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, 2003.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act for
the transition period from to ---------------------------------------
- --------------------------------------
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
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: 101,727,635
AS OF FEBRUARY 12, 2004
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 25 pages
Exhibit Index is on Page 21
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 13
Item 3 Controls and Procedures 17
PART II: OTHER INFORMATION 18
Item 2 Changes in Securities and Use of Proceeds 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
CERTIFICATIONS 22
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2003
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 451,260
Accounts receivable,, less allowance for doubtful
accounts of $25,000 390,471
Inventories 417,007
Prepaid expenses and other current assets 166,318
------------
Total current assets 1,425,056
PROPERTY AND EQUIPMENT, net 211,566
GOODWILL, net 238,120
OTHER ASSETS 353,414
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Total $ 2,228,156
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 208,334
Accounts payable 906,047
Accrued expenses 1,238,209
Deferred revenue 211,550
Current portion of long-term debt 8,098
------------
Total current liabilities 2,572,238
LONG TERM DEBT, LESS CURRENT PORTION 1,225,798
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Total liabilities 3,798,036
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Series B, C, D and 6% convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 137,202 shares issued and
outstanding 1,372
Common Stock, $.01 par value; authorized 200,000,000 shares;
101,727,635 shares issued and outstanding 1,017,276
Additional paid-in capital 46,634,876
Accumulated deficit (49,223,404)
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Total stockholders' deficit (1,569,880)
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Total $ 2,228,156
============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
2003 2002
-----------------------------
SALES $ 820,200 $ 1,497,656
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OPERATING EXPENSES
Cost of sales 533,907 991,397
Selling, general and administrative 746,736 1,157,036
Research and development 108,155 273,128
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Total operating expenses 1,388,798 2,421,561
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LOSS FROM OPERATIONS (568,598) (923,905)
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OTHER INCOME (EXPENSE)
Interest expense and financing costs (69,268) (75,553)
Other income (expense) 8,245 595
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Total other expense (61,023) (74,958)
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LOSS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS (629,621) (998,863)
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DISCONTINUED OPERATIONS:
Income (loss) from operations of USDTL 4,447 (9,909)
Loss from the disposal of USDTL (17,235) -
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Loss from discontinued operations (12,788) (9,909)
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NET LOSS $ (642,409) $ (1,008,772)
============ ============
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED OPERATIONS (Note 7) $ (0.01) $ (0.02)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE (Note 7): $ (0.01) $ (0.02)
============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 96,093,701 49,959,035
============ ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Three Months Ended December 31, 2003
(Unaudited)
Preferred Stock Common Stock
Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 137,202 $ 1,372 88,868,196 $ 888,682 $ 46,093,947 ($48,564,885)
Issuance of common stock for exercise
of warrants - - 7,496,436 74,964 (74,964) -
Issuance of common stock for interest on
long-term debt - - 696,336 6,963 81,560 -
Conversion of 8% redeemable convertible
preferred stock into common stock - - 4,666,667 46,667 534,333 -
Payment of preferred stock dividend for
8% redeemable convertible preferred stock - - - - - (16,110)
Net loss - - - - - (642,409)
--------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 137,202 $ 1,372 101,727,635 $1,017,276 $ 46,634,876 ($49,223,404)
--------- ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED DECEMBER 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($642,409) ($1,008,772)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from disposal of discontinued operation 17,235 -
Depreciation and amortization 29,481 40,689
Amortization of debt discount and deferred financing 14,484 13,507
Amortization of deferred rent expense 10,397 -
Common stock for services - 50,000
Common stock for interest on long-term debt 43,750 43,750
Changes in operating assets and liabilities:
Accounts receivable 127,090 192,485
Inventories (167,079) (227,772)
Prepaid expenses and other current assets (38,037) 94,951
Other assets 26,205 14,560
Accounts payable and accrued expenses (452,024) 387,597
Deferred revenue (1,200) 34,100
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Net cash used in operating activities (1,032,107) (364,905)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (835) (3,360)
Proceeds from sale of USDTL 500,000 -
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Net cash provided by (used in) investing activities 499,165 (3,360)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (130,607) (44,480)
Sales of common stock, preferred stock and warrants - 125,000
Payment of cash dividend on 8% redeemable convertible preferred stock (16,110) -
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Net cash provided by (used in) financing activities (146,717) 80,520
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NET DECREASE IN CASH AND CASH EQUIVALENTS (679,659) (287,745)
CASH AND CASH EQUIVALENTS, beginning of the period 1,130,919 503,204
------------ -------------
CASH AND CASH EQUIVALENTS, end of the period $451,260 $215,459
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ - $ -
Interest $ 7,899 $ 12,058
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the three months ended December 31, 2003, 696,336 shares of common stock
were issued for interest on long-term debt.
During the three months ended December 31, 2003, 700 shares of 8% redeemable
convertible preferred stock were converted into 4,666,667 shares of common
stock.
During the three months ended December 31, 2003, 7,496,436 shares of common
stock were issued for the exercise of warrants.
During the three months ended December 31, 2002, 198,864 shares of common stock
were issued for interest on long-term debt.
During the three months ended December 31, 2002, 1,639,133 shares of Series A, B
and C convertible preferred stock were converted into 17,701,101 shares of
common stock.
During the three months ended December 31, 2003, 5 shares of Series B preferred
stock were issued as payment of a preferred stock dividend of $14.
Fair value of equity instrument recorded in connection with financial
advisors Settlement Agreement $520,000
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 quarter of FY2004, 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. Through its wholly owned subsidiary, BJR Security,
Inc. (`BJR"), the Company provides specialized contraband detection and
education services.
On December 16, 2003, the Company sold the business and net assets,
excluding cash, of its wholly owned subsidiary, United States Drug Testing
Laboratories, Inc. ("USDTL"), which operated a certified laboratory and
provided specialized drug testing services primarily utilizing hair and
meconium as the samples. Therefore, USDTL is considered a discontinued
operation and this report reflects the continued operations of the Company.
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,
2003 are not necessarily indicative of the results that may be expected for
the full fiscal year ending September 30, 2004. 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, 2003.
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, 2003 of $1,147,182. The
Company raised net proceeds aggregating approximately $2,283,000 during the
fiscal year ended September 30, 2003 from the sale of stock and warrants.
In addition, the Company received net proceeds of approximately $955,000
from the issuance and conversion of long-term convertible notes payable
into common stock and net proceeds of $581,000 from the sale of redeemable
convertible preferred stock. No capital was raised during the quarter ended
December 31, 2003. The Company is working with placement agents and
investment fund mangers to obtain additional equity financing. Based upon
cash flow projections, the Company believes the anticipated cash flow from
operations and most importantly, the expected net 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, 2003, inventories consist of the following:
Raw Materials $307,272
Work-in-Process 85,165
Finished Goods 25,570
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Total $417,007
========
3. DISCONTINUED OPERATIONS
On December 16, 2003, the Company consummated a sale of USDTL's
business and net assets, excluding cash. The Company received $500,000 in
cash upon the closing of the sale and is entitled to receive an additional
$500,000 as the buyer of USDTL achieves specified revenue targets. Under
the terms of the sale, the buyer must pay the Company 10% of certain annual
revenues in excess of $1,500,000, less any amounts due from the Company for
the purchase of services from the buyer. The Company recorded the $500,000
received in the first quarter of FY2004. Due to the contingent nature of
the additional $500,000, the payments will be recorded as they are
received. The accompanying financial statements reflect USDTL as a
discontinued operation. The following is a summary of the results of
operations for the three months ended December 31, 2003 and 2002:
Three months ended December 31, 2003 2002
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Sales $ 289,501 $ 376,143
Operating expenses 284,223 385,982
Other expense ( 18,066) ( 70)
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Loss from discontinued operations $ ( 12,788) $ (9,909)
=======================================================================
Other income (expense) for the three months ended December 31, 2003
includes the loss from the disposal of USDTL of $17,235.
4. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended December 31,
2003 2002
---------------- ---------------
Customer A $ 133,135 $ 330,364
Customer B * 404,950
*Customer was not in excess of 10% of total sales.
At December 31, 2003, accounts receivable from major customers totaled
approximately $117,000.
5. COMMON AND PREFERRED STOCK
During the quarter ended December 31, 2003, the Company issued
7,496,436 shares of common stock to holders who exercised their warrants on
a cashless exercise basis. In addition, holders converted 700 shares of 8%
convertible preferred stock converted into 4,666,667 shares of the
Company's common stock at a conversion price of $.15 per share. As payment
of the interest due on the long-term notes to Global Capital Funding Group,
LP and various other note holders, the Company issued 696,336 shares of the
Company's common stock.
Preferred stock dividends related to the 8% convertible preferred
stock amounted to $16,110 for the three months ended December 31, 2003. As
of December 31, 2003, the total amount of unpaid and undeclared dividends
was $18,763.
6. GOODWILL
Effective October 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets. Prior to the adoption of SFAS No. 142,
goodwill resulting from the excess of cost over fair value of net assets
acquired was amortized on a straight-line basis over 10 years. 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. The Company will recognize an
impairment of goodwill if undiscounted estimated future operating cash
flows of the acquired business are determined to be less than the carrying
amount of the goodwill. If the Company determines that the goodwill has
been impaired, the measurement of the impairment will be equal to the
excess of the carrying amount of the goodwill over the amount of the fair
value of the asset. If an impairment of goodwill were to occur, the Company
would reflect the impairment through a reduction in the carrying value of
goodwill.
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 for the adoption of SFAS No. 142, 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 year ended September 30, 2003 during the quarter ended
March 31, 2003. No adjustment to the $238,120 balance of goodwill
associated with the BJR acquisition was deemed necessary as of October 1,
2002 or September 30, 2003. During fiscal 2003, the Company pursued the
sale of its USDTL subsidiary and this sale was consummated on December 16,
2003. Based on the sale price, considering only the cash paid at the
closing of $500,000, an additional impairment of goodwill was recorded for
$895,000 as of September 30, 2003.
Since September 30, 2003, no adjustment to $238,120 balance of
goodwill associated with the BJR acquisition was deemed necessary. No
effect on reported net loss due to the cumulative effect of change in
accounting principle and discontinuance of goodwill amortization occurred
for the three months ended December 31, 2003 or 2002.
7. LOSS PER SHARE
The following data show the amounts used in computing earnings per
share:
Three Months Ended December 31, 2003 2002
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Loss from continuing operations before
discontinued operations $( 629,621) $( 998,863)
Less:
Preferred Stock Dividends ( 24,327) ( 14)
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Loss available to common stockholders
from continuing operations before
discontinued operations ( 653,948) ( 998,877)
Add:
Loss from discontinued operations ( 12,788) ( 9,909)
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Net loss available to common
stockholders used in basic and
diluted EPS $( 666,736) $( 1,008,786)
============== ============
Weighted average number of
common shares outstanding 96,093,701 49,959,035
============ =============
Loss per share applicable to common
stockholders before discontinued
operations $( 0.01) $( 0.02)
Impact of discontinued operations - -
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Basic and diluted loss per share
applicable to common stockholders $( 0.01) $( 0.02)
============= =============
8. STOCK OPTIONS
The Company accounts for its 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 complies 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 the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
For the Three Months Ended December 31, 2003 2002
- --------------------------------------------------------------------------------
Loss available to common shareholders $( 666,736) $(1,008,786)
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 ( 58,803) ( 333,380)
--------------- ------------
Pro forma net loss $( 725,539) $(1,342,166)
============== =============
Loss per share:
Basic - as reported $ (.01) $ (.02)
Basic - pro forma (.01) (.03)
Diluted - as reported (.01) (.02)
Diluted - pro forma (.01) (.03)
In determining the pro forma amounts above, the Company estimated the fair value
of each option granted using the Black-Scholes option pricing model with the
following weighted-average assumptions:
December 31 2003 2002
----------- ---------------- ----------------------
Risk free interest rate 2.5% 2.5%
Expected dividend yield - -
Expected lives 5-9 years 5-9 years
Expected volatility 80% 80%
No options were granted for the three months ended December 31, 2003. The
weighted average fair value of options granted during the three months ended
December 31, 2002 was $0.16.
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, 2003 decreased $677,456 or
approximately 45 %, to $820,200 from $1,497,656 for the corresponding period of
the prior year. The change for the three months ended December 31, 2003
primarily reflects the decrease in the volume of sales of its OralScreen(TM)
products mainly resulting from the low level of employee hiring in the United
States and the impact of the decrease in sales staff that occurred as part of
the expense reductions described below under operating expenses.
Operating Expenses
Cost of sales for the three months ended December 31, 2003 were
approximately 65% of sales compared to the cost of sales of approximately 67% of
sales for the three months ended December 31, 2002. The change for the first
quarter of Fiscal 2004 reflects labor and facility rent reductions put in place
during the second half of FY2003.
Selling, general and administrative expenses for the three months ended
December 31, 2003 decreased $ 410,300, or approximately 35%, to $746,736 from
$1,157,036 for the corresponding period of the prior year. The decrease for the
three-month period ended December 31, 2003 primarily reflects the impact of
labor, facility rent and other expense reductions implemented during the last
six months of FY2003. In order to achieve revenue growth, the Company will incur
increased expenses to hire additional direct sales staff and expand marketing
programs during the remainder of FY2004 and beyond.
Research and development expenses for the three months ended December 31,
2003 amounted to $108,155 compared to $273,128 for the three months ended
December 31, 2002. The decrease of $164,973, or approximately 60%, was primarily
attributable to the lower staffing levels that were put in place as part of the
expense reductions implemented during the second half of FY2003. The Company
must continue developing and enhancing its ORALscreen products and therefore,
will most likely incur increased expenses for research and development during
the remainder of FY2004 and beyond.
Other Income and Expense
Interest expense and financing costs were $69,268 for the three months
ended December 31, 2003 compared to $75,553 incurred during the three months
ended December 31, 2002. The decrease resulted primarily from interest expense
on short-term notes.
For the three months ended December 31, 2003, other income amounted to
$8,245 compared to other income of $595 for the three months ended December 31,
2002. The quarter ended December 31, 2003 included approximately $7,000 received
from the Company's life and disability insurance carrier as a result of its
conversion from a mutual insurance company to a stock insurance company.
Discontinued Operations
On December 16, 2003, the Company consummated the sale of the business and
net assets, excluding cash, of its USDTL subsidiary. For the three months ended
December 31, 2003, USDTL had a loss of $12,788 compared to a loss $9,909 for the
corresponding period of the prior year. The change resulted from a loss on the
disposal of USDTL of $17,235 which was offset in part by income from operations
of $4,447 (see Note 3 of the consolidated financial statements).
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $642,409 for the three months ended December 31, 2003, as compared to
net loss of $1,008,772 for the three months ended December 31, 2002. The loss
per share was $.01 per basic and diluted share for the three months ended
December 31, 2003. The loss per share was $.02 per basic and diluted share for
the three months ended December 31, 2002.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2003, the Company had a working capital deficit of
$1,147,182 and cash and cash equivalents of $451,260. Net cash used in operating
activities during the three months ended December 31, 2003 amounted to
$1,032,107 resulting primarily from a net loss of $642,409, an increase in
inventories of $167,079, an increase in prepaid and other current assets of
$38,057, a decrease in accounts payable and accrued expenses of $452,024 and a
decrease in deferred revenue of $1,200; partially offset by the loss from
disposal of discontinued operation of $17,235, depreciation and amortization of
$29,481, amortization of debt discount and deferred financing of $14,484,
amortization of deferred rent expense of $10,397, common stock for interest of
$43,750, a decrease in accounts receivable of $127,090 and a decrease in other
assets of $26,205. Net cash provided by financing and investing activities
during the three months ended December 31, 2003 amounted to $352,448 from
proceeds from the sale of USDTL of $500,000; offset in part by the repayment of
notes payable and long-term debt of $130,607, payment of cash dividend on
preferred stock of $16,110 and purchases of property and equipment of $835.
As indicated in the Results of Operations above, the Company sold the net
assets, excluding cash, and the business of its USDTL subsidiary in December
2003. From this sale, the Company received net proceeds of approximately
$500,000. In addition, under the terms of the sale, the Company expects to
receive an additional $500,000 in the future, less amounts for the purchase of
services by Avitar under a services and consulting agreement, based on
obligations of the purchaser of USDTL to pay the Company 10% of certain revenues
in excess of $1,500,000 annually. The Company recorded the $500,000 received in
the first quarter of FY2004 and will recognize proceeds for the additional
$500,000 when they are received.
During FY 2004, 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 its ORALscreen product line. The
cash available at December 31, 2003 and anticipated customer receipts are
expected to be sufficient to fund the operations of the Company through early
March 2004. As part of the agreement covering the preferred stock sold in
September 2003, the investor agreed to purchase additional preferred stock for
$1,000,000 subject to certain conditions including shareholder approval. The
Company has requested such shareholder approval at a meeting scheduled for
February 27, 2004. Beyond that time, the Company will require significant
additional financing from outside sources to fund its operations. The Company
plans to continue working with placement agents and/or investment fund managers
in order to raise approximately $10 million during the remainder of Fiscal 2004
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 pursue the
development of in-vitro oral fluid diagnostic testing products. However, there
can be no assurance that these financings will be achieved.
The Company has accumulated losses that have reduced shareholders' equity
to a deficit. As a result, the Company received a letter dated January 30, 2004
from The American Stock Exchange ("AMEX" or the "Exchange") noting that the
Company's 2003 Annual Report on Form 10-KSB indicates that the Company is not in
compliance with all the continued listing standards of AMEX. In its letter, the
Exchange indicated that, in order to maintain its AMEX listing, the Company must
submit a plan by March 3, 2004 advising the Exchange of the action that it takes
or will take that will bring it into compliance with the continued listing
standards within 18 months. The Company has advised the Exchange that it will
submit a plan. The Company intends to develop a plan that it believes will be
acceptable to the Exchange within the specified time period addressing among
other things new equity raising activities, debt/capitalization restructuring,
operating goals and financial projections. The proposed plan will be subject to
review by the Exchange and the Exchange will determine whether the proposed plan
is reasonable and acceptable. Upon acceptance of the plan by AMEX, the Company
will be subject to continued review until it regains full compliance with the
continued listing standards.
Operating revenues are expected to remain at the current levels for the
first half of FY 2004 and then begin to grow as employment begins to rise in the
United States and the Company is able to convert employers to using ORALscreen,
Avitar's oral fluid drug testing products. In order to achieve the revenue
growth, the Company will need to significantly increase its direct sales force
and implement an expanded, targeted marketing program. ORALscreen, as an instant
on-site diagnostic test, is part of the fastest growing segment of the
diagnostic test market. Inventories are currently at appropriate levels for
anticipated sales volumes and the Company, with its production capacity and the
arrangements with its current contract manufacturing sources, expects to be able
to maintain inventories at optimal levels. 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. Furthermore, there can
be no assurance that the Company will have sufficient resources to achieve the
growth in revenue while maintaining the cost reductions implemented in Fiscal
2003. 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 2003 contains an explanatory
paragraph indicating that there is 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 (December 5, 2003
except for Note 17 which is as of December 16, 2003). 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
In November 2002, the Emerging Issues Task Force ("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 is effective for periods beginning after June 15, 2003.
The adoption of EITF 00-21 did not 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 did not 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 July 1, 2003. The adoption of SFAS No. 150 did not 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 December 31, 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 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2003 the Company issued to warrant
holders 7,496,436 shares of the Company's common stock upon the cashless
exercise of their warrants. In addition, the Company issued to holders of the 8%
redeemable convertible preferred stock 4,666,667 shares of the Company's common
stock upon the conversion of 700 shares of their preferred stock. Also during
the quarter ended December 31, 2003, the Company issued 696,336 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 because the issuances were made to accredited investors in
private placements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 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:
Form 8-K, Items 5 and 7, dated October 1, 2003 regarding a private
placement to Gryphon Master Fund, LP for the sale of convertible preferred stock
and warrants.
Form 8-K, Items 2, 5 and 7, dated December 17, 2003 and Form-8KA, Items
2 and 7 dated December 31, 2003 regarding the sale of substantially all of the
assets of USDTL, a wholly owned subsidiary of the Company.
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 13, 2004 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: February 13, 2004 /S/ J.C. Leatherman, Jr.
---------------------------
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
EXHIBIT INDEX
Exhibit No. Document
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002