U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
(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, 2005.
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
65 Dan Road, Canton, Massachusetts 02021
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 821-2440
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(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [x]Yes [ ]No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK: 179,110,838
AS OF AUGUST 5, 2005
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
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 23
PART II: OTHER INFORMATION 24
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 27
EXHIBIT INDEX 28
CERTIFICATIONS 29
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2005
(Unaudited)
(As restated)
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 514,844
Accounts receivable, net 458,931
Inventories 376,171
Prepaid expenses and other current assets 130,197
------------
Total current assets 1,480,143
PROPERTY AND EQUIPMENT, net 215,998
GOODWILL, net 238,120
OTHER ASSETS 294,058
------------
Total Assets $ 2,228,319
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 339,441
Convertible notes payable 372,171
Accounts payable 523,633
Accrued expenses 805,168
Deferred income 116,050
Fair value of warrants (Note 12) 229,797
Fair value of embedded derivatives (Note 12) 941,900
------------
Total current liabilities 3,328,160
------------
REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED
STOCK (Note 6) 3,895,000
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT:
Series B convertible preferred stock, $.01 par value; authorized
5,000,000 shares; 5,689 shares issued and outstanding 58
Common Stock, $.01 par value; authorized 300,000,000 shares;
173,277,505 shares issued and outstanding 1,732,773
Additional paid-in capital 46,425,265
Accumulated deficit (53,152,937)
------------
Total stockholders' deficit (4,994,841)
------------
Total Liabilities and Stockholders' Deficit $ 2,228,319
============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(As restated)
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------------------------------------
2005 2004 2005 2004
------------ ------------ ------------ -------------
SALES $ 1,233,087 $ 967,292 $ 3,224,350 $ 2,804,682
------------ ------------ ------------ -------------
OPERATING EXPENSES
Cost of sales 911,377 658,307 2,341,320 1,980,009
Selling, general and administrative expenses 1,208,606 835,872 3,173,564 2,227,684
Research and development expenses 181,008 157,971 560,757 385,638
------------ ------------ ------------ ------------
Total operating expenses 2,300,991 1,652,150 6,075,641 4,593,331
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,067,904) (684,858) (2,851,291) (1,788,649)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (77,451) (182,619) (113,820) (324,301)
Other income, net 686,739 333,837 877,430 226,235
------------ ------------ ------------ ------------
Total other income (expense), net 609,288 151,218 763,610 (98,066)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (458,616) (533,640) (2,087,681) (1,886,715)
------------ ------------ ------------ ------------
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 $ (458,616) $ (533,640) $(2,087,681) $(1,899,503)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS (Note 9) $ - $ (0.01) $ (0.03) $ (0.03)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE (Note 9) $ - $ (0.01) $ (0.03) $ (0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 160,598,894 108,821,108 146,206,417 102,419,332
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Nine Months Ended June 30, 2005
(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 $ 1,231,18 $49,657,819 $(51,556,85) $ (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)
--------- -------- ---------- --------- ---------- ---------- ----------
Sale of common stock 23,479 235 2,565 2,800
Conversion of Series A convertible
preferred stock into common stock (1,500) (15) 17,173,239 171,732 (171,717) - -
Conversion of Series A redeemable
convertible preferred stock into -
common stock - - 27,102,900 271,027 1,384,984 - 1,656,011
Conversion of Series E preferred stock - - 3,909,027 39,090 160,910 200,000
Payment of convertible preferred stock
dividend for Series A preferred stock - - 874,963 8,750 56,518 (65,268) -
Accretion of mandatorily redeemable
preferred stock (1,548,735) (1,548,735)
Common stock issued in connection
with establishing equity credit line 1,075,732 10,757 114,243 125,000
Net loss - - - - - (2,087,681) (2,087,681)
- ------------------------------------------------------- ------- ------------ ---------- -------------- ------------ ------------
Balance at June 30, 2005 5,689 $ 58 173,277,505 $1,732,773 $46,425,265 ($53,152,937)($4,994,841)
- ------------------------------------------------------- ------- ------------ ---------- -------------- ------------------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(As restated)
- -------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
------------------------------
2005 2004
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,087,681) $(1,899,503)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from disposal of discontinued operation - 17,235
Depreciation and amortization 116,307 86,810
Amortization of debt discount and deferred financing 62,733 101,084
Amortization of deferred rent expense 93,575 72,780
Common stock for interest on long-term debt - 114,236
Loss on extinguishment of long-term debt - 66,000
Income from changes in value of embedded derivatives and warrants (876,277) (216,479)
Changes in operating assets and liabilities:
Accounts receivable 176,806 61,757
Inventories (27,318) (137,858)
Prepaid expenses and other current assets 44,283 14,132
Other assets (161,385) 36,007
Accounts payable and accrued expenses (337,997) (945,534)
Deferred revenue (76,450) (3,600)
------------ ------------
Net cash used in operating activities (3,073,404) (2,632,933)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (28,967) (136,901)
Proceeds from sale of USDTL - 500,000
------------ ------------
Net cash provided by (used in) investing activities (28,967) 363,099
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of common stock, preferred stock and warrants 2,497,575 1,736,310
Proceeds from (repayment of) notes payable and long-term debt 160,764 (184,796)
Proceeds from convertible notes payable 450,000 -
Payment of cash dividend on 8% redeemable convertible preferred stock - (16,110)
------------ ------------
Net cash provided by financing activities 3,108,339 1,535,404
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,968 (734,430)
CASH AND CASH EQUIVALENTS, beginning of the period 508,876 1,130,919
------------ ------------
CASH AND CASH EQUIVALENTS, end of the period $ 514,844 $ 396,489
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period:
Income taxes $ - $ -
Interest $ 16,986 $ 9,347
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
During the nine months ended June 30, 2005, 958 shares of Series A
redeemable convertible preferred stock were converted into
27,102,900 shares of common stock.
During the nine months ended June 30, 2005, 1500 shares of Series A
convertible preferred stock were converted into 17,173,239 shares
of common stock.
During the nine months ended June 30, 2005, 874,963 shares of common
were issued as payment of dividends for Series A convertible and
redeemable convertible preferred stock.
During the nine months ended June 30, 2005, warrants to purchase $ 32,802 -
700,000 shares of common stock were issued in connection with
the issuance of notes payable.
During the nine months ended June 30, 2005, 1,075,732 shares $ 125,000 -
of common stock were issued as payment of investor and placement
agent fees in connection with SEDA financing.
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.
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 three quarters 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 statements of stockholders' deficit as of September 30, 2004 and for
the nine months ended June 30, 2005, the balance sheet as of June 30, 2005,
the statements of operations for the quarter and nine months ended June 30,
2005 and 2004 and the statements of cash flow for the nine months ended
June 30, 2005 and 2004 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 $5,659,829 at June 30, 2005 (an
increase of $4,031,685), net loss of $458,616 for the quarter ended June
30, 2005 (a decrease of $690,568 or $.00 per share), a net loss of $533,640
for the quarter ended June 30, 2004(a decrease of $333,188 or $.00 per
share), a net loss of $2,087,681 for the nine months ended June 30, 2005 (
a decrease of $880,114 or $.00 per share) and a net loss of $1,899,503 for
the nine months ended June 30, 2004 (a decrease of $216,479 or $.01 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 and nine months ended June 30,
2005 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 had a working capital deficit as of June 30, 2005 and
September 30, 2004 of $1,848,017 and $1,136,512, respectively. 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 nine months ended June 30, 2005, the Company raised net
proceeds of approximately $2,498,000 from the sale of common stock,
preferred stock and warrants and $700,000 from short-term notes. The
Company is working with placement agents and investment fund mangers to
obtain additional equity financing.
2. INVENTORIES
At June 30, 2005, inventories consist of the following:
Raw Materials $247,812
Work-in-Process 77,858
Finished Goods 50,501
----------
Total $376,171
========
3. DISCONTINUED OPERATIONS
On December 16, 2003, the Company consummated the 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 USDTL for the three and nine months ended June 30, 2005 and
2004:
Three Months Nine Months
Ended June 30, Ended June 30,
2005 2004 2005 2004
------------ ------------ -------------- -----------
Sales $ - $ - $ - $289,501
Operating expenses - - - 284,223
Other income (expense) - - - (18,066)
------------ ------------ --------------- ----------
Loss from discontinued operations $ - $ - $ - $(12,788)
============ ============ =============== ==========
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,
------------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------ ------------- ----------------
Customer A $ 348,839 $ 226,050 $ 911,000 $ 628,273
At June 30, 2005, accounts receivable from this major customer totaled
approximately $200,562 from sales in the quarter ended June 30, 2005.
5. NOTES AND CONVERTIBLE NOTES PAYABLE
Since March 1, 2005, the Company issued short-term notes payable of
$250,000 and convertible notes payable totaling $450,000 to an accredited
investor. These notes have a term of six months with $250,000 bearing
interest at 1% per month and $650,000 bearing interest at 10% per year. In
connection with the notes payable, for each dollar loaned to the Company,
the holder received warrants to purchase one share of the Company's common
stock for a period of three years at exercise prices ranging from $.08 to
$.11 per share. During the quarter ended June 30, 2005, $12,673
representing the value of the warrants issued to purchase 250,000 shares of
common stock associated with the $250,000 of short-term notes payable debt
and is being amortized over the term of the notes. In addition, the entire
principal plus accrued interest associated with the $450,000 of short-term
convertible notes is convertible into the Company's common stock at a
conversion price of the lesser of the closing price of the common stock on
the date of the loan or 85% of the average closing price of the common
stock for the five (5) trading days preceding the notice of conversion. In
no event shall the conversion price be lower than 50% of the closing price
of the common stock on the date of the loan. A discount to debt totaling
$104,540 ($92,700 for the fair value of the conversion feature of these
notes and $11,840 for the value of the warrants issued in connection with
these notes) was recorded during the quarter ended June 30, 2005 and is
being amortized over the term of the notes. A liability of approximately
$105,000 was recorded for the fair value of the warrants issued in
connection with the $450,000 of notes and the conversion feature which was
$93,735 at June 30, 2005.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In the April and June 2005, the Company raised net proceeds of
approximately $1,335,000 from the sale of 1,500,000 shares of Series E
Redeemable Convertible Preferred Stock with a face value of $1,500,000 and
Warrants to purchase 150,000 shares of the Company's common stock. The
$1,500,000 of Series E Preferred Stock are convertible into Common Stock at
the lesser of $.08 per share or 80% of the average of the three lowest
closing bid prices for the ten trading days immediately prior to the notice
of conversion, subject to adjustments and limitations, and the Warrants are
exercisable at $.084 per share for a period of three years. The warrants
issued in connection with the sale of 1,500,000 shares of preferred stock
and the conversion feature resulted in a deemed dividend of $1,087,000
being recorded and included in the earnings per share calculation for the
quarter and nine months ended June 30, 2005. A liability of approximately
$1,087,000 was recorded for the original fair value of the warrants issued
in connection with the sale of the 1,500,000 shares of preferred stock and
the conversion feature which was $706,901 at June 30, 2005. Upon the
occurrence of specific events, the holders of the Series E 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.
Prior to entering into the Securities Purchase Agreement for the sale of
the Series E Preferred Stock, the Company entered into a Termination
Agreement terminating the Standby Equity Distribution Agreement (`SEDA")
made as of February 1, 2005 with Cornell Capital Partners, L.P. ("Cornell
Capital"). The terms of this SEDA were discussed in detail in Notes 1 and
10 to the Financial Statements and in the Financial Condition and Liquidity
Section of Management's Discussion and Analysis of the Company's Report on
Form 10-QSB/A filed for the quarter ended December 31, 2004. If Cornell
Capital does not enter into a SEDA on identical terms within ninety (90)
days after all amounts payable under the Securities Purchase Agreement are
satisfied, Cornell Capital has agreed to return to the Company all fees
pursuant to the February 2005 SEDA. The fees of 1,075,732 shares of common
stock with a value of $125,000 that were paid to Cornell Capital and its
placement agent in connection with the SEDA were recorded as deferred
financing costs in the quarter ended March 31, 2005 and will be amortized
over the 24 month term of the SEDA. As of June 30, 2005, 200,000 shares of
this preferred stock had been converted into common stock and 1,300,000
were outstanding.
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 nine months ended June 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 $194,720 at June 30,
2005. 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. As of June 30, 2005, 885 shares of this preferred stock had been
converted into common stock and 400 shares were outstanding.
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 June 30, 2005.
7. COMMON AND PREFERRED STOCK
During the nine months ended June 30, 2005, the Company issued
44,276,139 shares of common stock to holders who converted 1500 shares of
Series A Convertible Preferred Stock and 1,843 shares of Series A
Redeemable Convertible Preferred Stock. As payment of $65,267 of dividends
on these converted shares, the Company issued 874,963 shares of the
Company's common stock. Dividends for all preferred stock amounted to
$152,685 for the nine months ended June 30, 2005 and the total amount of
unpaid and undeclared dividends was $210,242.
8. 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 at June 30, 2005.
9. 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,
-------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Loss from continuing operations $ (458,616) $ (533,640) $(2,087,681) $(1,899,50)
Less:
Preferred Stock Dividends (71,006) (38,470) (152,685) (81,980)
Deemed dividends in connection
with Series A, E and 6% preferred
stock sales (1,087,000) (586,000) (2,145,260) (1,586,000)
----------- ------------ ----------- -----------
Loss attributable to common
stockholders from
continuing operations (1,616,622) (1,158,110) (4,385,626) (3,567,483)
Add:
Income (loss) from discontinued
operation - - - (12,788)
------------ ------------ ----------- -----------
Net loss attributable to common
stockholders used in basic and
diluted EPS $(1,616,622) $(1,158,110) $(4,385,626) $(3,580,271)
============ ============ ============ ============
Weighted average number of
common shares outstanding 160,598,894 108,821,108 146,206,417 102,419,332
============ ============ ============ ============
Loss per share applicable to common
stockholders before discontinued
operations $(0.01) $(0.01) $(0.03) $(0.03)
Impact of discontinued operations - - - -
------------ ------------ ------------ ------------
Basic and diluted loss per share
applicable to common
stockholders $(0.01) $(0.01) $(0.03) $(0.03)
============ ============ ============= =============
10. 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 quarter and nine months
ended June 30, 2005 or 2004, 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,
2005 2004 2005 2004
------------ ------------- ------------- -------------
Net loss $ (458,616) $ (533,640) $ (2,087,681) $ (1,899,503)
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 (41,930) (67,005) (109,075) (188,000)
------------ ------------ ------------ ------------
Pro forma net loss $ (500,546) $ (600,645) $(2,196,756) $(2,087,503)
============= ============ ============ ============
Loss per share:
Basic and diluted - as reported $ (.00) $ (.01) $ (.02) $ (.02)
Basic and diluted - pro forma (.00) (.01) (.02) (.02)
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,
2005 2004
---------------- ------------
Risk free interest rate 3.8 % 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, 2005 was $0.07. The weighted average fair value of options
granted for the three and nine months ended June 30, 2004 was $.11 and $0.15,
respectively.
11. SUBSEQUENT EVENTS
Since June 30, 2005, holders of convertible preferred stock converted
250,000 shares of Series E Convertible preferred stock into 5,833,333
shares of common stock.
12. 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 June 30, 2005, 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 nine
months ended June 30, 2005, the balance sheet as of June 30, 2005, the
statements of operations for the quarter and nine months ended June 30, 2005 and
2004 and the statements of cash flow for the nine months ended June 30, 2005 and
2004 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 June 30, 2005 increased $265,795, or
approximately 27%, to $1,233,087 from $967,292 for the corresponding period of
the prior year. For the nine months ended June 30, 2005, sales increased
$419,668, or approximately 15% to $3,224,350 from $2,804,682. The change for the
three months ended June 30, 2005 primarily reflects increases in volume of sales
of $102,000 for its ORALscreen(R) products and $178,000 for its foam products;
offset in part by a decrease of $14,000 in revenue from contraband detection
services. The change for the nine months ended June 30, 2005 primarily reflects
increases in volume of sales of $196,000 for its ORALscreen(R) products and
$279,000 for its foam products; offset in part by a decrease of $54,000 in
revenue from contraband detection services.
Operating Expenses
Cost of sales for the three months ended June 30, 2005 was approximately
74% of sales compared to the cost of sales of approximately 68% of sales for the
three months ended June 30, 2004. For the nine months ended June 30, 2005, the
cost of sales was 73% compared to 71% of sales for the same period of Fiscal
2004. The change for Fiscal 2005 resulted primarily from a shift in the product
mix (48% in Fiscal 2005 versus 44% in Fiscal 2004) to the lower margin foam
products, a change in customer mix for the ORALscreen products and an increase
of $79,000 for a defective lot of raw materials for the ORALscreen products
during the three months ended June 30, 2005; offset in part by a reduction in
warranty expense of approximately $29,000 for the quarter ended June 30, 2005
and $132,000 for the nine months ended June 30, 2005.
Selling, general and administrative expenses for the three months ended
June 30, 2005 increased $372,734, or approximately 45%, to $1,208,606 from
$835,872 for the corresponding period of the prior year. For the nine months
ended June 30, 2005, selling, general and administrative expenses increased
$945,880 or approximately 42%, to $3,173,564 from $2,227,684 for the nine months
ended June 30, 2004. The change for the three-month period ended June 30, 2005
primarily reflects the cost of approximately $302,000 for the addition of sales
and marketing resources, approximately %51,000 of increased public relations and
investor relations consulting expenses and increases in various other
administrative expenses of approximately $19,000. The increase for the nine
months ended June 30, 2005, included approximately $701,000 for additional sales
and marketing resources and approximately $125,000 for public and investor
relations consulting expense increases; offset in part by a reduction of
approximately $122,000 in various other administrative expenses. The nine month
period ended June 30, 2004 included a reduction for accrued royalty expense of
approximately $242,000 as a result of management's revision of estimates of
amounts due to a former supplier under a product development agreement. With
respect to the revision in accrued royalty expenses in Fiscal 2004, the Company,
during the term of a product development agreement with the supplier, had
accrued the royalties due under this agreement with expectation that the
supplier would fulfill the terms of the agreement. However, in 2002, the Company
notified the supplier that the supplier had failed to meet the terms of the
product development agreement and therefore, under the terms of this agreement,
no royalties would be payable. Since being notified, the supplier had done
nothing to cure this default. In view of this lapse in time and that other
product undertakings by the supplier would prevent the supplier from ever curing
any of its defaults under the agreement, there was no longer any need to
maintain the royalty reserve for this supplier. 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.
Expenses for research and development for the three months ended June 30,
2005 amounted to $181,008 compared to $157,971 for the corresponding period of
the prior year, an increase of $23,037. For the nine months ended June 30, 2005,
expenses for research and development were $560,757 versus $385,638 for the nine
months ended June 30, 2004, an increase of $175,119. The change for the quarter
ended June 30, 2005 was primarily attributable to additional personnel and
related expenses. For the nine months ended June 30, 2005, the increase was
mainly the result of additional personnel and related expenses of approximately
$111,000, contracted development and material expenses of approximately $34,000
for ORALscreen product enhancements that included the Drugometer(TM), a single
step drug test device introduced in November 2004, and various other development
related expenses of approximately $22,000. The Company plans to continue
improving 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 $77,451 for the three months
ended June 30, 2005 compared to $182,619 incurred during the three months ended
June 30, 2004. For the nine months ended June 30, 2005, interest expense and
financing costs amounted to $113,820 versus $324,301 for the corresponding
period of Fiscal 2004. The decrease for the three months ended June 30, 2005
resulted primarily from interest expense and amortization of deferred financing
costs of approximately $104,000 associated with the long-term debt of $1,250,000
that was converted into preferred stock in May 2004. For the nine months ended
June 30, 2005, the change primarily reflected the reduction of approximately
$210,000 in interest expense and financing costs associated with the long-term
debt of $1,250,000 that was converted into preferred stock in May 2004.
For the three months ended June 30, 2005, other income amounted to $686,739
compared to $333,837 for the three months ended June 30, 2004. Other income for
the nine months ended June 30, 2005 was $877,430 compared to other income of
$226,235 for the nine months ended June 30, 2004. The amount for the quarter
ended June 30, 2005 reflected an increase in income of approximately $354,000
from changes in the fair market value of derivative securities and warrants. The
amount for the nine months ended June 30, 2005, reflected an increase in income
of approximately $660,000 from changes in the fair market value of derivative
securities and warrants.
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 and nine
months ended June 30, 2005, no activity was recorded for USDTL compared to a
loss of $12,788 for the nine months ended June 30, 2004. The loss for the nine
months ended June 30, 2004 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 $458,616 for the three months ended June 30, 2005, as compared to net
loss of $533,640 for the three months ended June 30, 2004. For the nine months
ended June 30, 2005, the Company had a net loss of $2,087,681 versus $1,899,503
for the corresponding period of Fiscal 2004. The loss per share was $.01 per
basic and diluted share for the three months ended June 30, 2005 compared to a
loss per share of $.01 per basic and diluted share for the three months ended
June 30, 2004. For the nine months ended June 30, 2005, the loss per share was
$.03 per basic and diluted share versus a loss per share of $.03 per basic and
diluted share for the nine months ended June 30, 2004.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2005, the Company had a working capital deficit of $1,848,017
and cash and cash equivalents of $514,844. Cash flows from financing activities
of approximately $3,100,000 provided the primary source of funding during the
nine months ended June 30, 2005 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 nine month period ended June 30, 2005:
Nine Months Ended
June 30,
Sources (uses) of cash flows 2005
---------------------------- -------------
Operating activities $(3,073,404)
Investing activities (28,967)
Financing activities 3,108,339
------------
Net decrease in cash and equivalents $ 5,968
============
Operating Activities. The net loss of $2,087,681 (composed of expenses
totaling $6,189,461 less revenues and other income of $4,101,780) 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 income
from the changes in the fair market value of derivative securities and
warrants, the cash needed to finance the net loss was $2,691,343.
Working capital requirements necessitated the use of $337,997 to pay
aging accounts payable and reduce accrued expenses, $161,385 to fund
other assets such as a security deposit on the new lease for the
facility, and $27,318 to maintain sufficient inventory levels to meet
anticipated demand for products during the next quarter. In addition,
changes netting $32,167 in various other assets and liabilities
further increased the operating cash needs. A decrease in accounts
receivable due to cash receipts exceeding billings for ORALscreen
products during the second quarter lessened working capital needs by
$176,806.
Investing and Financing Activities. Cash used in investing consisted of
cash paid of $28,967 for additions to property, plant and equipment. To
finance the business, preferred stock and warrants (as described below)
were sold and raised approximately $2,498,000. In addition, short term
borrowings generated approximately $611,000 after repayment of certain
short-term notes payable.
During the last quarter FY 2005 and FY2006, the Company's cash requirements
are expected to include primarily the funding of operating losses, the payment
of outstanding accounts payable, the repayment of certain notes payable, the
funding of operating capital to grow the Company's drugs of abuse testing
products and services, and the continued funding for the development of its
ORALscreen product line.
In the April and June 2005, the Company raised net proceeds of
approximately $1,335,000 from the sale of 1,500,000 shares of Series E
Redeemable Convertible Preferred Stock with a face value of $1,500,000 and
Warrants to purchase 150,000 shares of the Company's common stock. The
$1,500,000 of Series E Preferred Stock are convertible into Common Stock at the
lesser of $.08 per share or 80% of the average of the three lowest closing bid
prices for the ten trading days immediately prior to the notice of conversion,
subject to adjustments and limitations, and the Warrants are exercisable at
$.084 per share for a period of three years. The warrants issued in connection
with the sale of 1,500,000 shares of preferred stock and the conversion feature
resulted in a deemed dividend of $1,087,000 being recorded and included in the
earnings per share calculation for the quarter and nine months ended June 30,
2005. A liability of approximately $1,087,000 was recorded for the original fair
value of the warrants issued in connection with the sale of the 1,500,000 shares
of preferred stock and the conversion feature which was $706,901 at June 30,
2005. Upon the occurrence of specific events, the holders of the Series E
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. Prior
to entering into the Securities Purchase Agreement for the sale of the Series E
Preferred Stock, the Company entered into a Termination Agreement terminating
the Standby Equity Distribution Agreement (`SEDA") made as of February 1, 2005
with Cornell Capital Partners, L.P. ("Cornell Capital"). The terms of this SEDA
were discussed in detail in Notes 1 and 10 to the Financial Statements and in
the Financial Condition and Liquidity Section of Management's Discussion and
Analysis of the Company's Report on Form 10-QSB/A filed for the quarter ended
December 31, 2004. If Cornell Capital does not enter into a SEDA on identical
terms within ninety (90) days after all amounts payable under the Securities
Purchase Agreement are satisfied, Cornell Capital has agreed to return to the
Company all fees pursuant to the February 2005 SEDA. The fees of 1,075,732
shares of common stock with a value of $125,000 that were paid to Cornell
Capital and its placement agent in connection with the SEDA were recorded as
deferred financing costs in the quarter ended March 31, 2005 and will be
amortized over the 24 month term of the SEDA. As of June 30, 2005, 200,000
shares of this preferred stock had been converted into common stock and
1,300,000 were outstanding.
Since March 1, 2005, the Company issued short-term notes payable of
$250,000 and convertible notes payable totaling $450,000 to an accredited
investor. These notes have a term of six months with $250,000 bearing interest
at 1% per month and $650,000 bearing interest at 10% per year. In connection
with the notes payable, for each dollar loaned to the Company, the holder
received warrants to purchase one share of the Company's common stock for a
period of three years at exercise prices ranging from $.08 to $.11 per share.
During the quarter and nine months ended June 30, 2005, $12,673 representing the
value of the warrants issued to purchase 250,000 shares of common stock
associated with the $250,000 of short-term notes payable was recorded as a
discount to debt and is being amortized over the term of the notes. In addition,
the entire principal plus accrued interest associated with the $450,000 of
short-term convertible notes is convertible into the Company's common stock at a
conversion price of the lesser of the closing price of the common stock on the
date of the loan or 85% of the average closing price of the common stock for the
five (5) trading days preceding the notice of conversion. In no event shall the
conversion price be lower than 50% of the closing price of the common stock on
the date of the loan. A discount to debt totaling $104,540 ($92,700 for the fair
value of the conversion feature of these notes and $11,840 for the value of the
warrants issued in connection with these notes) was recorded during the quarter
and nine months ended June 30, 2005 and is being amortized over the term of the
notes. A liability of approximately $105,000 was recorded for the fair value of
the warrants issued in connection with the $450,000 of notes and the conversion
feature which was $93,735 at June 30, 2005.
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 nine months ended June 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 $194,720 at June 30, 2005. 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. As of June 30, 2005, 885 shares of this preferred stock had been
converted into common stock and 400 shares were outstanding.
The cash available at June 30, 2005 and anticipated customer receipts are
expected to be sufficient to fund the operations of the Company through August
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 calendar year 2005 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 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 permitted the Company to maintain its
listing on the AMEX . More specifically, the Exchange granted the Company an
extension through July 2005 subject to periodic reviews by the Exchange.
However, to date, the Company has failed to regain compliance with the continued
listing standards.
On August 10, 2005, Avitar, received notice from the Staff of AMEX
indicating that the Staff determined to proceed with the filing of an
application with the Securities and Exchange Commission to strike the common
stock of Avitar from listing and registration on the Exchange. This
determination by the Staff was based upon the failure of the Company to achieve
compliance with the continued listing standards of AMEX.
As indicated in the Staff notice, the Company failed to achieve compliance
with several continued listing standards of AMEX as set forth in the AMEX
Company Guide, specifically, having a deficit of shareholders' equity and losses
from continuing operations and/or net losses in its five most recent fiscal
years resulting in non-compliance with Sections 1003(a)(i-iii); losses that were
so substantial in relation to its overall operations or its existing financial
resources resulting in the opinion of the Exchange to be in non-compliance with
Section 1003(a)(iv); and finally its low selling price per share resulting in
non-compliance with Section 1003(f)(v).
Management continues to expect that operating revenues will continue to
grow during the remainder of Fiscal 2005 and beyond 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 has begun 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 future 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 of 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 FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"), which replaces SFAS 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion no. 25, "Accounting for Stock Issued
to Employees." SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values beginning with the first interim or annual
period after June 15, 2005. In April 2005, the Securities and Exchange
Commission (the "SEC") postponed the effective date of SFAS 123R until the
issuer's first fiscal year beginning after June 15, 2005. Under the current
rules, the Company will be required to adopt SFAS 123R in the first quarter of
fiscal 2006.
Under SFAS 123R, pro forma disclosures previously permitted will no longer
be an alternative to financial statement recognition. The Company must determine
the appropriate fair value model to be used for valuing share-based payments to
employees, the amortization method for compensation cost and the transition
method to be used at the date of adoption. The transition methods include
modified prospective and retrospective adoption options. Additionally, SFAS 123R
clarifies the timing for recognizing compensation expense for awards subject to
acceleration of vesting on retirement and also specifies the treatment of excess
tax benefits associated with stock compensation.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107")
regarding the SEC's interpretation of SFAS 123R and the valuation of share-based
payments for public companies. Avitar is evaluating the requirements of SFAS
123R and SAB 107 and expects that the adoption of SFAS 123R will have a material
impact on Avitar's consolidated results of operations and earnings per share.
The Company has not yet determined the method of adoption or the effect of
adopting SFAS 123R, and it has not determined whether the adoption will result
in amounts that are similar to the current pro forma disclosures under SFAS 123.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS
151"), an amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4,
"Inventory Pricing". SFAS 151 amends previous guidance regarding treatment of
abnormal amounts of idle facility expense, freight, handling costs, and
spoilage. This statement requires that those items be recognized as current
period charges regardless of whether they meet the criterion of "so abnormal"
which was the criterion specified in ARB No. 43. In addition, this Statement
requires that allocation of fixed production overheads to the cost of the
production be based on normal capacity of the production facilities. This
pronouncement is effective for the Company for fiscal periods beginning after
October 1, 2005. The Company is currently evaluating the effect that the
adoption of SFAS 151 will have on its consolidated results of operations and
financial condition, but it is expected to have a material impact.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces APB Opinions No. 20 "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements" An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error corrections. It
establishes retrospective application, or the latest practicable date, as the
required method for reporting a change in accounting principle and the reporting
of a correction of an error. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005 and
is required to be adopted by Avitar in the first quarter of fiscal 2007. The
Company is currently evaluating the effect that the adoption of SFAS 154 will
have on its consolidated results of operations and financial condition, but does
not expect it will have a material impact.
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
nine months ended June 30, 2005, the balance sheet as of June 30, 2005, the
statements of operations for the quarter and nine months ended June 30, 2005 and
2004 and the statements of cash flow for the nine months ended June 30, 2005 and
2004 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 June 30, 2005, 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 June 30, 2005 the Company issued to holders of
convertible preferred stock 17,806,045 shares of the Company's common stock upon
the conversion of their preferred stock. Also during the quarter ended June 30,
2005, the Company issued 264,018 shares of the Company's common stock as payment
for dividends on the Series A 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 No. Document
(A) 4.1 Securities Purchase Agreement dated as of June 3, 2005 between the
Company and Cornell Capital Partners, LP
(A) 4.2 Registration Rights Agreement dated as of June 3, 2005 between the
Company and Cornell Capital Partners, LP
(A) 4.3 Certificate of Designations of the Series E Convertible Preferred
Stock
(A) 4.4 Warrant
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
(A) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Report on 8-K (Commission File No. 1-51695), as filed on June 3,
2005, and incorporated herein by reference.
(b) Reports on Form 8-K:
Form 8-K, Items 1.01, 1.02, 3.02 and 9.01, dated April 19, 2005
regarding a private placement to Cornell Capital Partners, LP Distribution
Agreement with Cornell Capital Partners, LP for the sale of preferred stock and
warrants.
Form 8-K, Items 1.01 and 9.01, dated June 3, 2005 regarding a private
placement to Cornell Capital Partners, LP Distribution Agreement with Cornell
Capital Partners, LP for the sale of 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
(A) 4.1 Securities Purchase Agreement dated as of June 3, 2005 between the
Company and Cornell Capital Partners, LP
(A) 4.2 Registration Rights Agreement dated as of June 3, 2005 between the
Company and Cornell Capital Partners, LP
(A) 4.3 Certificate of Designations of the Series E Convertible Preferred
Stock
(A) 4.4 Warrant
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
(A) Previously filed with the Securities and Exchange Commission as an Exhibit
to the Report on 8-K (Commission File No. 1-51695), as filed on June 3,
2005, and incorporated herein by reference.