<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 September 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
November 3, 1997 was 28,002,988 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------------------------------- ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets-September 30, 1997
and December 31, 1996 2
Consolidated Statements of Operations-Three Months
and Nine Months Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
1
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,147,577 $ 776,380
Accounts receivable 223,373 178,436
Inventories 477,640 268,431
Prepaid expenses 45,132 34,425
------------ -----------
Total current assets 1,893,722 1,257,672
Property and equipment, less accumulated
depreciation of $952,928 and $792,309 363,098 493,649
Deposits 193,898 188,647
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $46,076 and $39,183 110,840 117,733
------------ -----------
$ 2,682,058 $ 2,178,201
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,227,080 $ 818,073
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 36,026 35,057
------------ -----------
Total current liabilities 1,331,346 921,370
Long-term debt and obligations under capital
leases, net of current portion 67,046 96,199
------------ -----------
Total liabilities 1,398,392 1,017,569
Stockholders' equity:
Common stock, $.01 par value, 33,000,000
shares authorized, issued and outstanding:
1997:27,945,268 and 1996: 22,090,785 279,507 220,908
Additional paid-in capital 26,807,976 22,998,052
Note receivable from shareholder for stock (83,825) (83,825)
Cumulative foreign currency translation adjustment 22,179 (60,257)
Accumulated deficit (25,742,171) (21,914,246)
------------ -----------
Total stockholders' equity 1,283,666 1,160,632
------------ -----------
$ 2,682,058 $ 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 Nine months ended
September 30, September 30,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 296,302 $ 183,749 $ 1,008,205 $ 480,065
Costs and expenses:
Cost of products sold 464,153 124,934 1,233,463 312,197
Research and development expense 170,921 150,115 521,757 345,953
Selling, general and administrative
expense 768,861 1,232,509 2,504,041 3,212,425
Restructuring expense 194,000 -- 194,000 --
------------ ----------- ----------- -----------
Loss from operations (1,301,633) (1,323,809) (3,445,056) (3,390,510)
Interest income 8,680 12,382 22,808 64,461
Interest expense (2,441) (12,242) (411,725) (81,910)
Other income (expense) (1,981) -- 6,049 --
------------ ----------- ----------- -----------
Net loss $(1,297,375) $(1,323,669) $(3,827,924) $(3,407,959)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Net loss per share $ (0.05) $ (0.06) $ (0.16) $ (0.18)
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Shares used in per share calculations 26,680,384 21,886,000 23,697,836 19,331,000
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</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>
Nine months ended
September 30,
--------------------------------
1997 1996
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,827,924) $ (3,407,959)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 209,310 263,707
Net loss on disposal of assets 9,446 --
Shares issued in lieu of fees and expenses -- 65,251
Interest expense related to conversion of Debentures 404,395 --
Changes in current assets and liabilities:
Accounts receivable (44,937) (113,595)
Inventories (209,209) (53,632)
Prepaid expenses and deposits (15,958) 9,469
Accounts payable and accrued expenses 409,007 176,765
------------- ------------
Net cash used in operating activities (3,065,870) (3,059,994)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (61,049) (359,788)
Other assets -- (9,086)
------------- ------------
Net cash used in investing activities (61,049) (368,874)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock, net of
issuance costs 2,063,414 --
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 (28,184) (17,521)
Exercise of Common Stock options and warrants 450 2,440,897
------------- ------------
Net cash provided by financing activities 3,415,680 2,507,852
------------- ------------
Cumulative foreign translation adjustment 82,436 13,455
Net increase (decrease) in cash and cash equivalents 371,197 (907,561)
Cash and cash equivalents, beginning of period 776,380 2,688,014
------------- ------------
Cash and cash equivalents, end of period $ 1,147,577 $ 1,780,453
------------- ------------
------------- ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Shares issued in lieu of fees and expenses $ -- $ 65,251
Conversion of Debentures into Common Stock 1,380,000 2,760,000
</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 nine month periods ended September 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 nine month periods ended
September 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 third quarter 1997 and 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:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Raw materials $ 262,044 $ 253,000
Work in process 10,949 2,495
Finished goods 204,647 12,936
------------ -----------
$ 477,640 $ 268,431
------------ -----------
------------ -----------
</TABLE>
4. RESTRUCTURING EXPENSE
Results of operations of the third quarter of 1997 included a charge of
$194,000 associated with a restructuring plan designed to reduce costs and
improve manufacturing and operational efficiencies. Under the plan, the
Company closed its Singapore manufacturing operations in October 1997. The
Company plans to out-source manufacturing previously performed in Singapore
to qualified sources and locations. Total costs expected to be expended in
connection with the restructuring include approximately $100,000 related to
termination of employees, approximately $37,000 associated with the
settlement of the lease obligation in Singapore, $47,000 for other costs
related to closing the Singapore location and $10,000 non-cash charge for the
write off of leasehold improvements.
5
<PAGE>
5. CONTINGENCIES
As previously disclosed 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. 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 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. A jury verdict for the plaintiff, which is not a final
judgment, was rendered on July 25, 1997 in the approximate amount of
$740,000. The Company has filed with the court motions to set aside the jury
verdict and to move for a new trial. 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.
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 December 31, 1998. 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
<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 $25,742,171 at September 30, 1997.
Such losses are expected to continue for the foreseeable future and until
such time, if ever, as the Company is able to attain sales levels sufficient
to support its operations. 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
THIRD QUARTER AND FIRST NINE MONTHS OF 1997 COMPARED TO THIRD QUARTER AND
FIRST NINE MONTHS OF 1996
REVENUES. The Company's revenues consist of product sales. Revenues
increased 61% to $296,300 in the third quarter of 1997 from $183,700 in the
third quarter of 1996, and increased 110% to $1,008,200 in the first nine
months of 1997 from $480,000 in the first nine months of 1996. The increases
in product sales revenue were primarily attributable to increasing demand for
the Company's rapid testing systems. Sales to two customers represented
approximately 23% and 13%, respectively, of total revenues for the nine
months ended September 30, 1997. Sales to two customers represented
approximately 38% and 29%, respectively, of total revenues for the quarter
ended September 30, 1997.
The Company has designed and built equipment for automated production of
its rapid tests at its Vancouver, Washington facility in the United States,
which has been installed and is functioning. 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. In
the third quarter of 1997, the Company reviewed the production efficiency,
costs and regulations related to its manufacturing facilities. As a result of
this review, the Company decided to close its Singapore manufacturing
operations (SEE RESTRUCTURING EXPENSE BELOW), and plans to out-source
manufacturing previously performed in Singapore to qualified sources and
locations.
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 (157%
of product sales) in the third quarter of 1997 from $124,900 (68% of product
sales) in the third quarter of 1996, and increased to $1,233,500 (122% of
product sales) in the first nine months of 1997 from $312,000 (65% of product
sales) in the first nine 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.
7
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 14% to $170,900 in the third quarter of 1997 from $150,100 in the
third quarter of 1996, and increased 51% to $521,800 in the first nine months
of 1997 from $346,000 in the first nine months of 1996. The increases were
primarily a result of the maintenance of and addition to existing test sites
for the U.S. clinical trials for the Company's Stat-Simple test for
Heliobacter 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 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 38% to $768,900 in the third quarter of
1997 from $1,232,500 in the third quarter of 1996, and decreased 22% to
$2,504,000 in the first nine months of 1997 from $3,212,400 in the first nine
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 securities filings and
compliance matters in the first nine months of 1997.
RESTRUCTURING EXPENSE. Results of operations of the third quarter of 1997
included a charge of $194,000 associated with a restructuring plan designed
to reduce costs and improve manufacturing and operational efficiencies. Under
the plan, the Company closed its Singapore manufacturing operations in
October 1997. The Company plans to out-source manufacturing previously
performed in Singapore to qualified sources and locations. Total costs
expected to be expended in connection with the restructuring include
approximately $100,000 related to termination of employees, approximately
$37,000 associated with the settlement of the lease obligation in Singapore,
$47,000 for other costs related to closing the Singapore location and $10,000
non-cash charge for the write off of leasehold improvements.
INTEREST EXPENSE AND LOAN FEES. Interest expense decreased to $2,400 in
the third quarter of 1997 from $12,200 in the third quarter of 1996, and
increased to $411,700 in the first nine months of 1997 from $81,900 in the
first nine 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 and August 1997, the Company entered into three separate common
stock subscription agreements for the issuance and sale of a total of
4,082,905 shares of Common Stock for an aggregate purchase price of
$2,260,000.
Cash used in operating activities in the first nine months of 1997 was
$3,065,900. This was primarily a result of a net loss of $3,827,900, 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. Inventories increased as a
result of the Company's decision to accumulate increased finished
8
<PAGE>
goods inventories due to the closing of the Singapore manufacturing
operations, and accounts payable and accrued expenses increased as a result
of the timing of payments.
Cash used in investing activities in the first nine months of 1997 was
$61,000, which primarily represented the purchase of manufacturing equipment.
The Company has no material commitments for capital expenditures at September
30, 1997.
Cash provided by financing activities in the first nine months of 1997 was
$3,415,700. This was primarily a result of net proceeds of $2,063,400 from
the issuance of Common Stock in July and August 1997 and net proceeds of
$1,380,000 from the sale of the Debentures in March 1997.
The Company's capital requirements have been and will continue to be
significant. The Company has been dependent on private placements of its debt
and equity securities and on a public offering of securities in March 1993 to
fund such requirements. The Company continues to be dependent upon its
efforts to raise capital to finance the costs of manufacturing, marketing and
conducting clinical trials and submissions for FDA approval of its products
and continuing the design and development of the Company's new products.
Marketing, manufacturing and clinical testing may require capital resources
substantially greater than the resources currently available to the Company.
There can be no assurance that the Company will be able to obtain additional
capital resources necessary to permit the Company to implement or continue
its programs. There can be no assurance that such financing will be
available on commercially reasonable terms or at all.
1997 FINANCING ACTIVITIES
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 March 1997, the Company also issued warrants to Grayson & Associates, Inc.
("Grayson") in consideration of certain financial consulting services
performed on behalf of the Company related to the sale of the Debentures. 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.) 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. In accordance with such provisions, one holder of
the Debentures exercised his right to receive an additional 57,720 shares on
October 13, 1997.
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.
9
<PAGE>
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 ("Regulation D"), 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.
On August 22, 1997, the Company entered into a Common Stock Subscription
Agreement for the issuance and sale of shares of the Company's Common Stock
pursuant to Regulation D, (the "August Offering.") Pursuant to a Common Stock
Purchase Agreement between the Company an investor named therein, (the
"August Investor") the Company sold a total of 1,250,000 shares of Common
Stock for an aggregate purchase price of $750,000. The Closing of the August
Offering took place on August 26, 1997.
Tail Wind and the August Investor are entitled to receive additional
shares of Common Stock under their respective agreements 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 and the August
Offering (collectively referred to as "the Offerings") is subject to certain
resale restrictions. In connection with the Offerings, the Company also
entered into separate registration rights agreements with the Investors, Tail
Wind, and the August Investor 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. A registration statement on Form S-3
covering resales of such shares was declared effective on September 30, 1997.
In connection with the Offerings, the Company paid a finder's fee to
Grayson & Associates, Inc. ("Grayson") of $104,800 in cash and warrants to
purchase 161,600 shares of the Company's Common Stock for an exercise price
of $0.50 per share, and 33,032 shares of the Company's Common Stock for an
exercise price of $0.72656 per share, all of which expire on June 30, 2002.
The Company also issued 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, at an exercise price of $1.00 per share. Grayson and
Tail Wind have certain registration rights with respect to the shares of
Common Stock that may be issued upon exercise of their respective warrants.
The registration statement on Form S-3 which was declared effective on
September 30, 1997, covered resales of these shares.
NASDAQ LISTING. 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. On June 5, 1997,
the Company caused the early conversion of $800,000 of the 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.
On October 27, 1997 the Company was informed that because the minimum
closing bid price of the Company's Common Stock was below $1.00, its Common
Stock could be subject to delisting from the Nasdaq SmallCap Market. The
Company was informed that it will be provided ninety calendar days in which
to regain compliance with the minimum bid price or the alternative
requirement, as described below. If at anytime within the ninety calendar
days from October 27, 1997, the shares of the Company's Common Stock report a
closing bid price of $1.00 or greater for ten consecutive trading days, it
will have compiled with the minimum bid price requirement. Alternatively, if
the Company's capital and surplus and market value of its public float equal
or
10
<PAGE>
exceed $2,000,000 and $1,000,000, respectively, for ten consecutive trading
days, the Company will be deemed to have compiled with this standard.
Under the Nasdaq system continued listing requirements effective February
1998, a company will be required to maintain net tangible assets of
$2,000,000, market capitalization of $35,000,000 or net income of $500,000 in
the most recently completed fiscal year or in two of the last three most
recently completed fiscal years. Continued inclusion will also require a
$1,000,000 market value of the public float, two market-makers and a minimum
bid price of $1.00 per share without exception.
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 previously disclosed, 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. 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 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. A jury verdict for the plaintiff, which is not a final
judgment, was rendered on July 25, 1997 in the approximate amount of
$740,000. The Company has filed with the court motions to set aside the jury
verdict and to move for a new trial. 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.
ITEM 2. CHANGES IN SECURITIES
(c) On June 30, 1997 and August 22, 1997, the Company entered into 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 dated as of June 30, 1997 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. Pursuant to a second Common Stock
Purchase Agreement dated as of June 30, 1997 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.
Pursuant to a Common Stock Subscription Agreement dated as of August 22, 1997
between the Company and David Freund ("Freund"), the Company sold a total of
1,250,000 shares of Common Stock to Freund for an aggregate purchase price of
11
<PAGE>
$750,000. The closing of $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 an additional $547,500 principal
amount of the Offering to the Investors took place on July 17, 1997; the
closing of an additional $325,000 principal amount of the Offering to the
Investors took place on July 22, 1997; and the closing of $750,000 principal
amount of the Offering to Freund took place on August 26, 1997. Each of Tail
Wind and Freund are entitled to receive additional shares of Common Stock
under their respective agreements, subject to certain conditions related to
the trading price of the Common Stock during a specified period.
The Company also entered into registration rights agreements with the
Investors, Tail Wind and Freund, respectively, under each of which the
Company must file a registration statement covering resales of shares of the
Common Stock within 30 days after the date on which the closing relating to
such shares occurred. A registration statement on Form S-3 covering resales
of those shares was declared effective on September 30, 1997.
In connection with the Offering, the Company paid a finder's fee to
Grayson & Associates, Inc. ("Grayson") of $104,800 in cash, warrants to
purchase up to 161,600 shares of Common Stock for an exercise price of $0.50
per share, and warrants to purchase up to 33,032 shares of Common Stock for
an exercise price of $0.72656 per share. The warrants issued to Grayson
expire on June 30, 2002. The Company also issued to Tail Wind warrants to
purchase up to 100,000 shares of Common Stock, exercisable at any time from
January 1, 1998 to January 1, 2003, at an exercise price of $1.00 per share.
Grayson and Tail Wind have certain registration rights with respect to the
shares of Common Stock that may be issued upon exercise of their respective
warrants. The registration statement on Form S-3, which was declared
effective on September 30, 1997, covered resales of these shares.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
<TABLE>
Exhibit
No. Description
-- -----------
<S> <C>
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.
4.10 Common Stock Subscription Agreement dated as of August 22,
1997 by and between the Company and David Freund,
incorporated by reference to Exhibit 10.5 of Amendment
No. 1 to the Company's Registration Statement on Form S-3
dated September 26, 1997 (Registration No. 333-33429) (the
S-3/A).
4.11 Registration Rights Agreement dated as of August 22, 1997
between the Company and David Freund, incorporated by
reference to Exhibit 10.6 of the S-3/A.
27 Financial Data Schedule *
</TABLE>
* Filed herewith.
(b) Reports on Form 8-K
A Current Report on Form 8-K, reporting common stock subscription
agreements for an offering of the Company's common stock and the
conversion of the Company's 7.5% Convertible Debentures due February 28,
1999, under Item 5, was filed on July 30, 1997.
13
<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: November 10, 1997
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ Kenneth J. McLachlan
-------------------------
Kenneth L. McLachlan
President
14
<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 SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,148
<SECURITIES> 0
<RECEIVABLES> 223
<ALLOWANCES> 0
<INVENTORY> 478
<CURRENT-ASSETS> 1,894
<PP&E> 363
<DEPRECIATION> 953
<TOTAL-ASSETS> 2,682
<CURRENT-LIABILITIES> 1,331
<BONDS> 0
0
0
<COMMON> 280
<OTHER-SE> 1,004
<TOTAL-LIABILITY-AND-EQUITY> 2,682
<SALES> 1,008
<TOTAL-REVENUES> 1,008
<CGS> 1,233
<TOTAL-COSTS> 1,233
<OTHER-EXPENSES> 3,191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> (3,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,828)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
