SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission File Number: 0-21284
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SALIVA DIAGNOSTIC SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1549305
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
419 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016
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(Address of principal executive offices) (Zip Code)
(212) 937-3801
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(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 |_| NO |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1999
- -------------------------------------- ---------------------------------
Common Stock, par value $.01 per share 6,749,028 shares
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
- INDEX -
Page(s)
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PART I. Financial Information:
ITEM 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Operations (Unaudited) -
Nine Months and Three Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. Other Information 12
ITEM 1. Legal Proceedings 12
ITEM 2. Changes in Securities 12
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
EXHIBITS:
Exhibit 27 - Financial Data Schedule
Page 2.
<PAGE>
PART I. FINANCIAL INFORMATION:
ITEM I. FINANCIAL STATEMENTS:
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
- ASSETS -
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 73,073 $ 151,524
Accounts receivable, less allowance of $94,718 (1999) and $83,603 (1998) 107,471 95,242
Inventories 96,290 205,792
Prepaid expenses 2,834 25,974
------------ ------------
TOTAL CURRENT ASSETS 279,668 478,532
------------ ------------
Property and equipment, less accumulated depreciation of $853,311 (1999)
and $782,463 (1998) 98,772 208,950
Leasehold improvements less, accumulated depreciation of $21,851 16,418 --
Deposits 14,307 14,307
Restricted cash -- 59,420
Patents and trademarks, less accumulated amortization of $69,356 (1999) and
$57,605 (1998) 87,560 99,310
------------ ------------
TOTAL ASSETS $ 496,725 $ 860,519
============ ============
- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) -
CURRENT LIABILITIES:
Accounts payable $ 1,646,853 $ 439,227
Deferred officer payable -- 75,000
Accrued expenses 1,117,939 1,604,536
Accrued interest payable 68,240 68,240
Customer deposits 65,659 --
Current portion of long-term debt and obligations under capital leases -- 59,387
------------ ------------
TOTAL CURRENT LIABILITIES 2,898,691 2,246,390
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LONG-TERM LIABILITIES:
Loan payable - Washington Biotech 18,451 --
------------ ------------
TOTAL LONG-TERM LIABILITIES 18,451 --
------------ ------------
CONTINGENCIES
TOTAL LIABILITIES 2,917,142 2,246,390
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SHAREHOLDERS' EQUITY:
Series 1998-B Convertible Preferred Stock:
1,645 shares authorized, shares issued and outstanding: 1,645 (1999)
and 1,145 (1998) 1,555,000 1,085,000
Common stock, $.01 par value, 50,000,000 shares authorized; shares issued
and outstanding: 6,749,028 (1999) and 5,231,888 (1998) 67,490 52,319
Additional paid-in capital 32,064,445 32,069,415
Note receivables from shareholders for stock (83,825) (83,825)
Accumulated deficit (36,023,527) (34,508,780)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (2,420,417) (1,385,871)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 496,725 $ 860,519
============ ============
</TABLE>
Page 3.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 151,171 $ 290,726 $ 747,966 $ 739,835
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products sold 190,067 271,305 673,447 839,082
Research and development expense 52,582 42,890 176,527 357,928
Selling, general and administrative
expense 335,467 696,953 1,394,517 1,967,122
Restructuring expense -- -- -- 25,000
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (426,945) (720,422) (1,496,525) (2,449,297)
----------- ----------- ----------- -----------
INTEREST INCOME 243 3,976 638 14,330
INTEREST EXPENSE (485) (5,735) (6,265) (8,440)
OTHER INCOME (EXPENSE) -- 216 (12,596) 52,348
----------- ----------- ----------- -----------
NET LOSS $ (427,187) $ (721,965) $(1,514,748) $(2,391,059)
=========== =========== =========== ===========
DIVIDENDS, INCLUDING DEEMED DIVIDENDS ON
PREFERRED STOCK (234,388) (293,660) (796,354) (961,151)
----------- ----------- ----------- -----------
NET LOSS TO COMMON SHAREHOLDERS $ (661,575) $(1,015,625) $(2,311,102) $(3,352,210)
=========== =========== =========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (.10) $ (0.23) $ (.39) $ (1.02)
=========== =========== =========== ===========
SHARES USED IN BASIC AND DILUTED PER SHARE
CALCULATIONS 6,749,028 4,374,424 5,996,171 3,297,312
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 4.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the Nine Months ended
September 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,514,748) ($2,391,059)
Adjustments to reconcile net loss to net cash used in operating activities:
Net cash used in operating activities:
Depreciation and amortization 113,368 161,149
Loss on sale of property and equipment -- (43,479)
Changes in current assets and liabilities:
Accounts receivable (12,229) (113,898)
Inventories 109,502 121,476
Prepaid expenses and deposits 88,799 51,875
Accounts payable and accrued expenses 648,406 (50,320)
----------- -----------
Net cash used in operating activities (566,902) (2,264,256)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment -- (49,304)
Proceeds from sale of property and equipment -- 33,482
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Net cash used in investing activities -- 15,822
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 18,451 --
Proceeds from sale of common shares -- 250,000
Proceeds from sale of preferred shares, net of issuance costs 470,000 1,850,000
Repayment of long-term debt and capital lease obligations -- (17,389)
----------- -----------
Net cash provided by financing activities 488,451 2,082,611
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (78,451) (197,467)
Cash and cash equivalents, beginning of year 151,524 271,312
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 73,073 $ 73,845
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest $ -- $ 1,405
=========== ===========
Noncash transactions:
Debt extinguished on disposition of property and equipment $ -- $ 11,007
Dividends and deemed dividends on 1998-A Convertible
Preferred Stock -- 704,443
Dividends and deemed dividends on 1998-B Convertible
Preferred Stock 796,354 256,708
Payment of common stock to former employee -- 25,600
Capital lease obligation extinguished using restricted stock 59,387 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 5.
<PAGE>
SALIVA DIAGNOSTIC SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of and for the
three and nine month periods ended September 30, 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/A for the year ended December 31, 1998.
Certain information or note 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/A for the year ended December 31, 1998.
Operating results for the three and nine month periods ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year 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:
September 30, December 31,
1999 1998
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Raw materials $ 81,593 $140,394
Work in process -- 31,701
Finished goods 14,697 33,697
-------- --------
$ 96,290 $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 for the three and nine months ended September 30, 1999
and 1998, and accordingly, the denominator was equal to 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.
6
<PAGE>
The Company had 1,645 shares of Series 1998-B Convertible Preferred stock
outstanding at September 30, 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 LIABILITIES
September 30, December 31,
1999 1998
---------- ----------
Accrued wages and salaries $ 430,223 $ 429,513
Accrued payroll taxes 130,626 107,357
Accrued restructuring expense -- 13,040
Accrued litigation expenses 440,000 440,000
Accrued legal expenses -- 508,210
Other accrued liabilities 185,330 174,656
---------- ----------
$1,186,179 $1,672,776
========== ==========
5. SHAREHOLDER TRANSACTIONS
On March 2, 1999, the Company issued to Biscount Overseas Limited ("Biscount")
1,364,516 shares of its common stock upon the conversion of 500 shares of the
Company's Series 1998-B Convertible Preferred Stock. Because the Company was
unable to successfully register the 1,364,516 common shares, the Company, in
July 1999, reissued to Biscount the 500 Series 1998-B Convertible Preferred
Shares. The 1,364,516 shares were returned to the Company. On October 14, 1999,
Biscount converted all of the outstanding 1,645,000 shares of the Series 1998-B
Convertible Preferred Stock into 9,495,822 shares of the Company's common stock.
In addition, as a result of the conversion, Biscount will receive additional
common shares or cash in penalties because of the unsuccessful registration of
the common shares received in the March 1999 conversion. The penalties are not
expected to be material to the Company's operations.
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
1,500,000 shares of common stock, filing a registration statement covering
resales of those shares by April
7
<PAGE>
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 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 tortuous
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.
In July, 1999, the Company's former chief executive officer and president
executed a promissory note in favor of Bryan Cave LLP, the Company's former
legal counsel in the amount of $610,000 and granted Bryan Cave LLP, a security
interest in the assets of the Company, including intellectual property. The
Company currently is in discussions with Bryan Cave LLP regarding this matter.
At this time, the Company cannot determine how the matter will be resolved.
On September 30, 1999, Kenneth J. McLachlan was terminated as the Company's
chief operating officer, president, and chairman of the board, effective
immediately. In connection with this termination, the Company notified
International Business Consulting Company (IBCO), an affiliate of Mr. McLachlan,
that it is terminating its consulting agreement, effective immediately. Mr.
McLachlan has filed claims against the Company alleging unpaid salary of about
$300,000, severance pay of $530,000, expense reimbursement of about $100,000,
stock options, and other matters. The Company intends to vigorously defend
against such claims, but there is no assurance as to the outcome of this matter.
Due to the Company's closing of its Vancouver, Washington plant in February 2000
(Note 7), Mr. Stefan Paskall, the executive vice president, resigned in February
2000. In that regard, he and an affiliated entity have made certain claims
against the Company. The Company presently is reviewing this matter and there
can be no assurance as to the outcome of this matter.
In connection with the closing of the plant, the Company was responsible for
environmental cleanup. The Company contacted the local county environmental
health authority and already has complied with their instructions. The Company
believes that all environmental hazards have been disposed of and that there is
no existing environmental contamination.
7. CONTRACTS
In October 1999, the Company entered into a contract with Whatman International
Limited to license its Omni Swab patent exclusively to Whatman for the life of
the patent. The contract also requires the transfer of all Omni Swab tooling and
equipment to Whatman. The licensing agreement included a payment for the value
of tooling, rights and equipment, as well as a guaranteed revenue stream for the
ongoing licensing fees, payable in advance.
8
<PAGE>
8. SUBSEQUENT EVENTS
Settlement of Lealos Litigation
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. On January 15, 2000, the Company and Mr.
Lealos settled the claim for $246,000 paid and payable as follows: $72,094.62
was paid on January 15, 2000, $11,047.62 was paid on February 15, 2000; $6,000
is payable on the 15th of each month for thirteen additional months beginning
March 15, 2000, plus $5,047.62 payable on the 15th of each month for nineteen
additional months beginning March 15, 2000.
Line of Credit
In October 1999, the Company granted Sterling National Bank (the "Bank") a
security interest in the Company's assets in exchange for a line of credit of
$500,000. The Bank also required additional collateral, which was provided by an
investor. Since that time, the Company has borrowed $390,000. The loan is
repayable with interest at twelve percent (12%) per annum and is convertible by
the investor into preferred stock of the Company (which, in turn, is convertible
into common stock) under the same terms as the previously issued preferred stock
(see Note 5).
Plant Closing
In February 2000, the Company decided to refocus its business operation from
manufacturing its products to outsourcing production. In that regard, the
Company closed its Vancouver, Washington manufacturing and sales facility, and
relocated its sales office to New York. The employees at the Vancouver plant
were terminated. Claims by the landlord for unpaid rent and lease obligations of
approximately $148,000 have been settled by the Company.
9
<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 focusing 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 sales. The Company has incurred significant operating losses
since its inception, resulting in an accumulated deficit of $36,023,527 at
September 30, 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.
On March 2, 1999, the Company issued to Biscount Overseas Limited ("Biscount")
1,364,516 shares of its common stock upon the conversion of 500 shares of the
Company's Series 1998-B Convertible Preferred Stock. In July 1999, because the
registration statement covering resales of these shares of common stock did not
become effective, the Company issued to Biscount 500 shares of Series 1998-B
Convertible Preferred Stock. Biscount returned to the Company the 1,364,516
shares of SDS' common stock. On October 14, 1999, Biscount converted all of the
outstanding 1,645,000 shares of the Series 1998-B Convertible Preferred Stock
into 9,495,822 shares of the Company's common stock. In addition, as a result of
the conversion, Biscount will receive additional common shares or cash in
penalties because of the unsuccessful registration of the common shares received
in the March 1999 conversion. The penalties are not expected to be material to
the Company's operations.
As discussed in Note 8 to the Notes to the Consolidated Financial Statements, in
February 2000, the Company decided to refocus its business operations from
manufacturing its products to outsourcing production. In that regard, the
Company closed its Vancouver, Washington plant and moved its sales office to New
York.
RESULTS OF OPERATIONS
THIRD QUARTER AND FIRST NINE MONTHS OF 1999 COMPARED TO THIRD QUARTER AND FIRST
NINE MONTHS OF 1998
REVENUES. The Company's revenues consist of product sales. Revenues decreased
48.0% to $151,171in the third quarter of 1999 from $290,726 in the third quarter
of 1998, and increased .01% to $747,966 in the first nine months of 1999 from
$739,835 in the first nine months of 1998. The decrease in revenue was primarily
attributable to decreased sales of Omni-Swabs. Sales to four customers
represented approximately 62% of total revenues in the third quarter of 1999.
COST OF PRODUCTS SOLD. Costs of products sold decreased to $190,067 (125% of
product sales) in the third quarter of 1999 from $271,305 (93% of product sales)
in the third quarter of 1998, and decreased to $673,447 (90% of product sales)
in the first nine months of 1999 from $839,082 (113% of product sales) in the
first nine months of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
18.4% to $52,582 in the third quarter of 1999 from $42,890 in the third quarter
of 1998, and decreased 50.1% to $176,527 in the first nine months of 1999 from
$357,928 in the first nine months of 1998, primarily as a result of reduced
payroll and related expenses. The Company is focused on cost controls in all
departments, including research and development, and is focusing on controlling
these costs. This is being achieved without compromising standards in research
and development.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 52% to $335,467 in the third quarter of
10
<PAGE>
1999 from $696,953 in the third quarter of 1998, and decreased 29.1% to
$1,394,517 in the first nine months of 1999 from $1,967,122 in the first nine
months of 1998, due to a reduction in the number of administrative personnel and
continued restraint on expenditure.
INTEREST EXPENSE. Interest expense decreased to $485 in the third quarter of
1999 from $5,725 in the third quarter of 1998, and decreased to $6,265 in the
first nine months of 1999 from $8,440 in the first nine months of 1998 due to
significant reductions in the Company debt.
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 $25 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 nine months of 1999 was $566,902.
This was primarily a result of a net loss of $1,514,748, adjustments for
depreciation and amortization for $113,368, and an increase in accounts payable
and accrued liabilities of $648,406.
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.
In April 1999, the Company sold an additional 212 shares of the 1998-B Preferred
Stock to the investor for an aggregate purchase price of $200,000 (net of
issuance costs of $12,000) and in June, 1999, the Company sold an additional 288
shares of the 1998-B Preferred Stock to the investor for an aggregate purchase
price of $270,000 (net of issuance costs of $18,000).
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 September 30, 1999.
11
<PAGE>
Accreted or Earned
During the Three
Total Months Ended
Value September 30, 1999
-------- ------------------
Beneficial conversion feature $586,308 $209,713
Earned dividends (6% of preferred
principal value) 24,675 24,675
-------- --------
Total $610,983 $234,388
======== ========
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. The Company, in consideration of the
registration statement covering resales of these shares of common stock not
becoming effective, reissued to Biscount Overseas Limited 500 shares of Series
1998-B Convertible Preferred Stock in July 1999. Biscount returned the 1,364,516
common stock to the Company.
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.
The Company believes that its current cash position, combined with revenues and
other cash receipts, will be insufficient to fund the Company's operations
through 2000. Substantial additional financing will be required in 2000. 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." The Company's failure to timely file its periodic reports with
the U.S. Securities and Exchange Commission may result in the de-listing of the
Company's common stock from the OTC Bulletin Board, which would adversely affect
a shareholder's ability to resell the Company's common stock.
12
<PAGE>
Other Recent Developments (See also Note 6)
In July, 1999, the Company's former chief executive officer and president
executed a promissory note in favor of Bryan Cave LLP, the Company's legal
counsel in the amount of $610,000 and granted Bryan Cave LLP, a security
interest in the assets of the Company, including intellectual property. The
Company currently is in discussions with Bryan Cave LLP regarding this matter.
At this time, the Company cannot determine how the matter will be resolved.
In September 1999, at a special meeting of the Board, the Company nominated and
confirmed the appointment of Leo Ehrlich and Joseph Levi to its Board of as
Directors.
In September 1999, Dr. Hans Vauthier resigned as a member of the Board of
Directors to pursue other interests.
On September 30, 1999, Kenneth J. McLachlan was terminated as the Company's
president, CEO and chairman of the board, effective immediately. In connection
with this termination, the Company notified International Business Consulting
Company (IBCO), an affiliate of Mr. McLachlan, that it is terminating its
consulting agreement with them, effective immediately. Mr. McLachlin has made
claims against the Company as a result of his termination. (See Note 6)
In September, 1999, Dr. Paul Slowey resigned his position as vice-president of
sales and marketing, effective immediately.
In September, 1999, the Company held a special meeting of the Board to nominate
and confirm the appointment of Leo Ehrlich as chairman of the board, and as
chief executive officer of the Company. Mr. Ehrlich had previously been
appointed to and confirmed as a member of the Board of Directors.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 6 to the Notes to the Consolidated Financial Statements.
ITEM 2. Changes in Securities
See Note 5 to the Notes to the Consolidated Financial Statements.
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
13
<PAGE>
(a) No exhibits are filed as part of this report.
27 Financial Data Schedule *
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30, 1999. A
Form 8-K was filed on October 15, 1999 and a Form 8-K/A is being simultaneously
filed herewith.
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: March 8, 2000
SALIVA DIAGNOSTIC SYSTEMS, INC.
By: /s/ LEO EHRLICH
--------------------------------------
Leo Ehrlich
President & Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated interim financial statements for the second quarter ended September
30, 1999 and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 73,073
<SECURITIES> 0
<RECEIVABLES> 202,189
<ALLOWANCES> 94,718
<INVENTORY> 96,270
<CURRENT-ASSETS> 279,668
<PP&E> 952,083
<DEPRECIATION> 853,311
<TOTAL-ASSETS> 496,725
<CURRENT-LIABILITIES> 2,917,142
<BONDS> 18,451
0
1,555,000
<COMMON> 67,490
<OTHER-SE> (4,042,907)
<TOTAL-LIABILITY-AND-EQUITY> 496,725
<SALES> 747,966
<TOTAL-REVENUES> 747,966
<CGS> 673,447
<TOTAL-COSTS> 673,447
<OTHER-EXPENSES> 1,583,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,265
<INCOME-PRETAX> (1,514,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,514,748)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
