<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-21284
SALIVA DIAGNOSTIC SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 91-1549305
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11719 NE 95TH STREET
VANCOUVER, WA 98682
(Address of principal executive offices and zip code)
(360) 696-4800
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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: Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of July
30, 1997 was 26,688,868 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets -June 30, 1997
and December 31, 1996 2
Consolidated Statements of Operations-Three Months
and Six Months Ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
1
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 360,125 $ 776,380
Accounts receivable 227,705 178,436
Inventories 433,944 268,431
Prepaid expenses 47,092 34,425
Stock subscriptions receivable 912,500 --
---------- ----------
Total current assets 1,981,366 1,257,672
Property and equipment, less accumulated
depreciation of $912,859 and $792,309 430,202 493,649
Deposits 197,738 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $43,779 and $39,183 113,137 117,733
---------- ----------
$2,842,943 $2,178,201
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,324,040 $818,073
Accrued interest payable 68,239 68,240
Current portion of long-term debt and
obligations under capital leases 30,000 35,057
---------- ----------
Total current liabilities 1,422,279 921,370
Long-term debt and obligations under capital
leases, net of current portion 83,493 96,199
---------- ----------
Total liabilities 1,505,772 1,017,569
Stockholders' equity:
Common stock, $.01 par value, 33,000,000
shares authorized, issued and outstanding:
1997: 23,855,963 and 1996: 22,090,785 238,560 220,908
Additional paid-in capital 25,697,948 22,998,052
Note receivable from shareholder for stock (83,825) (83,825)
Cumulative foreign currency translation adjustment (70,716) (60,257)
Accumulated deficit (24,444,796) (21,914,246)
---------- ----------
Total stockholders' equity 1,337,171 1,160,632
---------- ----------
$2,842,943 $2,178,201
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $484,869 $124,937 $711,903 $296,316
Technology license income -- 12,342 -- 12,342
----------- ----------- ----------- -----------
484,869 137,279 711,903 308,658
Costs and expenses:
Cost of products sold 464,219 66,753 723,860 187,263
Research and development expense 156,124 91,843 350,836 195,838
Selling, general and administrative
expense 826,715 1,075,132 1,780,628 1,979,916
----------- ----------- ----------- -----------
Loss from operations (962,189) (1,096,449) (2,143,421) (2,054,359)
Interest income 8,447 17,395 14,126 39,737
Interest expense (400,705) (645) (409,284) (69,668)
Other income (expense) (1,200) -- 8,030 --
----------- ----------- ----------- -----------
Net loss $(1,355,647) $(1,079,699) $(2,530,549) $(2,084,290)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share $(0.06) $(0.05) $(0.11) $(0.11)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in per share calculations 22,322,340 20,992,000 22,206,563 18,760,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,530,549) $(2,084,290)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative foreign translation adjustment (10,459) (33,433)
Depreciation and amortization 147,632 190,615
Shares issued in lieu of fees and expenses 65,702
Interest expense related to conversion of Debentures 404,395
Changes in current assets and liabilities:
Accounts receivable (49,269) (36,770)
Inventories (165,513) (52,673)
Prepaid expenses and deposits (21,758) 4,188
Accounts payable and accrued expenses 505,967 11,280
------------- ------------
Net cash used in operating activities (1,719,554) (1,935,381)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (59,387) (294,230)
Other assets -- (3,004)
------------- ------------
Net cash used in investing activities (59,387) (297,234)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debentures, net of
issuance costs 1,380,000
Payment of convertible debentures -- (25,000)
Notes payable and interim financing, net -- 109,476
Repayment of long term debt and capital lease obligations (17,764) (9,061)
Exercise of Common Stock options and warrants 450 1,905,897
------------- ------------
Net cash provided by financing activities 1,362,686 1,981,312
------------- ------------
Net decrease in cash and cash equivalents (416,255) (251,303)
Cash and cash equivalents, beginning of period 776,380 2,688,014
------------- ------------
Cash and cash equivalents, end of period $360,125 $2,436,711
------------- ------------
------------- ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Shares issued in lieu of fees and expenses $ -- $ 65,702
Conversion of Debentures into Common Stock 1,380,000 2,760,000
Subscription receivable for Common Stock 912,500 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and
for the three and six month periods ended June 30, 1997 and 1996 have been
prepared in conformity with generally accepted accounting principles. The
financial information as of December 31, 1996 is derived from Saliva
Diagnostic Systems, Inc. (the "Company") consolidated financial statements
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996. Certain information or footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying consolidated
financial statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. The accompanying consolidated financial statements should
be read in conjunction with the Company's audited financial statements for
the year ended December 31, 1996, as included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996.
Operating results for the three month and six month periods ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 31, 1997, or any other portion thereof.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 statement of
operations to conform to the 1997 presentation. These reclassifications had
no effect on the results of operations in any periods presented.
3. INVENTORIES
Inventories are stated at the lower of cost or market determined on a
first-in, first-out (FIFO) basis, and consist of the following:
June 30, December 31,
1997 1996
------------ ------------
Raw materials $251,411 $253,000
Work in process 102,622 2,495
Finished goods 79,911 12,936
-------- --------
$433,944 $268,431
-------- --------
-------- --------
4. CONTINGENCIES
As discussed in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 and the Form 10-QSB for the quarter ended March 31,
1997, in January 1997, a lawsuit was filed by Ronald Lealos, the former
President of the Company, who resigned in December 1996. The complaint in the
lawsuit alleged various breach of contract claims. This lawsuit was dismissed
without prejudice as a prerequisite to a settlement agreement between Mr.
Lealos and the Company currently in the process of being documented. There
can be no assurance that a final settlement acceptable to the Company will be
concluded with Mr. Lealos, or that if new litigation ensues and is decided
adverse to the Company, that it would not have a material adverse effect on
the Company.
5
<PAGE>
As previously disclosed, Luc Hardy, a former director and officer of the
Company, filed a complaint in Federal court against the Company and several
individual defendants making certain allegations, including breach of
employment agreement, intentional interference with contract by the
individual defendants, slander and deceptive trade practices, arising from
his termination. On July 25, 1997, a jury in this case rendered a verdict for
the plaintiff, awarding approximately $200,000 for lost compensation and
$525,000 for unawarded stock options. The jury's award, which is not a final
judgment, will be the subject of post-trial motions of the Company to set
aside the verdict and enter judgment for the Company. Although the Company
intends to defend itself vigorously and believes the jury verdict is
unsupported by the evidence, there can be no assurance the Company's motions
will be granted or that the final judgment in this case will not have a
material adverse effect on the Company. A final judgment is expected
subsequent to a September 29, 1997 hearing.
5. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS 129"), which are
effective for fiscal years ending after December 15, 1997. The Company
believes the implementation of these statements will not have a material
effect on its results of operations or financial statement disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes
requirements for disclosure of comprehensive income and is effective for the
Company's fiscal year ending May 1999. Reclassification of earlier financial
statements for comparative purposes is required. The Company believes the
implementation of this statement will not have a material effect on its
financial statement disclosures.
6. SUBSEQUENT EVENTS
As discussed below in "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources," on June 30, 1997, the Company
entered into two separate common stock subscription agreements for the
issuance and sale of shares of the Company's Common Stock pursuant to
Regulation D, promulgated under the Securities Act of 1933, as amended (the
"Offering"). Pursuant to a Common Stock Purchase Agreement between the
Company and certain investors named therein (the "Investors"), the Company
sold a total of 2,420,000 shares of Common Stock to the Investors for an
aggregate purchase price of $1,210,000, $612,500 of which was subscribed for
by Investors as of June 30, 1997. Pursuant to a Common Stock Purchase
Agreement between the Company and The Tail Wind Fund Ltd. ("Tail Wind"), the
Company sold a total of 412,905 shares of Common Stock to Tail Wind for an
aggregate purchase price of $300,000.
The closing on $337,500 principal amount of the Offering to the Investors
and $300,000 principal amount of the Offering to Tail Wind took place on July
14, 1997; the closing of $547,500 principal amount of the Offering to the
Investors took place on July 17, 1997; and the closing of the remaining
$325,000 principal amount of the Offering to the Investors took place on July
22, 1997.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Since its founding, the Company has been engaged almost exclusively in
research and development activities focused on the development, manufacturing
and marketing of rapid in vitro assays for use in the detection of infectious
diseases and other conditions, proprietary specimen collection devices and
other diagnostic devices..
The Company has incurred significant operating losses since its
inception, resulting in an accumulated deficit of $24,444,796 at June 30,
1997. Such losses are expected to continue through 1997. There can be no
assurance that the Company will achieve or maintain profitability in the
future. The Company's significant operating losses and significant capital
requirements raise substantial doubt about the Company's ability to continue
as a going concern.
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST SIX MONTHS OF 1997 COMPARED TO SECOND QUARTER AND FIRST
SIX MONTHS OF 1996
REVENUES. The Company's revenues consist primarily of product sales and
license revenue. Revenues from product sales increased 288% to $484,900 in
the second quarter of 1997 from $124,900 in the second quarter of 1996, and
increased 140% to $711,900 in the first six months of 1997 from $296,300 in
the first six months of 1996. The increases in product sales revenue were
primarily attributable to increasing demand for the Company's rapid testing
systems. There were no revenues received under license agreements in 1997.
Sales to one customer represented approximately 24% of total revenues for the
six months ended June 30, 1997.
In 1996, the Company began to design and build equipment for automated
production of its rapid tests at its Vancouver, Washington facility in the
United States. The Company now believes such equipment will be fully
installed and functioning by late 1997. The Company is required to meet
certain conditions, including compliance with Food and Drug Administration
requirements (such as good manufacturing practices), in order to manufacture
its tests at its Vancouver facility and to export its products from there.
The Company is currently addressing compliance with those requirements.
The Company has limited marketing resources. Achieving market acceptance
will require substantial marketing efforts and capabilities. The Company
relies in large part on forming partnerships with other companies for
marketing and distribution of its products. There can be no assurance that
the Company will form alliances with potential distributors or that these
distributors will be successful in promoting the Company's products.
COST OF PRODUCTS SOLD. Costs of products sold increased to $464,200 (96%
of product sales) in the second quarter of 1997 from $66,800 (53% of product
sales) in the second quarter of 1996, and increased to $723,900 (102% of
product sales) in the first six months of 1997 from $187,300 (63% of product
sales) in the first six months of 1996. Costs of products sold increased as a
percentage of product sales due to increased manufacturing overhead, larger
square footage of manufacturing facilities and an increase in the number of
manufacturing personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 70% to $156,100 in the second quarter of 1997 from $91,800 in the
second quarter of 1996, and increased 79% to $350,800 in the first six months
of 1997 from $195,800 in the first six months of 1996. The increases were
primarily a result of U.S. clinical trials for the Company's Stat-Simple test
for Helicobacter PYLORI (H. PYLORI), which began in the second quarter of
1997.
Many of the Company's competitors are more established and have
significantly greater financial and technological resources than the Company.
In the biotechnology industry technological change and obsolescence
7
<PAGE>
are rapid and frequent. There can be no assurance that the Company can keep pace
with such changes or avoid product obsolescence.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 23% to $826,700 in the second quarter of
1997 from $1,075,100 in the second quarter of 1996, and decreased 10% to
$1,780,600 in the first six months of 1997 from $1,979,900 in the first six
months of 1996. The decreases were primarily a result of cost cutting
programs put in place to reduce administrative expenses, offset by increased
legal fees related to litigation matters, and increased accounting and legal
fees related to securities compliance matters in the first six months of 1997.
INTEREST EXPENSE AND LOAN FEES. Interest expense increased to $400,700
in the second quarter of 1997 from $600 in the second quarter of 1996, and
increased to $409,200 in the first six months of 1997 from $69,700 in the
first six months of 1996. In March 1997, in connection with the sale of $1.5
million of Convertible Debentures, due February 28, 1999 (the "Debentures"),
a discount of $375,000 was recorded, resulting from an allocation of proceeds
to the discounted conversion feature. This discount was written off to
interest expense at June 30, 1997, in connection with the conversion of the
Debentures.
INCOME TAXES. The Company is in a net deferred tax asset position and has
generated net operating losses to date. Accordingly, no provision for or
benefit from income taxes has been recorded in the accompanying statements of
operations. The Company will continue to provide a valuation allowance for
its deferred tax assets until it becomes more likely than not, in management's
assessment, that the Company's deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its capital requirements through
proceeds from its public offering of stock in March 1993 and the exercise of
common stock purchase warrants pursuant to such offering, proceeds from sales of
convertible debentures, proceeds from private placements of Common Stock, and
the exercise of common stock purchase warrants and stock options. In March 1997,
the Company raised net proceeds of approximately $1,380,000 (net of issuance
costs of $120,000) from the private sale of the Debentures. In June 1997, the
Company entered into two separate common stock subscription agreements for the
issuance and sale of a total of 2,420,000 shares of Common Stock to the
Investors for an aggregate purchase price of $1,210,000.
Cash used in operating activities in the first six months of 1997 was
$1,719,600. This was primarily a result of a net loss of $2,530,500, and
adjustments for the write off of the discounted conversion feature of the
Debentures sold in March 1997 and the amount of accrued interest on the
Debentures which was converted to Common Stock. Additionally, accounts
receivable and inventories increased as a result of the increased level of
revenues and accounts payable and accrued expenses increased as a result of
the timing of payments.
Cash used in investing activities in the first six months of 1997 was
$59,400, which represented the purchase of manufacturing equipment. The
Company has no material commitments for capital expenditures at June 30, 1997.
Cash provided by financing activities in the first six months of 1997 was
$1,362,700. This was primarily a result of net proceeds of $1,380,000 from
the sale of the Debentures in March 1997, offset by the payment of long-term
debt and capital lease obligations.
In March 1997, the Company issued warrants to Grayson & Associates, Inc.
("Grayson") in consideration of certain financial consulting services
performed on behalf of the Company. The warrants entitle the holder thereof
to purchase up to 89,552 shares of Common Stock from the Company for a
purchase price of $1.34 per share on or before March 14, 2002. The
warrantholder has certain demand and piggyback registration rights with
respect to the shares that may be issued upon exercise of the warrants.
8
<PAGE>
In May and June 1997, the holders of the Debentures agreed to an
acceleration of conversion and to hold the Common Stock issued pursuant to
such conversion (the "Early Conversion Shares") in accordance generally with
the original conversion schedule. On June 5, 1997, $800,000 in principal
amount of the Debentures were converted into a total of 833,598 shares of the
Company's Common Stock and on June 30, 1997 the remaining $700,000 in
principal amount of the Debentures were converted into a total of 903,226
shares of the Company's Common Stock. A total of $29,395 of accrued interest
on the converted Debentures payable June 30, 1997 was paid to holders of the
Debentures in the form of 27,604 shares of the Company's Common Stock. In
addition, the Company agreed to certain conversion reset provisions, pursuant
to which the holders of the Early Conversion Shares may receive certain
additional shares of the Company's Common Stock under certain conditions.
The number of shares of Common Stock issuable upon the conversion of the
Debentures was determined by dividing the principal amount of the Debentures
converted by the Conversion Price, as defined in the Debenture agreement. The
number of shares of the Company's Common Stock issuable upon conversion was
defined as the lesser of 115% of Company's Common Stock market price at
issuance of the Debenture (i.e. $1.9191 per share) or 80% of the Company's
Common Stock market price at conversion of the Debenture.
A discount had been recorded at the date of issuance of the Debentures,
resulting from an allocation of proceeds to the discounted conversion
feature, which was to be amortized to interest expense over the conversion
period. Additionally, financing costs related to these Debentures were
deferred and amortized, using the effective interest method, over the term of
the Debentures. The discount and remaining unamortized financing costs of
$375,000 and $99,800, respectively, were written off to interest expense and
additional paid in capital, respectively, upon conversion of the Debentures.
On June 30, 1997, the Company entered into two separate common stock
subscription agreements for the issuance and sale of shares of the Company's
Common Stock pursuant to Regulation D, promulgated under the Securities Act
of 1933, as amended (the "Offering"). Pursuant to a Common Stock Purchase
Agreement between the Company and certain investors named therein (the
"Investors"), the Company sold a total of 2,420,000 shares of Common Stock to
the Investors for an aggregate purchase price of $1,210,000, $612,500 of
which was subscribed for by Investors as of June 30, 1997. Pursuant to a
Common Stock Purchase Agreement between the Company and The Tail Wind Fund
Ltd. ("Tail Wind"), the Company sold a total of 412,905 shares of Common
Stock to Tail Wind for an aggregate purchase price of $300,000. Tail Wind is
entitled to receive additional shares of Common Stock under its agreement
subject to certain conditions related to the trading price of the Company's
Common Stock during a specified period. The Common Stock purchased in the
Offering is subject to certain resale restrictions. In connection with the
Offering, the Company also entered into two separate registration rights
agreements with the Investors and Tail Wind, under each of which the Company
is required to file a registration statement covering resales of shares of
the Common Stock sold in the Offering within 30 days after the date on which
the closing relating to those shares occurred. Under each of such agreements,
the Company may be required to make certain payments to the Investors and
Tail Wind as damages if the registration statement is not declared effective
by the Securities and Exchange Commission by October 12, 1997. In connection
with the Offering, the Company has agreed to issue Grayson & Associates, Inc.
("Grayson") warrants to purchase up to 226,632 shares of the Company's Common
Stock which expire on June 30, 2002. Prior to September 1, 1997, the Company
intends to issue to Tail Wind warrants to purchase up to 100,000 shares of
the Company's Common Stock, exercisable at any time from January 1, 1998 to
January 1, 2003, for an exercise price of $1.00 per share. Grayson and Tail
Wind will have certain demand piggyback registration rights with respect to
the shares of Common Stock that may be issued upon exercise of their
respective warrants.
The Company's capital requirements have been and will continue to be
significant. The Company's capital base is smaller than that of many of its
competitors, and there can be no assurance that the Company's cash resources
will be able to sustain its business. The Company currently has an accumulated
deficit due to its history of losses. The Company is dependent upon its effort
to raise capital to finance its future operations, including the cost of
manufacturing and marketing of its products, to conduct clinical trials and
submissions for FDA approval of its products and to continue the design and
development of its new products. Marketing, manufacturing and clinical testing
may require capital resources substantially greater than the resources available
to the Company.
9
<PAGE>
The Company will continue to seek public or private placement of its equity
and debt securities and corporate partners to develop products.
The Company's future capital needs will depend upon numerous factors,
including the progress of the approval for sale of the Company's products in
various countries, including the United States, the extent and timing of the
acceptance of the Company's products, the cost of marketing and manufacturing
activities and the amount of revenues generated from operations, none of
which can be predicted with certainty.
Upon the filing by the Company of its Form 10-QSB for the period ended
March 31, 1997, Nasdaq issued a letter to the Company asking the Company to
demonstrate that it currently meets all Nasdaq listing requirements and can
continue to meet those requirements. In order to continue to be included in
Nasdaq, a company must maintain $2,000,000 in total assets, a $200,000 market
value of the public float and $1,000,000 in total capital and surplus. In
addition, continued inclusion requires two market-makers and a minimum bid
price of $1.00 per share; provided, however, that if a company falls below
such minimum bid price, it will remain eligible for continued inclusion in
Nasdaq if the market value of the public float is at least $1,000,000 and the
Company has $2,000,000 in capital and surplus. In June 5, 1997, the Company
caused the early conversion of $800,000 of the 7.5% Convertible Debentures
due February 28, 1999 to Common Stock to demonstrate current compliance with
the Nasdaq continued inclusion requirements and submitted to Nasdaq on June
4, 1997, its plan to sustain compliance with the Nasdaq requirements. By
letter dated July 16, 1997, Nasdaq advised the Company of its acceptance of
the Company's plan of continued compliance upon certain conditions. To date,
the Company has performed in accordance with such conditions.
If the Company is removed from the Nasdaq system, trading, if any, in the
Common Stock would thereafter be conducted in the over-the-counter market on
an electronic bulletin board established for securities that do not meet the
Nasdaq listing requirements or in what are commonly referred to as the "pink
sheets". As a result, an investor would find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's
securities. In addition, if the Company's securities were removed from the
Nasdaq system, they would be subject to so-called "penny stock" rules that
impose additional sales practice requirements on broker-dealers who sell such
securities. Consequently, removal from the Nasdaq system, if it were to
occur, could affect the ability or willingness of broker-dealers to sell the
Company's securities and the ability of purchasers of the Company's
securities to sell their securities in the secondary market.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996 ("Form 10-KSB") and the Form 10-QSB for the quarter
ended March 31, 1997, in January 1997, a lawsuit was filed by Ronald Lealos,
the former President of the Company, who resigned in December 1996. The
complaint in the lawsuit alleged various breach of contract claims. This
lawsuit was dismissed without prejudice as a prerequisite to a settlement
agreement between the former President and the Company currently in the
process of being documented. There can be no assurance that a final
settlement acceptable to the Company will be concluded with Mr. Lealos, or
that if new litigation ensues and is decided adverse to the Company, that it
would not have a material adverse effect on the Company.
As previously disclosed, Luc Hardy, a former director and officer of the
Company, filed a complaint in U.S. District Court for the District of
Connecticut in August 1994 against the Company and several individual
defendants making certain allegations, including breach of employment
agreement, intentional interference with contract by the individual
defendants, slander and deceptive trade practices, arising from Mr. Hardy's
termination. The complaint sought damages and punitive damages in an
unspecified amount. On July 25, 1997, a jury in this case rendered a verdict
for the plaintiff, awarding approximately $200,000 for lost compensation and
$525,000 for unawarded stock options. The jury's award, which is not a final
judgment, will be the subject of
10
<PAGE>
post-trial motions of the Company to set aside the verdict and enter judgment
for the Company. Although the Company intends to defend itself vigorously and
believes the jury verdict is unsupported by the evidence, there can be no
assurance the Company's motions will be granted or that the final judgment in
this case will not have a material adverse effect on the Company. A final
judgment is expected subsequent to a September 29, 1997 hearing.
ITEM 2. CHANGES IN SECURITIES
(c) On June 30, 1997, the Company entered into two separate common stock
subscription agreements for the issuance and sale of shares of the Company's
Common Stock pursuant to Regulation D, promulgated under the Securities Act
of 1933, as amended. Pursuant to a Common Stock Purchase Agreement between
the Company and certain accredited investors named therein (the "Investors"),
the Company sold a total of 2,420,000 shares of Common Stock to the Investors
for an aggregate purchase price of $1,210,000, $612,500 of which was
subscribed for by Investors as of June 30, 1997. Pursuant to a Common Stock
Purchase Agreement between the Company and The Tail Wind Fund Ltd. ("Tail
Wind"), the Company sold a total of 412,905 shares of Common Stock to Tail
Wind for an aggregate purchase price of $300,000. In connection with this
offering, the Company paid a finders fee to Grayson & Associates, Inc. of
$104,800 in cash and warrants to purchase up to 226,632 shares of the
Company's Common Stock.
On June 5 and June 30, 1997, a total of $1,500,000 of the Company's 7.5%
Convertible Debentures due February 28, 1999 were converted by holders into
1,736,824 shares of Common Stock. A total of 27,604 shares of Common Stock
for payment of accrued interest on the Debentures payable June 30, 1997 were
issued to the holders of the Debentures. See "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources" for
additional information about the Debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 30, 1997. The
number of shares entitled to vote at the annual meeting was 22,040,785. The
following matters were submitted to shareholders for their consideration:
1. With respect to the three nominees for director identified in the
Company's Proxy Statement; Kenneth J. McLachlan received 17,211,111 votes
and 926,106 votes were withheld, Hans R. Vauthier received 17,213,661 votes
and 923,556 votes were withheld, and Eric F. Stoer received 17,214,311 votes
and 922,906 votes were withheld.
2. The ratification of the appointment of Arthur Andersen LLP as the
Company's independent auditors for the year ending December 31, 1997 was
ratified as follows: 17,276,135 shares were voted in favor, 112,874 shares
were voted in opposition, 748,208 votes abstained and there were no broker
non-votes.
11
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
Exhibit
No. Description
- ------- -----------
3.1 Certificate of Incorporation, as amended, incorporated by reference
to Exhibits 2.1 through 2.6 of the Company's Registration Statement
No. 33-46648 filed on Form S-1 (the "Form S-1"); and to Exhibit 2.7
of the Company's Annual Report on Form 10-KSB for its fiscal year
ended December 31, 1995; and to Exhibit 2.2 of the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1996.
3.2 Company's By-laws, incorporated by reference to Exhibit 3.1 of the
Form S-1.
4.1 7.5% Convertible Debenture due February 28, 1999, issued by the
Company to The Tail Wind Fund, Ltd. on March 11, 1997, incorporated
by reference to Exhibit 4 to the Company's Quarterly Report on Form
10-QSB for its fiscal quarter ended March 31, 1997.
4.2 Common Stock Purchase Warrant for 89,552 shares, issued by the
Company to Grayson & Associates on March 14, 1997, incorporated by
reference to Exhibit 4.3 of the Company's Registration Statement on
Form SB-2 (Registration No. 333-26795).
4.3 Letter Agreement dated May 28, 1997 between the Company and The Tail
Wind Fund Ltd., incorporated by reference to Exhibit 4.9 to the
Company's Current Report on Form 8-K dated June 5, 1997 (File No.
000-21284) (the "June 1997 8-K").
4.4 Letter Agreement dated June 27, 1997 between the Company and The Tail
Wind Fund Ltd., incorporated by reference to Exhibit 4.10 to the June
1997 8-K.
4.5 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and The Tail Wind Fund Ltd., incorporated by
reference to Exhibit 4.2 of the June 1997 8-K.
4.6 Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto, incorporated by reference to Exhibit 4.3 of the June 1997
8-K.
4.7 Registration Rights Agreement dated as of June 30, 1997 between the
Company and The Tail Wind Fund Ltd., incorporated by reference to
Exhibit 4.4 of the June 1997 8-K.
4.8 Form of Registration Rights Agreement dated as of June 30, 1997
between the Company and the investors set forth on Schedule A to the
Common Stock Subscription Agreement dated as of June 30, 1997 by and
between the Company and the investors set forth on Schedule A
thereto, incorporated by reference to Exhibit 4.5 of the June 1997
8-K.
4.9 Form of Warrant to be issued to each of Grayson & Associates, Inc.
and The Tail Wind Fund Ltd., incorporated by reference to Exhibit 4.1
of the June 1997 8-K.
27 Financial Data Schedule *
* Filed herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated June 2, 1997 was filed reporting
the Change in Registrant's Certifying Accountant under Item 4.
An Amended Current Report on Form 8-K/A dated June 9, 1997 was filed
reporting the Change in Registrant's Certifying Accountant, under Item 4.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 8, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ PAUL D. SLOWEY
----------------------------
Paul D. Slowey
Chief Operating Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOUND IN THE COMPANY'S REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 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> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 360,125
<SECURITIES> 0
<RECEIVABLES> 227,705
<ALLOWANCES> 0
<INVENTORY> 433,944
<CURRENT-ASSETS> 1,981,366
<PP&E> 1,343,061
<DEPRECIATION> 912,859
<TOTAL-ASSETS> 2,842,943
<CURRENT-LIABILITIES> 1,422,279
<BONDS> 0
0
0
<COMMON> 238,560
<OTHER-SE> 1,098,611
<TOTAL-LIABILITY-AND-EQUITY> 2,842,943
<SALES> 711,903
<TOTAL-REVENUES> 711,903
<CGS> 723,860
<TOTAL-COSTS> 723,860
<OTHER-EXPENSES> 2,109,308
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 409,284
<INCOME-PRETAX> (2,530,549)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,530,549)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,530,549)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
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