-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2tANQV9kcCrOS4aMNP5IUxUr+zOjxhUmTrioi+ZQFAmJ3migamRVhft6ZgGhB+E 0iSGd7VQGyWneoxU9y0r7Q== 0001005477-00-002048.txt : 20000310 0001005477-00-002048.hdr.sgml : 20000310 ACCESSION NUMBER: 0001005477-00-002048 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALIVA DIAGNOSTIC SYSTEMS INC CENTRAL INDEX KEY: 0000885534 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 911549305 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21284 FILM NUMBER: 564639 BUSINESS ADDRESS: STREET 1: 11719 NE 95TH ST STE G CITY: VANCOUVER STATE: WA ZIP: 98682 BUSINESS PHONE: 3606964800 MAIL ADDRESS: STREET 1: 11719 NE 95TH STREET CITY: VANCOUVER STATE: WA ZIP: 98682 10QSB 1 FORM 10-QSB 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 ----------- Commission File Number: 0-21284 ------- SALIVA DIAGNOSTIC SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 91-1549305 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 419 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 937-3801 - -------------------------------------------------------------------------------- (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| SALIVA DIAGNOSTIC SYSTEMS, INC. - INDEX - Page(s) ------- 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. PART I. FINANCIAL INFORMATION: ITEM I. FINANCIAL STATEMENTS: SALIVA DIAGNOSTIC SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS - ASSETS -
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) 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 ------------ ------------ LONG-TERM LIABILITIES: Loan payable - Washington Biotech 18,451 -- ------------ ------------ TOTAL LONG-TERM LIABILITIES 18,451 -- ------------ ------------ CONTINGENCIES TOTAL LIABILITIES 2,917,142 2,246,390 ------------ ------------ 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 ============ ============
Page 3. SALIVA DIAGNOSTIC SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended Nine Months ended September 30, September 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. Page 4. SALIVA DIAGNOSTIC SYSTEMS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months ended September 30, 1999 1998 ----------- ----------- 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 ----------- ----------- Net cash used in investing activities -- 15,822 ----------- ----------- 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 ----------- ----------- 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 --
The accompanying notes are an integral part of these financial statements. Page 5. 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 -------- -------- 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 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 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 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 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 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 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 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 (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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 73,073 0 202,189 94,718 96,270 279,668 952,083 853,311 496,725 2,917,142 18,451 0 1,555,000 67,490 (4,042,907) 496,725 747,966 747,966 673,447 673,447 1,583,640 0 6,265 (1,514,748) 0 0 0 0 0 (1,514,748) (.39) (.39)
-----END PRIVACY-ENHANCED MESSAGE-----