U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB/A-2
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 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: 150,991,344
As of February 11, 2005
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 25 pages
Exhibit Index is on Page 21
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION 3
Item 1 Consolidated Financial Statements
Balance Sheet 4
Statements of Operations 5
Statement of Stockholders' Deficit 6
Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 13
Item 3 Controls and Procedures 18
PART II: OTHER INFORMATION 20
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT INDEX 23
CERTIFICATIONS 24
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 2004
(Unaudited)
(As restated)
- -------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 626,351
Accounts receivable 488,914
Inventories 501,131
Prepaid expenses and other 144,960
------------
Total current assets 1,761,356
PROPERTY AND EQUIPMENT, net 278,541
GOODWILL, net 238,120
OTHER ASSETS 113,494
------------
Total $ 2,391,511
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 134,348
Accounts payable 620,542
Accrued expenses 814,808
Deferred revenue 192,500
Fair value of warrants (Note 11) 739,140
Fair value of embedded drivatives (Note 11) 1,060,700
------------
Total current liabilities 3,562,038
------------
REDEEMABLE CONVERTIBLE AND CONVERTIBLE
PREFERRED STOCK (Note 5) 3,480,000
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Series A and B convertible preferred stock, $.01 par
value; authorized 5,000,000 shares; 6,939 shares
issued and outstanding 70
Common Stock, $.01 par value; authorized 300,000,000
shares; 139,155,798 shares issued and outstanding 1,391,558
Additional paid-in capital 46,323,998
Accumulated deficit (52,366,153)
-------------
Total stockholders' deficit (4,650,527)
-------------
Total $ 2,391,511
=============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(As restated)
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------
2004 2003
---------- ---------
SALES $ 1,036,040 $ 820,200
----------- ---------
OPERATING EXPENSES
Cost of sales 716,009 533,907
Selling, general and administrative 932,662 746,736
Research and development 196,443 108,155
----------- ----------
Total operating expenses 1,845,114 1,388,798
----------- ----------
LOSS FROM OPERATIONS (809,074) (568,598)
----------- ----------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (13,186) (69,268)
Other income (expense), net (520,630) (283,545)
----------- ----------
Total other expense, net (533,816) (352,813)
----------- ----------
LOSS FROM CONTINUING OPERATIONS (1,342,890) (921,411)
----------- ----------
DISCONTINUED OPERATIONS:
Income (loss) from operations of USDTL - 4,447
Loss from the disposal of USDTL - (17,235)
----------- ----------
Loss from discontinued operations - (12,788)
----------- ----------
NET LOSS $ (821,823) $ (642,409)
=========== ==========
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS BEFORE DISCONTINUED OPERATIONS (Note 8) $ (0.02) $ (0.01)
=========== ==========
BASIC AND DILUTED NET LOSS PER SHARE (Note 8): $ (0.02) $ (0.01)
=========== ==========
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 130,174,135 96,093,701
============ ===========
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Three Months Ended December 31, 2004
(Unaudited)
(As Restated)
Preferred Stock Common Stock
................... ...................... Total
Additional Accumulated Stockholders'
Shares Amount Shares Amount paid-in capital deficit Deficit
- ------------------------------------------- -------- ---------- ----------- --------------- ----------- ------------
Balance at September 30, 2004 46,130 $ 462 123,118,165 $1,231,182 $49,657,819 $(51,556,850 $ (667,387)
Adjustment (38,941) (389) - - (3,231,322) 556,862 (2,674,849)
--------- -------- ----------- ---------- ----------- ----------- -----------
Balance at September 30, 2004
(As Restated) 7,189 73 123,118,165 1,231,182 46,426,497 (50,999,988) (3,342,236)
--------- -------- ----------- ---------- ----------- ------------ -----------
Conversion of Series A convertible
preferred stock into common stock (250) (3) 2,520,251 25,202 (25,199) - -
Conversion of Series A redeemable
convertible preferred stock into
common stock - - 13,205,882 132,059 894,640 - 1,026,699
Payment of preferred stock dividend
for Series A preferred stock - - 311,500 3,115 20,160 (23,275) -
Accretion of mandatiorily redeemable
preferred stock (992,100) (992,100)
Net loss - - - - - (1,342,890) (1,342,890)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 6,939 70 139,155,798 1,391,558 46,323,998 (52,366,153) (4,650,527)
============================================================================================================================
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(As restated)
THREE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,342,890) $(934,199)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from disposal of discontinued operation - 17,235
Depreciation and amortization 39,669 29,481
Amortization of debt discount and deferred financing - 14,484
Amortization of deferred rent expense 31,192 10,397
Common stock for interest on long-term debt - 43,750
Expense from changes in value of embedded derivatives and warrants 521,067 291,790
Changes in operating assets and liabilities:
Accounts receivable 146,823 127,090
Inventories (152,278) (167,079)
Prepaid expenses and other current assets 29,520 (38,037)
Other assets (201) 26,205
Accounts payable and accrued expenses (231,448) (452,024)
Deferred revenue - (1,200)
---------- ----------
Net cash used in operating activities (958,546) (1,032,107)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,482) (835)
Proceeds from sale of USDTL - 500,000
---------- --------
Net cash provided by (used in) investing activities (20,482) 499,165
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt (63,272) (130,607)
Sales of common stock, preferred stock and warrants 1,159,775 -
Payment of cash dividend on 8% redeemable convertible preferred stock - (16,110)
---------- ---------
Net cash provided by (used in) financing activities 1,096,503 (146,717)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 117,475 (679,659)
CASH AND CASH EQUIVALENTS, beginning of the period 508,876 1,130,919
---------- ----------
CASH AND CASH EQUIVALENTS, end of the period $626,351 $451,260
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period:
Income taxes $ - $ -
Interest $ 8,291 $ 7,899
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the three months ended December 31, 2004, 958 shares of Series
A redeemable convertible preferred stock were converted 13,205,882
shares of common stock.
During the three months ended December 31, 2004, 250 shares of Series
A convertible preferred stock were converted into 2,520,251 shares
of common stock.
During the three months ended December 31, 2004, 311,500 shares of
common were issued as payment of dividends for Series A
convertible and redeemable convertible preferred stock.
During the three months ended December 31, 2003, 696,336 shares of
common stock were issued for interest on long-term debt.
During the three months ended December 31, 2003, 700 shares of 8%
redeemable convertible preferred stock were converted into
4,666,667 shares of common stock.
During the three months ended December 31, 2003, 7,496,436 shares of
common stock were issued for the exercise of warrants.
See accompanying notes to consolidated financial statements.
AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
Avitar, Inc. (the "Company" or "Avitar") through its wholly-owned
subsidiary Avitar Technologies, Inc. ("ATI") develops, manufactures,
markets and sells diagnostic test products and proprietary hydrophilic
polyurethane foam disposables fabricated for medical, diagnostics, dental
and consumer use. During the first quarter of FY2005, 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.
During the audit for Fiscal 2005, the Company was advised by its
independent registered public accounting firm that the method used to
account for sales of certain convertible preferred stock and convertible
notes was not in accordance with the requirements of Emerging Issues Task
Force ("EITF") Issue No. 00-19 "Accounting for Derivative Financial
Instruments Indexed To and Potentially Settled In a Company's Own Stock".
The statement of stockholders' deficit as of September 30, 2004 and for the
quarter ended December 31, 2004, the balance sheet for the as of December
31, 2004, the statements of operations for the quarters ended December 31,
2004 and 2003 and the statements of cash flow for the quarters ended
December 31, 2004 and 2003 included herein have been restated to correct the
error in accounting for the issuance of various securities and the
derivative features embedded therein. These restatements resulted in a
stockholders' deficit of $3,342,236 at September 30, 2004 (an increase of
$2,674,849), a stockholders' deficit of $4,650,527 at December 31, 2004 (an
increase of $3,994,840), net loss of $1,342,890 for the quarter ended
December 31, 2004 (an increase of $521,067 or $.01 per share) and a net loss
of $934,199 for the quarter ended December 31, 2003 (an increase of $291,790
or $.00 per share).
The accompanying consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-QSB and
Regulation S-B (including Item 310(b) thereof). Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company's management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended December 31,
2004 are not necessarily indicative of the results that may be expected for
the full fiscal year ending September 30, 2005. 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, 2004.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 stockholders' deficit as of December 31, 2004 of
$655,687. The Company raised net proceeds aggregating approximately
$2,800,000 during the fiscal year ended September 30, 2004 from the sale of
stock and warrants. In addition, the Company converted $1,250,000 of
long-term debt into preferred stock. During the quarter ended December 31,
2004, the Company raised net proceeds of approximately $1,160,000 from the
sale of preferred stock and warrants. The Company is working with placement
agents and investment fund mangers to obtain additional equity financing.
As of February 1, 2005, the Company entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. ("Cornell
Capital") Pursuant to the Standby Equity Distribution Agreement, the
Company may, at its discretion, periodically sell to Cornell Capital shares
of common stock for a total purchase price of up to $10.0 million. For each
share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell Capital will pay the Company 99% of the lowest volume
weighted average price of the Company's common stock as quoted by
Bloomberg, LP on the American Stock Exchange or other principal market on
which the Company's common stock is traded for the 5 days immediately
following the notice date. The price paid by Cornell Capital for the
Company's stock shall be determined as of the date of each individual
request for an advance under the Standby Equity Distribution Agreement.
Cornell Capital will also retain 4% of each advance under the Standby
Equity Distribution Agreement. Cornell Capital's obligation to purchase
shares of the Company's common stock under the Standby Equity Distribution
Agreement is subject to certain conditions, including the Company obtaining
an effective registration statement for shares of common stock sold under
the Standby Equity Distribution Agreement and is limited to $250,000 per
weekly advance and $1,000,000 per 30 days. Based upon cash flow
projections, the Company believes the anticipated cash flow from operations
and most importantly, the expected net proceeds from future equity
financings will be sufficient to finance the Company's operating needs
until the operations achieve profitability. There can be no assurances that
forecasted results will be achieved or that additional financing will be
obtained. The financial statements do not include any adjustments relating
to the recoverability and classification of asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
2. INVENTORIES
At December 31, 2004, inventories consist of the following:
Raw Materials $395,309
Work-in-Process 44,914
Finished Goods 60,908
-------
Total $501,131
=======
3. DISCONTINUED OPERATIONS
On December 16, 2003, the Company consummated a sale of USDTL's
business and net assets, excluding cash. The Company received $500,000 in
cash upon the closing of the sale and is entitled to receive an additional
$500,000 as the buyer of USDTL achieves specified revenue targets. Under
the terms of the sale, the buyer must pay the Company 10% of certain annual
revenues in excess of $1,500,000, less any amounts due from the Company for
the purchase of services from the buyer. The Company recorded the $500,000
received in the first quarter of FY2004. Due to the contingent nature of
the additional $500,000, the payments will be recorded as they are
received. The accompanying financial statements reflect USDTL as a
discontinued operation. The following is a summary of the results of
operations for the three months ended December 31, 2004 and 2003:
Three months ended December 31, 2004 2003
----------------------------------------------------------------
Sales $ - $ 289,501
Operating expenses - 284,223
Other income (expense) - (18,066)
----------------------------------------------------------------
Loss from discontinued operations $ - $ (12,788)
----------------------------------------------------------------
Other income (expense) for the three months ended December 31, 2003
includes the loss from the disposal of USDTL of $17,235.
4. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended December 31,
2004 2003
---------------- ---------------
Customer A $ 253,786 $ 133,135
Customer B 222,200 *
*Customer was not in excess of 10% of total sales.
At December 31, 2004, accounts receivable from major customers totaled
approximately $275,000.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 2004, the Company sold 1,285 shares of Series A Redeemable
Convertible Preferred Stock and Warrants to purchase 600,000 shares of
common stock for which it received net proceeds of approximately
$1,160,000. The Series A Redeemable Convertible Preferred Stock, with a
face value of $1,285,000, 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 the sale of 1,285 shares of preferred stock and the put
right and the conversion feature resulted in a deemed dividend of
$1,058,260 being recorded and included in the earnings per share
calculation for the year ended September 30, 2005. A liability of
approximately $1,058,260 was recorded for the original fair value of the
warrants issued in connection with the sale of the 1,285 shares of
preferred stock and the conversion feature which was $1,139,060 at December
31, 2004. Upon the occurrence of specific events, the holders of the Series
A Redeemable Convertible Preferred Stock are entitled to redeem these
shares under certain provisions of the agreement covering the purchase of
the preferred stock. Accordingly, this security was not classified as
permanent equity.
36,941 shares of the Series C convertible preferred stock with a face
value of $195,000 and 2,000 shares of the 6% Convertible preferred stock
with a face value of $2,000,000 are carried at face value on the balance
sheet outside permanent equity as the Company cannot be sure it has
adequate authorized shares for their conversion as of December 31, 2004.
6. COMMON AND PREFERRED STOCK
During the quarter ended December 31, 2004, the Company issued
15,726,133 shares of common stock to holders who converted 250 shares of
Series A convertible preferred stock and 958 shares of Series A redeemable
convertible preferred stock. As payment of $23,275 of dividends on these
converted shares, the Company issued 311,500 shares of the Company's common
stock. Dividends for all preferred stock amounted to $50,264 for the three
months ended December 31, 2004 and the total amount of unpaid and
undeclared dividends was $150,251.
7. GOODWILL
As of September 30, 2004, the Company's goodwill was composed of
$238,120 associated with the acquisition of BJR in 2001. In accordance with
SFAS No. 142, the Company evaluated the goodwill related to the BJR
acquisition and determined that no adjustment to the goodwill balance of
$238,120 was deemed necessary since September 30, 2004.
8. LOSS PER SHARE
The following data show the amounts used in computing earnings per
share:
Three Months Ended December 31, 2004 2003
---------------------------------------------------------------------------------
Loss from continuing operations $(1,342,890) $(934,199)
Less:
Deemed dividends in connection with
Series A preferred stock sales (1,058,260) -
Preferred stock dividends ( 50,264) (24,327)
----------- ---------
Loss available to common stockholders
from continuing operations (2,451,414) (958,526)
Add:
Loss from discontinued operations (-) (12,788)
----------- ---------
Net loss applicable to common
stockholders used in basic and
diluted EPS $(2,451,414) $(971,314)
=========== =========
Weighted average number of
common shares outstanding 130,174,135 96,093,701
============ ===========
Loss per share applicable to common
stockholders before discontinued
operations $ (0.02) $ (0.01)
Impact of discontinued operations - -
----------- ----------
Basic and diluted loss per share
applicable to common stockholders $ (0.02) $ (0.01)
=========== =========
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 for the quarters ended December 31, 2004 or 2003, as
all options granted under those plans had an exercise price equal to the
fair market value of the underlying common stock on the date of grant.
The following table illustrates, in accordance with the provisions of
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
For the Three Months Ended December 31, 2004 2003
- -------------------------------------------------------------------------------
Net loss $( 1,342,890) $ (934,199)
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 ( 32,395) (58,803)
----------- ----------
Pro forma net loss $(1,375,285) $ (993,002)
=========== ==========
Pro forma loss per share:
Basic and diluted - as reported $ (.01) $ (.01)
Basic and diluted - pro forma (.01) (.01)
In determining the pro forma amounts above, the Company estimated the fair
value of each option granted using the Black-Scholes option pricing model
with the following weighted-average assumptions:
December 31 2004 2003
----------- ---------------- -------------------
Risk free interest rate 3.8% 2.5%
Expected dividend yield - -
Expected lives 5-9 years 5-9 years
Expected volatility 80% 80%
Options granted during the quarter ended December 31, 2004 amounted to
1,663,700 while no options were granted for the three months ended December
31, 2003. The weighted average fair value of options granted during the
three months ended December 31, 2004 was $0.07.
10. SUBSEQUENT EVENTS
Since December 31, 2004, holders of Series A convertible preferred
stock converted 750 shares of preferred stock and accrued dividends for
such shares into 8,491,666 shares of common stock. As part of an agreement
covering a commitment by an investor to purchase up to $10 million of the
Company's common stock over twenty-four months, a commitment fee totaling
1,075,732 shares of common stock was paid to the investor and the placement
agent that will be used by the investor for this financing transaction.
11. DERIVATIVES
The Company has issued and outstanding convertible debt and certain
convertible equity instruments with embedded derivative features. The
Company analyzes these financial instruments in accordance with SFAS No.
133 and EITF Issue Nos. 00-19 and 05-02 to determine if these hybrid
contracts have embedded derivatives which must be bifurcated. In addition,
free-standing warrants are accounted for as equity or liabilities in
accordance with the provisions of EITF Issue No. 00-19. As of December 31,
2004, the Company could not be sure it had adequate authorized shares for
the conversion of all outstanding instruments due to certain conversion
rates which vary with the fair value of the Company's common stock and
therefore all embedded derivatives and freestanding warrants are recorded
at fair value, marked-to-market at each reporting period, and are carried
on separate lines of the accompanying balance sheet. If there is more than
one embedded derivative, their value is considered in the aggregate.
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.
RESTATEMENT
As indicated in Note 1 of the Consolidated Financial Statements, the
statements of stockholders' deficit as of September 30, 2004 and for the quarter
ended December 31, 2004, the balance sheet as of December 31, 2004, the
statements of operations for the quarters ended December 31, 2004 and 2003 and
the statements of cash flow for the quarters ended December 31, 2004 and 2003
included herein have been restated to correct the error in accounting for the
issuance of various securities and the derivative features embedded therein. The
effects of these restatements are described in Note 1 of the Consolidated
Financial Statements and the discussions below are based on restated
information.
RESULTS OF OPERATIONS
Revenues
Sales for the three months ended December 31, 2004 increased $215,840 or
approximately 26 %, to $1,036,040 from $820,200 for the corresponding period of
the prior year. The improvement for the three months ended December 31, 2004
primarily reflects increases of $122,000 in the volume of sales for its
OralScreen(R) products and $121,000 for its Foam Products; offset in part by a
decrease of $27,000 in revenue from contraband detection services.
Operating Expenses
Cost of sales for the three months ended December 31, 2004 were
approximately 69% of sales compared to the cost of sales of approximately 65% of
sales for the three months ended December 31, 2003. The change for the first
quarter of Fiscal 2005 resulted from a shift in the product mix to the lower
margin foam products (44% in Fiscal 2005 versus 40% in Fiscal 2004).
Selling, general and administrative expenses for the three months ended
December 31, 2004 increased $185,926, or approximately 25%, to $932,662 from
$746,736 for the corresponding period of the prior year. The change for the
three-month period ended December 31, 2004 primarily reflects the cost of
approximately $166,000 for the addition of sales and marketing resources. 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 FY2005 and beyond.
Research and development expenses for the three months ended December 31,
2004 amounted to $196,443 compared to $108,155 for the three months ended
December 31, 2003. The increase of $88,288, or approximately 82%, was primarily
attributable to additional personnel expense of approximately $48,000 and
contracted development expense of approximately $23,000 associated with the Oral
Screen product enhancements that included the Drugometer(TM), a single step drug
test device introduced in November 2004. 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 FY2005
and beyond.
Other Income and Expense
Interest expense and financing costs were $13,186 for the three months
ended December 31, 2004 compared to $69,268 incurred during the three months
ended December 31, 2003. The decrease resulted primarily from interest expense
and amortization of deferred financing costs of approximately $53,000 associated
with the long-term debt of $1,250,000 that was converted into preferred stock in
May 2004.
For the three months ended December 31, 2004, other expense amounted to
$520,630 compared to other expense of $283,545 for the three months ended
December 31, 2003. The amount for the quarter ended December 31, 2004 reflected
an increase in expense of approximately $229,000 from changes in the fair market
value of derivative securities and warrants. The quarter ended December 31, 2003
included approximately $7,000 received from the Company's life and disability
insurance carrier as a result of its conversion from a mutual insurance company
to a stock insurance company.
Discontinued Operations
On December 16, 2003, the Company consummated the sale of the business and
net assets, excluding cash, of its USDTL subsidiary. For the three months ended
December 31, 2004, no activity was recorded for USDTL compared to a loss of
$12,788 for the corresponding period of the prior year. The loss for the quarter
ended December 31, 2003 resulted from a loss on the disposal of USDTL of $17,235
which was offset in part by income from operations of $4,447 (see Note 3 of the
consolidated financial statements).
Net Loss
Primarily as a result of the factors described above, the Company had a
net loss of $1,342,890 for the three months ended December 31, 2004, as compared
to net loss of $934,199 for the three months ended December 31, 2003. The loss
per share was $.02 per basic and diluted share for the three months ended
December 31, 2004. The loss per share was $.01 per basic and diluted share for
the three months ended December 31, 2003.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2004, the Company had a stockholders'deficit of $4,650,527
and cash and cash equivalents of $626,351. Our cash flows from financing
activities provided the primary source of funding during the quarter ended
December 31, 2004 and the Company will continue to rely on this type of funding
until profitability is reached. The following is a summary of cash flows for the
three month period ended December 31, 2004:
December 31,
Sources (use) of cash flows 2004
--------------------------- ------------------
Operating activities $ (958,546)
Investing activities (20,482)
Financing activities 1,096,503
-------------
Net increase in cash and equivalents $ 117,475
=============
Operating Activities. The net loss of $1,342,890 (comprised of
expenses totaling $2,378,930 less revenues of $1,036,040) was the
major use of cash by operations. When the net loss is adjusted for
non-cash expenses such as depreciation and amortization, amortization
of debt discounts, deferred financing costs, deferred rent and
expenses from the changes in the fair market value of derivative
securities and warrants, the cash needed to finance the net loss was
$750,962. Working capital requirements necessitated the use of
$231,448 to pay aging accounts payable and reduce accrued expenses and
$152,278 to increase inventory levels to meet anticipated demand for
our products during the next quarter. A decrease in accounts
receivable due to the lower billings for ORALscreen products during
the last month of the quarter lessened working capital needs by
$146,823. In addition, reductions netting $29,319 in various other
assets further reduced the operating cash needs.
Investing and Financing Activities. Cash used in investing consisted
of cash paid of $20,482 for additions to property, plant and
equipment. To finance the business, preferred stock and warrants (as
described below) were sold and approximated $1,160,000; of which
$63,272 was used to repay various short-term notes payable.
During FY 2005, 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. During
December 2004, the Company sold 1,285 shares of Series A Redeemable Convertible
Preferred Stock and Warrants to purchase 600,000 shares of common stock for
which it received net proceeds of approximately $1,160,000. The Series A
Redeemable Convertible Preferred Stock, with a face value of $1,285,000, 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 the sale of 1,285 shares of preferred
stock and the put right and the conversion feature resulted in a deemed dividend
of $1,058,260 being recorded and included in the earnings per share calculation
for the year ended December 31, 2004. A liability of approximately $1,058,260
was recorded for the original fair value of the warrants issued in connection
with the sale of the 1,285 shares of preferred stock and the conversion feature
which was $1,139,060 at December 31, 2004. Upon the occurrence of specific
events, the holders of the Series A Redeemable Convertible Preferred Stock are
entitled to redeem these shares under certain provisions of the agreement
covering the purchase of the preferred stock. Accordingly, this security was not
classified as equity.
The cash available at December 31, 2004 and anticipated customer receipts
are expected to be sufficient to fund the operations of the Company through
March 2005. 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 additional capital during the remainder of fiscal year 2005 from the
sales of equity and/or debt securities. As part of this process, the Company, as
of February 1, 2005, entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, LP ("Cornell Capital"). Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital shares of common stock for a total purchase price of up to $10.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital will pay the Company 99% of the lowest
volume weighted average price of the Company's common stock as quoted by
Bloomberg, LP on the American Stock Exchange or other principal market on which
the Company's common stock is traded for the 5 days immediately following the
notice date. The price paid by Cornell Capital for the Company's stock shall be
determined as of the date of each individual request for an advance under the
Standby Equity Distribution Agreement. Cornell Capital will also retain 4% of
each advance under the Standby Equity Distribution Agreement. Cornell Capital's
obligation to purchase shares of the Company's common stock under the Standby
Equity Distribution Agreement is subject to certain conditions, including the
Company obtaining an effective registration statement for shares of common stock
sold under the Standby Equity Distribution Agreement and is limited to $250,000
per weekly advance and $1,000,000 per 30 days. 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. The Company has provided AMEX with quarterly updates on its performance
against the plan. Although certain milestones of the plan were not achieved as
of December 31, 2004, the Company has made progress towards meeting the overall
objective of the plan. Failure to meet the overall objectives of the plan or to
make adequate progress towards meeting these objectives could result in the
Company losing its listing on AMEX.
Operating revenues are expected to grow during Fiscal 2005 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 anticipated growth. 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 registered public accounting firm
relating to the financial statements for Fiscal 2004 contains an explanatory
paragraph expressing 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 8, 2004 except for
Note 17 which is as of December 17, 2004). 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 December 2004, the Financial Accounting Standards Board ("FASB") issued
a Statement, "Share-Based Payments", 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 statement eliminates the ability to account for share-based compensation
transactions using APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and generally requires 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. The
adoption of this statement is effective for fiscal periods beginning after
December 15, 2005 and 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
As discussed in of our consolidated financial statements, we have restated
our statements of stockholders' deficit as of September 30, 2004 and for the
quarter ended December 31, 2004, the balance sheet as of December 31, 2004, the
statements of operations for the quarters ended December 31, 2004 and 2003 and
the statements of cash flow for the quarters ended December 31, 2004 and 2003 to
correctly apply GAAP related to our issuance of certain securities.
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of December 31, 2004, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). As part of its evaluation, management considered the
facts and circumstances relating to the restatement described above. 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
were not operating effectively.
(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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended December 31, 2004 the Company issued to holders of
both the Series A preferred stock and the Series A redeemable preferred stock
15,726,133 shares of the Company's common stock upon the conversion of 1,208
shares of their preferred stock. Also during the quarter ended December 31,
2004, the Company issued 311,500 shares of the Company's common stock as payment
for dividends on both the Series A preferred stock and Series A redeemable
preferred stock. 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 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
(b) Reports on Form 8-K:
Form 8-K, Items 1.01, 3.02 and 9.01, dated December 10, 2004 regarding a
private placement to Global Capital Funding Group, LP for the sale of
convertible preferred stock and warrants.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVITAR, INC.
(Registrant)
Dated: February 10, 2006 /S/ Peter P. Phildius
-----------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: February 10, 2006 /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