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, 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
------------------------------------------------
Avitar, Inc.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 06-1174053
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
65 Dan Road, Canton, Massachusetts 02021
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 821-2440
------------------------------------------------------------------------------
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [x]Yes [ ]No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK: 120,509,917
AS OF AUGUST 10, 2004
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 29 pages
Exhibit Index is on Page 25
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 15
Item 3 Controls and Procedures 20
PART II: OTHER INFORMATION 21
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Small Issuer Purchases
of Equity Securities 22
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 24
EXHIBIT INDEX 25
CERTIFICATIONS 26
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc and Subsidiaries
Consolidated Balance Sheet
June 30
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 396,489
Accounts receivable, net 455,804
Inventories 387,786
Prepaid expenses and other current assets 114,149
----------
Total current assets $1,354,228
PROPERTY AND EQUIPMENT, net 297,856
GOODWILL, net 238,120
OTHER ASSETS 213,381
----------
Total Assets $2,103,585
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $161,439
Accounts payable 720,287
Accrued expenses 930,469
Deferred income 209,150
Current portion of long-term debt 2,897
----------
Total current liabilities 2,024,242
LONG TERM LIABILITIES -
----------
Total liabilities 2,024,242
----------
REDEEMABLE CONVERTIBLE PREFERRED STOCK 1,316,000
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Series B, C and D convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 45,630 shares issued and outstanding 457
Common Stock, $.01 par value; authorized 200,000,000 shares;
109,404,794 shares issued and outstanding 1,094,048
Additional paid-in capital 48,365,815
Accumulated deficit (50,696,977)
------------
Total stockholders' deficit (1,236,657)
------------
Total Liabilities and Stockholders' Deficit $2,103,585
============
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,
--------------------------------- ----------------------------
2004 2003 2004 2003
--------------------------------- ---------------------------
SALES $967,292 $995,511 $2,804,682 $3,508,186
------------- ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 630,152 961,042 1,848,311 2,681,828
Selling, general and administrative expenses 864,027 787,628 2,359,382 2,951,916
Research and development expenses 157,971 154,088 385,638 663,899
------------- ------------ ------------
------------
Total operating expenses 1,652,150 1,902,758 4,593,331 6,297,643
------------- ------------ ------------ ------------
LOSS FROM OPERATIONS (684,858) (907,247) (1,788,649) (2,789,457)
------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (182,619) (193,155) (324,301) (397,146)
Other income (expense), net 649 14,225 9,756 14,554
------------- ------------ ------------
------------
Total other expense, net (181,970) (178,930) (314,545) (382,592)
------------- ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE (866,828) (1,086,177) (2,103,194) (3,172,049)
------------- ------------ ------------ ------------
DISCONTINUED OPERATIONS
Income from operations of USDTL - 25,648 4,447 18,916
Loss from the disposal of USDTL - - (17,235) -
------------- ------------ ------------ ------------
Income (loss) from discontinued operations - 25,648 (12,788) 18,916
------------- ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (866,828) (1,060,529) (2,115,982) (3,153,133)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE - - - (650,000)
------------- ------------ ------------ ------------
NET LOSS $ (866,828) $(1,060,529) $(2,115,982) $(3,803,133)
============= ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED OPERATIONS (Note 7) $(0.01) $(0.02) $(0.04) $(0.05)
============= ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $(0.01) $(0.02) $(0.04) $(0.06)
============= ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 108,821,108 73,130,567 102,419,332 63,228,778
============= ============ ============ ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Nine Months Ended June 30, 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 2,000 20 - - 1,733,980 -
Issuance of common stock for exercise
of warrants - - 11,903,844 119,038 (119,038) -
Issuance of common stock for interest on
long-term debt - - 1,149,400 11,494 147,515 -
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) -
Conversion of Series D redeemable
convertible preferred stock into
common stock (93,333) (933) 2,799,990 28,000 (27,067)
Payment of preferred stock dividend for 8%
redemmable convertible preferred stock - - - - - (16,110)
Net loss - - - - - (2,115,982)
- ----------------------------------------------------- ---------- ----------------- ------------- -------------- -------------
Balance at June 30, 2004 45,630 $457 109,404,794 $1,094,048 $48,365,815 ($50,966,519)
- ----------------------------------------------------- ---------- ----------------- ------------- -------------- -------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED JUNE 30,
------------------------------------
2004 2003
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,115,982) $(3,803,133)
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 86,810 143,432
Amortization of debt discount and deferred financing 101,084 124,822
Amortization of deferred rent expense 72,780 -
Common stock for services - 60,000
Common stock for interest on long-term debt 114,236 131,250
Loss on extinguishment of long-term debt 66,000 -
Changes in operating assets and liabilities:
Accounts receivable 61,757 690,249
Inventories (137,858) 184,474
Prepaid expenses and other current assets 14,132 47,515
Other assets 36,007 (160,003)
Accounts payable and accrued expenses (945,534) 13,827
Deferred revenue (3,600) 187,400
------------- ------------------
Net cash used in operating activities (2,632,933) (1,730,167)
------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (136,901) (8,559)
Proceeds from sale of USDTL 500,000 -
------------- ------------------
Net cash provided by (used in) investing activities 363,099 (8,559)
------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, preferred stock and warrants 1,736,310 340,180
Exercise of warrants - 128,813
Proceeds from (repayment of) notes payable and long-term debt (184,796) 947,623
Payment of cash dividend on 8% redeemable convertible preferred stock (16,110) -
------------- ------------------
Net cash provided by financing activities 1,535,404 1,416,616
------------- ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (734,430) (322,110)
CASH AND CASH EQUIVALENTS, beginning of the period 1,130,919 503,204
------------- ------------------
CASH AND CASH EQUIVALENTS, end of the period $396,489 $181,094
============= ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period:
Income taxes $- $-
Interest $9,347 $33,786
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the nine months ended June 30, 2004, 1,149,400 shares of common stock
were issued for interest on long-term debt.
During the nine months ended June 30, 2004, 700 shares of 8% redeemable
convertible preferred stock were converted into 4,666,667 shares of common
stock.
During the nine months ended June 30, 2004, 11,903,844 shares of common stock
were issued for the exercise of warrants.
During the nine months ended June 30, 2004, 239 shares of Series B convertible
preferred stock were converted into 2,390 shares of common stock.
During the nine months ended June 30, 2004, 93,333 shares of Series D
convertible preferred stock were converted into 2,799,990 shares of common
stock.
During the nine months ended June 30, 2003, 833,246 shares of common stock were
issued for services.
During the nine months ended June 30, 2003, 751,049 shares of common stock were
issued for interest on long-term debt.
During the nine months ended June 30, 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 nine months ended June 30, 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 nine months 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 nine month periods ended June
30, 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 June 30, 2004 of $670,014. 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 nine months ended June 30, 2004, the
Company raised net proceeds aggregating approximately $1,736,000 from the
sale of stock and warrants and converted $1,250,000 of long term debt into
preferred stock (see Notes 5 and 6). 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 June 30, 2004, inventories consisted of the following:
Raw Materials $218,710
Work-in-Process 57,254
Finished Goods 111,822
--------
Total $387,786
========
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 nine months ended June 30, 2004 and
2003.
Three Months Nine Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
-------- ------------ -------------- -------------
Sales $ - $ 429,023 $ 289,501 $1,205,620
Operating expenses - 399,586 284,223 1,182,405
Other income (expense) - (3,789) (18,066) (4,299)
-------------------------------------------------------------------------------------------------
Income (loss) from discontinued
operations $ - $ 25,648 $ (12,788) $ 18,916
----------------------------------------------------------------------------------------------
Other income (expense) for the nine months ended June 30, 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 June 30, Nine Months Ended June 30,
2004 2003 2004 2003
------------- ------------ ---------- ---------------
Customer A $226,050 $ 221,226 $628,273 $ 734,923
Customer B * * * 418,790
*Customer was not in excess of 10% of total sales.
At June 30, 2004, accounts receivable from major Customer A totaled
approximately $151,430.
5. LONG-TERM DEBT AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 2004, the Company converted a long-term note of $1,250,000 with a
maturity date of August 2005 into 1,316 shares of Series A Convertible
Redeemable Preferred Stock. The Series A Convertible Redeemable Preferred
Stock, with a face value of $1,316,000, is convertible into common stock at
the lesser of $.12 per share or 85% of the average of the three lowest
closing bid prices, as reported by Bloomberg, for the ten trading days
immediately prior to the notice of conversion subject to adjustments and
floor prices. The conversion feature of these preferred shares resulted in
a deemed dividend of $329,000 being recorded and included in the earnings
per share calculation for the three and nine months ended June 30, 2004. In
addition, $66,000 of interest and financing charges for the loss on
extinguishment of long term debt were recorded during the three and nine
months ended June 30, 2004.
6. COMMON STOCK AND PREFERRED STOCK
During the nine months ended June 30, 2004, the Company issued
11,903,844 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 1,149,400 shares of the Company's common stock.
During May 2004, the Company sold 1,000 shares of Series A Convertible
Preferred Stock and Warrants to purchase 100,000 shares of common stock for
which it received net proceeds of approximately $815,000. The Series A
Convertible Preferred Stock, with a face value of $1,000,000, is
convertible into common stock at the lesser of $.12 per share or 85% of the
average of the three lowest closing bid prices, as reported by Bloomberg,
for the ten trading days immediately prior to the notice of conversion
subject to adjustments and floor prices. The Warrants are exercisable at
$.126 per share. The warrants issued in connection with sale of 1,000
shares of preferred stock and the conversion feature resulted in a deemed
dividend of $257,000 being recorded and included in the earnings per share
calculation for the three and nine months ended June 30, 2004. 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 nine months ended June 30, 2004. During the nine months
ended June 30, 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 and 93,999 shares of Series C Convertible Preferred Stock were
converted into 2,799,990 shares of common stock.
Preferred stock dividends related to the Series A, Series B, 8% and 6%
Convertible Preferred Stock amounted to $81,980 for the nine months ended
June 30, 2004. As of June 30, 2004, the total amount of unpaid and
undeclared dividends was $76,416.
7. 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 available to common shareholders due to the
cumulative effect of change in accounting principle and discontinuance of
goodwill amortization is as follows:
Nine months ended June 30, 2004 2003
------------------------------------------------------------------------------------------
Loss available to common shareholders
used in basic and diluted EPS (Note 8) $(3,796,750) $(3,804,463)
Cumulative effect of change in accounting
principle - 650,000
----------- -----------
Adjusted net loss before cumulative effect
of change in accounting principle $(3,796,750) $(3,154,463)
=========== ===========
Basic and diluted earnings per share as reported $(.04) $(.06)
Cumulative effect of change in accounting
principle - .01
----------- -----------
Basic and diluted earnings per share before
cumulative effect of change in accounting
principle $(.04) $(.05)
======== ========
8. LOSS PER SHARE
The following data show the amounts used in computing earnings per
share:
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Loss from continuing operations
before discontinued operations
and cumulative effect of a
change in accounting principle $ (866,828) $(1,086,177) $(2,115,982) $(3,172,049)
Less:
Preferred Stock Dividends (38,470) (476) (81,980) (1,330)
Deemed dividends in connection
with preferred stock sales (586,000) - (1,586,000) -
------------ ------------ ----------- ----------
Loss available to common stockholders
from continuing operations before
discontinued operations and
cumulative effect of a change
in accounting principle (1,491,298) (1,086,653) (3,783,962) (3,173,379)
Add:
Income (loss) from discontinued
operation - 25,648 (12,788) 18,916
Cumulative effect of a change in
accounting principle - - - (650,000)
------------ ------------ ------------- -----------
Net loss available to common
stockholders used in basic and
diluted EPS $(1,491,298) $(1,061,005) $(3,796,750) $(3,804,463)
============ ============ ============ ============
Weighted average number of
common shares outstanding 108,821,108 73,130,567 102,419,332 63,228,778
=========== ============ ============ ============
Loss per share applicable to common
stockholders before discontinued
operations and cumulative effect of a
change in accounting principle $ (0.01) $ (0.02) $ (0.04) $ (0.05)
Impact of discontinued operations - - - -
Impact of cumulative effect - - - (0.01)
------------ ------------ ------------ ------------
Basic and diluted loss per share
applicable to common
stockholders $ (0.01) $ (0.02) $ (0.04) $ (0.06)
============ ============ ============ ============
9. 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 June 30, Nine Months Ended June 30,
2004 2003 2004 2003
----------- ----------- ------------ ------------
Loss available to common shareholders $(1,491,298) $(1,061,005) $ (3,796,750) $ (3,804,463)
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 (67,005) (295,957) (188,000) (887,871)
----------- ---------- ----------- ------------
Pro forma net loss $(1,558,303) $(1,356,962) $ (3,984,750) $ (4,692,334)
=========== =========== ============ ============
Loss per share:
Basic - as reported $ (.01) $ (.02) $ (.04) $ (.06)
Basic - pro forma (.01) (.02) (.04) (.07)
Diluted - as reported (.01) (.02) (.04) (.06)
Diluted - pro forma (.01) (.02) (.04) (.07)
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,
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 nine
months ended June 30, 2004 was $.11 and $0.15, respectively. The weighted
average fair value of options granted for the nine months ended June 30,
2003 was $0.19.
10. ACCRUED EXPENSES
The amount for accrued expenses for the nine month period ended June
30, 2004 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.
11. SUBSEQUENT EVENTS
Since June 30, 2004, holders of Series A Convertible Preferred stock
converted 925 shares of preferred stock and accrued dividends for such
shares into 11,087,274 shares of common stock. On August 5, 2004, the
Company sold 1,250 shares of Series A Convertible Preferred Stock and
Warrants to purchase 125,000 shares of common stock for which it received
net proceeds of approximately $1,061,000. These shares of Series A
Convertible Preferred Stock, with face value of $1,250,000, are convertible
into common stock at the lesser of $.09 per share or 85% of the average of
the three lowest closing bid prices, as reported by Bloomberg, for the ten
trading days immediately prior to the notice of conversion subject to
adjustments and floor prices. The Warrants are exercisable at $.095 per
share.
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 June 30, 2004 decreased $28,219 to
$967,292 from $995,511 for the corresponding period of the prior year. For the
nine months ended June 30, 2004, sales decreased $701,504 to $2,804,682 from
$3,508,186. The change for the three and nine months ended June 30, 2004
primarily reflects the decrease in the volume of sales of its OralScreen(TM) and
foam products. The reduction for the ORALscreen products resulted 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 June 30, 2004 were approximately
65% of sales compared to the cost of sales of approximately 96% of sales for the
three months ended June 30, 2003. For the nine months ended June 30, 2004, the
cost of sales were 66% compared to 76% of sales for the same period of Fiscal
2003. The amount for the quarter ended June 30, 2003 included a charge of
approximately $125,000 for expired inventory. The change for the three and nine
months ended June 30, 2004 reflects labor and facility rent reductions put in
place during the second half of FY2003 and no charges for expired inventory.
Selling, general and administrative expenses for the three months ended
June 30, 2004 increased $ 76,399, or approximately 10%, to $864,027 from
$787,628 for the corresponding period of the prior year. For the nine months
ended June 30, 2004, selling, general and administrative expenses decreased
$592,524 or approximately 20%, to $2,359,382 from $2,951,916 for the nine months
ended June 30, 2003. The change for the quarter ended June 30, 2004 resulted
mainly from increased sales, marketing, legal and accounting expenses of
totaling approximately $80,000; offset in part by a reduction of $10,000 in rent
expense. The decrease for the nine months ended June 30, 2004 primarily reflects
the impact of labor, facility rent and other expense reductions implemented
during the last six months of FY2003 of approximately $606,000 and reductions in
accrued royalty expenses of approximately $242,000 due to management's 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 $213,000 and increases in
sales and marketing expenses of approximately $36,000. In order to achieve
revenue growth, the Company will continue to 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 June 30,
2004 amounted to $157,971 compared to $154,048 for the corresponding period of
the prior year. For the nine months ended June 30, 2004, expenses for research
and development were $385,638 versus $663,899 for the nine months ended June 30,
2003, a reduction of $278,261. The decrease for the nine months ended June 30,
2004 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 $182,619 for the three months
ended June 30, 2004 compared to $193,155 incurred during the three months ended
June 30, 2003. For the nine months ended June 30, 2004, interest expense and
financing costs amounted to $324,301 versus $397,146 for the corresponding
period of Fiscal 2003. The change for both the three and nine months periods
resulted primarily from non-cash interest expense of approximately $66,000
associated with the loss on the extinguishment of debt related to issuance of
preferred stock in May 2004 in connection with the conversion of a long-term
note of $1,250,000 with a maturity date of August 2005 and the write-off of the
remaining deferred financing costs and original issue discount related to this
long-term note of approximately $71,000; offset by the decrease in 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 June 30, 2004, other income amounted to $649
compared to other income of $14,225 for the three months ended June 30, 2003.
Other income for the nine months ended June 30, 2004 was $9,756 compared to
$14,554 for the nine months ended June 30, 2003.
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
June 30, 2004, no income was recorded for USDTL compared to income of $25,648
for the corresponding period of the prior year. For the nine months ended June
30, 2004, the loss was $12,788 compared to income of $18,916 for the nine months
ended June 30, 2003. The change for the nine months ended June 30, 2004, which
included only two months of operations in the Fiscal 2004 period due to the
sale, 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 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 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 $866,828 for the three months ended June 30, 2004, as compared to net
loss of $1,060,529 for the three months ended June 30, 2003. For the nine months
ended June 30, 2004, the Company had a net loss of $2,115,982 versus $3,803,133
for the corresponding period of Fiscal 2003. The loss per share was $.01 per
basic and diluted share for the three months ended June 30, 2004 compared to a
loss per share of $.02 per basic and diluted share for the three months ended
June 30, 2003. For the nine months ended June 30, 2004, the loss per share was
$.03 per basic and diluted share versus a loss per share of $.06 per basic and
diluted share for the nine months ended June 30, 2003.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2004, the Company had a working capital deficit of $670,014 and
cash and cash equivalents of $396,489. Net cash used in operating activities
during the nine months ended June 30, 2004 amounted to $2,632,933 resulting
primarily from a net loss of $2,115,982, an increase in inventories of $137,858,
a decrease in accounts payable and accrued expenses of $945,534 and a decrease
in deferred revenue of $3,600; partially offset by the loss from disposal of
discontinued operation of $17,235, depreciation and amortization of $86,810,
amortization of debt discount and deferred financing of $101,084, amortization
of deferred rent expense of $72,780, common stock for interest of $114,236,
interest expense associated with the extinguishment of long-term debt of
$66,000, a decrease in accounts receivable of $61,757, a decrease in prepaid
expenses and other current assets of $14,132 and a decrease in other assets of
$36,007. Net cash provided by financing and investing activities during the nine
months ended June 30, 2004 amounted to $1,898,503 resulting from proceeds from
the sale of USDTL of $500,000 and the sale of stock and warrants of $1,736,310;
offset in part by the repayment of notes payable and long-term debt of $184,796,
payment of cash dividend on preferred stock of $16,110 and purchases of property
and equipment of $136,901.
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. On
August 5, 2004, the Company sold 1,250 shares of Series A Convertible Preferred
Stock and Warrants to purchase 125,000 shares of common stock for which it
received net proceeds of approximately $1,061,000. These shares of Series A
Convertible Preferred Stock, with face value of $1,250,000, are convertible into
common stock at the lesser of $.09 per share or 85% of the average of the three
lowest closing bid prices, as reported by Bloomberg, for the ten trading days
immediately prior to the notice of conversion subject to adjustments and floor
prices. The Warrants are exercisable at $.095 per share. During May 2004, the
Company sold 1,000 shares of Series A Convertible Preferred Stock and Warrants
to purchase 100,000 shares of common stock for which it received net proceeds of
approximately $815,000. The Series A Convertible Preferred Stock, with a face
value of $1,000,000, is convertible into common stock at the lesser of $.12 per
share or 85% of the average of the three lowest closing bid prices, as reported
by Bloomberg, for the ten trading days immediately prior to the notice of
conversion subject to adjustments and floor prices. The Warrants are exercisable
at $.126 per share. The warrants issued in connection with sale of 1,000 shares
of preferred stock and the conversion feature resulted in a deemed dividend of
$257,000 being recorded and included in the earnings per share calculation for
the three and nine months ended June 30, 2004. In May 2004, the Company
converted a long-term note of $1,250,000 with a maturity date of August 2005
into 1,316 shares of Series A Convertible Redeemable Preferred Stock. The Series
A Convertible Redeemable Preferred Stock, with a face value of $1,316,000, is
convertible into common stock at the lesser of $.12 per share or 85% of the
average of the three lowest closing bid prices, as reported by Bloomberg, for
the ten trading days immediately prior to the notice of conversion subject to
adjustments and floor prices. The conversion feature of these preferred shares
resulted in a deemed dividend of $329,000 being recorded and included in the
earnings per share calculation for the three and nine months ended June 30,
2004. In addition, $66,000 of interest and financing charges for the loss on
extinguishment of long term debt were recorded during the three and nine months
ended June 30, 2004. 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 nine months ended June 30, 2004. The cash available at June 30, 2004, the
net proceeds from the financing completed on August 5, 2004 and anticipated
customer receipts are expected to be sufficient to fund the operations of the
Company through November 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 $8 million during the remainder of
calendar year 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 quarter 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 June 30, 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 1 LEGAL PROCEEDINGS
In June 2004, the Circuit Court of the 19th Judicial Circuit in Lake
County, Illinois dismissed with prejudice the complaint filed by Virotek LLC
("Virotek") against Avitar on November 6, 2003, seeking approximately $4 million
in damages for repudiation of an alleged agreement. The dismissal followed a
settlement reached by the parties under which Virotek permanently discontinued
its lawsuit in return for Avitar's payment of $47,500 for the purchase of a
production tool valued at $50,000 in an earlier Avitar-Virotek agreement.
ITEM 2. CHANGE IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
During the quarter ended June 30, 2004 the Company issued to warrant
holders 1,504,630 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 D redeemable convertible preferred stock 2,799,990 shares of the
Company's common stock upon the conversion of 93,333 shares of its preferred
stock. Also during the quarter ended June 30, 2004, the Company issued 222,801
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 May 25, 2004 regarding a private placement
to GCA Strategic Investment Fund Limited and Global Capital Funding Group, L.P.
for the sale of convertible preferred stock and warrants and the conversion of
long-term debt into convertible preferred stock.
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 18, 2004 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 18, 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