UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: December 31, 2001
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period N/A to N/A
Commission File number: 0-24974
DiaSys Corporation
(Exact name of small business issuer as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
06-1339248
(I.R.S. Employer ID #)
81 West Main Street, Waterbury, CT 06702
(Address of principal executive offices)
203-755-5083
(Issuer's Telephone number including area code)
None
(Former name, address and/or fiscal year if changed from last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirement for the past
90 days: Yes XX No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court: Yes XX No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 14, 2002, the Company had 7,364,909 common shares outstanding.
DiaSys Corporation
PART I
FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2001 June 30, 2001
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and equivalents $ 561,155 $ 1,198,707
Accounts receivable, less allowance for doubtful
accounts of $140,000 716,105 707,001
Finance receivables, net 158,130 148,807
Inventories 509,694 511,837
Prepaid expenses and other current assets 72,077 118,994
Total Curent Assets $ 2,017,161 $ 2,685,346
EQUIPMENT, FURNITURE AND FIXTURES, LESS
ACCUMULATED DEPRECIATION 265,180 318,548
OTHER ASSETS:
Computer software, less accumulated amortization 3,880 11,823
Patents, less accumulated amortization 2,426,621 2,503,479
Deferred acquisition and offering costs 9,669 9,668
Other Assets - Non-Current 65,579 58,501
Long-term finance receivables, net 103,689 121,593
Total Assets $ 4,891,779 $ 5,708,958
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 298,073 296,684
Due to Bank 0 14,143
Total Current Liabilities $ 298,073 $ 310,827
STOCKHOLDERS' EQUITY:
Preferred stock $.001 par value:
Authorized 100,000 shares, 1,718
shares outstanding at 12/31/01 and
1,890 shares outstanding at 6/30/01 2 2
Common stock $.001 par value:
Authorized 99,900,000 shares,
outstanding 7,364,909 at 12/31/01
and 6,874,597 outstanding at 6/30/01 7,365 6,875
Additional paid-in-capital 15,249,102 15,249,592
Accumulated deficit (10,642,285) (9,842,312)
Accumulated other comprehensive loss (20,478) (16,026)
Total Stockholders' Equity $ 4,593,706 $ 5,398,131
Total Liabilities and Stockholders' Equity $ 4,891,779 $ 5,708,958
See accompanying notes to the financial statements.
DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended December 31, Three Months Ended December 31,
2001 2000 2001 2000
NET SALES $ 1,028,091 $ 959,043 $ 538,655 $ 594,579
COST OF GOODS SOLD 368,352 353,082 195,132 243,882
GROSS PROFIT 659,739 605,961 343,523 350,697
OPERATING EXPENSES:
Selling 507,794 417,597 239,436 189,554
General and administrative(footnote 4) 707,138 454,039 439,826 275,117
Research and development 256,195 203,862 121,668 83,828
Total Operating Expenses 1,471,127 1,075,498 800,930 548,499
LOSS FROM OPERATIONS (811,388) (469,537) (457,407) (197,802)
INTEREST INCOME 16,835 54,984 5,954 22,376
NET LOSS BEFORE TAXES (794,553) (414,553) (451,453) (175,426)
INCOME TAXES 5,420 39,046 4,420 39,046
NET LOSS $ (799,973) $ (453,599) $(455,873) $ (214,472)
WEIGHTED AVERAGE OF
COMMON SHARES OUTSTANDING 7,179,147 6,309,700 7,297,518 6,284,580
BASIC AND DILUTED LOSS
PER COMMON SHARE ($0.11) ($0.07) ($0.06) ($0.03)
See accompanying notes to financial statements.
DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITTED)
Other
Common Stock Preferred Stock Paid-in- Comprehensive Accumulated
Shares Par Value Shares Par Value Capital Loss Deficit
BALANCE, JUNE 30, 2001 6,874,597 $ 6,875 1,890 $ 2 $ 15,249,592 $ (16,026) $ (9,842,312)
Conversion of 120
shares of preferred
stock to 290,312 shares
of common stock 290,312 290 (120) - (290) - -
Conversion of 52 shares
of preferred stock to
200,000 shares of common
stock 200,000 200 (52) - (200) - -
Foreign Currency
Translation adjustment - - - - - (4,452) -
Net Loss (a) - - - - - - (799,973)
BALANCE DECEMBER 31,2001 7,364,909 $ 7,365 1,718$ 2 $ 15,249,102 $ (20,478) $ (10,642,285)
(a) Comprehensive loss, i.e., net loss plus other comprehensive income (loss) totals $(804,425) in 2001.
DIASYS CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended, December 31,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (799,973) $ (453,599)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Amortization of patents and software 91,215 31,734
Depreciation of equipment, furniture and fixtures 53,692 5,103
Taxes Unpaid 0 37,245
Bad debt expense (50,000) 0
Changes in operating assets and liabilities:
Accounts receivable 40,896 (215,290)
Inventories 2,143 6,009
Unpaid Common Stock 0 10,224
Prepaid expenses and other current assets 46,917 (80,103)
Other assets (7,078) 0
Accounts payable and accrued expenses (12,754) 46,266
Net cash flows from operating activities (634,942) (612,411)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures
and leasehold improvements (1,469) (296)
Cost of computer software 0 0
Cost of patents (5,270) (14,106)
Deferred acquisition and offering costs 0 (40,348)
Change in finance receivables 8,581 (127,367)
Payment for purchase of Intersep, Ltd. 0 (500,000)
Net cash flows from investing activities 1,842 (682,117)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock 0 1
Proceeds from issuance of common stock 0 1,151,131
Reduction in finance payables 0 (77,450)
Net cash flows from financing activities 0 1,073,682
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH (4,452) 0
NET CHANGE IN CASH AND EQUIVALENTS (637,552) (220,846)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,198,707 2,415,256
CASH AND EQUIVALENTS, END OF PERIOD $ 561,155 $ 2,194,410
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 0 $ 3,704
Income taxes paid $ 1,000 $ 1,801
NONCASH FINANCING ACTIVITIES:
Issuance of common shares in conjunction with
business acquisition $ 0 $ 1,700,000
Conversion of preferred stock to common stock $ 490 $ 0
See accompanying notes to financial statements
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of the Business and Basis of the Presentation:
Nature of the Report: The accompanying consolidated financial statements
include the accounts of DiaSys Corporation and Intersep Ltd. from the date of
acquisition on September 30, 2000. The balance sheet for the end of the
preceding fiscal year has been derived from the Company's last audited balance
sheet contained in the Company's Form 10-KSB and is provided for comparative
purposes. All other financial statements are unaudited. In the opinion of
management, all adjustments, which include only normal recurring adjustments
necessary to fairly present the financial position, results of operations and
changes in cash flows for all periods present, have been made. The results of
operations for interim periods are not necessarily indicative of the operating
results for the full year.
Footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10-KSB for the most recent fiscal year.
Certain statements contained herein are not based on historical facts, but are
forward looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated event,
transactions or results described in such statements. The Company's ability
to consummate such transactions and achieve such events or results is subject
to certain risks and uncertainties. Such risks and uncertainties include, but
are not limited to, the existence of demand for and acceptance of the Company's
products and services, regulatory approvals and developments, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the
Company's control. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
Note 2. Intersep Ltd. Acquisition:
In September 2000, the Company acquired all of the capital stock of Intersep
Ltd., an England based manufacturer and distributor of consumable laboratory
products, reagents and test kits. The Company paid $500,000 at closing plus
297,131 shares of common stock having a value of $8.1842 per share.
Following the acquisition, Intersep Limited's name was changed to DiaSys
Europe Limited.
The acquisition has been accounted for under the purchase method of accounting,
and, accordingly, the results of operations are included in the financial
statements as of the date of acquisition, and the assets and liabilities were
recorded based upon the fair values at date of acquisition. The Company has
allocated the excess purchase price over the fair value of net tangible assets
acquired to patents. In accounting for the acquisition of Intersep, the
Company recorded approximately $2,650,000 in intellectual property, which is
being amortized on a straight-line basis over the estimated useful like of
twenty years.
The following Unaudited pro forma information has been prepared assuming that
the acquisition of Intersep, Ltd. had taken place at the beginning of the
respective periods presented. The pro forma financial information is not
necessarily indicative of the combined results that would have occurred had the
acquisition taken place at the beginning of the period, nor is it necessarily
indicative of results that may occur in the future.
Pro forma for periods ended December 31,
Six-months ended Three-months ended
2001 2000 2001 2000
Revenue $1,028,091 $1,230,843 $ 538,655 $ 594,579
Loss from operations (811,388) (383,615) (457,407) (197,802)
Net Loss (799,973) (370,403) (455,873) (214,472)
Loss per share (0.11) (0.06) (0.06) (0.03)
Note 3. Stock Options
The Company accounts for stock option grants using the intrinsic value based
method prescribed by APB Opinion No. 25. Since the exercise price equaled or
exceeded the estimated fair value of the underlying shares at the date of
grant, no compensation was recognized in 2001.
Had compensation cost been based upon the fair value of the option on the date
of grant, as prescribed by SFAS No. 123, the Company's pro forma net loss and
net loss per share would have been approximately $(1,191,825) $(0.17) per share
at December 31, 2001, using the Black-Scholes option pricing model.
Note 4. Legal Proceedings
In September of 2001, the Company found reason to believe that Mr. Paul Reardon,
the Managing Director of DiaSys Europe Limited, was engaging in competitive
practices in violation of his employment agreement and the Share Purchase
Agreement between the Company and the shareholders of Intersep. In connection
withe this matter,the Company served injunctive court orders on HealthTest
Limited, Mr. Reardon, and two past employees of Diasys Europe Limited. The
Company incurred nonrecurring costs for legal and investigative services
totaling approximately $300,000, which are included in General and
Administrative expenses for the three month and six month period ended
December 31, 2001.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS
FINANCIAL CONDITION:
The Company's financial results for the period ended December 31, 2001 was
materially and adversely affected by the HealthTest matter (See Item 1. Legal
Proceedings: HealthTest; below). The Company believes that it has taken all
necessary and advised precautions to protect its Europe business and revised
its business plan.
Liquidity and Capital Resources:
As of December 31, 2001, the Company had cash and equivalents of $561,155
compared to $1,198,707 at June 30, 2001. The decrease in cash and equivalents
was due primarily to the interruption of European sales (See Item 1. Legal
Proceedings: HealthTest; below) in the past quarter and approximately $150,000
in non-recurring expenditures including $80,000 paid in connection with the
HealthTest matter. The Company does not expect to incur these
costs again.
Based on cash and equivalents and continuing operations, management believes
that it has sufficient funds and resources on hand to discharge its obligations
as they become due for at least the next 12 months.
RESULTS OF OPERATIONS
Net Revenue:
Net revenue for the three-month period ended December 31, 2001 decreased
$55,924 or 9% from $594,579 to $538,655 compared to the same period of the
prior year. Net revenue for the six-month period ended December 31, 2001,
increased from $959,043 to $1,028,091, or 7%, over the same period of the prior
year. The decrease in revenue for the three-month period ended
December 31, 2001 was due primarily to a loss of approximately $200,000 in
European sales occasioned by: (i) the HealthTest matter see Item 1 below); and,
(ii) suspension of business with the Company's distributor in Turkey due to
Turkey's economic crisis and certain disputes arising between the Turkish
distributor and DiaSys Europe. DiaSys Europe has implemented a plan to restore
its business including removal of Mr. Reardon, installing a new Director of
European Sales, Marketing and Service, and entering into a new three-year
accord with its Turkish distributor effective January 17, 2002.
Gross Profit and Gross Profit Margins:
Gross profit for the three-month period ended December 31, 2001 decreased 2%
from $350,697 to $343,523. Gross profit for the six-month period ended
December 31, 2001 increased 9% from $605,961 to $659,739. Gross profit margins
for the three-month period ended December 31, 2001 increased from 59% to 64%
over the comparable period of last year. Gross profit margins for the
six-month period remained essentially unchanged over the comparable period at
64% and 63% respectively. DiaSys Europe sells product primarily through
independent, third party distributors where lower gross profit margins are off
set by lower selling and operation costs. Notwithstanding this fact, the
Company has implemented several measures to increase the gross profit margins
of DiaSys Europe, including better buying practices, an increase in the price
of some items and the elimination of several non-proprietary products. The
Company believes that gross profit margins will continue to rise as the effects
of these and other measures are realized.
Selling General And Administrative (SG&A):
For the three-month period ended December 31, 2001, SG&A increased $214,591 or
46% from $464,671 to $679,262 over the prior comparable period. SG&A for the
six-month period ended December 31, 2001 increased $343,296 or 39% from
$871,636 to $1,214,932 over the comparable period of the prior year. The
increase in SG&A was composed of approximately $300,000 of nonrecurring
expenses associated primarily with the HealthTest matter (See Item 1. Legal
Proceedings: HealthTest; below).
The Company does not expect to incur these expenses going forward. If it were
not for theses expenses, then SG&A would have actually decreased by
approximately $90,000 or 19% for the three month period ended December 31, 2001
and would have increased $38,000 or 4% for the six month period ended
December 31, 2001.
Research And Development (R&D):
R&D for the three-month period ended December 31, 2001 increased $37,840 or 45%
from $83,828 to $121,668 over the prior comparable period. R&D for the
six-month period ended December 31, 2001 increased 26% from $203,862 to
$256,195 over the comparable prior year period. The increase in R&D reflects
our continued pursuit and patent protection of the Company's intellectual
property.
Net (Loss):
For the three-month period ended December 31, 2001, Net Loss increased 113%
from $214,472 to $455,873 over the same three-month period in 2000. Net Loss
for the six-month period ended December 31, 2001 increased 76% from $453,599 to
$799,973 over the comparable six-month period of the prior year. The increase
in net loss was due primarily to: (a) the interruption of business occasioned
by HealthTest matter (See Item 1. Legal Proceedings: HealthTest; below); and
(b) approximately $300,000 of expenses accrued in connection therewith. The
Company does not expect to incur these expenses going forward. Management
believes these nonrecurring expenses and the shortfall of sales due to the
interruption of business, prevented the Company from reaching profitability
for the three month period ended December 31, 2001.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings:
Intelligent Medical Imaging Inc (IMI): In 1999, the Company won an arbitration
award against IMI. Due to the worsening financial condition of IMI, the
Company subsequently agreed to a $325,000 final settlement of the award. The
Company received $10,000 from IMI against the settlement. However, on
November 29, 1999, IMI filed for bankruptcy protection. The Bankruptcy Court
subsequently approved the Company as an unsecured creditor of IMI in the amount
of $315,000. On January 28, 2002, the Court ruled that with exception of the
final distribution to unsecured creditors and a few associated administrative
issues, the IMI matter was fully settled. The Company expects to receive
$15,000-to-$20,000 in distribution but will recognize the asset only when
received.
HealthTest Limited, Paul Reardon, et al.: In September of 2001, the Company
found reason to believe that Mr. Paul Reardon, the Managing Director of DiaSys
Europe Limited, was engaging in competitive practices in violation of his
employment agreement and the Share Purchase Agreement between the Company and
the shareholders of Intersep (see Note 2. Fiancial Statements). Subsequently,
the Company discovered evidence which strongly suggested that Mr. Reardon was
attempting to divert the business of DiaSys Europe to HealthTest Limited, a
Company which Mr. Reardon was a Director and a participant in further breach
of contract. The evidence further suggested that Mr. Reardon assisted
HealthTest to obtain the customer, distributor, and supplier lists of DiaSys
Europe, and permitted HealthTest to operate from the premises of DiaSys Europe.
On November 13,2001, following a meeting called to review these improprieties
with Mr. Reardon, Mr. Reardon was immediately discharged from employment
FOR CAUSE, and the Company served injunctive court orders on HealthTest
Limited, Mr. Reardon, and two past employees of DiaSys Europe Limited. The
Company temporarily installed Mr. Robert P. Carroll, a Director of the
Company, in England as interim acting Managing Director, and in January 2002,
hired Mr.Reardon's replacement. The Company experienced an interruption
in its European business for the quarter ended December 31, 2001 and incurred
substantial costs for legal and investigative services. The Company believes
that it has taken all necessary or advisable precautions to secure its
business in Europe and has resumed application of its business plan.
HealthTest, Mr. Reardon and the other two respondents have been stopped from
trading in the business and markets of DiaSys Europe while this matter in
pending. The Company is currently in settlement discussions with the
respondents.
Item 5. Other Information:
On February 7, 2000, Registrant entered into an Agreement pursuant to which it
agreed to sell up to 4,000 Series "A" Convertible Preferred Shares
(the "Preferred") and accompanying 5 year warrants (the "Warrants") to purchase
common shares, to two unaffiliated accredited investors, B.H. Capital
Investments, L.P. and Excalibur Limited Partnership, both of Toronto, Ontario,
Canada. The terms of the Preferred are as provided for in Certificate of
Designations filed with the Secretary of the State of Delaware. Under the
Agreement, the investors purchased all of tranches as of November 17, 2000.
In October, 2001, the Company entered into a Stock Repurchase Agreement with
B.H. Capital and Excalibur Limited pursuant to which the Company obtained the
right but not the duty to repurchase all of the unexercised Preferred, Warrants
and any accrued interest thereon for a fixed price of $1,750,000 ("Call"). The
Company is in the process of seeking additional capital in order to exercise
the Call. The Call expires on February 27, 2002.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
DiaSys Corporation
Date: February 14, 2002
Todd M. DeMatteo,
President and Chief Executive Officer
Diane J. Sentner
Director of Finance and Chief Financial Officer