<PAGE>
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, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Exchange act for
the transition period from ____________________ to ____________________
Commission File Number: 0-20316
Avitar, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 06-1174053
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
65 Dan Road, Canton, Massachusetts 02021
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(Address of principal executive offices) (Zip Code)
(617)821-2440
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(Issuer's telephone number)
35 Thorpe Avenue, Suite 101, Wallingford, Connecticut 06492
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(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK: 12,538,778
AS OF MAY 14, 1997
Transitional Small Business Disclosure Format
(Check One): [ ] Yes ; [x] No
Page 1 of 17 pages
Exhibit Index: is on page 16 hereof.
<PAGE>
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION 3
Item 1 Consolidated Financial Statements
Balance Sheet 4
Statements of Operations 5
Statement of Stockholders' Equity 6
Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis or Plan of Operation 9
PART II: OTHER INFORMATION 13
Item 2 Changes in Securities 14
Item 6 Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
2
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PART I FINANCIAL INFORMATION
3
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Item 1. FINANCIAL STATEMENTS
Avitar, Inc. and Subsidiaries
Consolidated Balance Sheet
March 31 1997
(Unaudited)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 95,297
Accounts receivable, net 349,002
Notes Receivable 29,100
Inventories 131,490
Prepaid expenses and other 93,647
------------
Total current assets 698,536
PROPERTY AND EQUIPMENT, net 380,085
GOODWILL, net of accumulated amortization of $1,046,579 4,550,536
OTHER ASSETS 24,751
------------
Total $ 5,653,908
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (including 7,063 to an affiliate) $ 179,795
Accounts payable 662,209
Accrued expenses 457,128
Current portion of long-term debt 287,037
------------
Total current liabilities 1,586,169
LONG TERM DEBT, LESS CURRENT PORTION 207,496
------------
Total liabilities 1,793,665
COMMITMENTS
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; 817,256 shares
issued and outstanding 8,172
Common Stock, $.01 par value;
authorized 25,000,000 shares;
11,928,220 shares issued and outstanding 119,282
Additional paid-in capital 14,037,640
Accumulated deficit (10,304,851)
------------
Total stockholders' equity 3,860,243
------------
Total $ 5,653,908
============
See accompanying notes to consolidated financial statements.
4
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Avitar, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
----------------------------- -----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 463,063 $ 1,225,545 $ 1,091,806 $ 2,492,585
OPERATING EXPENSES
Direct cost of revenues 610,378 786,012 1,161,411 1,569,977
Selling, general and administrative expenses 593,623 581,127 1,201,135 1,157,462
Research and development expenses 102,502 82,575 191,158 169,540
Amortization of goodwill 139,926 139,928 279,854 279,856
----------- ----------- ----------- -----------
Total operating expenses 1,446,429 1,589,642 2,833,558 3,176,835
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (983,366) (364,097) (1,741,752) (684,250)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 2,248 -- 2,248 137
Interest expense and financing costs (20,248) (31,269) (44,301) (64,146)
Other income, net 1,539 39 1,539 2,943
----------- ----------- ----------- -----------
Total other income (expense) (16,461) (31,230) (40,514) (61,066)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (999,827) (395,327) (1,782,266) (745,316)
PROVISION FOR INCOME TAXES 4,400 2,833 7,000 5,044
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,004,227) $ (398,160) $(1,789,266) $ (750,360)
=========== =========== =========== ===========
INCOME (LOSS) PER SHARE $ (0.10) (0.08) $ (0.21) (0.15)
=========== =========== =========== ===========
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING 9,612,447 5,177,450 8,561,137 5,177,450
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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Avitar, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Six Months Ended March 31, 1997
(Unaudited)
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<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------- ------------------------
Additional Accumulated
Shares Amount Shares Amount paid-in capital deficit
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 1,275,261 $ 12,752 6,966,884 $ 69,669 $ 12,958,934 $ (8,515,585)
Sales of Common Stock 2,237,628 22,376 521,625
Exercise of warrants 1,125,000 $ 11,250 468,105
Issuance of common stock for services 224,693 2,247 98,136
Conversion of Preferred Stock (458,005) (4,580) 1,374,015 13,740 (9,160)
Net loss (1,789,266)
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Balance at March 31, 1997 817,256 $ 8,172 11,928,220 $ 119,282 $ 14,037,640 $(10,304,851)
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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Avitar, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,789,266) $ (750,360)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 100,782 96,282
Amortization of goodwill 279,854 279,856
Provision (recovery) for losses on accounts receivable 671 2,000
Non-cash charges for services 100,383
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable 114,247 (196,479)
(Increase) Decrease in prepaid expenses and other current assets 9,673 84,715
Increase in other assets 4,337 (2,368)
Increase in account payable, accrued expenses,
consulting fees and customer advances 132,440 375,656
----------- -----------
Net cash used in operating activities (1,046,879) (110,698)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment -- (17,329)
Net cash provided by (used in) investing activities -- (17,329)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants 172,808 189,623
Sales of preferred stock, common stock and warrants, net 755,417 20,778
Repayment of long-term debt (153,107) (44,995)
Repayment of notes payable (3,798) (117,832)
Other -- (1,025)
----------- -----------
Net cash provided by financing activities 771,320 46,549
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (275,559) (81,478)
CASH AND CASH EQUIVALENTS, beginning of the period 370,856 155,409
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period $ 95,297 $ 73,931
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during period:
Income taxes $ 500 $ 3,567
Interest $ 37,148 $ 49,308
</TABLE>
See accompanying notes to consolidated financial statements.
7
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AVITAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
================================================================================
1. BASIS OF PRESENTATION
Avitar, Inc. ("Avitar" or the "Company"), through its two wholly-owned
subsidiaries, Avitar Technologies Inc. ("ATI") and Managed Health Benefits
Corporation ("MHB"), operates in two significant segments of the healthcare
industry. ATI produces disposable medical and dental products made from
polyurethane foam and has recently entered the rapid diagnostic screening
test market. MHB provides healthcare cost containment services to employers
and other third-party payers to assist them in controlling costs of group
medical, workers' compensation and disability benefits. ATI sells its
products and services primarily to large medical supply companies located
both inside and outside of the United States. All of MHB's customers are
located or headquartered in the United States.
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, 1997 are not necessarily indicative of the results that may be expected
for the full fiscal year ending September 30, 1997. 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, 1996.
The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. The Company has suffered recurring losses from operations and has
a working capital deficit as of March 31, 1997 of $887,633. The Company
raised net proceeds aggregating approximately $1,500,000 during the fiscal
years ended September 30, 1996 and 1995 from the sale of stock. During the
six months ended March 31, 1997, the Company raised net proceeds of
approximately $212,000 from the exercise of certain warrants (previously
issued in connection with notes during fiscal years 1994 and 1995) and
approximately $544,000 from the sale of common stock. The Company was also
successful in extinguishing debt payable to PKS in the amount of $268,000
from PKS's exercise of the warrants described above. The Company is
attempting to obtain additional equity financing. Based upon current
revenues, expenses and cash flow projections, the Company believes the
current level of working capital, anticipated cash flow from operations,
and expected net proceeds from the financing noted above will be sufficient
to finance the Company's operating needs until the combined 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.
8
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2. INVENTORIES
At March 31, 1997, inventories consist of the following:
Raw Materials $ 41,192
Work-in-Process 2,903
Finished Goods 87,395
--------
Total $131,490
========
3. MAJOR CUSTOMERS
Customers in excess of 10% of total sales are:
Three Months Six Months
Ended March 31, Ended March 31,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
Customer A $ 71,000 $309,000 $ 76,000 $838,000
Customer B 45,000 122,000 112,000 256,000
Customer C 58,000 61,000 136,000 131,000
Customer D 36,000 114,000 121,000 208,000
4. SUBSEQUENT EVENT
During April 1997, Peter Phildius, Chairman and Chief Executive Officer of
the Company, and Douglas Scott, President and Chief Operating Officer of
the Company, made loans to the Company in the amount of $205,923, with
interest payable at 10% per annum. These loans and the accrued interest
thereon are to be repaid on or before September 30, 1997.
In May 1997, the Company completed Regulation S placements totaling 461,538
of its common stock to offshore investors resulting in net proceeds of
approximately $150,000.
During May 1997, the Company established the Avitar, Inc. Stock Based
Compensation Plan. Under the terms of this plan, the Company will be able
to issue up to 1.4 million shares of its common stock to cover the salaries
of certain employees for ninety days and to pay for services provided by
certain consultants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
Revenues
Revenues for the three months ended March 31, 1997 decreased $762,482, or
approximately 62%, to $463,063 from $1,225,545 for the corresponding period
of the prior year. For the six months ended March 31, 1997, revenues
decreased $1,400,779, or approximately 56%, to
9
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$1,091,806 from $2,492,585 for the six months ended March 31, 1996. The
decrease for the three months ended March 31, 1997 occurred mainly from the
reductions in revenue of $470,000 from the sales of wound dressing products
and $287,000 from the sales of psychiatric review services. For the six
months ended March 31, 1997, the results primarily reflect the reductions
in revenue of $74,000 from the sales of Medgate's OHS&E software, $965,000
from the sales of wound dressing products and $362,000 from the sales of
psychiatric review services.
Operating Expenses
For the three months ended March 31, 1997, the direct costs of sales were
$610,378, or approximately 132% of sales, as compared to $786,012, or
approximately 64% of sales, for the three months ended March 31, 1996. The
direct cost of sales for the six months ended March 31, 1997 were
$1,161,411, or approximately 106% of sales, as compared to $1,569,977, or
approximately 63% of sales, for the corresponding period of the prior year.
The change for the three months and the six months ended March 31, 1997 was
related primarily to the decrease in sales described above.
Selling, general and administrative expenses for the three months ended
March 31, 1997 increased $12,496, or approximately 2%, to $593,623 from
$581,127 for the corresponding period of the prior year. For the six months
ended March 31, 1997, selling, general and administrative expenses
increased $43,673, or approximately 4%, to $1,201,135 from $1,157,462. The
increase for the three month period ended March 31, 1997 was primarily
attributable to staffing expense for ATI's new Senior Vice President of
Sales and Marketing. For the six months ended March 31, 1997, the increase
resulted mainly from consulting expenses related to diagnostic products of
$18,000, staffing expense of $8,000 for ATI's new Senior Vice President of
Sales and Marketing and for various other administrative and sales expenses
of $17,000.
Expenses for research and development and the amortization of goodwill for
the three months ended March 31, 1997 amounted to $242,428 which
represented less than a 9% increase over the $222,503 incurred for the
corresponding period of the prior year. For the six months ended March 31,
1997, expenses for research and development and the amortization of
goodwill were $471,012 compared to $449,396 for the six months ended March
31, 1996. The increase for the three and six months ended March 31, 1997
resulted mainly from staffing expense for ATI's new Vice President for
Research and Development.
Other Income and Expense
For the three months ended March 31, 1997, other expenses (net of other
income) amounted to $16,461 as compared to $31,230 for the three months
ended March 31, 1996. Other expenses (net of other income) for the six
months ended March 31, 1997 were $40,514 compared to $61,066 for the
corresponding period of the prior year. This change resulted primarily from
the reduction in interest expense on MHB's bridge loans.
Net Loss
Primarily as a result of the factors described above, the Company had a net
loss of $1,004,227 ($0.10 per share) for the three months ended March 31,
1997, as compared to a net loss of $398,160 ($0.08 per share) for the three
months ended March 31, 1996. For the six months
10
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ended March 31, 1997, the net loss was $1,789,266 ($0.21 per share) versus
a net loss of $750,360 ($0.15 per share) for the corresponding period of
the prior year.
Financial Condition and Liquidity
At March 31, 1997 and September 30, 1996 the Company had working capital
deficiencies of ($887,633) and ($496,067), respectively, and cash and cash
equivalents of $95,297 and $370,856 respectively. Net cash used in
operating activities during the six months ended March 31, 1997 amounted to
$1,046,879 resulting primarily from an operating loss of $1,789,266 offset
in part by a decrease in accounts receivable of $114,247, decreases in
prepaid expenses and other assets of $14,010, depreciation and amortization
of equipment and goodwill of $380,636, non-cash charges for consulting
services of $100,383 and increases in accounts payable and accrued expenses
of $132,440. Net cash provided by financing and investing activities during
the six months ended March 31, 1997 amounted to $771,320 which included the
sale of the Company's common stock of $755,417 and proceeds from notes
payable of $172,808; offset in part by repayment of notes payable of $3,798
and repayment of long term debt of $153,107.
In November 1996, the Company lowered the exercise price of certain
warrants (previously issued in connection with notes during fiscal years
1994 and 1995) with the intent of inducing warrant holders to exercise the
warrants. As a result, the Company issued 1,125,000 shares of its common
stock for which it received $212,000 and extinguished debt payable to PK&S
in the amount of $268,000.
During the three months ended March 31, 1997 and the early part of May
1997, the Company completed Regulation S placements of 2,699,166 shares of
its common stock to offshore investors resulting in net proceeds of
approximately $694,000. In April 1997, Peter Phildius, Chairman and Chief
Executive Officer of the Company, and Douglas Scott, President and Chief
Operating Officer of the Company, made loans to the Company in the amount
of $205,923 with interest payable at 10% per annum. These loans and the
accrued interest thereon are to be repaid on or before September 30, 1997.
In addition, the Company is attempting to raise up to $5,000,000 through
private placement, possible exercise of its Redeemable Warrants and/or a
possible rights offering to existing shareholders. Proceeds from these
financings are expected to be used to finance any Company operating losses,
to meet working capital needs, to pay outstanding payables and to expand
the business.
In May 1997, the Company established the Avitar, Inc. Stock Based
Compensation Plan. Under the terms of this plan, the Company will be able
to issue up to 1.4 million shares of its common stock to cover the salaries
of certain employees for ninety days and to pay for services provided by
certain consultants.
For the balance of fiscal year 1997, the Company's cash requirements are
expected to include primarily funding of working capital, completing
the payment of accrued professional fees incurred in relation to the
acquisition of ATI, repaying the loans described above and financing the
development of products for the rapid diagnostic testing market.
Operating revenues of the Company declined significantly during the first
six months of fiscal 1997, but are expected to gradually increase over the
balance of fiscal year 1997 as the Company begins to expand the use of its
polyurethane foam based technology to produce and market.
11
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products for the diagnostic marketplace. Based on current sales, expense
and cash flow projections, the Company believes that the current level of
cash and short-term investments on hand, the anticipated cash flow from
operations, and, most significantly, the proceeds from the financing
mentioned above would be sufficient to fund operations until the Company
achieves profitability. There can be no assurances that the Company will be
able to obtain all of the proceeds sought from the above mentioned
financing. Once the Company achieves profitability, the longer-term cash
requirements of the Company to fund operating activities, purchase capital
equipment and expand the business are expected to be met by the anticipated
cash flow from operations and proceeds from any financings. 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 additional
capital on favorable terms.
As a result of the Company's recurring losses from operations and working
capital deficit, the report of its independent certified public accountants
relating to the financial statements for the fiscal year ended September
30, 1996 contains an explanatory paragraph stating substantial doubt about
the Company's ability to continue as a going concern. Such report also
states that the ultimate outcome of this matter could not be determined as
of the date of such report (November 15, 1996). The Company's plans to
address the situation are presented above. However, there are no assurances
that these endeavors will be successful or sufficient.
12
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PART II OTHER INFORMATION
13
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ITEM 2. CHANGES IN SECURITIES
(a) The Company has extended the expiration date of its Redeemable Warrants
(Nasdaq SmallCap Market: AVITW) from April 30, 1997 to June 30, 1997.
Further, the Company reduced the exercise price of the Redeemable Warrants
so that each Redeemable Warrant entitles the holder to purchase 4.0 shares
of Common Stock (subject to further adjustment) for $0.60 per share. This
offering will be made only by means of a prospectus.
The Company has approximately 2.7 million Redeemable Warrants outstanding.
If all of these warrants were exercised, approximately 11 million shares of
Common Stock would be issued in exchange for the aggregate exercise price
of approximately $6.5 million. To the extent that any Redeemable Warrants
are exercised, the funds would be used to provide working capital and to
expand the Company's business.
There can be no assurance that any or all of the Redeemable Warrants will
be exercised.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Document
----------- --------
27.3 Financial Data Schedule
(b) Reports on Form 8-K:
On February 4, 1997, March 12, 1997, March 20, 1997, April 1, 1997 and
April 23,1997, the Company filed with the Securities and Exchange
Commission reports on Form 8K, Item 9.
14
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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 14, 1997 /s/ Peter P. Phildius
_________________________________
Peter P. Phildius
Chairman and Chief
Executive Officer
(Principal Executive Officer)
Dated: May 14, 1997 /s/ J.C. Leatherman, Jr.
_________________________________
J.C. Leatherman, Jr.
Chief Financial Officer
(Principal Accounting and
Financial Officer)
15
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EXHIBIT INDEX
================================================================================
Exhibit No. Document Page
- ----------- -------- ----
27.3 Financial Data Schedule 17
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVITAR'S
REPORT FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 95,297
<SECURITIES> 0
<RECEIVABLES> 378,102
<ALLOWANCES> 7,000
<INVENTORY> 131,490
<CURRENT-ASSETS> 698,536
<PP&E> 380,085
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,653,908
<CURRENT-LIABILITIES> 1,586,169
<BONDS> 0
0
8,172
<COMMON> 119,282
<OTHER-SE> 3,732,789
<TOTAL-LIABILITY-AND-EQUITY> 5,653,908
<SALES> 1,091,806
<TOTAL-REVENUES> 1,091,806
<CGS> 1,161,411
<TOTAL-COSTS> 2,833,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,301
<INCOME-PRETAX> (1,782,266)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (1,789,266)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,789,266)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
