<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 March 31, 1998
[ ] 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)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 91-1549305
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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
May 11, 1998 was 32,378,821 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 -March 31, 1998
and December 31, 1997 (unaudited) 2
Consolidated Statements of Operations -Three Months
Ended March 31, 1998 and 1997 (unaudited) 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 (unaudited) 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
1
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SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 575,211 $ 271,312
Accounts receivable, less allowance of
$42,000 1998 and 1997 192,690 154,052
Inventories 458,520 458,177
Prepaid expenses 48,609 51,876
----------- ------------
Total current assets 1,275,030 935,417
Property and equipment, less accumulated
depreciation of $977,661 (1998) and
$995,853 (1997) 370,791 434,457
Deposits 31,125 40,162
Restricted cash 120,500 120,500
Patents and trademarks, less accumulated
amortization of $50,673 (1998) and
$48,375 (1997) 106,243 108,541
----------- ------------
$ 1,903,689 $ 1,639,077
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 450,859 $ 670,400
Accrued expenses 1,423,429 1,473,944
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases 20,557 33,779
----------- ------------
Total current liabilities 1,963,085 2,246,363
Long-term debt and obligations under capital
leases, net of current portion 54,735 59,401
----------- ------------
Total liabilities 2,017,820 2,305,764
Series 1998-A Convertible Redeemable Preferred
Stock, $.01 par value, 1,500 shares issued
and outstanding 1,157,203 -
Stockholders' equity:
Common stock , $.01 par value, 50,000,000
shares authorized; shares issued and
outstanding: 30,543,475 (1998)
and 29,344,624 (1997) 305,435 293,447
Preferred Stock, $.01 par value, 1,000,000
shares authorized (1,500 Series 1998-A
Convertible issued and outstanding, see above)
Additional paid-in capital 28,183,935 27,650,149
Note receivable from shareholder for stock (83,825) (83,825)
Accumulated deficit (29,676,879) (28,526,458)
------------- --------------
Total stockholders' equity (1,271,334) (666,687)
------------- --------------
$ 1,903,689 $ 1,639,077
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues $ 197,578 $ 227,034
Costs and expenses:
Cost of products sold 252,700 259,641
Research and development expense 172,379 194,712
Selling, general and administrative
expense 646,377 953,913
----------- -----------
Loss from operations (873,878) (1,181,232)
Interest income
6,575 5,679
Interest expense (1,405) (8,578)
Other income 43,740 9,230
----------- -----------
Net loss (824,968) (1,174,901)
Dividends including deemed dividends on
preferred stock (325,453) -
----------- -----------
Net loss to common stockholders $ (1,150,421) $(1,174,901)
----------- -----------
----------- -----------
Basic and diluted net loss per share $ (0.04) $ (0.05)
----------- -----------
----------- -----------
Shares used in basic and diluted
per share calculations 30,423,590 22,040,784
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (824,968) $ (1,174,901)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 68,490 69,053
Gain on sale of property and equipment (43,479) -
Other (2,476) (10,466)
Changes in current assets and liabilities:
Accounts receivable (38,638) 136,643
Inventories (343) (7,304)
Prepaid expenses and deposits 12,304 (12,377)
Accounts payable and accrued expenses (270,056) 263,569
------------ -----------
Net cash used in operating activities (1,099,166) (735,783)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 33,482 -
Acquisitions of property and equipment (3,536) (18,984)
------------ -----------
Net cash provided by (used in) investing activities 29,946 (18,984)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net of issuance costs 1,380,000 -
Proceeds from convertible debentures, net of issuance costs - 1,380,000
Repayment of long term debt and capital lease obligations (6,881) (8,376)
------------ -----------
Net cash provided by financing activities 1,373,119 1,371,624
------------ -----------
Net increase (decrease) in cash and cash equivalents 303,899 616,857
Cash and cash equivalents, beginning of period 271,312 776,380
------------ -----------
Cash and cash equivalents, end of period $ 575,211 $ 1,393,237
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,405 $ 8,578
Debt extinguished on disposition of property
and equipment $ 11,007 $ -
</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 month periods ended March 31, 1998 and 1997 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1997 is derived from Saliva Diagnostic
Systems, Inc. (the "Company") consolidated financial statements included in
the Company's Annual Report on Form 10-KSB/A for the year ended December 31,
1997. 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, 1997, as included in the Company's Annual Report on Form
10-KSB/A for the year ended December 31, 1997.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire
fiscal year ending December 31, 1998, or any other portion thereof.
2. 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>
March 31, December 31,
1998 1997
---------- -------------
<S> <C> <C>
Raw materials $ 278,608 $ 280,438
Work in process 10,023 11,569
Finished goods 169,889 166,170
---------- -------------
$ 458,520 $ 458,177
---------- -------------
---------- -------------
</TABLE>
3. LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 changes the standards for computing and presenting
earnings per share (EPS) and supersedes Accounting Principles Board Opinion
No. 15, "Earnings per Share." This Statement requires restatement of all
prior-period EPS data presented. The Company implemented SFAS 128 for its
year ended December 31, 1997.
Basic earnings per common share is computed using the weighted average number
of shares of common stock outstanding for the period. Diluted earnings per
common share is computed using the weighted average number of shares of
common stock and dilutive common equivalent shares related to stock options
and warrants outstanding during the period.
As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are the
exclusion of common stock equivalents in the determination of Basic Earnings
Per Share and the market price at which common stock equivalents are
calculated in the determination of Diluted Earnings Per Share. The adoption
of SFAS 128 had no effect on previously reported loss per share amounts for
the quarter ended March 31, 1997. A net loss was reported in the first
5
<PAGE>
quarters of 1998 and 1997, and accordingly, the denominator was equal to the
weighted average outstanding shares with no consideration for outstanding
options and warrants to purchase shares of the Company's common stock,
because to do so would have been anti-dilutive. Stock options for the
purchase of 2,195,500 shares, warrants for the purchase of 1,567,216 shares
and 11,842,038 shares which represent the number of common shares that
preferred stock would convert into at March 31, 1998 were not included in
loss per share calculations, because to do so would have been anti-dilutive.
4. ACCRUED EXPENSES
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Accrued wages and salaries $ 471,948 $ 493,352
Accrued payroll taxes 65,959 92,144
Accrued restructuring expenses 135,522 135,522
Litigation contingencies 750,000 750,000
Other accrued liabilities - 2,926
----------- ------------
$ 1,423,429 $ 1,473,944
----------- ------------
----------- ------------
</TABLE>
5. SERIES 1998-A CONVERTIBLE REDEEMABLE PREFERRED STOCK
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "1998-A Preferred Stock") (the "Preferred Offering"). Pursuant to
the Securities Purchase Agreement, the Company sold a total of 1,500 shares
of the 1998-A Preferred Stock to an investor for an aggregate purchase price
of $1,500,000. SEE MANAGEMENT'S DISCUSSION AND ANALYSIS-LIQUIDITY AND CAPITAL
RESOURCES FOR ADDITIONAL DISCLOSURE REGARDING THE 1998-A PREFERRED STOCK.
The 1998-A Preferred Stock is convertible into Common Stock of the Company at
a beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred Stock. The discount
will be accreted to deemed preferred dividends over the conversion period,
which ends July 25, 1998. Additionally, the Company incurred offering costs
related to the 1998-A Preferred Stock totaling approximately $120,000. These
offering costs are reflected as a discount to the 1998-A Preferred Stock and
will be accreted as deemed preferred dividends over the conversion period,
which ends July 25, 1998. At March 31, 1998, $197,708 had been recorded as
deemed dividends, relating to the beneficial conversion ratio and offering
costs.
In connection with the issuance of the 1998-A Preferred Stock, the Company
issued warrants to purchase up to 750,000 shares of Common Stock at an
exercise price of $0.3375 per share, which expire on January 26, 2003. The
fair value of these warrants of $248,250 has been reflected as a discount to
the 1998-A Preferred Stock and will be accreted as deemed preferred dividends
over the conversion period, which ends July 25, 1998. At March 31, 1998,
$127,745 had been recorded as deemed dividends related to the fair value of
the warrants.
6. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes
standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. The Company adopted SFAS 130
during the first quarter of 1998. Comprehensive loss did not differ from
currently reported net loss in the periods presented.
6
<PAGE>
7. CONTINGENCIES
Luc Hardy, a former director and officer of the Company, filed a complaint in
Federal court against the Company and several individual defendants,
including former directors and officers of the Company, making certain
allegations, including breach of Mr. Hardy's employment agreement with the
Company, intentional interference with contract by the individual defendants,
slander and deceptive trade practices, all arising from his termination. The
complaint seeks damages and punitive damages in an unspecified amount. 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. In October 1997, a
hearing was held on the Company's motions to set aside the jury verdict and
for a new trial. The Company is currently awaiting a decision. There can be
no assurance such motions will be granted. A final judgment in this case
consistent with the jury verdict will have a material adverse effect on the
Company.
In January 1997, Lealos v. Saliva Diagnostic Systems, Inc. was filed in
Superior Court in Clark County in the State of Washington by Ronald Lealos,
former President and CEO of the Company. 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. The parties did not reach a settlement and, in February 1998,
Mr. Lealos filed a complaint against the Company in the same court which
alleged substantially the same claims. The complaint seeks damages in the
approximate amount of $1,000,000. Management of the Company intends to
vigorously defend the Company. In March 1998, the Company filed a response to
the complaint and asserted numerous counterclaims against Mr. Lealos,
including breach of fiduciary duty and conversion and the Company is seeking
damages in excess of $1,500,000. There can be no assurance that the
litigation will not be decided adverse to the Company and that such an
adverse decision would not have a material adverse effect on the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Since July 1990, the Company has been engaged almost exclusively in research
and development activities focused on developing proprietary saliva based
collection devices and rapid assays for infectious diseases. Other than sales
of the Company's collection devices, the Company has not yet commenced any
significant product commercialization. The Company has incurred significant
operating losses since its inception, resulting in an accumulated deficit of
$29,676,879 at March 31, 1998. 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. Despite the
Company's preferred stock financing in January 1998, substantial additional
financing will be required in 1998. There can be no assurance that such
financing will be achieved or that financings will be on terms favorable to
the Company. 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
FIRST QUARTER OF 1998 COMPARED TO FIRST QUARTER OF 1997
REVENUES. The Company's revenues consist of product sales. Revenues decreased
13% to $197,578 in the first quarter of 1998 from $227,034 in the first
quarter of 1997. The decrease in revenue was primarily attributable to delays
in the transfer of manufacturing to outsourced manufacturing facilities. SEE
"COST OF PRODUCTS SOLD" BELOW. Sales to three customers represented
approximately 68% of total revenues in the first quarter of 1998, and sales
to four customers accounted for approximately 68% of total revenues in the
first quarter of 1997.
COST OF PRODUCTS SOLD. Costs of products sold decreased to $252,700 (128% of
product sales) in the first quarter of 1998 from $259,641 (114% of product
sales) in the first quarter of 1997. Costs of products sold increased as a
percentage of product sales due to reduced production levels in the first
quarter of 1998.
The Company has designed and built equipment for automated production of its
rapid tests at its Vancouver, Washington facility. However, the Company
currently intends to outsource all manufacturing of its products. The Company
expects to use the equipment at its Vancouver, Washington facility solely for
research and development purposes. Currently, Omni-SAL(R) is manufactured at
Wesley Coe, Ltd. in the U.K. and distributed from SDS International, Ltd.,
and Omni-Swab and Saliva-Sampler are manufactured at MML Diagnostic
Packaging, Inc. in the United States and distributed by the Company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 11% to $172,379 in the first quarter of 1998 from $194,712 in the
first quarter of 1997, primarily as a result of reduced payroll and related
expenses. Over the last year, the Company has focused on cost controls in all
departments, including research and development, and thus intentionally
reduced these costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 32% to $646,377 in the first quarter of
1998 from $953,913 in the first quarter of 1997, primarily as a result of the
closure of facilities in Singapore and a reduction in the number of
administrative personnel.
INTEREST EXPENSE AND LOAN FEES. Interest expense decreased to $1,405 in the
first quarter of 1998 from $8,578 in the first quarter of 1997.
8
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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 $1.5 million
Convertible Debentures, due February 28, 1999. 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 $2,063,000, net of offering costs. In January
1998, the Company entered into a Securities Purchase Agreement with an
investor for the issuance and sale of 1,500 shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock for an aggregate
purchase price of $1,380,000, net of offering costs.
Cash used in operating activities in the first quarter of 1998 was
$1,099,166. This was primarily a result of a net loss of $824,968,
adjustments for depreciation and amortization, and a decrease in accounts
payable and accrued expenses. Accounts payable and accrued expenses decreased
due to reduced production volume in the first quarter of 1998 resulting from
delays in the transfer of manufacturing to outsourced manufacturing
facilities.
Cash provided by investing activities in the first quarter of 1998 was
$29,946, which primarily represented proceeds from sale of property and
equipment, primarily in Singapore. The Company closed its Singapore
manufacturing operations in October 1997.
Cash provided by financing activities in the first quarter of 1998 was
$1,373,119. This was primarily a result of net proceeds of $1,380,000 from
the sale of Series 1998-A Convertible Preferred Stock. On January 26, 1998,
the Company entered into a Securities Purchase Agreement with an investor for
the issuance and sale of shares of the 1998-A Preferred Stock, (the "Preferred
Offering"). Pursuant to the Securities Purchase Agreement, the Company sold a
total of 1,500 shares of the 1998-A Preferred Stock to the Investor for an
aggregate purchase price of $1,500,000. The Investor is entitled to receive
a number of shares of the Company's Common Stock, upon conversion of the
1998-A Preferred Stock as determined by dividing the purchase price of the
1998-A Preferred Stock by the lesser of (i) $0.3375, and (ii) 80% of the
average closing bid price of the Common Stock for the five trading days
prior to conversion. The timing of conversion is subject to certain
restrictions. The Securities Purchase Agreement provides for an additional
offering of up to $1,500,000 of an additional series of the Company's
preferred stock and may be purchased at the investor's option upon
substantially the same terms as the Preferred Offering. This option must be
exercised by the Investor on or prior to September 26, 1998.
The 1998-A Preferred Stock is convertible into Common Stock of the Company at
a beneficial conversion ratio, and as a result, a discount of $300,000 was
recorded at the date of issuance of the 1998-A Preferred. The discount will
be accreted to deemed preferred dividends over the conversion period, which
ends July 25, 1998. Additionally, the Company incurred offering costs related
to the 1998-A Preferred Stock totaling approximately $120,000. These offering
costs are reflected as a discount to the 1998-A Preferred Stock and will be
accreted as deemed preferred dividends over the conversion period, which ends
July 25, 1998. At March 31, 1998, $197,708 had been recorded as deemed
dividends, relating to the beneficial conversion ratio
9
<PAGE>
and offering costs. Additionally, the 1998-A Preferred may be redeemed at the
option of the holders under certain conditions, as specified in the
Securities Purchase Agreement, which are outside the control of the Company.
Accordingly, the 1998-A Preferred Stock has not been classified as
stockholders' equity at March 31, 1998.
In connection with the Preferred Offering, the Company also entered into a
separate registration rights agreement with the investor under which the
Company is required to file a registration statement covering resales of
shares of the Common Stock issuable upon conversion of the 1998-A Preferred
Stock. The Agreement provides that the Company will pay certain amounts to
the investor if the registration statement is not filed on or before February
26, 1998 or is not declared effective by the Securities and Exchange
Commission by April 26, 1998. A registration statement on Form S-3 was filed
on February 26, 1998. Because the Company is no longer eligible to file on
Form S-3 due to the delisting of the Company's securities from Nasdaq, the
Company intends to file a pre-effective amendment to the registration
statement on Form SB-2.
In connection with the issuance of the 1998-A Preferred Stock, the Company
paid a cash fee of 7.5% of the gross proceeds and attorney's fees equal to
0.5% of the gross proceeds. The Company also issued warrants to purchase up
to 750,000 shares of Common Stock at an exercise price of $0.3375 per share,
which expire on January 26, 2003. The fair value of these warrants of
$248,250 has been reflected as a discount to the 1998-A Preferred Stock and
will be accreted as deemed preferred dividends over the conversion period,
which ends July 25, 1998. At March 31, 1998, $127,745 had been recorded as
deemed dividends related to the fair value of the warrants. In addition, the
Company has agreed to issue additional warrants to purchase up to 250,000
shares of Common Stock if and when the investor purchases an additional
series of the Company's preferred stock.
The Company's capital requirements have been and will continue to be
significant. 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. Despite the Company's preferred stock financing in January 1998,
substantial additional financing will be required in 1998. There can be no
assurance that such financing will be achieved or that financings will be on
terms favorable to the Company. The Company will continue to seek public or
private placement of its equity 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. The Company's
significant operating losses and capital requirements raise substantial doubt
about the Company's ability to continue as a going concern.
NASDAQ DELISTING
Effective with the close of the market on March 10, 1998, the Company's
securities were delisted from The Nasdaq SmallCap Market for failure to meet
the new Nasdsaq continued listing requirements. Trading in the Company's
securities is and will be conducted in the over-the-counter market on the OTC
Bulletin Board, 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 of the Nasdaq delisting, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Company's securities. In addition, the Company's securities
are 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 may 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.
10
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RECENT DEVELOPMENTS
On April 28, 1998, the Company issued to the Tail Wind Fund Ltd. ("Tail
Wind") 1,496,630 shares of its Common Stock, which Tail Wind was entitled to
receive pursuant to the terms of a common stock purchase agreement dated as
of June 30, 1997 between Tail Wind and the Company. The agreement provided
for the issuance of such additional shares upon the occurrence of certain
conditions related to the trading price of the Company's Common Stock during
a specified period.
Also on April 28, 1998, the Company issued to Biscount Overseas Limited
1,537,567 shares of its Common Stock upon the conversion of 140 shares of the
1998-A Preferred Stock.
YEAR 2000 ISSUE
The Company is aware of the critical business issue of how existing computer
software programs and operating systems will accommodate the Year 2000.
Programs and systems that do not properly recognize date sensitive
information upon the roll-over of the two-digit year value to "00" could
generate erroneous data or cause systems to fail. Management is in the
process of determining the impact the Year 2000 issue will have on the
Company and its revenues, both directly and indirectly through third parties
such as suppliers. The Company intends to send a written request to its
suppliers for an assessment of the impact the Year 2000 issue might have on
their activities. Based upon information currently available, the Company
does not expect the costs of addressing the Year 2000 issue will have a
material impact on the Company's financial position or on its results of
operations.
11
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MERITXELL LTD. v. SALIVA DIAGNOSTIC SYSTEMS, INC., filed in the United States
District Court for the Southern District of New York, involved a dispute with
respect to the conversion rate of a convertible debenture issued to Meritxell
by the Company. The plaintiff sought damages in an unspecified amount. In
February 1998, the Company's motion for summary judgment was granted and the
lawsuit was dismissed with prejudice.
In January 1997, LEALOS v. SALIVA DIAGNOSTIC SYSTEMS, INC. was filed in
Superior Court in Clark County in the State of Washington by Ronald Lealos,
former President and CEO of the Company. 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. The parties did not reach a settlement and, in February 1998,
Mr. Lealos filed a complaint against the Company in the same court which
alleges substantially the same claims. The complaint seeks damages in the
approximate amount of $1,000,000. Management of the Company intends to
vigorously defend the Company. In March 1998, the Company filed a response to
the complaint and asserted numerous counterclaims against Mr. Lealos,
including breach of fiduciary duty and conversion.
ITEM 2. CHANGES IN SECURITIES
On January 9, 1998, in reliance upon Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended ("Rule 506"), the Company issued
to The Tail Wind Fund Ltd. ("Tail Wind") 856,521 shares of its Common Stock,
and to Joseph Kaufman ("Kaufman") 342,330 shares of its Common Stock, which
they were entitled to receive pursuant to the terms of a letter agreement
dated June 27, 1997 among the Company, Tail Wind and Kaufman. The letter
agreement provided for the issuance of such additional shares upon the
occurrence of certain conditions related to the trading price of the
Company's Common Stock during a specified period.
On January 26, 1998, the Company entered into a Securities Purchase Agreement
with an investor for the issuance and sale of shares of the Company's newly
designated Series 1998-A Convertible Preferred Stock, stated value $1,000 per
share (the "1998-A Preferred Stock") (the "Preferred Offering") in reliance
upon Rule 506. Pursuant to the Securities Purchase Agreement, the Company
sold a total of 1,500 shares of the 1998-A Preferred Stock to the Investor
for an aggregate purchase price of $1,500,000. The Investor is entitled to
receive a number of shares of the Company's Common Stock, upon conversion of
the 1998-A Preferred Stock as determined by dividing the purchase price of
the 1998-A Preferred Stock by the lesser of (i) $0.3375, and (ii) 80% of the
average closing bid price of the Common Stock for the five trading days prior
to conversion. The timing of conversion is subject to certain restrictions.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on February 26,
1998. The following matter was submitted to the Company's shareholders for
their consideration:
Approval of an amendment to the Company's Certificate of Incorporation
authorizing a reverse stock split of the Company's Common Stock, par value,
$0.1 per share, at a ratio of up to 10:1. On this matter, 20,378,788 votes
were cast for, 3,090,075 votes were cast against, and there were 90,007
abstentions as to the approval of the amendment authorizing the reverse stock
split.
The Company's Board of Directors has deferred its decision as to whether to
implement the reverse stock split in light of the delisting of the Company's
securities from The Nasdaq SmallCap Market.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this report are listed below:
<TABLE>
<CAPTION>
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
3.2 Certificate of Amendment, dated February 25, 1997, incorporated
by reference to Exhibit 2.2 of the Company's Annual Report on
Form 10-KSB for its fiscal year ended December 31, 1996
3.3 Certificate of Amendment, dated November 21, 1997, incorporated
by reference to Exhibit 3.3 of the Company's Annual Report on
Form 10-KSB for its fiscal year ended December 31, 1997
3.4 Company's By-laws, as amended, incorporated by reference to
Exhibit 3.4 of the Company's Annual Report on Form 10-KSB for its
fiscal year ended December 31, 1997
4.1 Specimen of Certificate Representing Common Stock, incorporated
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-46648)
4.2 Form of Underwriter's Warrant, incorporated by reference to
Exhibit 4.2 of the Form S-1.
4.3 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.
4.4 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).
4.5 Letter Agreement dated May 28, 1997 among the Company and The
Tail Wind Fund Ltd. and Joseph Kaufman, 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").
4.6 Letter Agreement dated June 27, 1997 among the Company and The
Tail Wind Fund Ltd. and Joseph Kaufman, incorporated by reference
to Exhibit 4.10 to the June 1997 8-K.
4.7 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.
4.8 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.
4.9 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.
4.10 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.
4.11 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.
4.12 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").
4.13 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.
4.14 Certificate of Designations, Rights and Preferences of the Series
1998-A Convertible Preferred Stock, incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K, dated
January 26, 1998
4.15 Warrant dated as of January 26, 1998 issued to Biscount Overseas
Limited, incorporated by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-3 dated February 26,
1998 (Registration No. 333-46961) (the "1998 S-3")
27 Financial Data Schedule - included herein.
</TABLE>
14
<PAGE>
(b) Reports on Form 8-K
A Current Report on Form 8-K, reporting a securities purchase agreement
dated as of January 26, 1998 in connection with a financing pursuant to
Regulation D promulgated under the Securities Act of 1933, as amended, under
Item 5, was filed on February 13, 1998.
15
<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: May 15, 1998
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. McLACHLAN
-----------------------------------
Kenneth J. McLachlan
President, Chief Executive Officer and
Chief Financial Officer
16
<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 MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 575,211
<SECURITIES> 0
<RECEIVABLES> 234,690
<ALLOWANCES> 42,000
<INVENTORY> 458,520
<CURRENT-ASSETS> 1,275,030
<PP&E> 1,348,452
<DEPRECIATION> 977,661
<TOTAL-ASSETS> 1,903,689
<CURRENT-LIABILITIES> 1,963,085
<BONDS> 0
0
1,157,203
<COMMON> 305,435
<OTHER-SE> (1,576,769)
<TOTAL-LIABILITY-AND-EQUITY> 1,903,689
<SALES> 197,578
<TOTAL-REVENUES> 197,578
<CGS> 252,700
<TOTAL-COSTS> 252,700
<OTHER-EXPENSES> 1,071,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,405
<INCOME-PRETAX> (1,150,421)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,150,421)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,150,421)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
