975) $(4,692,334) $(3,919,936)
============= ============ ============ ============
Loss per share:
Basic - as reported $ (0.01) $ (.03) $ (0.05) $ (.07)
Basic - pro forma (0.02) (.04) (0.07) (.09)
Diluted - as reported (0.01) (.03) (0.05) (.07)
Diluted - pro forma (0.02) (.04) (0.07) (.09)
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:
June 30, June 30,
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%
10. SUBSEQUENT EVENTS
Since June 30, 2003, the Company sold 1,950,000 shares of the
Company's common stock and received proceeds of approximately $195,000. In
connection with the sale of the common stock, the Company issued to the
holders of the common stock warrants to purchase 1,950,000 shares of the
Company's common stock at an exercise price of $.20 per share, which expire
in three years. After shareholders at their annual meeting on July 28, 2003
approved the increase in authorized shares of common stock and all shares
of common stock issuable pursuant to the long-term debt described in Note
4, certain note holders converted their debt in the principal amount of
approximately $680,000 plus accrued interest into 7,668,510 shares of the
Company's common stock. The company also sold 700 shares of 8% Convertible
Preferred Stock and Warrants to purchase 4,666,666 shares of Common Stock.
The $700,000 of Preferred Stock is convertible into Common Stock at $0.15
per share, subject to adjustments, and the Warrants are exercisable at
$0.01 per share. The 700 shares of Preferred Stock are also redeemable in
five years at $1,000 per share plus accrued but unpaid 8% dividends.
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 June 30, 2003 decreased $808,786, or
approximately 36%, to $1,424,534 from $2,233,320 for the corresponding period of
the prior year. For the nine months ended June 30, 2003, sales decreased
$2,993,047, or approximately 39%, to $4,713,806 from $7,706,853 for the nine
months ended June 30, 2002. The reduction for the three and nine months ended
June 30, 2003 primarily reflects the decrease in sales of its ORALscreen(TM)
products especially to one major customer that purchased inventory during the
quarter and nine months ended June 30, 2002 of approximately $500,000 and
$2,478,000, respectively.
Operating Expenses
Cost of sales for the three months ended June 30, 2003 were approximately
82% of sales which compares to the cost of sales of 57% for the three months
ended June 30, 2002. For the nine months ended June 30, 2003, the cost of sales
were 69% compared to 57% of sales for the same period of Fiscal 2002. The change
for the three and nine months ended June 30, 2003 is mainly the result of the
decrease in sales of the higher margin ORALscreen products and a charge of
approximately $125,000 in the quarter ended June 30, 2003 for expired ORALscreen
inventory.
Selling, general and administrative expenses for the three months ended
June 30, 2003 decreased $706,670, or approximately 42%, to $984,897 from
$1,691,567 for the corresponding period of the prior year. For the nine months
ended June 30, 2003, selling, general and administrative expenses decreased
$1,280,332 or approximately 27%, to $3,519,193 from $4,799,525 for the nine
months ended June 30, 2002. The decrease for the three and nine months ended
June 30, 2003 reflected an overall expense reduction plan implemented by
management to adjust to the decrease in revenues described above.
Expenses for research and development for the three months ended June 30,
2003 amounted to $154,088 compared to $333,930 for the corresponding period of
the prior year. For the nine months ended June 30, 2003, expenses for research
and development were $663,899 versus $1,001,120 for the nine months ended June
30, 2002. The change for the three and nine months ended June 30,2003 was
primarily attributable to the reduction in development costs of the reading
instrument for the Company's OralScreen products and the lower staffing levels
that were put in place as part of the expense reduction plan mentioned above.
For the three months and nine months ended June 30, 2003, no amortization
of goodwill was recorded compared to $77,498 and $232,494, for the three and
nine months ended June 30, 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 an 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
Interest expense and financing costs were $197,065 for the three months
ended June 30, 2003 compared to $9,481 incurred during the three months ended
June 30, 2002. For the nine months ended June 30, 2003, interest expense and
financing costs were $402,109 versus $49,274 for the same period in the prior
year. The change for the three and nine months ended June 30, 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 June 30, 2003, other income amounted to $14,346
as compared to other income of $85 for the three months ended June 30, 2002.
Other income for the nine months ended June 30, 2003 was $15,218 versus other
income of $19,788 for the corresponding period of the prior year. The change for
nine months ended June 30, 2003 reflected a decrease in income from the sale of
excess equipment and equity investment.
Cumulative Effect of a Change in Accounting Principle
For the nine months ended June 30, 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 $1,060,529, $ .01 per basic and diluted share, for the quarter ended
June 30, 2003, as compared to a net loss of $1,153,300, $ .03 per basic and
diluted share, for the quarter ended June 30, 2002. For the nine months ended
June 30, 2003, the Company had a net loss of $3,803,133, $.06 per basic and
diluted share, versus a net loss of $2,776,891, $.07 per basic and diluted
share, for the nine months ended June 30, 2002.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2003, the Company had a working capital deficit of $2,329,092
and cash and cash equivalents of $181,094. Net cash used in operating activities
during the nine months ended June 30, 2003 amounted to $1,730,167 resulting
primarily from a net loss of $3,803,133 and an increase in other assets of
$35,181; partially offset by impairment of goodwill of $650,000, by depreciation
and amortization of $143,432, payment of common stock for services of $60,000,
payment of common stock for interest of $131,250, a decrease in accounts
receivable of $690,249, a decrease in inventories of $184,474, a decrease in
prepaid expenses and other current assets of $47,515, an increase in accounts
payable and accrued expenses of $13,827 and an increase in deferred revenue of
$187,400. Net cash provided by financing and investing activities during the
nine months ended June 30, 2003 amounted to $1,408,057 which included proceeds
from the sale of common stock and warrants of $340,180, proceeds from the
exercise of warrants of $128,813, proceeds from the notes payable and long-term
debt of $947,623; offset in part by purchases of property and equipment of
$8,559.
Since October 2002, the Company received proceeds of approximately $535,000
from the sale of 4,666,310 shares of the Company's common stock. In connection
with the sale of the common stock, the Company issued to the holders of the
common stock warrants to purchase 4,330,546 shares of the Company's common stock
at exercise prices from $.20 to $.30 per share, which expire in three years. In
addition, the Company received proceeds of approximately $129,000 from the
exercise of warrants to purchase 1,431,243 shares of common stock. 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 $.09
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 $.09 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 totaling approximately
$251,000 incurred in connection with securing these loans were recorded as a
deferred financing charge. After shareholders at their annual meeting on July
28, 2003 approved the increase in authorized shares of common stock and all
shares of common stock issuable pursuant to the long-term debt described in Note
4, certain note holders converted their debt in the principal amount of
approximately $680,000 plus accrued interest into 7,668,510 shares of the
Company's common stock. In August 2003, the Company sold 700 shares of 8%
Convertible Preferred Stock and Warrants to purchase 4,666,666 shares of Common
Stock. The $700,000 of Preferred Stock is convertible into Common Stock at $0.15
per share, subject to adjustments, and the Warrants are exercisable at $0.01 per
share. The 700 shares of Preferred Stock are also redeemable in five years at
$1,000 per share plus accrued but unpaid 8% dividends.
The Company was in default under a promissory note, which was issued for an
accrued trade payable in the original principal amount of approximately
$272,000, and prior to default was paid down to approximately $181,000 in
principal amount. In May 2003, a judgment of approximately $193,000 for the
unpaid principal and accrued interest was entered against the Company in an
Illinois state court pursuant to a confession of judgment contained in that
promissory note. The Company has paid the full amount of the judgment.
The cash available at June 30, 2003 along with customer receipts and some
additional capital was sufficient to finance operations through mid-August 2003.
Beyond that time, the Company requires significant additional financing from
outside sources to fund operations, of which $700,000 described above has been
received. The Company is aggressively seeking additional capital and needs to
raise $500,000 immediately with plans to raise an additional $3,000,000 during
the remainder of calendar 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. 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 at the current level for the
balance of 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 June 30, 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.
In November 2002, the EITF reached a consensus on Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables". EITF 00-21 addresses certain aspects
of the accounting by a vendor for arrangements under which the vendor will
perform multiple revenue generating activities. EITF 00-21 will be effective for
periods beginning after June 15, 2003. The adoption of EITF 00-21 is not
expected to have a material impact on the Company's financial position and
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, and hedging relations designated after June 30, 2003, except for
those provisions of SFAS No. 149 which relate to SFAS No. 133 implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003. For those issues, the provisions that are currently in effect should
continue to be applied in accordance with their respective effective dates. In
addition, certain provisions of SFAS No. 149, which relate to forward purchases
or sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a
material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective beginning September 1, 2003. The adoption of SFAS No. 150 is not
expected to have a material effect on the Company's financial statements.
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 Our management, including
our chief executive officer and chief financial officer, have carried out an
evaluation of the effectiveness of our disclosure controls and procedures as of
June 28, 2003, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based
upon that evaluation, our chief executive officer and chief financial officer
have concluded that as of such date, our disclosure controls and procedures in
place are adequate to ensure material information and other information
requiring disclosure is identified and communicated on a timely basis.
(b) Changes in Internal Control Over Financial Reporting During the period
covered by this report, there have been no changes in our internal control over
financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was in default under a promissory note, which was issued for an
accrued trade payable in the original principal amount of approximately
$272,000, and prior to default was paid down to approximately $181,000 in
principal amount. In May 2003, a judgment of approximately $193,000 for the
unpaid principal and accrued interest was entered against the Company in an
Illinois state court pursuant to a confession of judgment contained in that
promissory note. The Company has paid the full amount of the judgment.
ITEM 2. CHANGE IN SECURITIES
During the quarter ended June 30, 2003 the Company sold to private
investors 2,051,946 shares of the Company's common stock and received cash
proceeds of approximately $215,000. In connection with the sale of this common
stock, the Company issued to the holders of the common stock warrants to
purchase 1,751,946 shares of the Company's common stock at exercise prices of
$.20-$.22 per share which expire in three years. In addition, the Company issued
to warrant holders 1,431,243 shares of the Company's common stock upon the
exercise of their warrants and received proceeds of approximately $128,000. Also
during the quarter ended June 30, 2003, the Company issued 260,422 shares of the
Company's common stock as payment for interest on long-term debt. 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
The annual meeting of the shareholders was held on July 28, 2003. All
members of the Board of Directors were elected by more than 58% of the total
shares outstanding and more than 95% of the shares voted. In addition, the
reappointment of BDO Seidman, LLP as auditors was approved and the tabulation of
votes for all matters were as follows:
For Withheld Against Abstain
------------ ------------- --------------------
Election of Directors 43,053,759 2,169,945 N/A N/A
Ratification and Approval of the
Issuance of the Maximum Number
of Shares of Common Stock for the
February 2003 Private Placement 24,599,161 N/A 2,016,492 11,485
Approval of the Issuance of the
Maximum Number of Shares of
Common Stock issuable in
connection with the Modification
Agreement 24,581,811 N/A 2,016,442 25,885
Approval of the Issuance of the
Maximum Number of Shares of
Common Stock issuable in
connection with the New Private
Placement 24,565,211 N/A 2,046,442 15,485
Approval of Amendment to Certificate
of Incorporation to effect an increase
of Authorized Shares of Common
from 100,000,000 to 200,000,000 43,054,487 N/A 2,161,932 7,285
Reappointment of Auditors 44,974,424 N/A 213,080 36,200
Segregation of the Positions of Chief
Executive Officer and Chairman of the
Board 6,211,418 N/A 20,312,330 103,390
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
3.1 Complete Copy of Amended Certificate of Incorporation
Certification Pursuant to 18 U.S.C. Section 1350, as
31.1 Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
31.2 Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
32.1 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
32.2 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K:
On June 11, 2003 the Company filed a current report on Form 8-K
incorporating the risk factors included in a Registration Statement on Form S-3
filed on June 11, 2003 into the Prospectus of previously effective Registration
Statements of the Registrant.
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 13, 2003 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 13, 2003 /S/ J.C. Leatherman, Jr.
---------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer
EXHIBIT INDEX
Exhibit No. Document
3.1 Complete Copy of Amended Certificate of Incorporation
Certification Pursuant to 18 U.S.C. Section 1350, as
31.1 Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
31.2 Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
32.1 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification Pursuant to 18 U.S.C. Section 1350, as
32.2 Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002