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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended 09/30/2004 Commission File Number 0-26504
Diasense, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2275 Swallow Hill Road, Building 2500; Pittsburgh, PA 15220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 279-1059
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
and (2) has been subject to such filing requirements for the past
90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K, or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of January 7, 2005:
Common Stock, $.01 par value -- $__________*
*The market value cannot be determined because there is no
established trading market for the stock.
As of January 7, 2005, 22,980,051 shares of Common Stock, par
value $.01 per share were outstanding. As of January 7, 2005,
no shares of Preferred Stock were outstanding.
Exhibit index is located on page 21.
PART I
Item 1. Business
General Development of Business
Diasense, Inc. was incorporated in the Commonwealth of
Pennsylvania on July 5, 1989 as Diasense, Inc., a wholly owned
subsidiary of BICO Inc. BICO owned approximately 52% of Diasense
until July 23, 2004 when BICO sold its entire ownership interest
to Dominion Assets, LLC. The focus of our business since our
inception has been the research and development of our noninvasive
glucose sensor for use by diabetics. Because we ran out of
funding, we had to suspend our work on the noninvasive glucose
sensor, including our clinical trials. Until we are able to raise
funds on our own, we won't be able to re-start the project.
Based on several agreements between us and BICO, we own the
patent, marketing and distribution rights to the noninvasive
glucose sensor.
During 2000 and 2001, we made investments in two different
diabetes-related companies: MicroIslet, Inc., a California
company working with Duke University to develop encapsulated
insulin for human use; and Diabecore Medical, Inc., a Canadian
company working on a new type of insulin. We've sold our
interest in MicroIslet, and Diabecore is continuing its research
and development project.
Financial Information About Industry Segments
We operate in a single industry segment consisting of the
research, development, marketing and sale of biomedical products
and devices.
Forward-Looking Statements
From time to time, we may publish forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, technological developments, new products,
research and development activities, the regulatory approval
process, specifically in connection with the FDA marketing
approval process, and similar matters. You need to know that a
variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations we
expressed in our forward-looking statements. The risks and
uncertainties that may affect our operations, performance,
research and development and results include the following:
delays or complications in re-starting our ongoing clinical trials,
additional delays in obtaining FDA marketing approval of our sensor;
our difficulty in raising funds to continue our projects; delays in
the manufacture or marketing of our other products and medical devices;
our uncertainty of obtaining additional funding; competition and the
risk that our noninvasive glucose sensor or our other products may
become obsolete; our continued operating losses, negative net worth
and uncertainty of future profitability; potential conflicts of
interest; the status and risk to our patents, trademarks and licenses;
the uncertainty of third-party payor reimbursement for the sensor and other
medical devices and the general uncertainty of the health care
industry; our limited sales, marketing and manufacturing
experience; the amount of time or funds required to complete or
continue any of our various products or projects; the attraction
and retention of key employees; the risk of product liability;
the uncertain outcome and consequences of potential lawsuits
against us; our inability to establish a trading market for our
common stock; and the dilution of our common stock.
Description of Business
History and Development of the Noninvasive Glucose Sensor
Since we began, we've been working with BICO to develop a
noninvasive glucose sensor for diabetics that is able to measure
glucose without having to draw blood. Most currently available
glucose monitors require the drawing of blood by means of a
finger prick.
BICO's initial research and development with insulin pumps led to
a theory by which blood glucose levels could be detected
noninvasively by correlating points on the infrared spectrum that
are reflected by electromagnetic energy through the skin. BICO
studied this method in 1986 and 1987 using laboratory instruments
and working with consultants at Battelle Memorial Institute in
Columbus, Ohio. The results of the studies provided information
regarding the use of infrared light in the noninvasive
measurement of glucose. The information from the studies, along
with later additional work, led to a patent application by BICO's
research team in 1990. A patent covering the method was granted
to BICO's research team and assigned to Diasense in December
1991. We purchased those patent rights from BICO under a
purchase agreement. BICO filed a second patent application in
December 1992, which was granted in January 1995. That second
filing contained new claims, which extended the coverage of the
patent based on additional discoveries and data obtained since
the original patent was filed. BICO assigned the rights to that
patent to us. BICO developed additional concepts to improve the
capability of the instrument to recognize blood glucose, and, in
May 1993, filed corresponding patent applications. As of
November 2002, a total of 14 U.S. patents and three foreign
patents have been issued, with additional patent applications
pending. BICO has the right to develop and manufacture sensors
based on contracts with us. However we are in the process of
negotiating a termination of these contracts with BICO. If
and when we obtain FDA approval and adequate financing we will
consider manufacturing the Sensor in house or use contract
manufacturers.
The Diasensor is a spectrophotometer, which is a machine capable
of illuminating a small area of skin on a patient's arm with
infrared light, and then making measurements from the infrared
light that is reflected back into the device. The device then
displays the measurement in a window on the top of the device for
the user to read. The Diasensor uses internal mathematical
calculations and customized software to calculate a glucose
measurement.
On January 6, 1994, BICO submitted the initial 510(k)
Notification to the Food and Drug Administration for approval to
market the production model, the Diasensor 1000. A 510(k)
Notification is a type of FDA filing used to ask the FDA to
approve a device for sale in the U.S. BICO based the submission
on data obtained from the advanced research prototypes, since we
believed that the production model would be identical to the
advanced prototypes. In February 1996, the FDA convened a panel
of advisors to make a recommendation regarding our 510(k)
Notification. The majority of the panel members recommended that
we conduct additional testing and clinical trials of a production
model prior to marketing the Diasensor 1000. We, along with
BICO, announced that we would remain committed to bringing the
Diasensor 1000 to diabetics, and that additional research,
development and testing would continue.
After discussions with the FDA, we submitted a revised 510(k)
Notification in October 1996, which was followed by continued
discussions with the FDA. During 1997 and 1998, we continued to
meet with the FDA, and established a protocol for in-home testing
of the Diasensor 1000. Due to our cash flow problems beginning
in 1998, testing did not proceed at the pace originally
anticipated, and we suspended the testing all together in the
second quarter of 2002.
This model of the Diasensor was named the Diasensor 2000 to
differentiate between the earlier models. Based on advice from
the FDA, we decided it was in our best interest to submit a
PreMarket Approval Application to the FDA, rather than continue
with the 510(k) Notification process, in order to seek FDA
approval for the Diasensor 2000. In 1999 the FDA implemented a
new PMA system. Under the new system, individual modules - or
parts - of a PMA submission could be made, as they were ready.
In February 1999 we submitted a PMA shell to the FDA for the
Diasensor. In May 1999, we submitted the first module, which
covered manufacturing methods and procedures for the Diasensor
2000. The FDA asked for additional information in September
1999, and we responded. We filed the second module in May 2000.
The second module contained information regarding electrical and
mechanical standards for the FDA's requirements on safety and
effectiveness, and a description of how our noninvasive glucose
sensor will be used by patients. Future modules must include raw
data, laboratory study methods and test results.
The Clinical Trials
In August 1999, we hired Joslin Diabetes Center to help us with
our FDA submission. Joslin Diabetes Center designed and began to
conduct the clinical trials the FDA requires before they will
give us approval to market the sensor. Clinical trials began in
October 2000, but we suspended them in the second quarter of 2002
to focus on the new generation sensor. Unfortunately, we ran out
of money to fund any part of the project. Until we are able to
raise more money, we won't be able to re-start the trials, and
even if we do have the money, we may not be able to find suitable
sites willing to work with us.
Current Status of the Noninvasive Glucose Sensor
We've had to discontinue our research and development of the
Diasensor because we ran out of money to continue funding the
project. Until we are able to raise funds, we will not be able
to revive the project.
FDA approval is necessary to market the Diasensor in the United
States. In 1999, we also focused additional effort on the
European market; since no material sales occurred, we
discontinued our European marketing efforts.
If and when we are able to re-start the clinical
trials, and if we are able to get FDA approval, we plan to market
the noninvasive glucose sensor to diabetics, through their
doctors' orders. We may set our prices too high, which will
limit our sales, unless we can convince health insurance
companies to pay for them. Because the health insurance industry
is in a constant state of change, we can't predict whether - when
- - or if - we will convince them to pay for our noninvasive
glucose sensor or the telemedicine program. Not all diabetics will
be suitable users of our noninvasive glucose sensor. Those diabetics
who require and benefit from frequent glucose monitoring and whose
physicians adjust their insulin dosages based on glucose averages
over time make up the potential market for our sensor, and we can't
accurately estimate the size of that potential market at this time.
Invasive Glucose Sensors
Currently, the majority of diabetics measure their blood glucose
levels by using invasive glucose sensors that use two different
methods. The simplest method for monitoring blood glucose levels
requires the user to prick a finger, arm or leg, draw a drop of
blood, and place the blood on a chemically-treated test strip.
After a specified amount of time has elapsed, the blood must be
blotted or wiped off. After an additional amount of time has
elapsed, the color of the test strip is visually compared to that
of a color chart, and the glucose level is read from the chart.
The second method requires the user of an invasive glucose sensor
to draw a drop of blood, and to place the blood on a test strip
similar to those described above. Later, the user must wait a
prescribed period of time and place the test strip in the
invasive glucose sensor, which will display a readout of the
blood glucose level. We believe that many of the existing
invasive glucose sensors are complicated, time-consuming, prone
to user error, inconvenient, unpleasant and entail significant
ongoing expenditures by the user for supplies.
We believe that these methods generally yield accuracy levels
within plus or minus 25-30 mg/dl of actual glucose levels,
depending upon testing conditions. We believe that if our
research and development efforts are successful, our noninvasive
glucose sensor will have a range of accuracy at least as accurate
as currently available invasive glucose sensors.
With either method, adequate control of blood glucose levels
requires several finger or arm pricks each day, which is an
unpleasant experience for the user, especially for children.
Depending upon the relative facility of the user, it generally
takes at least two to four minutes for a readout to be provided
from existing invasive glucose sensors. Moreover, the ongoing
costs of repeated testing are significant to the average user,
given the cost of test strips, lancets, swabs, antiseptics, test
solutions, etc., and could represent a monthly cost of up to $100
or more. We believe that if our noninvasive glucose sensor is
successfully developed, manufactured and marketed, the
unpleasantness of existing testing methods will be effectively
eliminated, and the expense and inconvenience will, over the long
term, be significantly reduced.
Diabetes
The American Diabetes Association has estimated that diabetes is
the seventh leading cause of death in the United States.
Diabetics who are stricken with juvenile diabetes, the most
severe form of the disease, can survive with insulin injections.
However, the quality and length of their lives are generally
reduced by problems associated with insulin therapy and by the
onset of serious diabetic complications, including blindness,
kidney failure, impotence and increased susceptibility to
infection. Many tissues of the body normally rely on glucose, a form of
sugar, as a source of metabolic energy. Most cells store
significant amounts of glucose as glycogen, but certain tissues,
especially the brain, depend upon the blood to deliver a
continuous supply of glucose. The concentration of glucose in
the bloodstream must be controlled within a relatively tight
range to maintain normal health. If blood glucose drops too low,
causing hypoglycemia, the brain and nervous system stop working
properly, thereby causing faintness, weakness, tremulousness,
headache, confusion, and personality changes. Severe
hypoglycemia can progress to convulsions, coma, and death. If
blood glucose rises too high, causing hyperglycemia, there may be
excess urine production, thirst, weight loss, fatigue, and in the
most severe cases, dehydration, coma, and death. Moreover,
hyperglycemia causes damage from chemical reactions between the
excess glucose and proteins in cells, tissues, and organs. Over
long periods of time, episodes of hyperglycemia are thought to
lead to diabetic complications, including blindness, kidney
failure, impotence and increased susceptibility to infection.
To control the storage and metabolism of blood glucose, the
pancreas makes hormones that signal either removal or addition of
glucose to the blood, depending on the need. Insulin is a
pancreatic hormone that lowers blood glucose levels. Glucagon is
a pancreatic hormone that raises blood glucose levels. Although
certain other hormones affect blood glucose levels, insulin and
glucagon have been considered the principal regulators of glucose
metabolism associated with eating.
When the concentration of glucose in the bloodstream is not
controlled within a relatively tight range, severe complications
result. The principal disease associated with abnormal glucose
metabolism is diabetes mellitus, which is defined by the presence
of elevated blood glucose levels. Over the last 20 years, it has
become generally accepted that there are several distinct
subclasses of diabetes, the two most important of which are Type
I diabetes and Type II diabetes. Type I Diabetes, or insulin-
dependent diabetes mellitus, typically begins during childhood or
early adulthood, and is therefore termed juvenile diabetes. Type
II Diabetes, or non-insulin-dependent diabetes mellitus,
typically begins during or after middle age, and is therefore
termed adult onset diabetes.
Type I Diabetes. The ADA has estimated that there are between
500,000 and 1 million Type I diabetics in the United States.
Type I Diabetes is caused by the destruction of the pancreatic
cells that make insulin, resulting in deficient hormonal control
of glucose metabolism and abnormally high blood glucose. High
blood glucose levels can lead to coma and death if not adequately
controlled.
Before the discovery of insulin, Type I Diabetes was a rapidly
fatal disease. Insulin therapy corrects the most serious
metabolic disorders, and the discovery of insulin is regarded as
a major triumph of medical science. However, even with modern
insulin therapy, Type I diabetics cannot lead normal lives. Type
I diabetics' life spans can be shortened by the onset of serious
complications, including blindness, kidney failure, impotence and
increased susceptibility to infection. Consequently, intensive
insulin therapy to control blood glucose is an objective of
modern diabetes treatment. For Type I diabetics, glucose control
requires frequent monitoring of glucose levels and rigid
management of diet, exercise and therapy and is difficult to
achieve for many patients.
Type II Diabetes. The ADA estimates that there are nearly 10
million diagnosed Type II diabetics in the United States plus
another 5 million who are undiagnosed Type II diabetics and
people with impaired glucose tolerance, a condition characterized
by normal blood glucose levels before eating but a tendency
toward hyperglycemia afterward.
The cause of Type II Diabetes is not precisely known. What is
known is that Type II Diabetes usually occurs during or after
middle age, heredity plays a role, and energy-rich diets coupled
with sedentary lifestyles are involved. These factors appear to
combine to cause insulin resistance, which is a failure of
insulin to act normally to reduce blood glucose levels. As a
consequence, even though insulin continues to be secreted by the
pancreas, sometimes in above-normal amounts, blood glucose is
poorly controlled. Over time, the resulting episodes of
hyperglycemia are thought to cause widespread tissue damage,
including possible damage to insulin secretion mechanisms in the
pancreas. Current therapies for Type II diabetics include rigid
dietary control, often in conjunction with the prescription of
sulfonylurea compounds or, in the late stages of the disease,
daily insulin injections. Again, frequent monitoring of glucose
levels is required.
Diabecore Medical, Inc.
During fiscal 2000 and 2001, we invested in Diabecore Medical,
Inc., a Canadian company that is conducting research and working
with other research institutions to develop a new type of insulin
to treat diabetes. In preliminary studies, this new insulin has
demonstrated effectiveness in controlling hyperglycemia without
risk of severe hypoglycemia. Laboratory tests indicate that this
new insulin, when administered in large doses, extends the
duration of insulin action for improved control of glucose
levels, rather than producing hypoglycemia. Those tests also
have shown the new insulin to be 3 to 4 times less hypoglycemic
when compared to presently available insulin. William D.
Lougheed and Kusiel Perlman, M.D. are developing Diabecore's
insulin with the support of the Research Institute of the
Hospital for Sick Children in Toronto, where insulin was
discovered, and the Loyal True Blue and Orange Research Institute
in Richmond Hill, Ontario. We have invested a total of
approximately $987,500 in Diabecore, and own approximately 24% of
Diabecore's stock. In 2002, we decided to write down our
investment in Diabecore, since we don't believe it has a current
market value. We currently have no plans to make further
investments in Diabecore.
MicroIslet, Inc.
During fiscal 2000 and 2001, we also invested in MicroIslet, Inc.
MicroIslet is a California company that is developing several
diabetes research technologies with Duke University that focus on
optimizing microencapsulated islets for transplantation. The
current research involves the use of microencapsulated pancreatic
cells, which are transplanted into diabetic animals. The initial
trial on a non-human primate continues to provide very
encouraging results. The diabetic animal achieved and maintained
normal glucose readings for over one year following the
transplant. MicroIslet believes that there are several benefits
to using the microencapsulated islets for transplants, rather
than transplanting human pancreatic cells. One benefit is the
supply; the only source of human cells is from deceased organ
donors, and more than one donor is needed for each transplant.
In addition, human transplants involve a serious course of immuno-
suppression therapy so the human recipient does not reject the
transplanted cells. Dr. Emmanuel Opara, Ph.D. is the director of
islet transplantation research at Duke University Medical Center,
and he is heading up the research team. We invested a total of
approximately $1.6 million in MicroIslet.
During calendar year 2002, we sold all of our MicroIslet stock
for a total of $2,070,726.
Net Sales
We have not sold any noninvasive glucose sensors to date.
Research and Development
We have discontinued the research and development of our
noninvasive glucose sensor because there is no money to continue.
Product Development
Development of other models of the noninvasive glucose
sensor was halted because there is no money to fund the project.
Manufacturing
During 2000, production of the Diasensor models needed for our
clinical trials was completed. During 2001, production and
inventory buildup of the Diasensor 2000 continued. We never
began full scale manufacturing of the Diasensor 2000 because we
haven't received FDA approval. We currently have no facilities
to manufacture any products.
Marketing and Distribution
Without FDA approval, we are unable to begin marketing or
distribution of the Diasensor.
Patents, Trademarks and Licenses
We own a patent entitled "Non-Invasive Determination of Glucose
Concentration in Body of Patients" which covers certain aspects
of a process for measuring blood glucose levels noninvasively.
That patent was awarded to BICO's research team in December 1991
and was sold to Diasense, Inc. under a purchase agreement dated
November 18, 1991. The patent will expire, if all maintenance
fees are paid, no earlier than the year 2008. Because of the
lack of funding these maintenance fees were not paid and
approximately $26,000 in fees are required to reinstate these
patents. If clinical testing or regulatory review delays marketing
of a product made under the patent, we may be able to obtain an
extension of the term of the patent. Our patent relates only to
noninvasive sensing of glucose but not to other blood constituents.
We have filed corresponding patent applications in a number of foreign
countries.
As of November 2002, a total of 14 U.S. and three foreign patents
have been issued, all of which have been assigned to Diasense,
Inc., and additional patents are pending. Corresponding patent
applications have been filed in foreign countries where we
anticipate marketing the noninvasive glucose sensor.
We may file applications in the United States and other countries,
as appropriate, for additional patents directed to other features
of the noninvasive glucose sensor and related processes.
We know that competitors currently developing non-invasive
glucose sensors own patents directed to various devices and
processes related to the non-invasive monitoring of
concentrations of glucose and other blood constituents. It is
possible that those patents may require us to alter any model of
the noninvasive glucose sensor or the underlying processes
relating to the noninvasive glucose sensor, to obtain licenses,
or to cease certain activities.
We also rely upon trade secret protection for our confidential
and proprietary information. Although we take all reasonable
steps to protect such information, including the use of
confidentiality agreements and similar provisions, there
can be no assurance that others will not independently develop
substantially equivalent proprietary information or techniques,
otherwise gain access to our trade secrets, disclose such
technology, or that we can meaningfully protect our trade
secrets.
We have registered our trademark "Diasensor", which is intended
for use in connection with the Diasensor models. We intend to
apply, at the appropriate time, for registrations of other
trademarks as to any future products.
Warranties and Product Liability
We do not currently have any product liability insurance coverage.
Source of Supply
If we begin to manufacture the noninvasive glucose sensor, we
will be dependent upon suppliers for some of the components
required to manufacture the device. These components will not
be generally available, and we may become dependent upon those
suppliers, which do provide such specialized products.
Competition
With the rapid progress of medical technology, and in spite of
continuing research and development programs, our developmental
products are always subject to the risk of obsolescence if some
other company introduces a better product or technique. We are
aware that other research groups have developed noninvasive
glucose sensors, and that others are still in the research &
development phase, but we have limited knowledge about the actual
technology or the stage of development for most of our
competitors. We face the risk that some other group will
complete the development of their device and penetrate the market
before we do. If that happens, there is a significant chance
that even if we receive FDA approval, our sensor will not be
successful because marketing efforts started too late. We don't
believe there is any other company currently producing or
marketing noninvasive sensors for the measurement of blood
glucose that use the same technology as we do. Competitive
success in the medical device field is dependent upon product
characteristics including performance, reliability, and design
innovations.
If we are able to bring our Diasensor to the market, it will
compete with existing invasive glucose sensors. Although we
believe that the features of our noninvasive glucose sensor,
particularly its convenience and the fact that no blood samples
are required, will compete favorably with existing invasive
glucose sensors, we can't assure that it will succeed. Other
companies have established marketing and sales forces, and
represent established entities in the industry. Certain
competitors, including their corporate or joint venture partners
or affiliates, currently marketing invasive glucose sensors have
substantially greater financial, technical, marketing and other
resources and expertise than we do, and may have other
competitive advantages over us, based on any one or more
competitive factors such as accuracy, convenience, features,
price or brand loyalty. Additionally, competitors marketing
existing invasive glucose sensors may from time to time improve
or refine their products, or otherwise make them more price
competitive, so as to enhance their marketing competitiveness
over our noninvasive glucose sensor. As a result, we can't make
any guarantees that our sensor will be able to compete
successfully.
We face more direct competition from other companies who are
currently researching and developing noninvasive glucose sensors.
We have very limited knowledge as to the stage of development of
these other devices; however, if another company successfully
develops a noninvasive glucose sensor, obtains FDA approval, and
reaches the market before we do, we would suffer.
Certain organizations are also researching and developing
technologies that may regulate the use or production of insulin
or otherwise affect or cure the underlying causes of diabetes.
We are not aware of any new or anticipated technology that would
effectively render our noninvasive glucose sensor obsolete or
otherwise not marketable. However, future technological
developments or products could make our noninvasive glucose
sensor significantly less competitive or, in the case of the
discovery of a cure for diabetes, even obsolete.
Government Regulations
Since our noninvasive glucose sensor is a medical device as
defined by the Federal Food, Drug and Cosmetic Act, as amended,
it is subject to the regulatory authority of the FDA. The FDA
regulates the testing, marketing and registration of new medical
devices, in addition to regulating manufacturing practices,
labeling and record keeping procedures. If we are able to
establish facilities and operations the FDA can inspect them
and may also audit our record keeping procedures at any time.
The FDA's Quality System Regulation specifies various requirements
for our manufacturing processes and the way we must maintain
certain records.
In 1997, Congress passed legislation that addresses the
regulation of pharmaceutical and medical devices. Although the
impact of the FDA Administration Modernization Act of 1997 was
expected to reduce the quantity of information a company must
submit for approval of devices that has not been our experience.
Because the FDA regulates our noninvasive glucose sensor, we have
to meet all FDA requirements before we can market and sell our
device in the United States. These requirements include clinical
testing, which must be supervised by the chosen hospitals.
Any changes in FDA procedures or requirements will
require corresponding changes in our obligations in order to
maintain compliance with those standards. Those changes may
result in additional delays or increased expenses. Also, if we
decide to, depending on other countries, our products may also be
subject to additional foreign regulatory approval before we can
sell our devices.
Human Resources
We currently have no full-time employees.
Financial Information About Foreign and Domestic Operations and
Export Sales
Our operations are located in the United States of America.
Item 2. Properties
Due to cash flow problems, we sold our office condominium in
1999, and we leased the same space for our administrative
offices. Due to the cessation of operations we entered into an
agreement with our landlord to terminate our lease early for
a settlement fee of $5,000.
We do not currently have any research and development and
manufacturing facilities. We have a month to month lease for
limited administrative space. If we resume operations we will
require space, we believe such space will be available at
reasonable commercial rates, as long as we have the funds to
pay for it.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
We were incorporated in the Commonwealth of Pennsylvania on July
5, 1989. We have the authority to issue 40,000,000 shares of
common stock at a par value of $.01, and 1,000,000 shares of
preferred stock. As of January 7, 2005, 22,980,051 shares of
common stock were outstanding. No shares of preferred stock are
outstanding. As of January 7, 2005, there were currently
exercisable warrants outstanding to purchase 2,643,000 shares of
our common stock at exercise prices ranging from $.50 to $3.50
per share. The warrants have various expiration dates through
April 23, 2006.
As of January 7, 2005 we had approximately 600 holders of
record for our common stock and no holders of record for our
preferred stock.
Our stock is not currently listed on any stock exchange or
market. We currently act as our own registrar and transfer agent
for our common stock and warrants. There has never been an
established public trading market for our common stock.
Common Stock
The holders of our common stock are entitled to one vote per
share on all matters to be voted on by shareholders and are
entitled to cumulative voting rights in the election of
directors. In cumulative voting, the holders of common stock are
entitled to cast, for each share held, the number of votes equal
to the number of directors to be elected. A holder may cast all
of his or her votes for one nominee or distribute them among any
number of nominees for election. Subject to any preferences that
may be granted to any holders of preferred stock, the holders of
common stock are entitled to receive, on a pro rata basis,
dividends out of funds legally available for distribution, when
and if declared by the board of directors, and to share ratably
in our assets legally available for distribution to our
shareholders in the event of liquidation, dissolution or winding-
up. The holders of common stock have no preemptive, redemption
or conversion rights. The shares of our common stock currently
outstanding are fully paid and nonassessable.
Preferred Stock
Our Articles of Incorporation permit the issuance of up to
1,000,000 shares of preferred stock. No shares of preferred
stock are currently issued or outstanding. We have no present
intention to issue any such shares; although there can be no
assurance that we won't issue preferred stock in the future.
Dividends
We have not paid cash dividends on our common stock or our
preferred stock since our inception, and cash dividends are not
presently contemplated at any time in the foreseeable future. In
accordance with our Articles of Incorporation, cash dividends are
restricted under certain circumstances.
Warrants
As of January 7, 2005 there were outstanding warrants, all of
which are currently exercisable, to purchase 2,643,000 shares of
our common stock at exercise prices ranging from $0.50 to $3.50
per share and having expiration dates through April 23, 2006.
From October 1, 2003 through January 7, 2005 no warrants were
granted or exercised. The warrants were issued to our directors,
officers and employees and to certain other persons for certain
goods and services transferred or rendered to us and, in the case
of certain officers, in consideration of meritorious service. The
number of shares of common stock issuable upon the exercise of the
warrants and the exercise prices relating thereto are subject to
adjustment upon the occurrence of certain events, including stock
dividends, stock splits, mergers, consolidations and reorganizations.
We may not redeem the warrants prior to their expiration.
Employment Agreement Provisions Related to Changes in Control
We no longer have any employment agreements.
Item 6. Selected Financial Data
The selected financial data presented herein has been derived
from our audited consolidated financial statements. These
financial statements have been audited by Goff Backa Alfera &
Company, LLC, for the twelve-month periods ended September 30,
2003, 2002, 2001, 2000, and 1999; the reports of all of which
include explanatory paragraphs as to "going concern"
considerations. The selected financial data should be read in
conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and our financial
statements and related notes thereto included elsewhere in this
report.
FISCAL YEARS ENDED SEPTEMBER 30th
2004 2003 2002 2001 2000
Total $ 0 $ 0 $ 161,608 $1,727,940 $1,299,610
Assets
Total
Liabilities $1,959,936 $1,959,936 $2,841,225 $3,946,454 $1,817,760
Working
Capital
(Deficit) ($1,959,936) ($1,959,936) ($2,679,617) ($3,945,204) ($1,704,662)
Total
Revenues $ 0 $ 0 $ 0 $ 0 $ 0
General and
Administrative
Expenses $ 0 $ 96,173 $ 356,230 $1,195,550 $1,956,676
Warrant
Extensions $ 0 $ 0 $ 0 $ 0 $ 0
Benefit
(Provision)
for Income
Taxes $ 0 $ 0 $ 0 $ 0 $ 0
Net Income
(Loss) $ 0 $ 719,681 ($ 461,103) ($1,755,563) ($ 695,438)
Net Income (Loss)
per Common
Share:
Basic $0.00 $.03 ($.02) ($.08) ($.03)
Diluted $0.00 $.03 ($.02) ($.08) ($.03)
Cash Dividends
per share:
Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Common $ 0 $ 0 $ 0 $ 0 $ 0
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
We operate on a fiscal year ended September 30th. Therefore,
years are referred to as fiscal years; for example, the year from
October 1, 2003 through September 30, 2004 is referred to as
fiscal 2004.
Forward-Looking Statements
In addition to Part I of this Form 10-K, this Management's
Discussion and Analysis section also contains the type of forward-
looking statements we discussed on page 2. Please refer to such
discussion in connection with the information presented here.
Liquidity and Capital Resources
We were completely shut down throughout the fiscal year 2004
and accordingly had no activity for the year.
Our entire funding for the fiscal year 2003 of $691,340 came from
the sale of our remaining shares of MicroIslet stock. We used
$675,248 to repay advances previously received from BICO. The
remainding cash was used to pay accounts payable.
During the year ended September 30, 2002 funds were transferred
to Diasense from BICO to provide working capital. These funds
were used in operating activities. In January 2001, BICO adopted
a centralized cash management policy whereby funds were
transferred to Diasense on a daily basis to meet Diasense's
actual cash needs. As a result of this change in policy,
Diasense had a cash balance of zero at September 30, 2002 and
2001. The net effect of these transactions was to decrease cash
to zero at September 30, 2001, and 2002.
During fiscal 2001, we made investments in unconsolidated
subsidiaries, but we didn't make any investments in 2002 and
2003. In 2001, we invested an additional $700,000 in MicroIslet,
Inc.; a company working with Duke University on diabetes research
technologies that focus on optimizing microencapsulated islets
for transplantation. The project is in the research and
development phase. As of September 30, 2001, we had invested
$1,600,000 in Microislet and owned approximately 20.2% of this
company. In April 2002, MicroIslet participated in a merger with
ALD Services, Inc., a publicly traded company. In connection
with the merger, Diasense, along with the other MicroIslet
shareholders, consented to a forward stock split of MicroIslet
stock where each common stockholder received 3.1255 shares of
MicroIslet for every one share owned. As a result, Diasense
received 3,465,451 shares of MicroIslet common stock. All the
common stockholders maintained their same percentage ownership.
Diasense, along with the other MicroIslet stockholders, also
approved the merger with ALDI. As a result of the merger, each
MicroIslet common stockholder - including Diasense - received one
share of ALDI stock for each share of MicroIslet stock owned.
After the merger, Diasense owned approximately 15.3% of
restricted ALDI stock. In May 2002, ALDI changed its name to
MicroIslet, Inc. and its trading symbol to MIIS.OB. During
fiscal 2002, we sold 2,758,772 shares of our MicroIslet stock for
a total of $1,379,386. As of September 30, 2002, we still held
706,679 shares in MicroIslet. We sold the rest of our MicroIslet
stock in December 2002, and we discuss it at the end of this
section.
During 2001, we also increased our investment in Diabecore
Medical, Inc. Diabecore is a company in Toronto working with
other research institutions to develop a new insulin to treat
diabetes. In fiscal 2001, we invested $486,684 increasing the
total amount invested to $987,468 and our ownership in this
company to approximately 24%. This project is also in the
research and development phase. At the end of fiscal 2002, we
wrote down our investment in Diabecore because we don't believe
it has a current market value. We are hopeful that Diabecore
will complete its research and development and that our
investment will be worth more in the future.
We entered into employment agreements with Fred E. Cooper and
David L. Purdy effective November 1, 1994. In November 2000 Mr.
Purdy resigned from Diasense and BICO effective as of February
2001. In July 2002, Mr. Cooper resigned from Diasense, and he
gave up all of his rights under that employment contract, along
with all other claims against Diasense, which includes any claims
for accrued payroll.
Because we still don't have any revenue sources, we will have to
find additional financing that we'll use to finance development
of, and proceed to manufacture, our noninvasive glucose sensor.
In prior years, we were dependent upon BICO to support all
our sensor-related activity, but BICO discontinued our funding
in 2002, filed bankruptcy in March 2003 and sold its interest in
our Company in May 2004. We've had to stop all our
activity, and we won't be able to re-start it unless we can raise
our own money.
Our financial statements contain a going concern opinion from our
auditors. Our auditors issued that opinion because we have a
history of losses and no revenue to support our operations. In
the past, we obtained cash to fund our operations by selling
securities - but we haven't been able to continue because there
is no market for our common stock. Beginning in 1997, we became
dependent on BICO to sell stock to raise money to support us, but
beginning in late 2001, BICO's own ability to raise cash began to
suffer and since BICO sold its interest in us in May 2004 we no
longer receive any funding from them. Because we're not sure -
and our auditors are not sure - how long we can continue, our
financial statements include the auditor's opinion that we may not
be able to continue operating as a going concern.
If we are not able to obtain additional financing of approximately
$100,000 or if that additional financing is insufficient, we will
not be able to resume operations.
Results of Operations
We had no operations during the fiscal year 2004 and therefore
had no income or expenses for that year.
General and administrative expenses totaled $96,173 during
fiscal 2003 as compared to $356,230 during fiscal 2002. The
decrease resulted primarily from the cessation of our
operations due to cash shortages.
In fiscal 2003 and 2002, we recognized gains of $330,880 and
$752,972 respectively when we sold our MicroIslet stock.
Those funds were used primarily to offset the amounts we owe BICO.
Other income for the year ended September 30, 2003 includes
$269,449 in forgiveness of debt and $15,225 of rental income.
Other income for the year ending September 30, 2002 consists of
$62,100 of rental income. The rental income for both periods was
from BICO and its subsidiaries for office space.
We had losses of $229,821 from our unconsolidated subsidiaries,
during fiscal 2002 because we absorbed part of the losses incurred by
Diabecore and MicroIslet. Our share of the loss is determined
by applying our ownership percentage to the total loss incurred,
and we get to deduct the portion of the loss allocated to the
unrelated investors from our total net loss.
Income Taxes
As of September 30, 2004, we had approximately $26 million in
net operating losses available for federal tax purposes. Subject
to certain limitations, these losses will be available as carry
forwards to offset future taxable income through the years 2005-
2021. We also have federal research and development credit carry
forwards available to offset federal income taxes of
approximately $700,000, subject to limitations and expiring in
the years 2005 through 2013. Our ability to utilize these
carryforwards are significantly limited or eliminated due to
the change of ownership when BICO sold its 52% interest in
May 2004.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements appear on pages F-1 through
F-23.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers
As of September 30, 2004, our directors and executive officers
were as follows:
Director
Name Age Since Positions Held
Anthony Paterra 54 2003 Chief Executive Officer
Director
ANTHONY PATERRA, 54, joined BICO in 1999 as Director of Public
Affairs. He then began to consult on BICO and Diasense
corporate insurance issues. In May 2003 he was appointed
to our board of directors and was made CEO. Prior to joining
us, he worked as an Insurance Agent. He also served as a
director and CEO of BICO, Inc. until November 8, 2004.
Item 11. Executive Compensation
Normally, the following table would set forth information
concerning the annual and long-term compensation for services in
all capacities for the Fiscal Years ended September 30, 2004,
2003, and 2002 of those persons who were, at September 30, 2004:
(i) the Chief Executive Officer, and (ii) the other most highly
compensated executive officers whose remuneration exceeded
$100,000.
Anthony Paterra did not receive any compensation from Diasense.
Fred E. Cooper and Anthony J. Feola resigned as officers and
directors of Diasense in July 2002. The figures for 2002 indicate
the amounts they were paid from October 1, 2002 through their
departure in July 2002. At the time of their resignations, they
gave up all claims to any accrued payroll.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term All Other
Compension (1) Compensation
($) (2)
- -----------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) (2)Other Awards
Principal ($) Warrants
Position (number of
shares) (#)
- -----------------------------------------------------------------------------------------------
Fred E. 2002 $ 41,417 $ 0 $ 0 0 $ 0
Cooper,
CEO (5)
- -----------------------------------------------------------------------------------------------
Anthony J. 2002 $ 18,750 $ 0 $ 0 0 $ 0
Feola (6)
- -----------------------------------------------------------------------------------------------
(1) We do not currently have a Long-Term Incentive Plan or
LTIP, and no payouts were made under any LTIP during the
years 2003, 2002 or 2001. Except as noted in Note (3)
below, the Named Executives were awarded warrants to
purchase the number of shares of our common stock set forth
in the table above in each of the years noted. We have no
retirement, pension or profit-sharing programs for the
benefit of our directors, officers or other employees.
(2) During the years ended September 30, 2002, 2001,
the Named Executives received medical benefits under
BICO's group insurance policy.
(3) We did not grant any warrants to the named executives during
Fiscal 2002 or 2001.
(4) During Fiscal 2001 we extended warrants
previously issued to the named executives, which would have
otherwise expired. Although the extensions were in
connection with warrants already held by the named
executives, they are shown in the table set forth above as
"awards" for executive compensation disclosure purposes.
However, the extended warrants did not appear in the
"Option/Warrant Grant" Table, since, at the time of the
extension, the exercise price of the warrants, which
remained unchanged at $1.00 per share for the warrants
extended in Fiscal 2000, and $.50 per share for the
warrants extended in Fiscal 2001, was greater than or equal
to the designated "market price" of the common stock,
assumed to be $.50 per share, although there is currently
no public trading market for the common stock. During
Fiscal 2001, Fred E. Cooper's warrants to purchase 138,000
shares of our common stock at $.50 per share were extended
until April 24, 2004; and Anthony J. Feola's warrants to
purchase 100,000 shares of our common stock at $.50 per
share were extended until April 24, 2004. During Fiscal
2000, Fred E. Cooper's warrants to purchase 213,500 shares
of our common stock at $1.00 per share were extended until
January 27, 2003.
(5) In addition, Mr. Cooper was paid salary and bonuses
aggregating approximately $181,667 - which includes $15,000
in consulting fees by BICO and its other subsidiaries during
calendar years 2002.
(6) In addition, Mr. Feola was paid salary and bonuses
aggregating approximately $109,071 by BICO during
calendar year 2002 respectively.
Option/Warrant/SAR Grants in Last Fiscal Year
We did not grant any options, warrants or SARs to any of the
named executives during fiscal 2004.
Employment Agreements. We no longer have any employment
agreements. We entered into employment agreements with Fred E.
Cooper and David L. Purdy effective November 1, 1994. , In
November 2000, Mr. Purdy resigned effective February 2001. In
December 2001, we amended our agreement with Mr. Cooper and he
agreed to waive his salary from January 1, 2002 through December
31, 2002; Mr. Cooper then resigned as our officer and director in
July 2002, and gave up all of his rights under his employment
agreement.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Percent of
Amount & Nature Ownership with Class with
Name and Address of Beneficial Percent of Warrants and Warrants and
of Beneficial Owner Ownership(1) Class (2) Options(3) Options (4)
Dominion Assets, LLC 11,975,000 52.1% 11,975,000 52.1%
21155 Whitfield Place
Suite 206
Potomac Falls, VA 20165
All directors and 0 * 0(6)
executive officers
as a group
* Less than one percent
________________________
(1) Excludes currently exercisable warrants set forth in the
third column and detailed in the footnotes below.
(2) Represents current common stock owned by each person, as
set forth in the first column, excluding currently
exercisable warrants, as a percentage of the total number
of shares of common stock outstanding as of September 30,
2004, which was 22,980,051.
(3) Includes ownership of all shares of common stock which each
named person or group has the right to acquire, through the
exercise of warrants or options, within sixty (60) days,
together with the common stock currently owned.
(4) Represents total number of shares of common stock owned by
each person, as set forth in the third column, which each
named person or group has the right to acquire, through the
exercise of warrants or options within sixty (60) days,
together with common stock currently owned, as a percentage
of the total number of shares of common stock outstanding
as of September 30, 2004. For individual computation
purposes, the total number of shares of common stock
outstanding as of September 30, 2004 has been increased by
the number of additional shares which would be outstanding
if the person or group owned the number of shares set forth
in the third column.
Item 13. Certain Relationships and Related Transactions
Non Circumvention and Consulting Fee Agreement
On September 29, 2004 Diasense entered into a Non Circumvention
and Consulting Fee Agreement with Keith R. Keeling, President
of Dominion Assets, LLC (Diasense's majority shareholder). We
entered this agreement in order to raise cash to help finance
future operations. Under the terms of the agreement Mr. Keeling
will assist in the sale of Diasense assets including our patents
and Diabecore stock and will receive upon funding of any such
sale a fee equal to 5% of the sale proceeds. Diasense agreed to
work exclusively through Mr. Keeling in connection with its
sales of assets.
Employment Relationships
Anthony Paterra, who is our CEO and a member of our board of
directors, was also the CEO and chairman of the board for BICO.
Investments and Loans
Beginning in 2000 and through fiscal 2002, we invested a total of
$1.6 million in MicroIslet, Inc. One of our former directors,
John Steel, is the president of MicroIslet. During calendar year
2002, we sold all of our MicroIslet stock for a total of
$2,070,726.
In connection with the purchase of the 52% ownership of Diasense
by Dominion Assets, LLC. from BICO, the $1,954,936 intercompany
payable from Diasense to BICO was assigned to Dominion Assets, LLC.
This liability was documented by a note payable on demand without
interest.
After demand for payment was made by Dominion Assets, LLC, the
demand note was amended effective September 28, 2004. Under
the terms of the amended demand note Diasense now owes a
principle amount of $1,954,936 with interest calculated at a
rate of 8% per annum. The indebtedness is collateralized by
all of Diasense's assets. Dominion Assets, LLC agreed not to
demand payment for a period of 180 days following the
effective date of the amendment.
PART IV
Item 14. Principal Accountant Fees and Services
There were no audit, audit related, tax or other fees to our
principal accountants during fiscal years 2004 and 2003.
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
1. Consolidated Financial Statements
The consolidated financial statements, together with the report
thereon of the Company's independent accountants, are included in
this report on the pages listed below.
(a) Consolidated Financial Statements Page
Report of Independent Accountants Goff Backa Alfera &
Company, LLC.... F-1
Consolidated Balance Sheets as of September 30, 2003;
September 30, 2002. ... F-3
Consolidated Statements of Operations For the Fiscal
Years Ended September 30, 2003, 2002, 2001; and July
5, 1989 (inception) through September 30, 2003.. F-4
Consolidated Statements of Changes in Stockholders'
Equity for the period and from July 5, 1989 (inception)
through September 30, 2003 . . . . . F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended September 30, 2003, 2002, 2001; and July 5,
1989 (inception) through September 30, 2003. F-6
Notes to Consolidated Financial Statements for the
Fiscal Year Ended September 30, 2003........ F-7
2. Exhibits
(a) Reports on Form 8-K
Diasense filed a Form 8-K on December 20, 2002 for the event
dated December 19, 2002.
(b) Exhibits Required by Item 601 of Regulation S-K
The following Exhibits required by Item 601 of Regulation S-
K are filed as part of this report. Except as otherwise
noted, all exhibits are incorporated by reference from
Exhibits to Form S-1 (Registration #33-56574) filed December
31, 1992 or from exhibits to Form 10-K filings subsequent to
that date.
3.1 Articles of Incorporation of Diasense, Inc., as
amended
3.2 Amended and Restated Bylaws of Diasense, Inc.
4.1 Form of Specimen Common Stock Certificate of Diasense, Inc.
10.1 Purchase Agreement dated as of November 18, 1991
between Diasense, Inc. and Biocontrol Technology, Inc.
10.2 Manufacturing Agreement dated as of January 20,
1992, between Diasense, Inc. and Biocontrol Technology, Inc.
10.3 Research and Development Agreement dated as of
January 20, 1992 between Diasense, Inc. and Biocontrol
Technology, Inc.
10.4 Lease dated as of May 1, 1992 between Diasense,
Inc. and Biocontrol Technology, Inc.
10.5 First Amendment to Purchase Agreement dated as of
December 8, 1992 between Diasense, Inc. and Biocontrol
Technology, Inc.
10.6(1) Amendment to Manufacturing Agreement dated as of
June 7, 1994 between Diasense, Inc. and Biocontrol
Technology, Inc.
10.7(1) Deferral Agreement, dated as of July 1, 1994,
between Diasense, Inc. and Biocontrol Technology, Inc.
10.8 Deferral Agreement dated as of September 30, 1994
between Diasense, Inc. and Biocontrol Technology, Inc.
10.9 Employment Agreement dated as of November 1, 1994
between Diasense, Inc. and Fred E. Cooper
10.10 Employment Agreement dated as of November 1, 1994
between Diasense, Inc. and David L. Purdy
10.11(2) Letter of Resignation of director C. Terry Adkins
10.12(3) Letter of Resignation of director Patrick H. O'Neill
10.13(4) Letter of Resignation of director David L. Purdy
10.14 Amendment to Employment Agreement between Diasense, Inc.
and Fred E. Cooper
10.15(5) Letter of Resignation of director Anthony J. DelVicario
10.16(6) Letter of Resignation of director John F. Steel,IV
10.17(7) Letters of Resignation of directors Fred E. Cooper and
Anthony J. Feola
10.18(8) Letter of Resignation of director Paul W. Stagg
(1) Incorporated by reference from Exhibit with this title filed
with the Company's Form S-1 filed August 17, 1994 at 33-
82796.
(2) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated August 29, 1997.
(3) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated November 14, 2000.
(4) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated November 14, 2000.
(5) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated February 11, 2002
(6) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated April 29, 2002
(7) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K filed July 29, 2002
(8) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K filed December 20, 2002
(9) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K filed September 28, 2004
SIGNATURES
Based on the requirements of Section 13 or 15(d) 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 the 7th day of January 2005.
DIASENSE, INC.
By: /s/ Anthony Paterra
Anthony Paterra, Director,
principal executive
officer, principal
accounting officer and
principal financial
officer
Based on the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/Anthony Paterra Director January 7, 2005
Anthony Paterra
Goff, Backa, Alfera & Company, LLC
CERTIFIED PUBLIC ACCOUNTANTS
________________________
3325 Saw Mill Run Blvd.
Pittsburgh, Pa
Report of Independent Certified Public Accountants
Board of Directors
Diasense, Inc.
We have audited the accompanying consolidated balance sheets of
Diasense, Inc. (a development stage company) as of September 30,
2004 and 2003, and the related statements of operations, changes
in stockholder's equity and cash flows for each of the three
years in the period ended September 30, 2004, and for the period
from July 5, 1989 (inception) through September 30, 2004. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial
statements of Diasense, Inc. (a development stage company) as of
September 30, 1997, and for the period from July 5, 1989
(inception) through September 30, 1997, were audited by other
auditors whose report dated December 30, 1997, expressed an
unqualified opinion on these statements.
We conducted our audits in accordance with the Standards
of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the consolidated financial positions of
Diasense, Inc. as of September 30, 2004 and 2003, and the results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2004, and for the period from
July 5, 1989 (inception) through September 30, 2004, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in note B to the financial statements, the
Company is in the development stage and has incurred losses from
operations and negative cash flows from operations for the year
September 30, 2002 and from July 5, 1989 (inception) through
September 30, 2004 raising substantial doubt about its ability
to continue as a going concern. Management's plans in regard to
these matters are also described in note B. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty, including adjustments relating
to the recoverability and classification of recorded assets that
might be necessary in the event the Company cannot continue to
meet its financing requirements and achieve productive
operations.
/s/Goff, Backa, Alfera & Company, LLC
Goff, Backa, Alfera & Company, LLC
Pittsburgh, Pennsylvania
January 6, 2005
1
DIASENSE,INC.
(A Development Stage Company)
Consolidated Balance Sheets
September 30, September 30,
ASSETS 2004 2003
----------- -----------
Current assets
Other Assets
Investment $ - $ -
----------- ----------
- -
----------- ----------
TOTAL ASSETS $ - $ -
=========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 5,000 $ 5,000
Due to BICO - 1,954,936
Note payable to majority shareholder 1,954,936 -
----------- -----------
Total current liabilities 1,959,936 1,959,936
Commitment 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 Sept. 30, 2004 and
Sep. 30, 2003 229,801 229,801
Additional paid-in capital 41,509,499 33,327,775
Warrants 3,827,478 12,009,202
Deficit accumulated during the development stage(47,526,714) (47,526,714)
----------- -----------
(1,959,936) (1,959,936)
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY (DEFICIENCY) $ - $ -
=========== ===========
The accompanying notes are an integral part of this statement.
F-3
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 2004 September 30, 2003 September 30, 2002 September 30, 2004
------------------ ------------------ ------------------ ------------------
Research and development expenses
$ - $ - $ - $ 10,556,405
General and administrative expenses - 96,173 356,230 16,876,759
Warrant extensions - - - 17,890,676
Technology and patent rights acquired - - - 2,650,000
Interest expense - - - 11,725
Loss on unconsolidated subsidiaries - - 229,821 575,412
Impairment Loss - - 690,124 690,124
Amortization of Goodwill - - - 535,057
Other income - (284,974) (62,100) (1,042,997)
Other expense - - - 37,405
Gain from sale of MicroIslet Stock - (530,880) (752,972) (1,283,852)
-------------- -------------- -------------- ---------------
Net income (loss) $ - $ 719,681 $ ( 461,103) $ (47,496,714)
============== ============== ============== ===============
Net income (loss) per common share $ - $ 0.03 $ (0.02) $ (2.28)
============== ============== ============== ===============
The accompanying notes are an integral part of this statement.
F-4
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the period July 5, 1989 (inception) through September 30, 2004
Deficit Total
Accumulated Stock-
Common Additional During the Holders'
Common Stock Stock Paid-in Development equity
Shares Amount Subscribed Capital Warrants Stage (Deficit)
---------- --------- ---------- ---------- ----------- ------------ -----------
July 10,1989 Issuance of stock to BICO in
connection with obtaining License and
Marketing Agreement 8,000,000 $ 80,000 $ - $ - $ - $ - $ 80,000
Aug. 21 through Dec. 31, 1989 (various dates)
First Private Placement 656,000 6,560 - 321,440 - - 328,000
Sep. 29, 1989 - Issuance of stk in connection
with patent rights acquired by BICO 1,040,000 10,400 - 509,600 - - 520,000
Net loss - - - - - (80,000) (80,000)
---------- --------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1989 9,696,000 96,960 - 831,040 - (80,000) 848,000
Jan. 1 to Dec. 31, 1990 (various dates)
First private Placement 1,240,000 12,400 - 607,600 - - 620,000
May 1, 1990 through Aug. 31, 1990 (various dates)
First Private Placement
Exchange of debt for shares of stock 136,000 1,360 - 66,640 - - 68,000
Warrants issued - to BICO - - - - 27,500 - 27,500
Net loss - - - - - (497,628) (497,628)
---------- --------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1990 11,072,000 110,720 - 1,505,280 27,500 (577,628) 1,065,872
Jan. 1 to Dec. 31, 1991 (various dates)
First Private Placement 768,000 7,680 - 376,320 - - 384,000
Second Private Placement 3,948,250 39,482 - 3,896,468 - - 3,935,950
December 31, 1991 - common stock subscribed
62,500 shares at $ 1 - - 625 61,875 - - 62,500
Warrants issued - to BICO - - - - 19,085 - 19,085
Net loss - - - - - (3,650,203) (3,650,203)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at December 31, 1991 15,788,250 157,882 625 5,839,943 46,585 (4,227,831) 1,817,204
Jan. 1 to Sep. 30, 1992 (various dates)
Second Private Placement 986,750 9,868 - 976,883 - - 986,751
Third Private Placement 7,212 72 - 25,170 - - 25,242
Fourth Private Placement 120,000 1,200 - 418,800 - - 420,000
Jan. 1992 - Exchange of debt for share of stk 235,000 2,350 - 232,650 - - 235,000
Jan. 1992 - Common stk subscriptions recieved 62,500 625 (625) - - - 0
Net loss - - - - - (2,846,584) (2,846,584)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1992 17,199,712 171,997 - 7,493,446 46,585 (7,074,415) 637,613
Sep. 30, 1992 to Oct. 31,1992(various dates)
Fourth Private Placement 180,000 1,800 - 628,200 - - 630,000
June 1993 thru July 1993 warrants exercised 25,000 250 - 28,520 (3,770) - 25,000
Net loss - - - - - (3,763,101) (3,763,101)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1993 17,404,712 174,047 - 8,150,166 42,815 (10,837,516) (2,470,488)
Oct. 1, 1993 to Sep. 30, 1994(various dates)
Registered Stock 230,961 2,309 - 783,936 - - 786,245
Consulting service in exchange for stock 7,200 72 - 25,128 - - 25,200
Treasury Stock purchase (10,000) (100) - (4,900) - (30,000) (35,000)
Treasury Stock sale 10,000 100 - 34,900 - - 35,000
Nov. 1993 thru Aug. 1994 warrants exercised 105,000 1,050 - 38,950 (2,500) - 37,500
June 1994 Private Placement subject to Reg. S 91,667 917 - 287,834 - - 288,751
Net Loss - - - - - (5,145,081) (5,145,081)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1994 17,839,540 178,395 - 9,316,014 40,315 (16,012,597) (6,477,873)
Consulting service in exchange for stock 17,500 175 - 61,075 - - 61,250
May 1995 Exchange of debt for shrs of stk 3,000,000 30,000 - 10,470,000 - - 10,500,000
Oct. 1994 thru Sep. 1995 warrants exercised 29,512 295 - 9,771 - - 10,066
Warrant extensions - - - - 4,625,000 - 4,625,000
Oct. 1, 1994 to Sep. 30, 1995(various dates)
Registered Stock 437,768 4,378 - 1,497,114 - - 1,501,492
July 12, 1995 unregistered stock to BICO 1,200,000 12,000 - 4,188,000 - - 4,200,000
Net Loss - - - - - (10,336,514) (10,336,514)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1995 22,524,320 225,243 - 25,541,974 4,665,315 (26,349,111) 4,083,421
Consulting service in exchange for stock:Reg. 10,000 100 - 34,900 - - 35,000
Consulting service in exchange for stock:Unreg. 5,000 50 - 17,450 - - 17,500
Oct. 1995 thru Sep. 1996 warrants exercised 56,000 560 - 27,440 - - 28,000
Warrant extensions - - - - 7,640,468 - 7,640,468
Oct. 1, 1995 to Sep. 30, 1996(various dates)
Registered Stock 410,731 4,108 - 1,361,047 - - 1,365,155
Net Loss - - - - - (9,018,258) (9,018,258)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1996 23,006,051 230,061 - 26,982,811 12,305,783 (35,367,369) 4,151,286
Warrant extensions - - - - 5,593,875 - 5,593,875
Oct. 1, 1996 to Sep. 30, 1997(various dates)
Registered Stock (27,000) (270) - (94,230) - - (94,500)
Net Loss - - - - - (6,564,837) (6,564,837)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1997 22,979,051 229,791 - 26,888,581 17,899,658 (41,932,206) 3,085,824
Warrant extensions - - - - 25,000 - 25,000
Warrants expired - - - 2,400,000 (2,400,000) - -
Oct. 1, 1997 to Sep. 30, 1998(various dates)
Registered Stock 1,000 10 - 3,490 - - 3,500
Net Loss - - - - - (2,914,329) (2,914,329)
---------- --------- ---------- ---------- ---------- ---------- -----------
Balances at September 30, 1998 22,980,051 229,801 - 26,292,071 15,524,658 (44,846,535) 199,995
Warrants issued for services - - - - 228,538 - 228,538
Warrant extensions - - - - 6,333 - 6,333
Warrants expired - - - 377,625 (377,625) - -
Net Loss - - - - - (487,756) (487,756)
---------- --------- ---------- ---------- ---------- --------- ----------
Balances at September 30, 1999 22,980,051 $229,801 - 29,669,696 15,381,904 (45,334,291) (52,890)
Warrants issued for services - - - - - - -
Warrant extensions - - - - 230,178 - 230,178
Warrant expired - - - 291,250 (291,250) - -
Net Loss - - - - - (695,438) (695,438)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2000 22,980,051 $229,801 $ -$29,960,946 $15,320,832 $(46,029,729) $ (518,150)
Warrants issued for services - - - - 55,199 - 55,199
Warrant extensions - - - - - - -
Warrant expired - - - - - - -
Net Loss - - - - - (1,755,563) (1,755,563)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2001 22,980,051 $229,801 $ -$29,960,946 $15,376,031 $(47,785,292) $(2,218,514)
---------- --------- ---------- ---------- ---------- ----------- ----------
Warrant expired - - - 57,407 (57,407) - -
Net Loss - - - - - (461,103) (461,103)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2002 22,980,051 $229,801 $ -$30,018,353 $15,318,624 $(48,246,395) $(2,679,617)
========== ========= ========== ========== ========== =========== ===========
Warrant expired - - - 3,309,422 (3,309,422) - -
Net Income (Loss) - - - - - 719,681 719,681
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2003 22,980,051 $229,801 $ -$33,327,775 $12,009,202 $(47,526,714) $(1,959,936)
========== ========= ========== ========== ========== =========== ===========
Warrant expired - - - 8,181,724 (8,181,724) - -
Net Income (Loss) - - - - - - -
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2004 22,980,051 $229,801 $ -$41,509,499 $ 3,827,478 $(47,526,714) $(1,959,936)
========== ========= ========== ========== ========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 2004 September 30, 2003 September 30, 2002 September 30, 2004
------------------ ------------------ ------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ - $ 719,681 $ (461,103) $ (47,496,714)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation - 41 2,579 90,047
Amortization - - 380,810 535,057
Impairment loss - - 690,124 704,491
Gain on sale of MicroIslet stock - (530,880) (752,972) (1,283,852)
Loss on unconsolidated subsidiaries - - 229,821 575,412
Stock issued in exchange for services - - - 138,950
Stk issued for License & Marketing Agreement - - - 80,000
Warrants issued for services - - - 513,915
Warrant extensions - - - 17,890,676
Inventory deposit - BICO - - - (1,000,000)
(Increase) decrease in prepaid expenses - 868 382 -
Increase (decrease)in accounts payable - (38,099) 34,337 5,000
Increase (decrease) in accrued payroll
and withholdings - (167,942) 122,171 -
Decrease in other assets - 239 17,012 -
------------- ------------- ------------- -------------
Net cash used in operating activities - (16,092) (117,649) (29,247,018)
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 1,379,386 2,070,726
(Increase)in notes rec-related parties - - - (125,000)
(Increase)in interest rec-related parties - - - (13,538)
------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities - 691,340 1,379,386 (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 - - 1 04,246 14,496,167
Repayment of advances from BICO - (675,248) (1,365,983) (2,041,231)
Proceeds from issuance of common stock - - - 10,971,834
Proceeds from issuance of common stk to BICO - - - 4,200,000
Proceeds from warrants exercised - - - 118,066
Purchase from treasury stock - - - (35,000)
Proceeds from Regulation S - - - 288,751
Proceeds from issuance of notes payable - - - 303,000
------------- -------------- ------------ -------------
Net cash (used in)provided by fin. activities - (675,248) (1,261,737) 30,006,711
------------- -------------- ------------ -------------
Net increase(decrease)in cash and cash equiv. - - - -
Cash and cash equivalents at beg of period - - - -
------------- -------------- ------------ -------------
Cash and cash equivalents at end of period $ - $ - $ - $ -
============= ============== ============ =============
The accompanying notes are an integral part of this statement.
F-6
DIASENSE, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. ORGANIZATION
Diasense, Inc. (Diasense) was incorporated in the Commonwealth of
Pennsylvania on July 5, 1989 as a wholly owned subsidiary of
BICO, Inc. (BICO). BICO owned approximately 52% of the stock of
Diasense until July 23, 2004 when BICO sold its entire ownership
interest to Dominion Assets, LLC. Diasense's activities
have been focused on developing a noninvasive glucose sensor (the
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. However, all of these
activities were curtailed when BICO ceased operations and filed
for Chapter 11 bankruptcy in March 2003.
The consolidated financial statements include the accounts of
Diasense UK LTD., a 100% owned subsidiary of Diasense, Inc. as of
September 30, 2004. All significant intercompany accounts and
transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows,
Diasense considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
3. PROPERTY AND EQUIPMENT
Property and equipment are accounted for at cost and are
depreciated over their estimated useful lives (37 years for
property and 10 years for equipment) on a straight-line basis.
The carrying value of property and equipment is reduced for
impairment losses determined by management. Assets no longer used
in operations are written down to their fair market value.
4. INCOME TAXES
Diasense previously adopted Financial Accounting Standards Board
Statement No. 109 (FAS 109), Accounting for Income Taxes, which
requires the asset and liability method of accounting for income
taxes. Enacted statutory tax rates are applied to temporary
differences arising from the differences in financial statement
carrying amounts and the tax basis of existing assets and
liabilities. Due to the uncertainty of the realization of income
tax benefits, the adoption of FAS 109 had no effect on the
financial statements of Diasense.
5. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
6. NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted
average number of common shares outstanding, which amounted
to 22,980,051 for the years ended September 30, 2004 and
September 30, 2003 and September 30, 2002. The loss per share
does not include common stock equivalents since the effect
would be anti-dilutive.
For the period from July 5, 1989 (inception) to September 30,
2004, 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 income (loss)per
share calculation is required by the rules of the Securities
and Exchange Commission relative to the initial
registration statement which included Diasense'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 for the period from July 5,
1989 (inception) to September 30, 2004 amounted to 20,854,979.
7. RESEARCH AND DEVELOPMENT
All research and development costs incurred by Diasense, or by
BICO on its behalf, are charged to operations as incurred.
Patent and technology rights acquired from BICO have also been
written off as a charge to operations.
8. TREASURY STOCK
Diasense records treasury stock transactions using the par
value method.
9. INTERCOMPANY ACTIVITY
Certain expenses were allocated by management between Diasense,
BICO and BICO's subsidiaries. These expenses are reimbursed to
the paying entity through the use of intercompany accounts, which
accounts were also used to account for non-interest bearing cash
advances between the companies.
10. COMMON STOCK WARRANTS
Diasense recognizes cost on warrants granted or extended based
upon the minimum value method. There is currently no trading
market for Diasense's warrants or common stock. Under this
method, the warrants are valued by reducing the assumed current
market price of the underlying shares by the present value of the
exercise price discounted at an estimated risk-free interest rate
of 5% and assuming no dividends. The value of the warrants is
recalculated when warrants are extended and any increase in value
over the value recorded at the time the warrants were granted is
recognized at the time the warrant is extended.
11. COMPREHENSIVE INCOME
Diasense's consolidated net income (loss) is substantially the
same as comprehensive income required to be disclosed by
Financial Accounting Standards Board Statement No. 130.
NOTE B - OPERATIONS
Diasense has discontinued development of the Sensor and has not,
as yet, achieved a commercially marketable product. The ability of
Diasense to continue in existence is dependent on its having
sufficient financial resources to restore and 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 five fiscal years.
Until BICO's bankruptcy in March 2003, Diasense's operations
were funded by advances from BICO. As discussed in Note C, the
proceeds from the sale of MicroIslet stock, during the years ended
September 30, 2002 and 2003, were used to reduce the amount
payable to BICO.
Diasense is in the development stage, and accordingly, it has
presented cumulative information on results of operations, cash
flows, and changes in stockholders' equity since inception.
Diasense has incurred significant losses and negative cash flows
from operations from inception through September 30, 2004 and has
a significant accumulated deficit as of September 30, 2004,
raising substantial doubt about its ability to continue as a
going concern. 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. With the curtailment
of funding from BICO due to BICO's bankruptcy in March 2003,
Diasense will be required to find other funding in order to
continue as a going concern.
The Company plans to liquidate assets to the extent necessary to
continue operations.
Effective January 1, 2002, Fred E. Cooper, Former CEO and Anthony
J. Feola, Diasense's Former Chief Operating Officer, agreed to
waive any rights to compensation through December 31, 2002. In
July 2002, both Mssrs Cooper and Feola resigned as both
officers and directors of BICO and all of BICO's affiliates including
Diasense.
NOTE C - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
There were no additional investments during the years ended
September 30, 2004 and 2003 in MicroIslet, Inc., an investment
interest initially acquired during the fiscal year ended
September 30, 2000. MicroIslet is a California company, which
has licensed several diabetes research technologies from Duke
University with a specific focus on optimizing
microencapsulated islets for transplantation.
The Company's ownership percentage as of March 31, 2002 in
MicroIslet, Inc. was 20.21%. When MicroIslet raised additional
capital through the sale of stock during the first quarter of
fiscal year 2002, the Company was issued additional shares in
order to maintain an ownership percentage of 20.21%. As a result
of this transaction, the Company's share of the underlying net
assets of MicroIslet increased by $179,364 with a corresponding
decrease in goodwill. In April 2002, MicroIslet participated in
a merger with ALD Services, Inc., a publicly traded company also
known as ALDI. In connection with the merger, Diasense, along
with the other MicroIslet shareholders, consented to a forward
stock split of MicroIslet stock where each common shareholder
received 3.1255 shares of MicroIslet common stock for every one
share owned. As a result, Diasense received 3,465,451 shares of
MicroIslet common stock. All the common shareholders maintained
their same percentage ownership. Diasense, along with the other
MicroIslet shareholders, also approved a merger with ALDI. As a
result of the merger, each MicroIslet common shareholder -
including Diasense - received one share of ALDI stock for each
share of MicroIslet stock owned. After the merger, Diasense
owned approximately 15.3% of restricted ALDI stock. In May 2002,
ALDI changed its name to MicroIslet, Inc. and its trading symbol
to MIIS.OB. Because the Company's ownership percentage went
below 20% and because the Company was not represented on the board
of directors of MicroIslet, this investment was reported on the
cost basis at September 30, 2002 and no longer reported under
the equity method. Also, the investment is no longer classified
as an investment in an unconsolidated subsidiary as of September
30, 2002. This change in reporting method and classification had
no effect on the carrying value of the investment.
In July 2002, Diasense sold 1,000,000 shares of MicroIslet common
stock for $500,000 and an additional 1,758,772 shares were sold
in September 2002 for $879,386. The purchasers of the stock are
not affiliated with the Company, its subsidiaries or any of its
officers and directors. A gain of $752,973 was recognized as a
result of these sales. The proceeds from the sales were used to
reduce the amount owed by Diasense to BICO. As of September 30,
2002 Diasense owned 706,679 shares of MicroIslet common stock
recorded at a carrying value of $160,461.In December 2002, Diasense
sold the balance of its 706,679 shares of MicroIslet stock for
an aggregate of $691,340 which was used to reduce its payable to
BICO.
There were no additional investments during the year ended
September 30, 2003 and 2004 in Diabecore Medical, Inc., an
unconsolidated subsidiary interest initially acquired during
the fiscal year ended September 30, 2000. The Company's
ownership percentage as of September 30, 2003 and 2004 in
Diabecore Medical,Inc. was approximately 24%. Diabecore Medical,
Inc. is a Toronto-based company working to develop a new
insulin for the treatment of diabetes.
Although the investment in MicroIslet was being reported on the
cost basis at September 30, 2002, both investments had
previously been reported on the equity basis and differences
in the investment and the underlying net assets of the
unconsolidated subsidiaries were capitalized as part of the
investment in unconsolidated subsidiaries. These differences
had previously been amortized as goodwill over a 5-year
period. However, Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" became
effective for the Company's financial statements as of October
1, 2001 and, under this provision, goodwill is no longer
amortized. As a result of management's evaluation of the
Diabecore investment for the quarter ended September 30, 2002,
an impairment loss was recognized to write it off in
accordance with SFAS No. 142.
NOTE D - Goodwill and Other Intangible Assets - Adoption of
Statement 142
In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 supersedes APB Opinion No. 17 and addresses
financial accounting and reporting for acquired goodwill and
other intangible assets. Under this provision, goodwill
associated with the Company's investments in unconsolidated
subsidiaries will no longer be amortized. These assets will
be evaluated on a periodic basis to determine if an impairment
loss needs to be recorded. The provisions of this statement
became effective for the Company's fiscal year ending
September 30, 2002. A summary of the impact of the
implementation of SFAS 142 follows:
For the year From July 5, 1989
ended (inception)through
Sept. 30, 2002 Sept. 30, 2004
------------- ------------------
Reported net loss $ (461,103) $ (48,216,395)
Add back: Goodwill
Amortization 0 535,057
Impairment Loss 690,124 690,124
------------- ------------------
Adjusted net (loss)
income $ 229,021 $ (46,991,214)
============= ==================
Earnings per share:
Reported net loss $ (.02) $ (2.37)
Add back: Goodwill
Amortization .00 .03
Impairment Loss .03 .03
------------- ------------------
Adjusted net (loss)
income .01 (2.31)
============= ==================
NOTE E - LEASE
In December 1998 Diasense sold its building and leased it back
under an agreement which required monthly rent of $5,750 for five
years beginning on January 1, 1999. 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, 2003 the security deposit
had been used to partially offset the amount due on this lease.
Subsequent to September 30, 2003 Diasense and the landlord agreed
to settle all obligations under this lease for a total payment
of $5,000.
NOTE F - NOTE PAYABLE TO MAJORITY SHAREHOLDER
In connection with the purchase of the 52% ownership of Diasense
by Dominion Assets, LLC. from BICO, the $1,954,936 intercompany
payable from Diasense to BICO was assigned to Dominion Assets, LLC.
This liability was documented by a note payable on demand without
interest.
After demand for payment was made by Dominion Assets, LLC, the
demand note was amended effective September 28, 2004. Under
the terms of the amended demand note diasense now owes a
principle amount of $1,954,936 with interest calculated at a
rate of 8% per annum. The indebtedness is collateralized by
all of Diasense's assets. Dominion Assets, LLC agreed not to
demand payment for a period of 180 days following the
effective date of the amendment.
NOTE G - OTHER INCOME
We had no other income for the year ended September 30, 2004.
Other income for the year ended September 30, 2003 includes
$269,449 in forgiveness of debt and $15,525 of rental income.
Other income for the year ending September 30, 2002 consists of
$62,100 of rental income. The total rental income for the years
ended September 30, 2003 and 2002 was from BICO and
its subsidiaries for office space.
NOTE H - INCOME TAXES
As of September 30, 2004, Diasense has available approximately
$26 million of net operating loss carryforwards for federal
income tax purposes. These carryforwards are available, subject
to limitations, to offset future taxable income, and expire in
the tax years 2005 through 2021. Diasense also has research and
development credit carryforwards available to offset federal
income taxes of approximately $700,000 subject to limitations,
expiring in the years 2005 through 2013. The ability to utilize
these carry forwards are significantly limited or eliminated due
to the change in ownership which occured in May 2004.
Diasense has temporary differences arising from different methods
of accounting for the costs of patent and technology rights for
financial statement and tax purposes. For financial statement
purposes, these costs have been charged to operations. For tax
purposes, the costs of approximately $2,650,000 have been
capitalized and are being amortized over seventeen years. Also,
the fair market value of warrant extensions have been recorded
and expensed for financial statement purposes in the amount of
$17,945,875 as of September 30, 2002, and 2003. For tax
purposes, warrants are not recorded until the warrants are
exercised.
Diasense has not reflected any future income tax benefits for
these temporary differences or for net operating loss and credit
carryforwards because of the uncertainty as to their realization.
Accordingly, the adoption of FAS 109 had no effect on the
financial statements of Diasense.
The following is a summary of the composition of Diasense's
deferred tax asset and associated valuation allowance at
September 30, 2004 and 2003:
2004 2003
Net Operating Loss $8,897,860 $8,897,860
Warrant Expense 6,111,310 6,111,310
Patent Amortization 331,340 331,340
Tax Credit Carry Forward 700,000 700,000
---------- ----------
16,040,510 16,040,510
Valuation Allowance (16,040,510) (16,040,510)
---------- ----------
Net Deferred Tax Asset $ 0 $ 0
========== ==========
The deferred tax benefit and the associated increase in the
valuation allowance are summarized in the following schedule:
Deferred Increase (Decrease)
Tax in Valuation
Benefit Allowance Net
Year Ended September 30, 2004 $ 0 $ 0 $0
Year Ended September 30, 2003 $ 88,991 $ (88,991) $0
Year Ended September 30, 2002 $ (156,007) $ 156,007 $0
Year Ended September 30, 2001 $ (389,830) $ 389,830 $0
Year Ended September 30, 2000 $ (122,436) $ 122,436 $0
From July 5, 1989 (inception)
through September 30, 2004 $(16,040,510) $16,040,510 $0
NOTE I - RELATED PARTY TRANSACTIONS
1. INTERCOMPANY ACTIVITY
For the fiscal years ended September 30, 2003 and 2002, net
intercompany charges from BICO and its subsidiaries to Diasense
were $0 and $104,246, respectively. In the fiscal
years ended September 30, 2003 and 2002 Diasense repaid $675,248
and $1,365,983 respectively to BICO.
2. ACCRUED PAYROLL
Total accrued wages at September 30, 2002 included $128,042 to
Mr. Cooper our former CEO and director and $37,500 to TJ Feola,
a former director. Mr. Cooper and Mr. Feola resigned their
positions in July 2002 and subsequently released Diasense from
these claims for prior wages.
3. NON CIRCUMVENTION AND CONSULTING FEE AGREEMENT
On September 29, 2004 Diasense entered into a Non circumvention
and Consulting Fee Agreement with Keith R. Keeling, President
of Dominion Assets, LLC (Diasense's majority shareholder). Under
the terms of the agreement Mr. Keeling will assist in the sale
of Diasense assets and will receive upon funding of any such sale
a fee equal to 5% of the sale proceeds. Diasense agreed to work
exclusively through Mr. Keeling in connection with its sales of assets.
NOTE J - COMMITMENTS AND CONTINGENCIES
During April 1998, BICO and its affiliates, including Diasense,
were served with subpoenas requesting documents in connection
with an investigation by the U.S. Attorneys' office for the
District Court for the Western District of Pennsylvania. In July
2002, the Company was notified that this investigation was concluded
with no charges against BICO or its subsidiaries.
On April 30, 1996, a class action lawsuit was filed against
BICO, Diasense, and individual officers and directors.
The suit, captioned Walsingham v. Biocontrol Technology, et al.,
was certified as a class action in the U.S. District Court for
the Western District of Pennsylvania. The suit alleged
misleading disclosures in connection with the noninvasive glucose
sensor and other related activities, which BICO denies.
Without agreeing to the alleged charges or acknowledging any
liability or wrongdoing, BICO agreed to settle the lawsuit for a
total amount of $3,450,000. During September 2002, the class
action lawsuit was settled when BICO made thee final payment of
$50,000; the Company considers the case closed.
NOTE K - STOCKHOLDERS' EQUITY
Common Stock
Diasense sold 2,800,000 shares of common stock at $0.50 per
share, from August 1989 to May 1991 in connection with a joint
private offering with BICO. The aggregate amount raised was
$1,400,000, on which no commissions were paid to any third party.
Diasense sold 4,997,500 shares of common stock, at $1.00 per
share, in a private offering from May 1991 to January 1992. The
aggregate amount raised was $4,985,201, on which no commissions
were paid to any third party.
Diasense sold, in July 1992, 7,212 shares of common stock, at
$3.50 per share, in a private offering to one accredited
investor. The aggregate amount raised was $25,242, on which no
commissions were paid to any third party.
Diasense sold 300,000 shares of common stock, at $3.50 per share,
in a private offering from July 1992 through November 1992. The
aggregate amount raised was $1,050,000, on which no commissions
were paid to any third party.
In December 1991, Diasense issued 235,000 shares of common stock
in exchange for the cancellation of outstanding promissory notes
for $235,000.
In June 1994, Diasense sold 91,667 shares of its common stock
pursuant to the requirements set forth in Regulation S of the
Securities Act of 1933 ("Regulation S"). In connection with such
sale, the purchasers and any entity which facilitated such sale
undertook to ensure compliance with Regulation S, which among
other things, limits a foreign investor's ability to trade
Diasense's stock in the United States. Diasense received net
proceeds in the amount of $288,751 pursuant to such sales.
During 1995, Diasense issued the following shares of its common
stock to BICO: 3,000,000 shares at an assigned price of $3.50
per share in return for a corresponding reduction in the amount
due from Diasense to BICO pursuant to the R&D Agreement of
$10,500,000; and 1,200,000 shares of its common stock at a price
of $3.50 per share.
In July, 1993, Diasense commenced a public offering. As of
September 30, 1998, an aggregate of 1,063,460 shares had been
issued with proceeds to Diasense of $3,561,892. Of that total,
230,961 shares with net proceeds of $786,245 were issued in
fiscal 1994; 437,768 shares with net proceeds of $1,501,492 were
issued in fiscal 1995; 410,731 shares with net proceeds of
$1,365,155 were sold in fiscal 1996; 1,000 shares were issued in
fiscal 1998 at $3.50 per share; 10,000 shares were issued for
consulting services at a charge to operations of $35,000 in
fiscal 1996; and 27,000 shares were reimbursed with net repayment
of $94,500 in fiscal 1997.
Diasense issued unregistered common stock in exchange for
consulting services of 7,200 shares in fiscal 1994, 17,500 shares
in fiscal 1995, 5,000 shares in fiscal 1996 and none in fiscal
1997 through 2002. The associated consulting service expense was
recognized at a rate of $3.50 per share, which is the price at
which the common stock was being sold in Diasense's public
offering.
Common Stock Warrants
At September 30, 2004, Diasense has reserved 10,575,800 shares of
Diasense's unissued common stock for warrants which were
outstanding and exercisable. The fiscal years in which warrants
expire are as follows:
Warrant Expiration Fiscal Year Number of Shares
2005 2,143,000
2006 500,000
----------
2,643,000
==========
The following is a summary of warrant transactions during fiscal
years ended September 30,
2004 2003 2002 2001 2000
Outstanding beginning 8,292,750 10,575,800 10,635,013 10,463,013 8,644,013
of year
Granted during the year 0 0 0 500,000 2,085,000
Canceled during the year (5,649,750) (2,283,050) (59,213) (328,000) (266,100)
---------- ---------- --------- --------- ---------
Outstanding, and 2,643,000 8,292,750 10,575,800 10,635,013 10,463,013
eligible for exercise. ========== ========== ========= ========= =========
There were no warrants issued or extended during the fiscal years
ended September 30, 2003 and 2004.
During the period October 1, 2000 through September 30, 2001,
Diasense extended the exercise date of warrants to purchase
1,147,750 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 648,000 shares were
originally granted at an exercise price of $.05 per share and
warrants for 499,750 shares were originally granted at an
exercise price of $3.50 per share and were extended at the same
price. No expense was recognized in connection with the
extension of these warrants because there was no increase in the
value of the warrants over the value recorded at the time the
warrants were originally granted. In addition, during the year
ended September 30, 2001, Diasense granted warrants to purchase
500,000 shares of common stock to employees and consultants at an
exercise price of $.50 per share. These warrants were granted
for services rendered which were recognized in general and
administrative expenses for a total of $55,199.
During the period October 1, 1999 through September 30, 2000,
Diasense extended the exercise date of warrants to purchase
2,428,050 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 215,000 shares were
originally granted at an exercise price of $.50 per
share, warrants for 2,131,250 shares were originally granted at
an exercise price of $1.00 per share and warrants for 81,800
shares were originally granted at an exercise price of $3.50 per
share and were extended at the same price. No expense was
recognized in connection with the extension of these warrants
because there was no increase in the value of the warrants over
the value recorded at the time the warrants were originally
granted. In addition, during the year ended September 30, 2000,
Diasense granted warrants to purchase 2,085,000 shares of common
stock to employees and consultants at an exercise price of $.50
per share. These warrants were granted for services rendered
which were recognized in general and administrative expenses for
a total of $230,178.
During the period October 1, 1998 through September 30, 1999,
Diasense extended the exercise date of warrants to purchase
2,346,213 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,262,000 were
originally granted at an exercise price of $.50 per share,
warrants for 29,213 shares were origainally granted at an
exercise price of $1.00 per share and warrants for 55,000 shares
were originally granted at an exercise price of $3.50 per share
and were extended at the same price. In connection with the
extension of these warrants Diasense recorded a charge of $6,333
against operations. In addition, during the year ended September
30, 1999, Diasense granted warrants to purchase 2,070,000 shares
of common stock to employees and consultants at an exercise price
of $.50 per share. These warrants were granted for services
rendered which were recognized in general and administrative
expenses for a total of $228,538.
During the period October 1, 1997 through September 30, 1998,
Diasense extended the exercise date of warrants to purchase
758,000 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 748,000 were originally
granted at an exercise price of $.50 per share and warrants for
10,000 shares were originally granted at an exercise price of
$1.00 per share and were extended at the same price. Diasense
recorded $25,000 against operations in connection with the
extension of these warrants.
During the period October 1, 1996 through September 30, 1997,
Diasense extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,236,550 were
originally granted at an exercise price of $1.00 per share and
were extended at the same price. Diasense recorded $5,593,875
against operations in connection with the extension of these
warrants. In addition, during the year ended September 30,
1997, Diasense granted warrants to purchase 59,000 shares of
common stock to employees and consultants at an exercise price
of $1.00 and $3.50 per share. These warrants were granted for
services rendered which were recognized in general and
administrative expenses for a total of $2,500.
During the period October 1, 1995 through September 30, 1996,
Diasense extended the exercise date of warrants to purchase
2,556,213 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 49,213 and 2,507,000
shares were originally granted at an exercise price of $1.00
and $.50 per share, resepectively, and were extended at the
same price. Diasense recorded $7,640,468 against operations
in connection with the extensions of these warrants.
During the period October 1, 1994 through September 30, 1995,
Diasense extended the exercise date of warrants to purchase
1,550,000 shares of common stock to certain officers, directors,
employees and consultants. The warrants were originally granted
at an exercise price of $.50 per share and were extended at the
same price. The assumed value of the stock when the extensions
were granted was $3.50 per share. Diasense recorded $4,625,000
against operations in connection with the extensions of these
warrants.
In 1990, Diasense granted warrants to purchase 800,000 shares of
common stock at an exercise price of $.50 per share to eight
current or former directors or officers of Diasense or BICO who
personally guaranteed the payment of a lease obligation to the
bank for the premises occupied by BICO at the 300 Indian Springs
Road location. Diasense also granted warrants to purchase
100,000 shares of common stock each to an individual and his
company at an exercise price of $.50 per share for personally
guaranteeing the payment of an obligation related to the purchase
of equipment by BICO. In addition, Diasense granted warrants to
purchase 100,000 shares of common stock for services performed by
consultants at an exercise price of $.50 per share. Diasense
recorded an estimated value of these warrants at $27,500 which
was charged to operations.
NOTE L- SUPPLEMENT CASH FLOW INFORMATION
Diasense's financing activities included the following noncash
transactions.
During 1992 and 1990, notes payable aggregating $303,000 were
canceled and exchanged for 371,000 shares of Diasense's common
stock.
On March 31, 1995, Diasense issued 3,000,000 shares of its
unregistered stock to BICO in payment of $10,500,000 due to
BICO.
During the Fiscal year ended September 30, 1999, Diasense (by
agreement with BICO) converted $125,000 of related party
notes receivable and $13,538 of associated interest receivable
to due from BICO.
Cash paid for interest and income taxes were as follows:
From July 5, 1989
(inception)
September September September through September
30,2004 30,2003 30,2002 30,2004
Interest Paid $ 0 $ 0 $ 0 $11,725
====== ====== ======= =======
Income Taxes Paid $ 0 $ 0 $ 0 $ 0
====== ====== ======= =======