U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 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: 6,163,642
AS OF AUGUST 10, 2006
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 32 pages
Exhibit Index is on Page 28
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 17
Item 3 Controls and Procedures 23
PART II: OTHER INFORMATION 25
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6 Exhibits 26
SIGNATURES 27
EXHIBIT INDEX 38
CERTIFICATIONS 29
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2006
(Unaudited)
- ----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,545
Accounts receivable, net of reserve of $10,000 529,160
Inventories 266,833
Prepaid expenses and other current assets 96,758
--------------
Total current assets 930,296
PROPERTY AND EQUIPMENT, net 281,588
GOODWILL 138,120
OTHER ASSETS 504,543
--------------
Total Assets $ 1,854,547
==============
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 158,988
Convertible notes payable (Note 5) 650,000
Accounts payable 614,689
Accrued expenses 1,036,280
Deferred income 16,050
Current portion of long-term capital leases 15,991
Current portion of deferred lessor incentive 13,400
Fair value of warrants (Note 11) 478,975
Fair value of embedded derivatives (Note 11) 1,254,034
--------------
Total current liabilities 4,238,407
--------------
LONG-TERM DEBT, LESS CURRENT PORTION, net of
discount of $774,453 (Note 5) 2,190,610
LONG-TERM CAPITAL LEASES, LESS CURRENT PORTION 2,823
DEFERRED LESSOR INCENTIVE, LESS CURRENT PORTION 40,200
--------------
Total liabilities 6,472,040
--------------
REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED
STOCK (Note 6) 2,875,361
--------------
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;
4,916,124 shares issued and outstanding 49,161
Additional paid-in capital 49,223,821
Accumulated deficit (56,765,894)
--------------
Total stockholders' deficit (7,492,854)
--------------
Total Liabilities, Preferred Stock and Stockholders' Deficit $ 1,854,547
==============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
----------------------------------------------------------
2006 2005 2006 2005
------------ ------------ ------------ -------------
(As Restated) (As Restated)
SALES $ 1,308,575 $ 1,233,087 $ 3,513,111 $ 3,224,320
------------ ------------ ------------ -------------
OPERATING EXPENSES
Cost of sales 972,209 911,377 2,531,323 2,341,320
Selling, general and administrative expenses 948,417 1,208,606 3,005,416 3,173,564
Research and development expenses 109,738 181,008 348,692 560,757
------------ ------------ ------------ -------------
Total operating expenses 2,030,364 2,300,991 5,885,431 6,075,641
------------ ------------ ------------ -------------
LOSS FROM OPERATIONS (721,789) (1,067,904) (2,372,320) (2,851,321)
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE)
Interest expense and financing costs (825,211) (77,451) (1,214,297) (113,820)
Other income (expense), net 217,962 686,739 210,664 877,430
------------ ------------ ------------ -------------
Total other income (expense), net (607,249) 609,288 (1,003,633) 763,610
------------ ------------ ------------ -------------
LOSS FROM CONTINUING OPERATIONS (1,329,038) (458,616) (3,375,953) (2,087,711)
------------ ------------ ------------ -------------
DISCONTINUED OPERATIONS
Income from the disposal of USDTL - - 120,000 -
------------ ------------ ------------ -------------
Income from discontinued operations - - 120,000 -
------------ ------------ ------------ -------------
NET LOSS $(1,329,038) $ (458,616) $(3,255,953) $(2,087,711)
============ ============ ============ =============
BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS (Note 9) $ (0.31) $ (0.50) $ (0.81) $ (1.50)
BASIC AND DILUTED INCOME PER SHARE FROM DISCONTINUED
OPERATIONS (Note 9) - - 0.02 -
------------ ------------ ------------ -------------
BASIC AND DILUTED LOSS PER SHARE (Note 9) $ (0.31) $ (0.50) $ (0.79) $ (1.50)
============ ============ ============ =============
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 4,480,981 3,211,978 4,301,369 2,924,128
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Deficit
Nine Months Ended June 30, 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 - - 790,942 7,909 278,507 - 286,416
Payment of convertible preferred stock
dividend for Series A preferred stock - - - - - (5,417) (5,417)
Conversion of long-term convertible note - - 215,000 2,150 32,787 - 34,937
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 - - - - - (3,255,953) (3,255,953)
- --------------------------------------------- --------- ----------- ---------- ------------ ----------- -----------
Balance at June 30, 2006 5,689 $ 58 4,916,124 $ 49,161 $ 49,223,821 $(56,765,894)$(7,492,854)
- -----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JUNE 30,
---------------------
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,255,953)$(2,087,681)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 130,996 116,307
Amortization of debt discount and deferred financing 400,674 62,633
Amortization of deferred rent expense - 93,575
Amortization of deferred lessor incentive 10,050 -
(Income) expense from changes in value of embedded derivatives
and warrants (215,856) (876,277)
Interest expense from warrant replacements for long-term notes 605,000
Changes in operating assets and liabilities:
Accounts receivable 48,971 176,806
Inventories 108,083 (27,318)
Prepaid expenses and other current assets 106,632 44,283
Other assets (10,438) (161,385)
Accounts payable and accrued expenses 243,395 (337,997)
Deferred revenue (200) (76,450)
--------- ---------
Net cash used in operating activities (1,828,646) (3,073,504)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (90,384) (28,967)
--------- ---------
Net cash used in investing activities (90,384) (28,967)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of notes payable and long-term debt (131,211) 160,764
Sales of redeemable preferred stock, common stock and warrants 2,840 2,497,575
Net proceeds from issuance of convertible notes payable - 450,000
Net proceeds from issuance of convertible long-term debt 1,840,000 -
Redemption of Series A redeemable convertible preferred stock (150,000) -
Payment of cash dividend on Series A redeemable convertible preferred stock (5,417) -
--------- ---------
Net cash provided by financing activities 1,556,212 3,108,339
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (362,818) 5,868
CASH AND CASH EQUIVALENTS, beginning of the period 400,363 508,876
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period $ 37,545 $ 514,744
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ - $ -
Interest $ 25,144 $ 16,986
See accompanying notes to consolidated financial statements.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During the nine months ended June 30, 2006, 270,000 shares of
Series E redeemable convertible preferred stock were converted into
790,942 shares of common stock.
During the nine months ended June 30, 2006, 8,333 shares of
Series C convertible preferred stock were converted into
90,910 shares of common stock.
During the nine months ended June 30, 2006, $34,937 of
long-term convertible notes were converted into
215,000 shares of common stock.
During the nine months ended June 30, 2005, 958 shares of
Series A redeemable convertible preferred stock were converted
into 264,118 shares of common stock.
During the nine months ended June 30, 2005, 1500 shares of
Series A convertible preferred stock were converted into
343,464 shares of common stock.
During the nine months ended June 30, 2005, 11,749 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
14,000 shares of common stock were issued in connection with
the issuance of notes payable.
During the nine months ended June 30, 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 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 data
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 nine month periods ended June
30, 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 June 30, 2006 of
$7,492,854. 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 nine months of FY2006, the Company raised gross
proceeds of $2,000,000 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 June 30, 2006, the Company
raised gross proceeds of $750,000 from long-term convertible notes executed
in July 2006. The Company is working with placement agents and investment
fund managers 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 debt or equity
financings, will be sufficient to finance the Company's operating needs
until the operations achieve profitability. There can be no assurances that
forecasted results will be achieved or that additional financing will be
obtained. The financial statements do not include any adjustments relating
to the recoverability and classification of asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
2. INVENTORIES
At June 30, 2006, inventories consist of the following:
Raw Materials $196,446
Work-in-Process 45,349
Finished Goods 25,038
---------
Total $266,833
========
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 nine months ended June 30, 2006 and 2005:
Three Months Nine Months
Ended June 30, Ended June 30,
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 June 30, Nine Months Ended June 30,
------------------------------- -----------------------------
2006 2005 2006 2005
---------------- -------------- --------------- ----------------
Customer A $ 212,272 $ 348,839 $ 744,858 $ 911,000
Customer B $ 162,319 * * *
Customer C $ 142,132 * * *
* Not in excess of 10% during these periods.
At June 30, 2006, accounts receivable from these major customers
totaled approximately $286,224.
5. NOTES PAYABLE AND SHORT AND LONG-TERM CONVERTIBLE NOTES PAYABLE
In September 2005, October 2005, February 2006, April 2006 and May
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 $3,000,000 which are
payable at maturity in September 2008, October 2008, February 2009 April
2009 and May 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 originally issued warrants to purchase
100,000 shares of common stock at $12.50 per share for five years in
connection with these notes. In May 2006, the outstanding warrants were
cancelled and replaced with warrants to purchase 3,000,000 shares of common
stock at $1.25 per share for seven years. 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 $968,006
($850,500 for the fair value of the conversion feature of these notes and
$117,506 for the fair value of the warrants issued in connection with these
notes) was recorded during FY2005 and the first nine months of FY2006 and
is being amortized over the term of the notes. The unamortized discount was
$774,453 as of June 30, 2006. Non-cash interest expense of $605,000
representing the fair value of the warrants issued as replacement for the
outstanding warrants in May 2006 was recorded in the quarter ended June 30,
2006. Fees of approximately $385,000 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 $1,573,000 was recorded for the fair
value of the warrants issued in connection with the $3,000,000 of notes and
the conversion feature, which was reduced to its market value of
approximately $1,559,000 at June 30, 2006. As of June 30, 2006, notes
totaling $34,937 were converted into 215,000 shares of common stock.
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 June 30, 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 $328 at June 30, 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 $157,000 at
June 30, 2006. As of June 30, 2006, 769,639 shares of this preferred stock
had been converted into 1,037,336 shares of common stock and 730,361 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, these securities were 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 $1,212 at June 30,
2006. As of June 30, 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 June 30, 2006.
7. COMMON AND PREFERRED STOCK
During the nine months ended June 30, 2006, the Company issued 790,942
shares of common stock to holders who converted 270,000 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 $122,305 for the nine months ended June 30, 2006 and the
total amount of unpaid and undeclared dividends was $364,212.
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 Nine Months
Ended June 30, Ended June 30,
------------------------- ----------------------------
2006 2005 2006 2005
----------- ------------ ------------ --------------
Loss from continuing operations $(1,329,038) $ (458,616) $(3,375,953) $(2,087,711)
Less:
Preferred Stock Dividends (40,152) (71,006) (122,305) (152,685)
Deemed dividends in connection
with Series A preferred
stock sales - (1,087,000) (-) (2,145,260)
----------- ----------- ----------- -----------
Loss attributable to common
stockholders from
continuing operations (1,369,190) (1,616,622) (3,498,258) (4,385,656)
Add:
Income (loss) from discontinued
operation - - 120,000 (-)
----------- ----------- ----------- -----------
Net loss attributable to common
stockholders used in basic and
diluted EPS $( 1,369,190) $( 1,616,622) $(3,378,258) $(4,385,656)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,480,981 3,211,978 4,301,369 2,924,128
=========== =========== =========== ===========
Loss per share attributable to common
stockholders before discontinued
operations $ (0.31) $ (0.50) $ (0.81) $ (1.50)
Impact of discontinued operations - - .02 -
----------- ----------- ----------- -----------
Basic and diluted loss per share
attributable to common
stockholders $ (0.31) $ (0.50) $ (0.79) $ (1.50)
=========== =========== =========== ===========
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 nine months ended June 30, 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 June 30, Nine Months Ended June 30,
2006 2005 2006 2005
------------ ------------ ------------- -------------
Net loss $(1,329,038) $ (458,616) $ (3,255,953) $ (2,087,711)
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) (41,930) (92,079) (109,075)
------------- ------------ ------------- ------------
Pro forma net loss $ (1,359,780) $ (500,546) $ (3,348,032) $ (2,196,786)
=============== ============= ============= =============
Loss per share:
Basic and diluted - as reported $ (.31) $ (.50) $ (.79) $ (1.50)
Basic and diluted - pro forma (.31) (.52) (.81) (1.53)
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:
June 30 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 nine months ended June 30, 2006 totaled
7,000 while the options granted for the nine months ended June 30, 2005
amounted to 46,274. The weighted average fair value of options granted
during the nine months ended June 30, 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 June 30,
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 June 30, 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 $750,000. 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 1,500,000 shares of
common stock at $.23 per share for seven 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.
During July 2006, the Company issued to holders of convertible notes
880,000 shares of common stock upon conversion of long-term notes totaling
$56,500. In addition, 367,518 shares of common stock were issued to the
holder of Series E preferred stock upon conversion of 24,500 shares of its
preferred stock.
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.
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company~s financial statements in accordance with FASB Statement No.
109, Accounting for Income Taxes. FIN 48 prescribes the recognition and
measurement of a tax position taken or expected to be taken in a tax
return. It also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently evaluating the effect that the adoption
of FIN 48 will have on its consolidated financial statements but does not
expect that it will have a material impact.
In February 2006, the FASB issued SFAS 155, Accounting for Certain
Hybrid Financial Instruments which amends SFAS 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 simplifies the accounting for certain derivatives
embedded in other financial instruments by allowing them to be accounted
for as a whole if the holder elects to account for the whole instrument on
a fair value basis. SFAS 155 also clarifies and amends certain other
provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all
financial instruments acquired, issued or subject to a remeasurement event
occurring in fiscal years beginning after September 15, 2006 and is
therefore required to be adopted by the Company in the first quarter of
fiscal quarter of fiscal 2007. The Company is currently evaluating the
effect that the adoption of SFAS 155 will have on its consolidated
financial statements but does not expect that 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, common stock share and per share data 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 June 30, 2006 increased $75,488, or
approximately 6%, to $1,308,575 from $1,233,087 for the corresponding period of
the prior year. For the nine months ended June 30, 2006, sales increased
$288,791, or approximately 9%, to $3,513,111 from $3,224,320. The change for the
three months ended June 30, 2006 primarily reflects an increase in the volume of
sales for its OralScreen(R) and Foam Products of $77,000, offset in part by a
decrease of $2,000 in revenue from contraband detection services. The change for
the nine months ended June 30, 2006 primarily reflects an increase in the volume
of sales for its OralScreen(R) and Foam products of $292,000, offset in part by
a decrease of $3,000 in revenue from contraband detection services.
Operating Expenses
Cost of sales for the three months ended June 30, 2006 were approximately
74% of sales compared to the cost of sales of approximately 74% of sales for the
three months ended June 30, 2005. For the nine months ended June 30, 2006, the
cost of sales was 72% compared to 73% 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
June 30, 2006 decreased $260,189, or approximately 22%, to $948,417 from
$1,208,606 for the corresponding period of the prior year. For the nine months
ended June 30, 2006, selling, general and administrative expenses decreased
$168,148 or approximately 5%, to $3,005,416 from $3,173,564 for the nine months
ended June 30, 2005. The change for the nine months ended June 30, 2006
primarily resulted from expense reductions for legal, investor relations,
travel, staffing adjustments within sales personnel and various other
administrative items during the quarter ended June 30, 2006, offset in part by
increases in expenses of $92,041 primarily related to the addition of sales and
marketing resources that occurred during the first six months of FY2006. In
order to achieve revenue growth, the Company will most likely 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 June 30,
2006 amounted to $109,738 compared to $181,008 for the corresponding period of
the prior year, a decrease of $71,270. For the nine months ended June 30, 2006,
expenses for research and development were $348,692 versus $560,757 for the nine
months ended June 30, 2005, a decrease of $212,065. The decrease for the quarter
ended June 30, 2006 was primarily attributable to a reduction in salary expense
of $14,000, consulting expense of $34,000 and material and various development
related expenses of $23,000. The change for the nine months ended June 30, 2006
resulted primarily from reduced salary and fringe benefit expenses of $54,000,
consulting expense of $88,000, material and various development related expenses
of $70,000. Although research and development expenses were lower for the nine
months 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 final months of FY2006 and beyond.
Other Income and Expense
Interest expense and financing costs were $825,211 for the three months
ended June 30, 2006 compared to $77,451 incurred during the three months ended
June 30, 2005. For the nine months ended June 30, 2006, interest expense and
financing costs amounted to $1,214,297 versus $113,820 for the corresponding
period of Fiscal 2005. The increase for the three months ended June 30, 2006
resulted primarily from interest expense of approximately $66,000, non-cash
interest expense of $605,000 representing the fair value of the warrants issued
as replacement for the outstanding warrants in May 2006 was recorded in the
quarter ended June 30, 2006 and amortization of deferred financing costs and
debt discount of approximately $77,000 associated with the short-term notes and
convertible short and long-term notes totaling approximately $3,900,000 that
were executed by the Company in FY2005 and the first nine months of FY2006. For
the nine months ended June 30, 2006, the change primarily resulted from
increased interest expense of approximately $157,000, non-cash interest expense
of $605,000 representing the fair value of the warrants issued as replacement
for the outstanding warrants in May 2006 was recorded in the quarter ended June
30, 2006 and higher amortization of deferred financing costs and debt discount
of approximately $338,000 associated with the short-term notes and convertible
short and long-term notes totaling approximately $3,900,000 that were executed
by the Company in FY2005 and the first nine months of FY2006.
For the three months ended June 30, 2006, other income amounted to $217,962
compared to other income of $686,739 for the three months ended June 30, 2005.
Other income for the nine months ended June 30, 2006 was $210,664 compared to
other income of $877,430 for the nine months ended June 30, 2005. The changes
for the quarter and nine months ended June 30, 2006 from the corresponding
periods of Fiscal 2005 occurred primarily from the changes in the fair market
value of embedded 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 nine months ended
June 30, 2006, other income amounted to $120,000 compared to no activity for the
corresponding period of the prior year. The income for the first nine months 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 $1,329,038 for the three months ended June 30, 2006, as compared to
net loss of $458,616 for the three months ended June 30, 2005. For the nine
months ended June 30, 2006, the Company had a net loss of $3,255,953 versus
$2,087,711 for the corresponding period of Fiscal 2005. The loss per share was
$.31 per basic and diluted share for the three months ended June 30, 2006
compared to a loss per share of $.50 per basic and diluted share for the three
months ended June 30, 2005. For the nine months ended June 30, 2006, the loss
per share was $.79 per basic and diluted share versus a loss per share of $1.50
per basic and diluted share for the nine months ended June 30, 2005.
FINANCIAL CONDITION AND LIQUIDITY
At June 30, 2006, the Company had a stockholders' deficit of $7,492,854 and
cash and cash equivalents of $37,545. Our cash flows from financing activities
provided the primary source of funding during the nine months ended June 30,
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
nine-month period ended June 30, 2006:
June 30,
Sources (use) of cash flows 2006
--------------------------- ------------
Operating activities $(1,828,646)
Investing activities (90,384)
Financing activities 1,556,212
-------------
Net decrease in cash and equivalents $ (362,818)
=============
Operating Activities. The net loss of $3,255,953 (comprised of expenses
totaling $6,889,064 less revenues and income from discontinued operations
of $3,633,111) 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,
non-cash interest expense for warrant replacements for long-term notes and
changes in the fair market value of derivative securities and warrants, the
cash needed to finance the net loss was $2,325,089. Working capital
requirements necessitated the use of $10,638 for addition of $10,438 of
other assets and the reduction of $200 in deferred revenue. Decreases in
accounts receivable of $48,971, inventories of $108,083, prepaid expenses
of $106,632 along with increases in accounts payable and accrued expenses
of $243,395 reduced working capital needs by $507,081.
Investing and Financing Activities. Cash used in investing consisted of
cash paid of $90,384 for additions to property, plant and equipment. To
finance the business, long-term notes (as described below) were executed
and approximated $1,840,000; of which $131,211 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. Sales of common stock generated $2,840.
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, October 2005, February 2006, April 2006 and May 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 $3,000,000 which are payable at maturity in September 2008, October
2008, February 2009 April 2009 and May 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 originally issued
warrants to purchase 100,000 shares of common stock at $12.50 per share for five
years in connection with these notes. In May 2006, the outstanding warrants were
cancelled and replaced with warrants to purchase 3,000,000 shares of common
stock at $1.25 per share for seven years. 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 $385,000 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. As of
June 30, 2006, notes totaling $34,938 were converted into 215,000 shares of
common stock.
In July 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 $750,000.
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 1,500,000 shares of common stock at $.23 per share for
seven 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.
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 June 30, 2006, 769,639 shares of this preferred stock had
been converted into 1,017,336 shares of common stock and 730,361 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 June 30, 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 June 30, 2006, the proceeds from the $750,000
convertible note financing in July 2006, and the anticipated customer receipts
are expected to be sufficient to fund the operations of the Company through
August 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, February
2006, April 2006 and May 2006 convertible note financings described above have
expressed their intent to provide an additional $2,000,000 of financing on terms
to be negotiated, of which $750,000 was received in July 2006. 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 continue growing during the remainder of
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 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 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.
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company~s financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes the recognition and measurement
of a tax position taken or expected to be taken in a tax return. It also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the effect that the adoption of FIN 48 will have on its consolidated
financial statements but does not expect that it will have a material impact.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments which amends SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 155
simplifies the accounting for certain derivatives embedded in other financial
instruments by allowing them to be accounted for as a whole if the holder elects
to account for the whole instrument on a fair value basis. SFAS 155 also
clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155
is effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15, 2006
and is therefore required to be adopted by the Company in the first quarter of
fiscal quarter of fiscal 2007. The Company is currently evaluating the effect
that the adoption of SFAS 155 will have on its consolidated financial statements
but does not expect that 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 June 30, 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
There was no change in our internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal
quarter covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is 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, 2006, the Company issued to holders of
convertible notes 215,000 shares of common stock upon conversion of notes
totaling $34,937. In addition, 281,780 shares of common stock were issued to the
holder of Series E preferred stock upon conversion of 45,288 shares of its
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
(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: August 14, 2006 /S/ Peter P. Phildius
------------------------------
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: August 14, 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