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, 2004.
[ ] 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.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 06-1174053
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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: 109,181,993
AS OF MAY 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 14
Item 3 Controls and Procedures 18
PART II: OTHER INFORMATION 20
Item 2 Changes in Securities and Small Issuer Purchases of Equity
Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT INDEX 24
CERTIFICATIONS 25
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31
(Unaudited)
- -------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 381,112
Accounts receivable, net 528,881
Inventories 356,813
Prepaid expenses and other current assets 120,496
------------
Total current assets 1,387,302
PROPERTY AND EQUIPMENT, net 186,654
GOODWILL, net 238,120
OTHER ASSETS 309,239
------------
Total Assets $ 2,121,315
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 226,110
Accounts payable 770,972
Accrued expenses 887,678
Deferred income 211,550
Current portion of long-term debt 5,017
------------
Total current liabilities 2,101,327
LONG-TERM DEBT, LESS CURRENT PORTION 1,230,553
------------
Total liabilities 3,331,880
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Series B, C and D convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 137,963 shares issued and outstanding 1,380
Common Stock, $.01 par value; authorized 200,000,000 shares;
104,877,373 shares issued and outstanding 1,048,774
Additional paid-in capital 47,569,430
Accumulated deficit (49,830,149)
------------
Total stockholders' deficit (1,210,565)
------------
Total Liabilities and Stockholders' Deficit $ 2,121,315
============
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,
--------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
SALES $1,017,190 $ 1,015,019 $ 1,837,390 $ 2,512,675
---------- ----------- ---------- -----------
OPERATING EXPENSES
Cost of sales 684,252 729,389 1,218,159 1,720,786
Selling, general and administrative expenses 748,619 1,007,252 1,495,355 2,164,288
Research and development expenses 119,512 236,683 227,667 509,811
---------- ---------- -----------
-----------
Total operating expenses 1,552,383 1,973,324 2,941,181 4,394,885
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS (535,193) (958,305) (1,103,791) (1,882,210)
---------- ----------- ---------- -----------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (72,414) (128,438) (141,682) (203,991)
Other income (expense), net 4,660 (266) 9,107 329
---------- ---------- -----------
-----------
Total other expense, net (67,754) (128,704) (132,575) (203,662)
---------- ----------- ---------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (602,947) (1,087,009) (1,236,366) (2,085,872)
DISCONTINUED OPERATIONS
Income (loss) from operations of USDTL -- 3,177 4,447 (6,732)
Loss from the disposal of USDTL -- -- (17,235) --
---------- ----------- ---------- -----------
Income (loss) from discontinued operations -- 3,177 (12,788) (6,732)
---------- ----------- ---------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (602,947) (1,083,832) (1,249,154) (2,092,604)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE -- (650,000) -- (650,000)
---------- ----------- ---------- -----------
NET LOSS $ (602,947) $(1,733,832) $(1,249,154) $(2,742,604)
========== =========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED OPERATIONS (Note 7) $ (0.02) $ (0.02) $ (0.02) $ (0.04)
========== =========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE $ $(0.02) $ (0.03) $ (0.02) $ (0.05)
========== =========== ========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 102,438,882 67,938,589 99,248,955 57,721,739
============ =========== =========== ===========
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Six Months Ended March 31, 2004
(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)
Sale of common stock -- -- 14,307 143 2,167 --
Sale of preferred stock and warrants 1,000 10 -- -- 919,990 --
Issuance of common stock for exercise
of warrants -- -- 10,399,214 103,992 (103,992) --
Issuance of common stock for interest on
long-term debt --
Conversion of 8% redeemable convertible
preferred stock into common stock -- -- 4,666,667 46,667 534,333 --
Conversion of Series B redeemable
convertible preferred stock into
common stock (239) (2) 2,390 24 (22) --
Payment of preferred stock dividend for 8%
redemmable convertible preferred stock -- -- -- -- -- (16,110)
Net loss -- -- -- -- -- (1,249,154)
- ------------------------------------------------------- --------- ------------ ----------- ------------ -------------
Balance at March 31, 2004 137,963 $1,380 104,877,373 $1,048,774 $47,569,430 ($49,830,149)
======================================================= ========= ============ =========== ============ -------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
-------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,249,154) $(2,742,604)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from disposal of discontinued operation 17,235 --
Cumulative effect of a change in accounting principle -- 650,000
Depreciation and amortization 58,412 116,948
Amortization of debt discount and deferred financing 28,968 47,615
Amortization of deferred rent expense 41,589 0
Common stock for services -- 60,000
Common stock for interest on long-term debt 87,500 87,500
Changes in operating assets and liabilities:
Accounts receivable (11,320) 330,062
Inventories (106,885) (259,063)
Prepaid expenses and other current assets 7,786 113,182
Other assets 24,705 714
Accounts payable and accrued expenses (943,899) 1,142
Deferred revenue (1,200) 30,500
----------- -----------
Net cash used in operating activities (2,046,263) (1,564,004)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,239) (6,459)
Proceeds from sale of USDTL 500,000 --
----------- -----------
Net cash provided by (used in) investing activities 498,761 (6,459)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, preferred stock and warrants 922,310 132,304
Proceeds from (repayment of) notes payable and long-term debt (108,505) 1,027,967
Payment of cash dividend on 8% redeemable convertible preferred stock (16,110) --
----------- -----------
----------- -----------
Net cash provided by financing activities 797,695 1,160,271
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (749,807) (410,192)
CASH AND CASH EQUIVALENTS, beginning of the period 1,130,919 503,204
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 381,112 $ 93,012
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period:
Income taxes $ -- $ --
Interest $ 8,049 $ 21,303
SIX MONTHS ENDED MARCH 31,
-------------------------------------
2004 2003
-------------------------------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the six months ended March 31, 2004, 926,599 shares of common stock were
issued for interest on long-term debt.
During the six months ended March 31, 2004, 700 shares of 8% redeemable
convertible preferred stock were converted into 4,666,667 shares of common
stock.
During the six months ended March 31, 2004, 10,399,214 shares of common stock
were issued for the exercise of warrants.
During the six months ended March 31, 2004, 239 shares of Series B convertible
preferred stock were converted into 2,390 shares of common stock.
During the six months ended March 31, 2003, 833,246 shares of common stock were
issued for services.
During the six months ended March 31, 2003, 490,627 shares of common stock were
issued for interest on long-term debt.
During the six months ended March 31, 2003, 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 six months ended March 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 half 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 and six month periods ended March
31, 2004 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 March 31, 2004 of $714,025. 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. For the six months ended March 31, 2004, the
Company raised net proceeds aggregating approximately $922,000 from the
sale of stock and warrants. 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 March 31, 2004, inventories consisted of the following:
Raw Materials $267,105
Work-in-Process 50,045
Finished Goods 39,663
----------
Total $356,813
========
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 of USDTL for the three and six months ended March 31, 2004 and
2003.
Three Months Ended March 31, Six Months Ended March 31,
2004 2003 2004 2003
------------ ------------ -------------- -------------
Sales $ -- $ 400,454 $ 289,501 $776,597
Operating expenses -- 396,837 284,223 782,819
Other income (expense) -- (440) (18,066) (510)
----------------------------------------------------------------------------------------------------
Loss from discontinued operations $ -- $ 3,177 $ ( 12,788) $ (6,732)
---------------------------------------------------------------------------------------------------
Other income (expense) for the six months ended March 31, 2004
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 March 31, Six Months Ended March 31,
2004 2003 2004 2003
---------------- -------------- --------------- ----------------
Customer A $269,088 $ 183,332 $402,223 $ 513,697
Customer B * * * 418,790
*Customer was not in excess of 10% of total sales.
At September March 31, 2004, accounts receivable from major customers
totaled approximately $221,000.
5. COMMON AND PREFERRED STOCK
During the six months ended March 31, 2004, the Company issued
10,399,214 shares of common stock to holders who exercised their warrants
on a cashless exercise basis. In addition, the Company sold 14,307 shares
of the Company's common stock. 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 926,599 shares of the Company's common stock.
In March 2004, the Company sold 1,000 shares of 6% Convertible
Preferred Stock and Warrants to purchase 4,629,630 shares of common stock
for which it received net proceeds of approximately $920,000. The 6%
Convertible Preferred Stock, with a face value of $1,000,000, is
convertible into common stock at $0.216 per share, subject to adjustments,
and the Warrants are exercisable at $0.135 per share. The warrants issued
in connection with this preferred stock and the conversion feature resulted
in a deemed dividend of $1,000,000 being recorded and included in the
earnings per share calculation for the three and six months ended March 31,
2004. During the six months ended March 31, 2004, holders converted 700
shares of 8% Convertible Preferred Stock converted into 4,666,667 shares of
common stock at a conversion price of $0.15 per share. In addition, 239
shares of Series B Convertible Preferred Stock were converted into 2,390
shares of common stock.
Preferred stock dividends related to the Series B, 8% and 6%
Convertible Preferred Stock amounted to $43,510 for the six months ended
March 31, 2004. As of March 31, 2004, the total amount of unpaid and
undeclared dividends was $34,001.
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 the $238,120 balance of
goodwill associated with the BJR acquisition was deemed necessary. 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, 2004 2003
------------------------------------------------------------------------------------------------
Loss available to common shareholders
used in basic and diluted EPS (Note 7) $(2,292,664) $(2,743,458)
Cumulative effect of change in accounting
principle -- 650,000
----------- ----------
Adjusted net loss before cumulative effect
of change in accounting principle $(2,292,664) $(2,093,458)
=========== ============
Basic and diluted earnings per share as reported $(.02) $(.05)
Cumulative effect of change in accounting
principle -- .01
----------- ------------
Basic and diluted earnings per share before
cumulative effect of change in accounting
principle $(.02) $(.04)
======== ========
7. LOSS PER SHARE
The following data show the amounts used in computing earnings per
share:
Three Months Six Months
Ended March 31, Ended March 31,
------------------------ ---------------------------
2004 2003 2004 2003
---------- ------------ ----------- ------------
Loss from continuing operations
before discontinued operations
and cumulative effect of a
change in accounting principle $ (602,947) $(1,087,009) $(1,236,366) $(2,085,872)
Less:
Preferred Stock Dividends (19,183) (406) (43,510) (854)
Deemed dividends in connection
with 6% preferred stock sales (1,000,000) -- (1,000,000) --
---------- ------------ ----------- -----------
Loss available to common stockholders
from continuing operations before
discontinued operations and
cumulative effect of a change
in accounting principle (1,622,130) (1,087,415) (2,279,876) (2,086,726)
Add:
Income (loss) from discontinued
operation -- 3,177 (12,788) (6,732)
Cumulative effect of a change in
accounting principle -- (650,000) -- (650,000)
---------- ------------ ----------- -----------
Net loss available to common
stockholders used in basic and
diluted EPS $ (1,622,130) $(1,734,238) $(2,292,664) $(2,743,458)
============= ============ ============ ===========
Weighted average number of
common shares outstanding 102,438,882 67,938,589 99,248,955 57,721,739
============ ============= ============ ===========
Loss per share applicable to
common stockholders before discontinued
operations and cumulative effect of a
change in accounting principle $ (0.02) $ (0.02) $ (0.02) $ (0.04)
Impact of discontinued operations -- -- -- --
Impact of cumulative effect -- (0.01) --- (0.01)
------------ ------------- -------------- ----------
Basic and diluted loss per share
applicable to common
stockholders $( 0.02) $( 0.03) $( 0.02) $( 0.05)
================ ============= ============= ============
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.
Three Months Ended March 31, Six Months Ended March 31,
2004 2003 2004 2003
-------------- --------------- ----------------- -----------------
Loss available to common shareholders $(1,622,130) $(1,734,238) $ (2,292,664) $ (2,743,458)
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) (258,534) (117,606) (591,914)
----------- ----------- ------------ ------------
Pro forma net loss $(1,689,933) $(1,992,772) $ (2,410,270) $ (3,335,372)
=========== =========== ============ ============
Loss per share:
Basic - as reported $ (.02) $ (.03) $ (.02) $ (.05)
Basic - pro forma (.02) (.03) (.02) (.06)
Diluted - as reported (.02) (.03) (.02) (.05)
Diluted - pro forma (.02) (.03) (.02) (.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,
2004 2003
------------------ --------------
Risk free interest rate 2.5 % 2.5%
Expected dividend yield -- --
Expected lives 5-9 years 5-9 years
Expected volatility 80% 80%
The weighted average fair value of options granted for the three and six
months ended March 31, 2004 was $0.24. The weighted average fair value of
options granted for the three and six months ended March 31, 2003 was $0.19
and $0.17, respectively.
8. ACCRUED EXPENSES
The amount for accrued expenses reflects a reduction to accrued
royalty expense of approximately $242,000 due to management's revision of
estimates of amounts due to a former supplier under a development
agreement.
9. SUBSEQUENT EVENTS
Since March 31, 2004, holders of Series D Convertible Preferred stock
converted 93,333 shares of preferred stock into 2,799,990 shares of the
common stock. In addition, the Company issued 1,504,630 shares of the
common stock to a holder who exercised warrants on a cashless basis.
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 March 31, 2004 increased $2,171 to
$1,017,190 from $1,015,019 for the corresponding period of the prior year.
For the six months ended March 31, 2004, sales decreased $675,285 to
$1,837,390 from $2,512,675. The change for the six months ended March 31,
2004 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 March 31, 2004 were
approximately 67% of sales compared to the cost of sales of approximately
72% of sales for the three months ended March 31, 2003. For the six months
ended March 31, 2004, the cost of sales were 66% compared to 68% of sales
for the same period of Fiscal 2003.The change for the first half 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 March 31, 2004 decreased $ 258,633, or approximately 26%, to $748,619
from $1,007,252 for the corresponding period of the prior year. For the six
months ended March 31, 2004, selling, general and administrative expenses
decreased $668,933 or approximately 31%, to 1,495,355 from $2,164,288 for
the six months ended March 31, 2003. The decrease for the three months
ended March 31, 2004 primarily reflects the impact of labor, facility rent
and other expense reductions implemented during the last six months of
FY2003 of approximately $196,000 and reductions in accrued royalty expenses
of approximately $242,000 due to managements revision of estimates of
amounts due to a former supplier under a product development agreement;
offset in part by increases in accrued legal, warranty and special
shareholder meeting expenses totaling approximately $179,000. The change
for the six months ended March 31, 2004 mainly includes the impact of
labor, facility rent and other expense reductions implemented during the
last six months of FY2003 of approximately $606,000 and the reduction in
accrued royalty expenses of approximately $242,000 described above; offset
in part by increases in accrued legal, warranty and special shareholder
meeting expenses totaling approximately $179,000. 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.
Expenses for research and development for the three months ended March
31, 2004 amounted to $119,512 compared to $236,683 for the corresponding
period of the prior year, a reduction of $117,171. For the six months ended
March 31, 2004, expenses for research and development were $227,667 versus
$509,811 for the six months ended March 31, 2003, a reduction of $282,144.
The decreases for the three and six months were 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 $72,414 for the three months
ended March 31, 2004 compared to $128,438 incurred during the three months
ended March 31, 2003. For the six months ended March 31, 2004, interest
expense and financing costs amounted to $141,682 versus $203,991 for the
corresponding period of Fiscal 2003. The decrease resulted primarily from
interest expense and financing costs associated with long-term notes issued
in February 2003 and subsequently converted to common stock in August 2003.
For the three months ended March 31, 2004, other income amounted to
$4,660 compared to other expense of $266 for the three months ended March
31, 2003. Other income for the six months ended March 31, 2004 was $9,107
compared to $329 for the six months ended March 31, 2003. The three and six
months ended March 31, 2004 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 March 31, 2004, no income was recorded for USDTL compared to
income of $3,177 for the corresponding period of the prior year. For the
six months ended March 31, 2004, the loss was $12,788 compared to a loss of
$6,732 for the six months ended March 31, 2003. The change for the six
months ended March 31, 2004 resulted primarily from the 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).
Cumulative Effect of a Change in Accounting Principle
For the six months 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 6 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 $602,947 for the three months ended March 31, 2004, as
compared to net loss of $1,733,832 for the three months ended March 31,
2003. For the six months ended March 31, 2004, the Company had a net loss
of $1,249,154 versus $2,742,604 for the corresponding period of Fiscal
2003. The loss per share was $.02 per basic and diluted share for the three
months ended March 31, 2004 compared to a loss per share of $.03 per basic
and diluted share for the three months ended March 31, 2003. For the six
months ended March 31, 2004, the loss per share was $.02 per basic and
diluted share versus a loss per share of $.05 per basic and diluted share
for the six months ended March 31, 2003.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2004, the Company had a working capital deficit of
$714,025 and cash and cash equivalents of $381,112. Net cash used in
operating activities during the six months ended March 31, 2004 amounted to
$2,046,263 resulting primarily from a net loss of $1,249,154, an increase
in accounts receivable of $11,320, an increase in inventories of $106,885,
a decrease in accounts payable and accrued expenses of $943,899 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 $58,412, amortization of debt discount and deferred
financing of $28,968, amortization of deferred rent expense of $41,589,
common stock for interest of $87,500, a decrease in prepaid expenses and
other current assets of $7,786 and a decrease in other assets of $24,705.
Net cash provided by financing and investing activities during the six
months ended March 31, 2004 amounted to $1,296,456 from proceeds from the
sale of USDTL of $500,000 and the sale of stock and warrants of $922,300;
offset in part by the repayment of notes payable and long-term debt of
$108,495, payment of cash dividend on preferred stock of $16,110 and
purchases of property and equipment of $1,239.
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. In March 2004, the Company, as part of the agreement covering
the preferred stock sold in September 2003, sold 1,000 shares of 6%
Convertible Preferred Stock and Warrants to purchase 4,629,630 shares of
Common Stock for which it received net proceeds of approximately $920,000.
The 6% Convertible Preferred Stock, with a face value of $1,000,000, is
convertible into Common Stock at $0.216 per share, subject to adjustments,
and the Warrants are exercisable at $0.135 per share. The warrants issued
in connection with this preferred stock and the conversion feature resulted
in a deemed dividend of $1,000,000 being recorded and included in the
earnings per share calculation for the three and six months ended March 31,
2004. The cash available at March 31, 2004 and anticipated customer
receipts are expected to be sufficient to fund the operations of the
Company through May 2004. Beyond that time, the Company will require
significant additional financing from outside sources to fund its
operations. The Company plans to continuing 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, as previously reported, 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 submitted its plan. On March 17,
2004, the Exchange notified the Company that it had accepted Avitar's plan,
which will enable the Company to maintain its listing on the American Stock
Exchange. More specifically, the Exchange granted the Company an extension
through July 2005 subject to periodic reviews by the Exchange to assure
that Avitar is making progress consistent with the plan.
Operating revenues are expected to grow during the last half of FY 2004 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 stating substantial doubt about the Company's
ability to continue as a going concern. Such report states that the
ultimate outcome of this matter could not be determined as the date of such
report (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 March 2004, the Financial Accounting Standards Board ("FASB")
issued a proposed Statement, "Share-Based Payment", that addresses the
accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. The proposed statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No.
25, "Accounting for Stock Issued to Employees", and would generally require
that such transactions be accounted for using a fair value-based method. As
discussed in Note 4, the Company currently accounts for share-based
compensation transactions using APB Opinion No. 25. If this statement is
issued, the adoption of this interpretation will have an impact on the
Company's consolidated financial position and results of operations, the
level of which the Company is currently assessing.
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 March 31, 2004, 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 SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
During the quarter ended March 31, 2004 the Company issued to warrant
holders 2,902,778 shares of the Company's common stock upon the cashless
exercise of their warrants. In addition, the Company issued to a holder of
the Series B redeemable convertible preferred stock 2,390 shares of the
Company's common stock upon the conversion of 239 shares of his preferred
stock. Also during the quarter ended March 31, 2004, the Company issued
230,263 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders was held on February 27, 2004 to
approve the issuance of the maximum number of shares of the Company's
common stock that would be issuable or issued in connection with various
financing proposals. The tabulation of votes for all matters was as
follows:
For Against Abstain
------------ ------------- ----------
Proposal No. 1-Ratification and approval
of the issuance of the maximum number of
shares of the Company's common stock
issued or issuable in connection with the
first closing of the September 2003 Private
Placement. 51,420,727 5,557,166 93,170
Proposal No. 2-Ratification and approval
of the issuance of the maximum number of
shares of the Company's common stock
issued or issuable in connection with the
second closing of the September 2003 Private
Placement. 51,278,540 5,609,078 183,445
Proposal No. 3-Approval of the issuance of
the maximum number of shares of the
Company's common stock issued or issuable
in connection with the New Financing. 51,374,285 5,607,078 89,700
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 March 9, 2004 regarding a private placement
to Gryphon Master Fund, LP for the sale of convertible preferred stock and
warrants.
Form 8-K, Items 5 and 7, dated March 25, 2004 regarding the acceptance by
The American Stock Exchange ("AMEX") of a plan submitted by the Company to
regain full compliance with the continued listing standards of AMEX by July
2005.
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 17, 2004 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 17, 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