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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended December 31, 2002
Commission file number 33-56574
DIASENSE, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification no.)
2275 Swallow Hill Road, Bldg. 2500; Pittsburgh, PA 15220
(Address of principal executive offices) ( Zip Code)
(412) 279-9740
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has
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
As of December 31, 2002, 22,980,051 shares of Diasense,
Inc. common stock, par value $.01 were outstanding.
2
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
ASSETS 2002 2002
------------ ------------
Current assets
Cash and cash equivalent $ 887 $ 0
Prepaid expenses 1,260 868
----------- -----------
Total current assets 2,147 868
Property and equipment-at cost
Furniture and fixtures 42,750 42,750
----------- -----------
42,750 42,750
Less accumulated depreciation 42,750 42,709
----------- -----------
0 41
----------- -----------
Other assets
Investment 0 160,461
Security deposit 0 238
----------- -----------
0 160,699
----------- -----------
TOTAL ASSETS $ 2,147 $ 161,608
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 106,507 $ 43,099
Due to BICO 1,954,936 2,630,184
Accrued payroll and withholdings 167,942 167,942
----------- -----------
Total current liabilities 2,229,385 2,841,225
Commitments and Contingencies
Stockholders' equity (deficiency)
Preferred stock, 1,000,000 shares authorized, none issued
Common stock, 40,000,000 shares of $.01 par value
authorized; issued and outstanding
22,980,051 at Dec. 31, 2002 and
Sep. 30, 2002 229,801 229,801
Additional paid-in capital 31,553,353 30,018,353
Warrants 13,783,624 15,318,624
Deficit accumulated during the
development stage (47,794,016) (48,246,395)
----------- -----------
(2,227,238) (2,679,617)
TOTAL LIABILITIES AND ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 2,147 $ 161,608
=========== ===========
The accompanying notes are an integral part of this statement.
3
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
For the For the From July 5, 1989
three months ended three months ended (inception) through
December 31, 2002 December 31, 2001 December 31, 2002
-------------------- ------------------ -----------------
Research and development expenses $ - $ - $ 10,556,405
General and administrative expenses 94,025 217,075 16,874,612
Warrant extensions - - 17,890,676
Technology and patent rights acquired - - 2,650,000
Interest expense _ - 11,725
Loss on unconsolidated subsidiaries - 73,982 575,412
Impairment Loss - - 690,124
Amortization on Goodwill - - 535,057
Other income (15,525) (15,525) (773,548)
Other expense - - 37,405
Gain from sale of MicroIslet Stock (530,880) - (1,283,852)
-------------- ------------- --------------
Net income (loss) $ 452,380 $ (275,532) $ (47,764,016)
============== ============== ==============
Net income (loss) per common share $ 0.02 $ (0.01) $ (2.37)
============== ============== ==============
The accompanying notes are an integral part of this statement.
4
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the For the From July 5, 1989
three months ended three months ended (Inception) through
December 31, 2002 December 31, 2001 December 31, 2002
------------------ ------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 452,380 $ (275,532) $ (47,764,015)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 41 1,413 90,046
Amorization - - 535,057
Impairment loss - - 704,491
Gain on sale of MicroIslet stock (530,880) - (1,283,852)
Loss on unconsolidated subsidiaries - 73,982 575,412
Stock issued in exchange for services - - 138,950
Stock issued for License and Marketing Agreement - - 80,000
Warrants issued for services - - 513,915
Warrant extensions - - 17,890,676
Inventory Deposit - BICO - - (1,000,000)
(Increase) in prepaid expenses (392) (12,639) (1,260)
Increase in accounts payable 63,408 1,731 106,507
Increase (decrease) in accrued payroll & withholdings - 122,359 167,942
(Increase) decrease in other assets 238 - -
------------------ ------------------ ----------------
Net cash provided by (used in) operating activities (15,205) (88,686) (29,246,131)
Cash flows from investing activities:
Disposal of property and equipment - - 175,000
Purchase of property and equipment - - (279,413)
Investment - MicroIslet - - (1,600,000)
Investment - Diabecore - - (987,468)
Proceeds from sale of MicroIslet stock 691,340 - 2,070,726
(Increase) in notes receivable-related parties - - (125,000)
(Increase) in interest receivable-related parties - - (13,538)
------------------ ------------------ -----------------
Net cash used in investing activities 691,340 - (759,693)
Cash flows from financing activities:
Advances to BICO - - (7,498,369)
Repayment of advances to BICO - - 9,203,493
Advances from BICO, net - 88,686 14,496,167
Repayment of advances from BICO (675,248) - (2,041,231)
Proceeds from issuance of common stock - - 10,971,834
Proceeds from issuance of common stock to BICO - - 4,200,000
Proceeds from warrants exercised - - 118,066
Purchase of treasury stock - - (35,000)
Proceeds from Regulation S - - 288,751
Proceeds from issuance of notes payable - - 303,000
------------------ ------------------ -----------------
Net cash (used in) provided by financing activities (675,248) 88,686 30,006,711
------------------ ------------------ -----------------
Net increase in cash & cash equivalents 887 - 887
Cash and cash equivalents at beginning of period - - -
------------------ ------------------ -----------------
Cash and cash equivalents at end of period $ 887 $ - $ 887
================== ================== ==================
The accompanying notes are an integral part of this statement.
DIASENSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying financial statements of Diasense, Inc. (the
"Company") have been prepared in accordance with generally
accepted accounting principles for interim financial
information, and with the instructions to Form 10-Q and
Article 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included. For further information, refer to the financial
statements and footnotes included in the Company's annual
report on Form 10-K for the fiscal year ended September 30,
2002.
NOTE B - Organization
The Company was incorporated on July 5, 1989 as a wholly-
owned subsidiary of BICO, Inc. (parent). BICO owns
approximately 52% of the stock of the Company as of December
31, 2002. Diasense's activities have been focused on
developing a noninvasive glucose sensor (Sensor). The
sensor would use electromagnetic technology to measure the
concentration of glucose in human tissue without requiring
the user to take a blood sample.
NOTE C - Income (Net Loss) Per Common Share
Net loss per common share is based on the weighted average
number of outstanding common shares, which amounted to
22,980,051 and 22,980,051 for the periods ended December 31,
2002 and December 31, 2001, respectively. The loss per share
does not include common stock equivalents since the effect
would be anti-dilutive.
From July 5, 1989 (inception) to December 31, 2002, net loss
per common share is based on the weighted average number of
common shares outstanding and the number of common shares
issuable on the exercise of 1,708,000 warrants issued in
1992; reduced by 488,000 common shares that were assumed to
have been purchased with the proceeds from the exercise of
the warrants at an assumed price of $3.50 per share. The
inclusion of the warrants in the loss per share calculation
is required by the rules of the Securities and Exchange
Commission relative to the initial registration statement,
which included the Company's financial statements through
the period ended March 31, 1993. The registration statement
became effective July 19, 1993. The weighted average number
of common shares including the effect of the conversion of
the warrants amounted to 20,418,416 for the period from July
5, 1989 (inception) to December 31, 2002.
NOTE D - Operations
The ability of Diasense to continue in existence is
dependent on its ability to obtain sufficient financial
resources to maintain operations, to complete the research
and development necessary to successfully bring the Sensor
to market, and for marketplace acceptance. Diasense has no
other commercial products and is dependent on the successful
development of the Sensor technology. Diasense has had no
sales of its common stock over the last three fiscal years.
For the last three fiscal years Diasense's operations were
funded by advances from BICO. The proceeds from the sales of
MicroIslet stock, during the year ended September 30, 2002
and quarter ended December 31, 2002, were used almost
entirely to reduce the amount payable to BICO.
Since 1997, Diasense has been financially dependent upon
BICO and therefore BICO's ability to raise money through its
stock sales to support its operations. Management believes
that Diasense will remain dependent upon BICO to fund its
operations through the year ending September 30, 2003. If
BICO is not able to raise enough money, Diasense will be
required to find other funding in order to continue as a
going concern.
BICO has experienced, and continues to experience,
substantial losses and financial difficulties. The
consolidated financial statements for BICO for the year
ended December 31, 2001 included disclosures, which referred
to the existence of substantial doubt about BICO's ability
to continue as a going concern. BICO had a net loss for the
nine month period ended September 30, 2002 of $17,518,464
(unaudited) and for the fiscal year ended December 31, 2001
of $30,942,310, compared to a net loss for the fiscal year
ended December 31, 2000 of $42,546,303. As of December 31,
2001, and September 30, 2002, BICO's accumulated deficit was
$254,663,071 and $272,181,535 (unaudited) respectively.
In the past, BICO has financed its own operations from
proceeds generated from private and public sales of its
securities, the issuance of debt in the form of convertible
debentures, from funds paid by Diasense to BICO for research
and development of the Noninvasive Glucose Sensor, from
repayment of intercompany advances by Diasense and from
intercompany advances from Diasense and other BICO
subsidiaries. The failure of BICO to continue to exist as a
going concern would have a material adverse effect on
Diasense's business and ability to continue operations.
If BICO does not continue as a going concern, or generate
sufficient cash flow, Diasense would need to rely on other
arrangements to develop and manufacture the Sensor or to
perform that work itself. There can be no assurance that
Diasense would be able to find acceptable alternatives,
negotiate acceptable collaborative arrangements with any
alternative organizations, or to perform the work itself.
NOTE E - Investments
In December 2002, Diasense sold its remaining 706,679 shares
of MicroIslet common stock for $691,340. A gain of $530,879
was recognized as a result of this sale. $561,340 of the
proceeds from the sale was used to reduce the amount owed by
Diasense to BICO.
NOTE F - Lease
In December 1998 Diasense sold its building and leased it
back under an agreement which requires monthly rent of
$5,750 for five years beginning on January 1, 1999. Future
minimum rental payments under this lease are $69,000 for
each of the fiscal years ending on September 30, 2002 and
2003 and $17,250 for the final three months of the lease
concluding December 31, 2003. Diasense paid a security
deposit of $17,250 upon entering into this lease agreement.
At September 30, 2002 the security deposit was used to
partially offset the amount due on this lease. No payments
have been made since August 2002. Although this lease contains
acceleration provisions, the landlord has not exercised his
right to demand payment of the remaining lease obligations
to date.
Management's Discussion and Analysis of Financial Condition
and Cash Flows
Liquidity and Capital Resources
BICO utilizes a centralized cash management policy
whereby funds are transferred to Diasense on a daily basis
to meet Diasense's actual cash needs. As a result of this
policy, Diasense had a cash balance of zero at September 30,
2002. In the quarter ended December 31, 2002, Diasense
opened new checking accounts which had balances of $887 at
December 31, 2002.
Prepaid expenses increased from $868 to $1,260 during
the three months ended December 31, 2002. The increase
represents insurance premiums paid in advance of the
coverage period.
The Company's investment in MicroIslet, Inc. decreased
from $160,461 as of September 30, 2002, to zero at December
31, 2002. The decrease in this investment resulted from the
sale of the Company's remaining 706,679 shares of MicroIslet
stock in December 2002.
Amounts due to BICO from the Company decreased from
$2,630,184 as of September 30, 2002 to $1,954,936 as of
December 31, 2002. This decrease is due to the repayment of
amounts due to BICO with proceeds received from the
MicroIslet stock sale.
Results of Operations
There were no research and development expenses during
the three-month period ended December 31, 2002 and 2001 due
to the agreed-upon suspension of charges by BICO pursuant to
the research and development agreement between the Company
and its parent.
General and Administrative expenses decreased from
$217,075 for the three month period ended December 31, 2001
to $94,025 for the three month period ended December 31,
2002. The decrease was primarily due to a decrease in
salaries, administrative staff and administrative overhead
when Diasense's former officers resigned in July 2002.
Other income was $15,525 during the three-month periods
ended December 31, 2002 and 2001. These amounts represent
rental income, which is charged to BICO and its subsidiaries
for their share of the Company's office space.
Diasense realized a gain of $530,880 when the
MicroIslet stock was sold in December 2002; no similar sale
occurred in the quarter ended December 31, 2001. Similarly,
the loss on unconsolidated subsidiaries recorded in the
quarter ended December 31, 2001 was eliminated when the
MicroIslet stock was sold.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In May 1996, we, along with BICO and BICO's
individual directors, including David Purdy, Fred
Cooper, and Anthony J. Feola, who were also our
officers and directors, were served with a federal
class action lawsuit based on alleged
misrepresentations and violations of federal
securities laws. In 2000, even though we don't
believe any violations of the securities laws
occurred, we agreed to settle the lawsuit. The
parties reached a settlement, and BICO paid an
aggregate of $3,475,000. The final payments were
made in 2002, and we consider the case to be
closed.
In April 1998, we, along with our corporate
affiliates, were served with subpoenas requesting
documents in connection with an investigation by
the U.S. Attorneys' office for the U.S. District
Court for the Western District of Pennsylvania.
In July 2002, we received notice that the
investigation was concluded with no charges
brought against us, BICO or its other
subsidiaries. Fred E. Cooper, our former CEO and
a director, plead guilty to individual violations
and will be sentenced during the first quarter of
2003.
We are approximately six months behind on our
rent, and our landlord has listed our space in
order to find a new tenant. No formal legal
proceedings have begun, but our landlord does have
the right to evict us, to accelerate the remaining
amounts due on our lease, which would total
approximately $94,208, and to bring suit against
us. So far, we have been able to work with our
landlord, but we don't know how much longer that
will continue.
BICO is the subject of many lawsuits, and although
we are not named in those lawsuits, there are
enough creditors to put BICO into bankruptcy. If
they do, or if BICO files for bankruptcy - and we
don't have any control over whether that will
happen or not - we will probably end up in
bankruptcy as well.
Item 2. Changes in Securities
None.
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. Reports on Form 8-K
None.
SIGNATURES
Pursuant to 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 on this 14th day of February 2002.
DIASENSE, INC.
By /s/ Stan Cottrell
Stan Cottrell
Chief Executive Officer,
Chief Financial Officer
(principal executive officer,
principal financial officer
and principal accounting
officer)