U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended March 31, 2006.
[ ] 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
incorporation or organization) Identification No.)
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
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) [ ] Yes [x] 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: 4,419,344
AS OF MAY 10, 2006
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 25 pages
Exhibit Index is on Page 30
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 18
Item 3 Controls and Procedures 25
PART II: OTHER INFORMATION 26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 4 Submission of Matters to a Vote of Security Holders 27
SIGNATURES 29
EXHIBIT INDEX 30
CERTIFICATIONS 31
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 2006
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 42,633
Accounts receivable, net of reserve of $9,000 509,434
Inventories 424,883
Prepaid expenses and other current assets 129,226
-----------
Total current assets 1,106,176
PROPERTY AND EQUIPMENT, net 314,331
GOODWILL 138,120
OTHER ASSETS 528,477
------------
Total Assets $ 2,087,104
============
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 5) $ 167,007
Convertible notes payable (Note 5) 650,000
Accounts payable 555,901
Accrued expenses 955,150
Deferred income 16,100
Current portion of long-term capital leases 15,598
Current portion of deferred lessor incentive 13,400
Fair value of warrants (Note 11) 89,435
Fair value of embedded derivatives (Note 11) 1,055,941
------------
Total current liabilities 3,518,532
------------
LONG-TERM DEBT, LESS CURRENT PORTION (Note 5) 1,848,309
LONG-TERM CAPITAL LEASES, LESS CURRENT PORTION 6,971
DEFERRED LESSOR INCENTIVE, LESS CURRENT PORTION 43,550
------------
Total liabilities 5,417,362
------------
REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED
STOCK (Note 6) 2,920,649
------------
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 100,000,000 shares;
4,419,344 shares issued and outstanding 44,193
Additional paid-in capital 49,141,698
Accumulated deficit (55,436,856)
------------
Total stockholders' deficit (6,250,907)
------------
Total Liabilities, Preferred Stock and Stockholders' Deficit $ 2,087,104
============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
---------------------------------------------------------
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
---------------------------------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
(As Restated) (As Restated)
SALES $ 1,297,266 $ 955,223 $ 2,204,536 $ 1,991,263
------------ ------------ ------------ ------------
OPERATING EXPENSES
Cost of sales 900,121 714,610 1,559,114 1,430,619
Selling, general and administrative expenses 1,018,392 1,031,620 2,056,999 1,964,282
Research and development expenses 109,248 183,306 238,954 379,749
------------ ------------ ------------ ------------
Total operating expenses 2,027,761 1,929,536 3,855,067 3,774,650
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (730,495) (974,313) (1,650,531) (1,783,387)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (175,851) (23,183) (389,086) (36,369)
Other income (expense), net (128,640) 711,321 (7,298) 190,691
------------ ------------ ------------ ------------
Total other income (expense), net (304,491) 688,138 (396,384) 154,322
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,034,986) (286,175) (2,046,915) (1,629,065)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Income from the disposal of USDTL - - 120,000 -
------------ ------------ ------------ ------------
Income from discontinued operations - - 120,000 -
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET LOSS $(1,034,986) $ (286,175) $(1,926,915) $(1,629,065)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS (Note 9) $ (0.25) $ (0.11) $ (0.51) $ (1.00)
BASIC AND DILUTED INCOME PER SHARE FROM DISCONTINUED
OPERATIONS (Note 9) - - 0.03 -
------------ ------------ ------------ ------------
BASIC AND DILUTED LOSS PER SHARE (Note 9) $ (0.25) $ (0.11) $ (0.48) $ (1.00)
============ ============ ============ ============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 4,381,414 2,964,149 4,211,563 2,780,826
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Six Months Ended March 31, 2006
(Unaudited)
Preferred Stock Common Stock Total
..................... ........................
Additional Accumulated Stockholders'
Shares Amount Shares Amount paid-in capital deficit Deficit
- ---------------------------------------------- --------- ------------ ---------- ------------ ------------ ------------
Balance at September 30, 2005 5,689 $ 58.00 3,813,189 $ 38,132 $ 48,860,657 $(53,504,524)$(4,605,677)
Conversion of Series E preferred stock - - 509,162 5,091 229,171 - 234,262
Payment of convertible preferred stock
dividend for Series A preferred stock - - - - - (5,417) (5,417)
Sale of common stock - - 6,083 61 2,779 2,840
Conversion of Series C preferred stock - - 90,910 909 49,091 50,000
Net loss - - - - - (1,926,915) (1,926,915)
- ---------------------------------------------- --------- ------------ ---------- ------------ ------------ ------------
Balance at March 31, 2006 5,689 $ 58 4,419,344 $ 44,193 $ 49,141,698 $(55,436,856)$(6,250,907)
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS ENDED MARCH 31,
-----------------------
2006 2005
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,926,915) $(1,629,065)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 81,151 77,538
Amortization of debt discount and deferred financing 259,398 11,506
Amortization of deferred rent expense - 62,384
Amortization of deferred lessor incentive 6,700 -
(Income) expense from changes in value of embedded derivatives
and warrants 8,524 (189,546)
Changes in operating assets and liabilities:
Accounts receivable 68,697 153,756
Inventories (49,967) (202,157)
Prepaid expenses and other current assets 74,164 2,759
Other assets (4,858) 698
Accounts payable and accrued expenses 103,497 (60,529)
Deferred revenue (150) (13,950)
----------- -----------
Net cash used in operating activities (1,379,759) (1,786,606)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (85,957) (21,725)
----------- -----------
Net cash used in investing activities (85,957) (21,725)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of notes payable and long-term debt (119,437) 206,506
Sales of redeemable preferred stock, common stock and warrants 2,840 1,162,575
Net proceeds from issuance of convertible long-term debt 1,380,000 -
Redemption of Series A redeemable convertible preferred stock (150,000)
Payment of cash dividend on Seires A redeemable convertible preferred stock (5,417) -
----------- -----------
Net cash provided by financing activities1,107,986 1,369,081
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (357,730) (439,250)
CASH AND CASH EQUIVALENTS, beginning of the period 400,363 508,876
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 42,633 $ 69,626
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during period:
Income taxes $ - $ -
Interest $ 23,317 $ 16,986
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the six months ended March 31, 2006, 224,712 shares of Series
E redeemable convertible preferred stock were converted into
509,162 shares of common stock.
During the six months ended March 31, 2006, 8,333 shares of Series C
convertible preferred stock were converted into 90,910 shares of
common stock.
During the six months ended March 31, 2005, 958 shares of Series A
redeemable convertible preferred stock were converted into 264,118
shares of common stock.
During the six months ended March 31, 2005, 1500 shares of Series A
convertible preferred stock were converted into 343,464 shares of
common stock.
During the six months ended March 31, 2005, 11,749 shares of common
were issued as payment of dividends for Series A convertible and
redeemable convertible preferred stock.
During the six months ended March 31, 2005, warrants to purchase $ 12,673
5,000 shares of common stock were issued in connection with
the issuance of notes payable.
During the six months ended March 31, 2005, 21,515 shares $ 125,000
of common stock were issued as payment of investor and placement
agent fees in connection with SEDA financing.
See accompanying notes to consolidated financial statements.
AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
===============================================================================
1. BASIS OF PRESENTATION
Avitar, Inc. (the "Company" or "Avitar") through its wholly-owned
subsidiary Avitar Technologies, Inc. ("ATI") develops, manufactures,
markets and sells diagnostic test products and proprietary hydrophilic
polyurethane foam disposables fabricated for medical, diagnostics, dental
and consumer use. During the first half of FY2006, 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.
The Company's one for fifty (1 for 50) reverse split of its common
stock that was authorized by the Company's shareholders at their annual
meeting held on January 18, 2006 became effective at 5:00 PM on February
17, 2006. Accordingly, the numbers of common stock shares and related
calculations presented herein reflect the results of the reverse split for
current and prior reporting periods.
In December 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. In November 2005, the Company negotiated an
agreement with the new owners of USDTL to settle all outstanding matters
related to the sale of USDTL (see Note 3). Therefore, USDTL is considered a
discontinued operation and this report reflects the continued operations of
the Company. Due to the current financial condition at Avitar, the Company
may consider selling assets and/or operations, including BJR. However, at
the present time, there can be no assurances that the Company would be
successful in these efforts.
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".
As a result, management determined that certain previously issued financial
statements should not be relied upon. The consolidated financial statements
included herein reflect the correct method to account for the issuance of
various securities and the derivative features embedded therein.
The accompanying consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-QSB and
Regulation S-B (including Item 310(b) thereof). Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
the Company's management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended March
31, 2006 are not necessarily indicative of the results that may be expected
for the full fiscal year ending September 30, 2006. 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, 2005. 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 March 31, 2006 of
$6,250,907. The Company raised net proceeds aggregating approximately
$2,498,000 during the year ended September 30, 2005 from the sale of stock
and warrants. In addition, the Company raised gross proceeds of $900,000
from short-term convertible notes and $1,000,000 from long-term convertible
notes. During the first half of FY2006, the Company raised gross proceeds
of $1,500,000 from long-term convertible notes and received $120,000 from
the settlement agreement related to the sale of USDTL described above and
in Note 3. Subsequent to March 31, 2006, the Company raised gross proceeds
of $500,000 from the final installment of the long-term convertible note
financing agreement executed in September 2005. The Company is working with
placement agents and investment fund mangers to obtain additional equity
financing. Based upon cash flow projections, the Company believes the
anticipated cash flow from operations and most importantly, the expected
net proceeds from future equity financings will be sufficient to finance
the Company's operating needs until the operations achieve profitability.
There can be no assurances that forecasted results will be achieved or that
additional financing will be obtained. The financial statements do not
include any adjustments relating to the recoverability and classification
of asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
2. INVENTORIES
At March 31, 2006, inventories consist of the following:
Raw Materials $244,419
Work-in-Process 80,223
Finished Goods 100,241
Total $424,883
3. DISCONTINUED OPERATIONS
On December 16, 2003, the Company consummated a sale of USDTL's
business and net assets, excluding cash. Under the terms of that 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. In November 2005, the Company negotiated an
agreement with the new owners of USDTL to settle all outstanding matters
related to the sale of USDTL. Under the terms of this settlement, the
Company received an immediate lump sum payment of $120,000 rather than
waiting for the 10 to 14 years that the Company believed it would take to
collect the entire $500,000 from uncertain future revenues of USDTL. The
accompanying financial statements reflect USDTL as a discontinued
operation. The following is a summary of the results of its operations for
the three months and six months ended March 31, 2006 and 2005:
Three Months Six Months
Ended March 31, Ended March 31,
--------------------------------------------
2006 2005 2006 2005
---- ---- ---- ----
Sales $ - $ - $ - $ -
Operating expenses - - - -
Other income (expense) - - 120,000 -
--------- -------- --------- ----------
Income from discontinued operations$ $ - - $ 120,000 $ -
========= ======== ========= ==========
4. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Ended March 31, Six Months Ended March 31,
2006 2005 2006 2005
--------- ---------- ---------- -----------
Customer A $ 310,756 $ 308,375 $ 532,586 $ 562,161
At March 31, 2006, accounts receivable from this major customer
totaled approximately $163,579.
5. NOTES PAYABLE AND SHORT AND LONG-TERM CONVERTIBLE NOTES PAYABLE
In September 2005, October 2005 and February 2006, the Company
executed notes payable with AJW Partners, LLC, AJW Offshore, Ltd., AJW
Qualified Partners, LLC and New Millennium Capital Partners II, LLC in the
total principal amount of $2,500,000 which are payable at maturity in
September 2008, October 2008 and February 2009, respectively. Interest on
these notes is at 8% per annum and is payable quarterly in cash or the
Company's common stock at the option of the Company. The Company issued
warrants to purchase 100,000 shares of common stock at $12.50 per share for
five years in connection with these notes. In addition, the entire
principal plus any accrued and unpaid interest associated with these notes
is convertible, at the holder's option, into the Company's common stock at
a conversion price of 65% of the average of the three lowest intraday
trading prices of the common stock for the twenty trading days preceding
the date that the holders elect to convert. A discount to debt totaling
$765,756 ($708,750 for the fair value of the conversion feature of these
notes and $57,006 for the fair value of the warrants issued in connection
with these notes) was recorded during FY2005 and the first half of FY2006
and is being amortized over the term of the notes. The unamortized discount
was $651,691 as of March 31, 2006. Fees of approximately $340,000 incurred
in connection with securing these loans were recorded as a deferred
financing charge. The collateral pledged by the Company to secure these
notes includes all assets of the Company. A liability of approximately
$765,800 was recorded for the fair value of the warrants issued in
connection with the $2,500,000 of notes and the conversion feature, which
was increased to its market value of approximately $918,000 at March 31,
2006.
From April to August 2005, the Company executed convertible notes with
an individual in the total principal amount of $650,000 with interest at
10%. Each note has a maturity date of six months from the date of the note
and is payable in ten monthly installments plus accrued interest commencing
on the maturity date of the note. The Company issued warrants to purchase
13,000 shares of common stock at $1.65 to $4.95 per share for three (3)
years in connection with these notes. In addition, the entire principal
plus accrued interest associated with these 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 $172,930 ($156,800 for the value of the
conversion feature of these notes and $16,130 for the value of the warrants
issued in connection with these notes) was recorded during FY2005 and is
being amortized over the term of the notes. The discount was totally
amortized as of March 31, 2006. A liability of approximately $173,000 was
recorded for the fair value of the warrants issued in connection with the
$650,000 of notes and the conversion feature which was reduced to its
market value of $4,248 at March 31, 2006.
6. CONVERTIBLE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
In 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 3,000 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 $4.00 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 $4.20 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
year ended September 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 reduced to its market value of approximately $167,000 at
March 31, 2006. As of March 31, 2006, 724,351 shares of this preferred
stock had been converted into 735,556 shares of common stock and 775,649
were outstanding. 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.
In December 2004, the Company sold 1,285 shares of Series A Redeemable
Convertible Preferred Stock and Warrants to purchase 12,000 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
$6.00 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 $6.30 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 $3,830 at March 31,
2006. As of March 31, 2006, 1,135 shares of this preferred stock had been
converted into 452,156 shares of common stock and the remaining 150 shares
of Series A redeemable convertible preferred stock, with a face value of
$150,000, were redeemed by the Company in October 2005 for $155,415 which
included accrued dividends of $5,417.
28,608 shares of the Series C convertible preferred stock with a face
value of $145,000 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 March 31, 2006.
7. COMMON AND PREFERRED STOCK
During the six months ended March 31, 2006, the Company issued 509,162
shares of common stock to holders who converted 224,351 shares of Series E
redeemable convertible preferred stock, 90,910 shares of common stock to a
holder who converted 8,333 shares of Series C convertible preferred stock
and 6,083 shares of common stock to employees who purchased shares through
the Company's Employee Stock Purchase Plan. Dividends for all preferred
stock amounted to $82,153 for the six months ended March 31, 2006 and the
total amount of unpaid and undeclared dividends was $324,039.
8. GOODWILL
As of September 30, 2005, the Company's goodwill was composed of
$138,120 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
$138,120 was deemed necessary since September 30, 2005.
9. LOSS PER SHARE
The following data show the amounts used in computing earnings per share:
Three Months Six Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
------------ ----------- ------------ ------------
Loss from continuing operations $(1,034,986) $ (286,175) $(2,046,915) $(1,629,065)
Less:
Preferred Stock Dividends 39,718) (31,415) (82,153) (81,679)
Deemed dividends in connection
with Series A preferred
stock sales - (-) (-) (1,058,260)
----------- --------- ----------- -----------
Loss attributable to common
stockholders from
continuing operations (1,074,704) (17,590) (2,129,068) (2,769,004)
Add:
Income (loss) from discontinued
operation - - 120,000 (-)
----------- --------- ----------- -----------
Net loss attributable to common
stockholders used in basic and
diluted EPS $(1,074,704) $ (317,590) $(2,009,068) $(2,769,004)
=========== ========= =========== ===========
Weighted average number of
common shares outstanding 4,381,414 2,964,149 4,211,563 2,780,826
=========== ========= =========== ===========
Loss per share applicable to common
stockholders before discontinued
operations $(0.25) $(0.11) $(0.51) $(1.00)
Impact of discontinued operations - - .03 -
----------- --------- ----------- -----------
Basic and diluted loss per share
applicable to common
stockholders $(0.25) $(0.11) $(0.48) $(1.00)
=========== ========= =========== ===========
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
quarters and six months ended March 31, 2006 or 2005, as all options granted
under those plans had an exercise price equal to the fair market value of the
underlying common stock on the date of grant.
The following table illustrates, in accordance with the provisions of SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure, the
effect on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Three Months Ended March 31, Six Months Ended March 31,
2006 2005 2006 2005
----------- ----------- ------------ ------------
Net loss $(1,034,986) $ (286,175) $ (1,926,915) $ (1,629,065)
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 (30,742) (37,450) (61,337) (67,145)
----------- ----------- ------------ -----------
Pro forma net loss $(1,065,728) $ (323,625) $ (1,988,252) $(1,696,210)
=========== =========== ============ ===========
Loss per share:
Basic and diluted - as reported $ (.24) $ (.11) $ (.47) $ (.61)
Basic and diluted - pro forma (.24) (.11) (.47) (.61)
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:
March 31 2006 2005
Risk free interest rate 4.3% 3.8%
Expected dividend yield - -
Expected lives 5-9 years 5-9 years
Expected volatility 80% 80%
Options granted during the quarter and six months ended March 31, 2006 totaled
7,000 while the options granted for the three and six months ended March 31,
2005 amounted to 42,274. The weighted average fair value of options granted
during the six months ended March 31, 2006 and 2005 was $.42 and $3.50,
respectively.
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 March 31, 2006, 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.
12. SUBSEQUENT EVENTS
Subsequent to March 31, 2006, the Company executed additional notes payable
with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLC in the total principal amount of $500,000.
The gross proceeds of $500,000 received from these notes represent the final
installments of the $3,000,000 long-term convertible note financing agreement
executed by the Company in September 2005. The prior installments of this
financing are described in Note 5. As part of the final closing of the
$3,000,000 long-term convertible note financing, the Company received the
remainder of the gross proceeds although there was no effective registration
statement for the resale of the common stock into which the notes could be
converted. An effective registration statement was a condition to such funding.
In consideration for such funding without the effective registration statement,
on May 4, 2006 the Company agreed to cancel all warrants theretofore issued to
AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millennium Capital Partners II, LLC and in lieu thereof issued 3 million
warrants in the aggregate to the same parties in the same proportions, but
exercisable for 7 years at $1.25 per share instead of 5 years at $12.50 per
share. The reduced exercise price still substantially exceeded the market price
of the common stock, which had closed at $0.30 on May 3, 2004.
13. 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. The effective date for entities that file
as a small business issuer is as of the beginning of the first annual reporting
period that begins on or after December 15, 2005 Therefore, under the current
rules, the Company will be required to adopt SFAS 123R in the first quarter of
fiscal 2007.
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 was effective for the Company beginning October 1, 2005. The
adoption of SFAS 151 by the Company did not have a material impact on its
consolidated results of operations and financial condition.
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.
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.
ONE FOR FIFTY (1 FOR 50) REVERSE SPLIT OF COMMON STOCK
The Company's one for fifty (1 for 50) reverse split of its common stock
that was authorized by the Company's shareholders at their annual meeting held
on January 18, 2006 became effective at 5:00 PM on February 17, 2006.
Accordingly, the numbers of common stock shares and related calculations
presented herein reflect the results of the reverse split for current and prior
reporting periods.
RESULTS OF OPERATIONS
Revenues
Sales for the three months ended March 31, 2006 increased $324,043, or
approximately 36%, to $1,297,266 from $955,223 for the corresponding period of
the prior year. For the six months ended March 31, 2006, sales increased
$213,273, or approximately 11%, to $2,204,536 from $1,991,263. The change for
the three months ended March 31, 2006 primarily reflects an increase in the
volume of sales for its OralScreen(R) and Foam Products of $340,000, offset in
part by a decrease of $16,000 in revenue from contraband detection services. The
change for the six months ended March 31, 2006 primarily reflects an increase in
the volume of sales for its OralScreen(R) and Foam products of $215,000, offset
in part by a decrease of $2,000 in revenue from contraband detection services.
Operating Expenses
Cost of sales for the three months ended March 31, 2006 were approximately
69% of sales compared to the cost of sales of approximately 75% of sales for the
three months ended March 31, 2005. For the six months ended March 31, 2006, the
cost of sales was 71% compared to 72% of sales for the same period of Fiscal
2005. The improvement for Fiscal 2006 resulted from the overall increase in
sales described above.
Selling, general and administrative expenses for the three months ended
March 31, 2006 decreased $13,228, or approximately 1%, to $1,018,392 from
$1,031,620 for the corresponding period of the prior year. For the six months
ended March 31, 2006, selling, general and administrative expenses increased
$92,717 or approximately 5%, to $2,056,999 from $1,964,282 for the six months
ended March 31, 2005. The change for the six-month period ended March 31, 2006
primarily resulted from the addition of sales and marketing resources. In order
to achieve revenue growth, the Company will most likely continue to incur
increased expenses to hire additional direct sales staff and expand marketing
programs during the remainder of FY2006 and beyond.
Expenses for research and development for the three months ended March 31,
2006 amounted to $109,248 compared to $183,306 for the corresponding period of
the prior year, a decrease of $74,058. For the six months ended March 31, 2006,
expenses for research and development were $238,954 versus $379,749 for the six
months ended March 31, 2005, a decrease of $140,795. The decrease for the
quarter ended March 31, 2006 was primarily attributable to a reduction in salary
expense of $16,000, consulting expense of $23,000 and material and various
development related expenses of $27,000. The change for the six months ended
March 31, 2006 resulted primarily from reduced salary and fringe benefit
expenses of $39,000, consulting expense of $55,000, material and various
development related expenses of $35,000. Although research and development
expenses were lower for the first half of Fiscal 2006, 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
FY2006 and beyond.
Other Income and Expense
Interest expense and financing costs were $175,851 for the three months
ended March 31, 2006 compared to $23,183 incurred during the three months ended
March 31, 2005. For the six months ended March 31, 2006, interest expense and
financing costs amounted to $389,086 versus $36,369 for the corresponding period
of Fiscal 2005. The increase for the three months ended March 31, 2006 resulted
primarily from interest expense of approximately $43,000 and amortization of
deferred financing costs and debt discount of approximately $107,000 associated
with the short-term notes and convertible short and long-term notes totaling
approximately $3,500,000 that were executed by the Company in FY2005 and the
first half of FY2006. For the six months ended March 31, 2006, the change
primarily resulted from interest expense of approximately $93,000 and
amortization of deferred financing costs and debt discount of approximately
$259,000 associated with the short-term notes and convertible short and
long-term notes totaling approximately $3,500,000 that were executed by the
Company in FY2005 and the first half of FY2006
For the three months ended March 31, 2006, other expense amounted to
$128,640 compared to other income of $711,321 for the three months ended March
31, 2005. Other expense for the six months ended March 31, 2006 was $7,298
compared to other income of $190,691 for the six months ended March 31, 2005.
The change for the quarter and six months ended March 31, 2006 from the
corresponding periods of fiscal 2005 occured primarily from the changes in fair
market values 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 six months ended
March 31, 2006, other income amounted to $120,000 compared to no activity for
the corresponding period of the prior year. The income for the first half of
Fiscal 2006 resulted from the settlement described in 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 $1,034,986 for the three months ended March 31, 2006, as compared to net
loss of $286,175 for the three months ended March 31, 2005. For the six months
ended March 31, 2006, the Company had a net loss of $1,926,915 versus $1,629,065
for the corresponding period of Fiscal 2005. The loss per share was $.25 per
basic and diluted share for the three months ended March 31, 2006 compared to a
loss per share of $.11 per basic and diluted share for the three months ended
March 31, 2005. For the six months ended March 31, 2006, the loss per share was
$.48 per basic and diluted share versus a loss per share of $1.00 per basic and
diluted share for the six months ended March 31, 2005.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 2006, the Company had a stockholders'deficit of $6,250,907 and
cash and cash equivalents of $42,633. Our cash flows from financing activities
provided the primary source of funding during the six months ended March 31,
2006 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
six-month period ended March 31, 2006:
March 31,
Sources (use) of cash flows 2006
Operating activities $(1,379,759)
Investing activities (85,957)
Financing activities 1,107,986
Net decrease in cash and equivalents $ (357,730)
Operating Activities. The net loss of $1,926,915 (comprised of expenses
totaling $4,251,451 less revenues and income from discontinued operations
of $2,324,536) 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
changes in the fair market value of derivative securities and warrants, the
cash needed to finance the net loss was $1,571,142. Working capital
requirements necessitated the use of $49,967 to increase inventory levels
to meet anticipated demand for our products during the next several months.
A decrease in accounts receivable of $68,697, decreases in prepaid expenses
of $74,164 and an increase in accounts payable and accrued expenses of
$103,497 lessened working capital needs by $246,358. The addition of $4,858
of other assets and the reduction of $150 in deferred revenue further
increased the operating cash needs.
Investing and Financing Activities. Cash used in investing consisted of
cash paid of $85,957 for additions to property, plant and equipment. To
finance the business, long-term notes (as described below) were executed
and approximated $1,380,000; of which $119,437 was used to repay various
short and long-term debt and $155,417 was used to redeem remaining shares
of the Series A redeemable convertible preferred stock and the accrued
dividends for these shares.
During FY 2006, 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
September 2005 and the first half of Fiscal 2006, the Company executed notes
payable with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC
and New Millennium Capital Partners II, LLC in the total principal amount of
$2,500,000 which is payable at maturity in September 2008, October 2008 and
February 2009. Interest on these notes is 8% and is payable quarterly in cash or
the Company's common stock at the option of the Company. The Company issued
warrants to purchase 100,000 shares of common stock at $12.50 per share for five
years in connection with these notes, which as discussed below were cancelled
and replaced on May 4, 2006 In addition, the entire principal plus any accrued
and unpaid interest associated with these notes is convertible, at the holder's
option, into the Company's common stock at a conversion price of 65% of the
average of the three lowest intraday trading prices of the common stock for the
twenty trading days preceding the date that the holders elect to convert. Fees
of approximately $340,000 incurred in connection with securing these loans were
recorded as a deferred financing charge. The collateral pledged by the Company
to secure these notes includes all assets of the Company. Subsequent to March
31, 2006, the Company received the last installment of $500,000 of this
$3,000,000 long-term convertible note financing. The outstanding warrants were
cancelled on May 4, 2006 and replaced by 3 million warrants exercisable for 7
years at $1.25 per share.
From April to August 2005, the Company executed convertible notes with an
individual in the total principal amount of $650,000 with interest at 10%. Each
note has a maturity date of six months from the date of the note and is payable
in ten monthly installments plus accrued interest commencing on the maturity
date of the note. The Company issued warrants to purchase 13,000 shares of
common stock at $1.65 to $4.95 per share for three (3) years in connection with
these notes. In addition, the entire principal plus accrued interest associated
with these 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.
In 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 3,000
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 $4.00 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 $4.20 per share for a period of
three years. As of March 31, 2006, 724,351 shares of this preferred stock had
been converted into 735,556 shares of common stock and 775,649 were outstanding.
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.
In December 2004, the Company sold 1,285 shares of Series A Redeemable
Convertible Preferred Stock and Warrants to purchase 12,000 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 $6.00 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. As of March 31, 2006, 1,135 shares of this
preferred stock had been converted into 452,156 shares of common stock and the
remaining 150 shares of Series A redeemable convertible preferred stock, with a
face value of $150,000, were redeemed by the Company in October 2005 for
$155,415 which included accrued dividends of $5,417.
The cash available at March 31, 2006, the proceeds of $500,000 from the
last installment of the $3,000,000 convertible note financing, and the
anticipated customer receipts are expected to be sufficient to fund the
operations of the Company through June 2006. 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 FY2006 from
the sales of equity and/or debt securities. The investors involved in the
September 2005, October 2005 and February 2006 convertible note financings
described above have expressed their intent to provide an additional $2,000,000
of financing on terms to be negotiated. 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. In addition, the Company may
consider selling assets and/or operations, including BJR. However, at the
present time, there can be no assurances that the Company would be successful in
these efforts.
Operating revenues are expected to grow during Fiscal 2006 as increasing
number of employers in the United States and overseas convert to using
ORALscreen, Avitar's oral fluid drug testing products. In order to achieve
the revenue growth, the Company will need to 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 financings, 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 2005 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 (January 20, 2006). 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. The effective date for entities that file
as a small business issuer is as of the beginning of the first annual reporting
period that begins on or after December 15, 2005 Therefore, under the current
rules, the Company will be required to adopt SFAS 123R in the first quarter of
fiscal 2007.
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 was effective for the Company beginning October 1, 2005. The
adoption of SFAS 151 by the Company did not have a material impact on its
consolidated results of operations and financial condition.
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
when and if applicable
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievement expressed or implied by such forward-looking statements. Such
factors include, but are not limited to the following: product demand and market
acceptance risks, the effect of economic conditions, results of pending or
future litigation, the impact of competitive products and pricing, product
development and commercialization, technological difficulties, government
regulatory environment and actions, trade environment, capacity and supply
constraints or difficulties, the result of financing efforts, actual purchases
under agreements and the effect of the Company's accounting policies.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of March 31, 2006, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that as of such date, our
disclosure controls and procedures in place are adequate and effective to ensure
material information and other information requiring disclosure is identified
and communicated on a timely basis.
(b) Changes in Internal Control Over Financial Reporting
During the period covered by this report, we have improved our internal
control over financial reporting by correcting the historical accounting
problems to appropriately account for equity and debt issuances including
freestanding warrants and embedded derivatives. There have been no changes in
our other internal controls 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 March 31, 2006 the Company issued to holder of the
Series C preferred stock 90,910 shares of the Company's common stock upon the
conversion of 8,333 shares of his 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders was held on January 18, 2006. All
members of the Board of Directors were elected by more than 74% of the total
shares outstanding and more than 95% of the shares voted. In addition, the
reappointment of BDO Seidman, LLP as auditors was approved and the tabulation of
votes for all matters was as follows:
For Withheld Against Abstain
------------ ------------- ---------- ----------
Election of Directors 160,282,016 7,226,963 N/A N/A
Approval of Amendment to Effect
a 1 for 50 Reverse Split of
Common Stock 150,393,128 N/A 8,999,837 230,635
Approval of Amendment to Certificate
of Incorporation to effect a decrease
of Authorized Shares of Common
from 300,000,000 to 100,000,000 150,843,672 N/A 8,236,293 443,635
Ratify BDO Seidman, LLP as
Company's Independent
Registered Public Firm 154,057,510 N/A 5,028,573 537,517
ITEM 6. EXHIBITS
(a) Exhibits:
Exhibit No. Document
31.1 Rule 13a-14(a)/15d-14(a) Certification , as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Rule 13a-14(a)/15d-14(a) Certification , 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
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVITAR, INC.
(Registrant)
Dated: May 15, 2006 /S/ Peter P. Phildius
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 15, 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 Rule 13a-14(a)/15d-14(a) Certification, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Rule 13a-14(a)/15d-14(a) Certification, 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