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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, 1999
[ ] 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.
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(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 May 14,
1999 was 8,113,544 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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<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, 1999
(unaudited) and December 31, 1998 2
Consolidated Statements of Operations -Three Months
Ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 (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 13
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
1
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 64,818 $ 151,524
Accounts receivable, less allowance of
$95,870 (1999) and $83,603 (1998) 130,532 95,242
Inventories 150,967 205,792
Prepaid expenses 28,490 25,974
------------ ------------
Total current assets 374,807 478,532
Property and equipment, less accumulated
depreciation of $809,030 (1999) and
$782,463 (1998) 181,218 208,950
Deposits 14,307 14,307
Restricted cash - 59,420
Patents and trademarks, less accumulated
amortization of and $66,280 (1999)
$57,605 (1998) 90,636 99,310
------------ ------------
$ 660,968 $ 860,519
============ ============
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable $ 575,102 $ 439,227
Deferred officer payable 153,361 75,000
Accrued expenses 1,667,401 1,604,536
Accrued interest payable 68,240 68,240
Current portion of long-term debt and
obligations under capital leases - 59,387
------------ ------------
Total current liabilities 2,464,104 2,246,390
Commitments and contingencies
Shareholders' deficit:
Series 1998-B Convertible Preferred Stock:
1,645 shares authorized, shares issued and outstanding:
645 (1999) and 1,145 (1998) 615,000 1,085,000
Common stock , $.01 par value, 50,000,000
shares authorized; shares issued and outstanding:
8,113,544 (1999) and 5,231,888 (1998) 81,135 52,319
Additional paid-in capital 32,653,439 32,069,415
Note receivable from shareholder for stock (83,825) (83,825)
Accumulated deficit (35,068,885) (34,508,780)
------------ ------------
Total stockholders' equity (1,803,136) (1,385,871)
------------ ------------
$ 660,968 $ 860,519
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
-----------------------------
1999 1998
----------- -----------
Revenues $ 322,528 $ 197,578
Costs and expenses:
Cost of products sold 259,216 252,700
Research and development expense 55,752 172,379
Selling, general and administrative
expense 430,710 646,377
----------- -----------
Loss from operations (423,150) (873,878)
Interest income 121 6,575
Interest expense (1,965) (1,405)
Other income 5,585 43,740
----------- -----------
Net loss (419,409) (824,968)
Dividends including deemed dividends on
preferred stock (140,696) (325,453)
----------- -----------
Net loss to common stockholders $ (560,105) $(1,150,421)
=========== ===========
Basic and diluted net loss per share $ (0.10) $ (0.38)
=========== ===========
Shares used in basic and diluted
per share calculations 5,784,516 3,042,359
=========== ===========
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,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (419,409) $ (824,968)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 36,439 68,490
Gain on sale of property and equipment - (43,479)
Other - (2,476)
Changes in current assets and liabilities:
Accounts receivable (35,290) (38,638)
Inventories 54,825 (343)
Prepaid expenses and deposits (2,516) 12,304
Accounts payable and accrued expenses 279,245 (270,056)
----------- -----------
Net cash used in operating activities (86,706) (1,099,166)
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment - 33,482
Acquisitions of property and equipment - (3,536)
----------- -----------
Net cash provided by investing activities - 29,946
Cash Flows From Financing Activities:
Proceeds from sale of preferred stock, net of issuance - 1,380,000
costs
Repayment of long term debt and capital lease obligations 0 (6,881)
----------- -----------
Net cash provided by financing activities 0 1,373,119
----------- -----------
Net (decrease) increase in cash and cash equivalents (86,706) 303,899
Cash and cash equivalents, beginning of period 151,524 271,312
----------- -----------
Cash and cash equivalents, end of period $ 64,818 $ 575,211
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 1,965 $ 1,405
Debt extinguished on disposition of property
and equipment $ - $ 11,007
Capital lease obligation extinguished using
restricted cash $ 59,387 0
</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, 1999 and 1998 have been prepared in
conformity with generally accepted accounting principles. The financial
information as of December 31, 1998 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, 1998. 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, 1998, as included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
Operating results for the three month period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1999, or any other portion thereof.
The Company has adopted 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. Comprehensive loss did not differ from currently
reported net loss in the periods presented.
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:
March 31, December 31,
1999 1998
--------- ------------
Raw materials $106,896 $140,394
Work in process 23,187 31,701
Finished goods 20,884 33,697
-------- --------
$150,967 $205,792
======== ========
3. Loss per Share
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.
A net loss was reported in the three months ended March 31, 1999 and 1998, and
accordingly, the denominator was equal to weighted average outstanding shares
with no consideration for outstanding options
5
<PAGE>
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 197,450 and
219,550 shares and warrants for the purchase of 147,722 and 156,722 shares for
the three months ended March 31, 1999 and 1998, respectively, were not included
in loss per share calculations, because to do so would have been anti-dilutive.
The Company also had 645 shares of Series 1998-B Convertible Preferred stock
outstanding at March 31, 1999, which may be converted into common stock pursuant
to the agreement under which the shares were issued. These common equivalent
shares have not been included in loss per share calculations, because to do so
would have been anti-dilutive.
4. Accrued Expenses
March 31, December 31,
1999 1998
---------- ------------
Accrued wages and salaries $ 447,998 $ 429,513
Accrued payroll taxes 115,558 107,357
Accrued restructuring expenses 13,040 13,040
Accrued litigation expenses 440,000 440,000
Accrued legal expense 545,019 508,210
Other accrued liabilities 105,786 106,416
---------- ----------
$1,667,401 $1,604,536
========== ==========
5. Shareholders' Deficit
On January 22, 1999, the Company issued to The Tail Wind Fund Ltd. ("Tail Wind")
17,140 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, pursuant to which Tail Wind had purchased 412,905 shares of the Company's
common stock for an aggregate purchase price of $300,000. The subscription
agreement provided for the issuance of such additional shares upon the
occurrence of certain conditions related to the market price of the Company's
common stock during a specified period.
On March 2, 1999, the Company issued to Biscount Overseas Limited 1,364,516
shares of its common stock upon the conversion of 500 shares of the Company's
Series 1998-B Convertible Preferred Stock.
On March 25, 1999, the Company issued to Luc Hardy 1,500,000 shares of its
common stock pursuant to a settlement agreement between Mr. Hardy and the
Company. See Note 6.
6. Contingencies
In August 1994, Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos,
Eugene Seymour and Richard S. Kalin, was filed in United States District Court,
District of Connecticut by Luc Hardy, a former director and officer of the
Company. The complaint alleged several causes of action against the Company and
individual defendants, including former directors and officers of the Company,
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 employment termination by the
Company. A judgment was entered against the Company on March 23, 1999 for
approximately $1,675,000. Pursuant to a settlement agreement dated March 25,
1999, the Company issued approximately 1,500,000 shares of its common stock and
will pay approximately $290,000 in cash over a two-year period to Mr. Hardy. As
a part of this settlement, Mr. Hardy has agreed to enter into a two-year
consulting agreement pursuant to which Mr. Hardy will provide consulting
services to the Company. The settlement agreement provides that Mr. Hardy will
file a satisfaction and release of the judgment upon the Company issuing the
6
<PAGE>
1,500,000 shares of common stock, filing a registration statement covering
resales of those shares by April 30, 1999 and paying $50,000 to Mr. Hardy by
June 24, 1999. On March 29, 1999, Mr. Hardy filed a motion for reconsideration
of the Court's rulings that denied double damages on certain damages awarded to
Mr. Hardy and denied offer of judgment interest on the prejudgment interest
award. The Company is currently awaiting a decision on these motions. There can
be no assurance that such motions will not be granted or that the grant of such
motions will not have a further material adverse effect on the Company.
In February 1998, 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 alleged that Mr. Lealos
was entitled to certain cash payments and benefits under an employment agreement
whereby he would serve as the Company's president, and that the Company's
failure to make such payments and grant such benefits constituted anticipatory
breach and breach of that contract. The complaint sought damages in excess of
$1,000,000. In addition, the complaint alleged that the Company wrongfully
rescinded options to purchase 38,500 shares of common stock in breach of a stock
option agreement with Mr. Lealos. The Company denied all allegations of the
complaint and filed a counterclaim for Mr. Lealos' wrongful conduct seeking
damages of approximately $1,500,000. In December 1998, the Company filed a
motion for summary judgment on the claims stated in the complaint. The Court
granted the motion in February 1999 in favor of the Company. Subsequently, Mr.
Lealos moved to amend the original complaint to allege new grounds for recovery
of lost compensation, including quantum meruit. In February 1999, the Court
granted this motion, providing that Mr. Lealos will not be entitled to
contradict or withdraw factual allegations that have previously been set forth
in the litigation. A trial based on the amended complaint and the Company's
counterclaims is scheduled for October 1999. The Company intends to file a
motion to dismiss the amended complaint prior to the trial date. Although
management of the Company intends to vigorously defend against the suit, 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.
In February 1999, a demand for arbitration with the American Arbitration
Association was filed by Fremont Novo Sciences, LLC, former distributor of the
Company's products in India. The demand alleges that the Company wrongfully
terminated and breached the Sub-License Agreement among the Company, SDS
Singapore and Fremont. The demand seeks a declaration that the Sub-License
Agreement remains in effect and damages in an amount to be determined, including
lost profits. In April 1999, the Company filed an answering statement denying
Fremont's claims and seeking damages in an amount to be determined for Fremont's
breach and non-performance of the Sub-License Agreement and for tortious
interference with the Company's business and contracts. Although management of
the Company intends to vigorously defend against Fremont's allegations and
pursue its claims against Fremont, there can be no assurance that the
arbitration 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. Following closure of the
Company's Singapore facility in late 1997, the Company installed and received
FDA approval for manufacturing capabilities at its Vancouver, Washington
facility, from which the Company currently manufactures certain of its
strip-based products. The Company has not received sufficient revenues from the
sales of its products to support its operations.
The Company has incurred significant operating losses since its inception,
resulting in an accumulated deficit of $(35,068,885) at March 31, 1999. 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. In April 1999, the Company received $200,000 from the sales of 212
shares of its Series 1998-B Convertible Preferred Stock. In the second fiscal
quarter of 1999, the Company expects to receive $270,000 (net of issuance costs
of $30,000) from the sale of 288 shares of its Series 1998-B Convertible
Preferred Stock. The Company believes that its current cash position and the
expected proceeds, combined with revenues and other cash receipts, will be
insufficient to fund the Company's operations through 1999. Substantial
additional financing will be required in 1999. The Company's significant
operating losses and significant capital requirements raise substantial doubt
about the Company's ability to continue as a going concern. There can be no
assurance that the Company will be able to obtain the additional capital
resources necessary to continue its business, or that such financing will be
available on commercially reasonable terms or at all.
Results of Operations
First Quarter of 1999 Compared to First Quarter of 1998
Revenues. The Company's revenues consist of product sales. Revenues increased
63.2% to $322,528 in the first quarter of 1999 from $197,578 in the first
quarter of 1998. The increase in revenues was primarily attributable to $164,261
sales of Omni-Swab. Sales to one customer represented approximately 49% of total
revenues in the first quarter of 1999. Sales to three customers represented
approximately 68% of total revenues in the first quarter of 1998.
Cost of products sold. Costs of products sold increased to $259,216 (80% of
product sales) in the first quarter of 1999 from $252,700 (128% of product
sales) in the first quarter of 1998. The increase as a percentage of revenues
was attributable to transferring production from Singapore to Vancouver and
delays in setting up the manufacturing equipment in 1998.
Research and development expenses. Research and development expenses decreased
67.7% to $55,752 in the first quarter of 1999 from $172,379 in the first quarter
of 1998, primarily as a result of reduced payroll and related expenses and
changes in the amount of clinical trial activity and related expense. The
Company has maintained its focus on controlling costs in all departments,
including research and development, and thus intentionally reduced these costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 33.4% to $430,710 in the first quarter of 1999
from $646,377 in the first quarter of 1998, primarily as a result of the closure
of facilities in Singapore, a reduction in the number of administrative
personnel and an ongoing focus on controlling costs.
Interest expense. Interest expense increased to $1,965 in the first quarter of
1999 from $1,405 in the first quarter of 1998, due to increased interest owed on
payments due to vendors.
8
<PAGE>
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. The Company
has a net operating loss carryforward of approximately $24 million which is
available to offset future taxable income, if any, expiring through the year
2017. The Internal Revenue Code rules under Section 382 could limit the future
use of these losses based on ownership changes and the value of the Company's
stock.
Liquidity and Capital Resources
Since inception, the Company has financed its capital requirements through
proceeds from its public offering of common 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
preferred stock, and the exercise of common stock purchase warrants and stock
options.
Cash used in operating activities in the first quarter of 1999 was $86,706. This
was primarily a result of a net loss of $419,409, adjustments for depreciation
and amortization, and an increase in accounts payable and accrued liabilities of
$279,245.
On January 26, 1998, the Company entered into a securities purchase agreement
with an investor for the issuance and sale of shares of its 1998-A Convertible
Preferred Stock ("the 1998-A Preferred Stock"). 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 $1,380,000
(net of issuance costs of $120,000). As of December 31, 1998, all outstanding
shares of the 1998-A Preferred Stock had been converted into 1,804,251 shares of
common stock.
In connection with the issuance and sale of the 1998-A Preferred Stock, the
Company entered into a separate registration rights agreement with the investor
under which the Company was 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 would pay certain
amounts to the investor if the registration statement was not filed on or before
February 26, 1998 or was 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 was no longer eligible to file on Form
S-3 due to the delisting of the Company's securities from Nasdaq, the Company
had filed pre-effective amendments to the registration statement on Form SB-2.
The terms of the 1998-A Preferred Stock provided that, if the registration
statement was not declared effective by April 26, 1998, the Company would pay,
upon demand of the investor, an amount equal to two percent (2%) of the purchase
price of the 1998-A Preferred Stock for the period from April 26, 1998 until the
date the registration statement is declared effective. The investor waived the
right to receive any such payment in exchange for 145 shares of the Company's
1998-B Preferred Stock, which were issued to the investor on December 11, 1998.
The value of these shares, $145,000, has been included as deemed dividends on
preferred stock in the accompanying consolidated financial statements.
In connection with the issuance of the 1998-A Preferred Stock, the Company paid
a cash fee to the investor of 7.5% of the gross proceeds ($112,500) and
attorney's fees equal to 0.5% of the gross proceeds ($7,500). The Company also
issued warrants to the investor to purchase up to 75,000 shares of common stock
at an exercise price of $3.375 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 was accreted as deemed
9
<PAGE>
preferred dividends over the conversion period, which ended July 25, 1998. The
investor was 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 lessor of (i) $3.375 or
(ii) 80% of the average closing bid price of the Company's common stock for the
five trading days prior to conversion. The fair value of this beneficial
conversion feature, $300,000, was recorded as a discount to the 1998-A Preferred
Stock and was accreted to deemed preferred dividends over the conversion period
which ended July 25, 1998.
The following summarizes deemed dividends and earned dividends on the 1998-A
Preferred Stock and related accretion as of December 31, 1998.
Accreted or Earned
Total as of
Value December 31, 1998
-------- ------------------
Beneficial conversion feature $300,000 $300,000
Issuance costs 120,000 120,000
Warrants 248,250 248,250
Preferred stock issued in settlement
of registration delay 145,000 145,000
Earned dividends (6% of preferred
principal value) 36,193 36,193
-------- --------
Total $849,443 $849,443
======== ========
On August 3, 1998, the Company entered into a securities purchase agreement with
an investor for the issuance and sale of a total of 1,500 shares of its 1998-B
Convertible Preferred Stock ("1998-B Preferred Stock") for an aggregate purchase
price of $1,410,000 (net of issuance costs of $90,000). In August 1998, pursuant
to the securities purchase agreement, the Company sold a total of 500 shares of
the 1998-B Preferred Stock to the investor for an aggregate purchase price of
$470,000 (net of issuance costs of $30,000). In December 1998, the Company sold
an additional 500 shares of the 1998-B Preferred Stock to the investor for an
aggregate purchase price of $470,000 (net of issuance costs of $30,000) and
issued an additional 145 shares of the 1998-B Preferred Stock to the investor in
satisfaction of certain obligations under the terms of the 1998-A Preferred
Stock and 1998-B Preferred Stock held by the investor. Pursuant to a letter
agreement entered into in April 1999 amending the terms of the securities
purchase agreement, the investor is obligated to purchase an additional 500
shares of 1998-B Preferred Stock for an aggregate purchase price of $470,000
(net of issuance costs of $30,000). The investor has paid $200,000 of the
aggregate purchase price and has agreed to pay the remaining $270,000 of the
purchase price upon the filing of a satisfaction and release with the court in
the lawsuit recently settled between the Company and Luc Hardy.
The 1998-B Preferred Stock is convertible into common stock of the Company at a
beneficial conversion ratio and, as a result, a discount of $286,250 in the
aggregate, was recorded at the date of issuance of the 1,000 shares of the
1998-B Preferred Stock in 1998. The $286,250 discount was accreted to deemed
preferred dividends over the conversion period, which ended March 11, 1999.
In connection with the issuance of the 1998-B Preferred Stock, the Company
issued warrants to purchase up to 25,000 shares of Common stock at an exercise
price of $3.375 per share, which expire on January 26, 2003. The fair value of
these warrants of $253,750 was accreted to deemed preferred dividends over the
conversion period which ended November 1, 1998. The following summarizes deemed
dividends and earned dividends on the 1998-B Preferred Stock and related
accretion as of March 31, 1999.
10
<PAGE>
Total Accreted as of
Value March 31, 1999
-------- --------------
Beneficial conversion feature $286,250 $286,250
Warrants 253,750 253,750
-------- --------
Total $540,000 $540,000
======== ========
On January 22, 1999, the Company issued to The Tail Wind Fund Ltd. ("Tail Wind")
17,140 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, pursuant to which Tail Wind had purchased 412,905 shares of the Company's
common stock for an aggregate purchase price of $300,000. The subscription
agreement provided for the issuance of such additional reset shares upon the
occurrence of certain conditions related to the market price of the Company's
common stock during a specified period.
On March 2, 1999, the Company issued to Biscount Overseas Limited 1,364,516
shares of its common stock upon the conversion of 500 shares of the Company's
Series 1998-B Convertible Preferred Stock.
On March 25, 1999, the Company issued to Luc Hardy 1,500,000 shares of its
common stock pursuant to a settlement agreement between Mr. Hardy and the
Company. See Note 6 of Notes to Consolidated Financial Statements.
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.
In April 1999, the Company received $200,000 from the sales of 212 shares of its
Series 1998-B Convertible Preferred Stock. In the second fiscal quarter of 1999,
the Company expects to receive $270,000 (net of issuance costs of $30,000) from
the sale of 288 shares of its Series 1998-B Convertible Preferred Stock. The
Company believes that its current cash position and these expected proceeds,
combined with revenues and other cash receipts, will be insufficient to fund the
Company's operations through 1999. Substantial additional financing will be
required in 1999. There can be no assurance that the Company will be able to
obtain the additional capital resources necessary to implement or continue its
programs, or that such financing will be available on commercially reasonable
terms or at all. The Company will continue to seek public or private placement
of its equity securities and corporate partners to develop products. There can
be no assurance that the Company will be able to sell its securities on
commercially reasonable terms or to enter into agreements with corporate
partners on favorable terms or at all. 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 U.S., 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 Nasdaq 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."
11
<PAGE>
Year 2000 Issue
The Company is assessing its computer systems and software to determine
readiness for the Year 2000. For this purpose, the term "computer systems and
software" includes systems that are commonly thought of as information
technology ("IT") systems, including enterprise software, operating systems,
networking components, application and data servers, PC hardware, accounting,
data processing and other information systems, as well as systems that are not
commonly thought of as IT systems, such as telephone systems, fax machines,
manufacturing equipment and other miscellaneous systems and equipment. Both IT
and non-IT systems may contain imbedded technology, which complicates the
Company's Year 2000 assessment, remediation and testing efforts. The inability
of computer software programs and operating systems accurately to recognize,
interpret and process date codes designating the year 2000 and beyond could
cause systems to yield inaccurate results or encounter operating problems,
including disruption of the business operations these systems control. The
Company believes it was 100% complete with its internal assessment at the end of
December 1998.
The Company also may be exposed to risks from computer systems of parties with
which the Company transacts business. The Company has contacted most of its
critical suppliers to determine the extent to which the Company may be
vulnerable to those parties' failures to remedy their own Year 2000 issues and
to ascertain what actions, if needed, may be taken by the Company in response to
such risks. To date, the Company has received responses from approximately 15%
of the suppliers contacted to date, most of which have indicated they are, or
expect to be, Year 2000 compliant. It is expected that the Company's assessment
of critical suppliers' Year 2000 compliance will be completed by the end of June
1999.
The Company currently estimates that it will spend between $15,000 and $20,000
in addressing the Year 2000 issue, of which approximately $1,000 has been
incurred as of March 31, 1999. The estimates are subject to change as additional
information is obtained in connection with the Company's assessment of the Year
2000 issue. The principal costs will be incurred in updating the Company's
accounting system, which costs are currently estimated at $17,000.
The Company believes that Year 2000 issues will not pose significant problems
for the Company. However, if all Year 2000 issues are not properly identified,
or assessment, remediation and testing are not effected timely with respect to
Year 2000 problems that are identified, there can be no assurance that the Year
2000 issue will not have a material adverse impact on the Company's business,
financial condition or results of operations, or adversely affect the Company's
relationships with customers, vendors or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities, such as one or more of
the Company's critical customers or suppliers, will not have a material adverse
impact on the Company's systems or its business, financial condition or results
of operations.
The Company has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis. A contingency plan has not been developed for dealing with the
most reasonably likely worst case scenario, and such scenario has not yet been
clearly identified. The Company currently plans to complete such analysis and
contingency planning by the end of June 1999.
The costs of the Company's Year 2000 assessment, remediation and testing efforts
and the dates on which the Company believes it will complete such efforts are
based upon management's best estimates. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated.
Recent Developments
In March 1999, the Company's subsidiary, SDS International, Ltd., ceased trading
and operations. The subsidiary is in the process of terminating or canceling its
existing contracts and agreements. DTC Group
12
<PAGE>
PLC, London has agreed to distribute the Company's products in the United
Kingdom. DTC Group PLC was the principal customer for the Company's products in
the United Kingdom in 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1994, Hardy v. Saliva Diagnostic Systems, Inc., Ronald L. Lealos,
Eugene Seymour and Richard S. Kalin, was filed in United States District Court,
District of Connecticut by Luc Hardy, a former director and officer of the
Company. The complaint alleged several causes of action against the Company and
individual defendants, including former directors and officers of the Company,
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 employment termination by the
Company. A judgment was entered against the Company on March 23, 1999 for
approximately $1,675,000. Pursuant to a settlement agreement dated March 25,
1999, the Company issued approximately 1,500,000 shares of its common stock and
will pay approximately $290,000 in cash over a two-year period to Mr. Hardy. As
a part of this settlement, Mr. Hardy has agreed to enter into a two-year
consulting agreement pursuant to which Mr. Hardy will provide consulting
services to the Company. The settlement agreement provides that Mr. Hardy will
file a satisfaction and release of the judgment upon the Company issuing the
1,500,000 shares of common stock, filing a registration statement covering
resales of those shares by April 30, 1999 and paying $50,000 to Mr. Hardy by
June 24, 1999. On March 29, 1999, Mr. Hardy filed a motion for reconsideration
of the Court's rulings that denied double damages on certain damages awarded to
Mr. Hardy and denied offer of judgment interest on the prejudgment interest
award. The Company is currently awaiting a decision on these motions. There can
be no assurance that such motions will not be granted or that the grant of such
motions will not have a further material adverse effect on the Company.
In February 1998, 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 alleged that Mr. Lealos
was entitled to certain cash payments and benefits under an employment agreement
whereby he would serve as the Company's president, and that the Company's
failure to make such payments and grant such benefits constituted anticipatory
breach and breach of that contract. The complaint sought damages in excess of
$1,000,000. In addition, the complaint alleged that the Company wrongfully
rescinded options to purchase 38,500 shares of common stock in breach of a stock
option agreement with Mr. Lealos. The Company denied all allegations of the
complaint and filed a counterclaim for Mr. Lealos' wrongful conduct seeking
damages of approximately $1,500,000. In December 1998, the Company filed a
motion for summary judgment on the claims stated in the complaint. The Court
granted the motion in February 1999 in favor of the Company. Subsequently, Mr.
Lealos moved to amend the original complaint to allege new grounds for recovery
of lost compensation, including quantum meruit. In February 1999, the Court
granted this motion, providing that Mr. Lealos will not be entitled to
contradict or withdraw factual allegations that have previously been set forth
in the litigation. A trial based on the amended complaint and the Company's
counterclaims is scheduled for October 1999. The Company intends to file a
motion to dismiss the amended complaint prior to the trial date. Although
management of the Company intends to vigorously defend against the suit, 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.
In February 1999, a demand for arbitration with the American Arbitration
Association was filed by Fremont Novo Sciences, LLC, former distributor of the
Company's products in India. The demand alleges that the Company wrongfully
terminated and breached the Sub-License Agreement among the Company, SDS
Singapore and Fremont. The demand seeks a declaration that the Sub-License
Agreement remains in effect and damages in an amount to be determined, including
lost profits. In April 1999, the Company filed an answering statement denying
Fremont's claims and seeking damages in an amount to be determined for Fremont's
breach and non-performance of the Sub-License Agreement and for tortious
interference with the Company's business and contracts. Although management of
the Company intends to vigorously defend
13
<PAGE>
against Fremont's allegations and pursue its claims against Fremont, there can
be no assurance that the arbitration will not be decided adverse to the Company
and that such an adverse decision would not have a material adverse effect on
the Company.
Other than that set forth above, to the best knowledge of the Company, no other
material legal proceedings are pending.
Item 2. Changes in Securities
In January 1999, in reliance upon Regulation D promulgated under the Securities
Act of 1933, as amended, the Company issued to The Tail Wind Fund Ltd. ("Tail
Wind") 17,140 shares of its common stock, which Tail Wind was entitled to
receive pursuant to the terms of a common stock subscription agreement dated as
of June 30, 1997 pursuant to which Tail Wind had purchased 412,905 shares of the
Company's common stock for an aggregate purchase price of $300,000. The
subscription 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.
In March 1999, the Company issued to Luc Hardy 1,500,000 shares of its common
stock pursuant to a settlement agreement between Mr. Hardy and the Company. The
Company relied upon Regulation D promulgated under the Securities Act of 1933,
as amended, for the issuance.
In March 1999, the Company issued to Bisount Overseas Limited 1,364,516 shares
of its common stock upon conversion of 500 shares of the Company's Series 1998-B
Convertible Preferred Stock. The Company relied upon Regulation D promulgated
under the Securities Act of 1933, as amended, for the issuance. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources" for the terms of the Series 1998-B Convertible Preferred
Stock.
In April 1999, the Company entered into a letter agreement amending the
securities purchase agreement, pursuant to which Biscount Overseas Limited was
and is obligated to purchase an aggregate 1,500 shares of the Company's Series
1998-B Convertible Preferred Stock over an approximately eight-month period for
an aggregate purchase price of $1,500,000. Pursuant to the amended securities
purchase agreement, the Company issued 212 shares of 1998-B Preferred Stock in
exchange for net proceeds of $200,000. See "Management's Discussion and Analysis
or Plan of Operation - Liquidity and Capital Resources" for the terms of the
Series 1998-B Convertible Preferred Stock.
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
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 (the "1997
10-KSB")
3.4 Certificate of Amendment, dated July 31, 1998, incorporated by
reference to Exhibit 3.4 of the Company's Quarterly Report on Form
10-QSB for its fiscal quarter ended June 30, 1998 (the "1998
10-QSB")
3.5 Company's By-laws, as amended, incorporated by reference to Exhibit
3.4 of 1997 10-KSB
4.1 Specimen of Certificate Representing Common stock, incorporated by
reference to Exhibit 4.1 to the
14
<PAGE>
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 8,995 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 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")
4.6 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
4.7 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 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 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")
4.16 Amended Certificate of Designations, Rights and Preferences of the
Series 1998-A Convertible Preferred Stock, incorporated by
reference to Exhibit 4.14 of the 1998 10-QSB
4.17 Certificate of Designations, Rights and Preferences of the Series
1998-B Convertible Preferred Stock, incorporated by reference to
Exhibit 4.16 of the 1998 10-QSB
4.18 Securities Purchase Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form
8-K, dated January 26, 1998 (the "January 8-K")
4.19 Registration Rights Agreement dated as of January 26, 1998 between
the Company and Biscount Overseas Limited, incorporated by
reference to Exhibit 10.2 of the Company's January 8-K
4.20 Placement Agent Agreement dated as of January 26, 1998 between the
Company and Aryeh Trading, Inc. incorporated by reference to
Exhibit 10.3 of the January 8-K
4.21 Amendment to Securities Purchase Agreement dated as of January 26,
1998, dated as of July 30, 1998 between the Company and Biscount
Overseas Limited, incorporated by reference to Exhibit 4.22 of the
Company's Registration Statement on Form SB-2 dated September 2,
1998 (Registration No. 333-62787) (the "September SB-2")
4.22 Amendment to Registration Rights Agreement dated as of January 26,
1998, dated as of July 30, 1998 between the Company and Biscount
Overseas Limited, incorporated by reference to Exhibit 4.23 of the
15
<PAGE>
September SB-2
4.23 Placement Agent Agreement dated as of July 30, 1998 between the
Company and Aryeh Trading Inc., incorporated by reference to
Exhibit 4.24 of the September SB-2
4.24 Letter Agreement dated December 11, 1998, between the Company and
Biscount Overseas Limited regarding Series 1998-B Convertible
Preferred Stock, incorporated by reference to Exhibit 4.24 to the
Company's Annual Report on Form 10-KSB for its fiscal year ended
December 31, 1998 (the "1998 10-KSB")
4.25 Letter Agreement dated April 23, 1999, between the Company and
Biscount Overseas Limited regarding Series 1998-B Convertible
Preferred Stock, incorporated by reference to Exhibit 4.25 to the
1998 10-KSB
10.14 Distribution Agreement between Cadila Healthcare, Ltd. and the
Company, dated January 18, 1999, incorporated by reference to
Exhibit 10.14 to the 1998 10-KSB
27 Financial Data Schedule *
* Filed herewith.
# Denotes officer/director compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
16
<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 17, 1999
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ KENNETH J. McLACHLAN
--------------------------------------
Kenneth J. McLachlan
President, Chief Executive Officer and
Chief Financial Officer
17
<TABLE> <S> <C>
<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, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> SALIVA DIAGNOSTIC SYSTEMS, INC.
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615,000
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