Item 1. Business
General Development of Business
Diasense, Inc. was incorporated in the Commonwealth of Pennsylvania on July 5, 1989 as Diasense, Inc., ("Diasense" or the "Company") a wholly owned subsidiary of Biocontrol Technology, Inc., which later changed its name to BICO Inc. (BICO). BICO owned approximately 52% of Diasense until July 23, 2004 when BICO sold its entire ownership interest, 11,975,000 shares of common stock, 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. As of November 2002 we were dependent solely on BICO to provide the funding for our ongoing operations and BICO stopped funding us due to its own financial difficulties. Without funding, between November 2002 and July 2004, we had to suspend operations and stop further development of our noninvasive glucose sensor. We resumed limited operations in July 2004 and subsequently resumed development of the next generation of our noninvasive glucose sensor in April 2005. Until we are able to raise additional funds on our own, completion of a prototype device and clinical trials will be delayed. Pursuant to a purchase agreement between us and BICO, we own the intellectual property and patents to the noninvasive glucose sensor and have the exclusive marketing and distribution rights.
During 2000 and 2001, we made investments in two different diabetes-related companies: MicroIslet, Inc. ("MicroIslet"), a California company working with Duke University to develop encapsulated insulin for human use; and Diabecore Medical, Inc. ("Diabecore"), a Canadian company working on a new type of insulin. We've sold our interest in both MicroIslet and Diabecore and no longer have investments in any other company. 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 have or may express in our forward-looking statements. The risks and uncertainties that may affect our operations, performance, research and development and results include the following: the possibility that our creditors could force us into bankruptcy, delays or complications in starting our clinical trials, additional delays in obtaining FDA marketing approval of our noninvasive glucose sensor; our difficulty in raising funds to continue our projects; delays in the manufacture or marketing of our 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 our noninvasive glucose sensor, 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 From inception through November 2002, we worked with BICO to develop a noninvasive glucose sensor for diabetics that is able to measure blood glucose levels without a blood sample. Most currently available glucose monitors require a blood sample that is obtained by piercing the skin with a lancet or needle.
Our non-invasive glucose sensor, the Diasensorr, directs a beam of near infra-red light into the skin where some of the light is absorbed and some of the light is reflected back into the unit. The reflected light spectrum is analyzed and converted into a digital reading of glucose concentration by using mathematical calculations and customized embedded software.
As of November 2002, a total of 14 U.S. patents covering the Diasensor technology had been issued and assigned to Diasense pursuant to a purchase agreement with BICO. In June 2005, we filed another patent with the U.S. Patent and Trademark Office covering what we believe is new technology unique to the next generation of the Diasensor. This patent is pending but we cannot be certain the patent will ever be issued. Pursuant to other agreements between Diasense and BICO, BICO has the right to develop and manufacture the sensors, however we are in the process of terminating these agreements with BICO. If we obtain FDA approval to sell the Diasensor we will consider manufacturing the device in house or using contract manufacturers.
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 premarketing submission made to FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, to a legally marketed device that is not subject to premarket approval (PMA). Applicants must compare their 510(k) device to one or more similar devices currently on the U.S. market and make and support their substantial equivalency claims. 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 announced that we would remain committed to the Diasensor 1000, 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.
In 1998 we submitted a technical file including clinical data on the Diasensor 1000 to TUV Rheinland of Cologne, Germany, an organization recognized by the European Union as a Notified Body for Product Certification, in order to apply the Conformite Europeene (CE) Mark to the Diasensor . We were granted approval to apply the CE Mark to the Diasensor on June 23, 1998, which permitted us to sell the device in Europe. In 1999, we focused additional effort on the European market but because no material sales occurred, we discontinued our European marketing efforts.
The second model of the Diasensor was named the Diasensor 2000. 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 consider giving us approval to market the sensor. Clinical trials began in October 2000 but due to our continuing financial difficulties we suspended the trials in the second quarter of 2002 to focus our remaining financial resources on the next generation Diasensor. This project continued until November 2002 when development was halted due to BICO's inability to continue funding our operations.
Current Status of the Noninvasive Glucose Sensor
After BICO discontinued funding our operations in 2002 there was no activity in Diasense and consequently there was no further research and development of the Diasensor until BICO sold its entire interest in Diasense to Dominion Assets, LLC in July 2004. With loans from Dominion and the proceeds from the sale of our interest in Diabecore, development of the next generation of our non-invasive glucose sensor, the Diasensor Delta-2, resumed in April of 2005 and is continuing. If we are unable to raise substantially more money, we will not be able to complete the project.
The Delta-2 derives from applicable earlier Diasensor patents and we believe the new design will be able to achieve a performance superior to the earlier models in a unit that has the advantages of small size, battery operation, portability and can provide continuous monitoring with greater accuracy than currently available invasive meters. If and when we are able to complete development and produce a prototype of the Delta-2, there is no guarantee the device will actually perform better than the earlier models or if it will be more accuarate than invasive meters but because we believe the Delta-2 model will outperform the earlier models, we have no plans to resume clinical trials on the Diasensor 2000.
The Delta-2 will require further development and testing before a prototype of the device can be produced, if ever. We cannot be certain the engineering and design modifications to the original Diasensor models to produce a cell phone size device will work effectively in practice. If we are able to get FDA approval, we plan to market the Delta-2 to diabetics through recommendations or prescriptions of physicians. We cannot be certain that physicians will recommend or prescribe the Delta-2 immediately after FDA approval or when, if ever, the medical community will accept non-invasive blood glucose monitoring. The retail price of the Delta-2 may be high compared to the price of currently available devices and the disposable test strips needed to use those devices. The relative cost of the Delta-2 to invasive devices depends on how often a patient monitors; a patient may not monitor frequently enough to justify the price of the Delta-2. If we are able to get FDA approval but the Delta-2 is not accepted by physicians and patients to a degree necessary to achieve adequate sales revenue, we will continue to incur losses. If we are able to get FDA approval to market the Delta-2 and if the device is accepted by patients and physicians, our sales will be adversely affected if insurance coverage and reimbursement for the Delta-2 is not available. The cost of invasive devices and the disposable test strips needed are reimbursed by Medicare and other third party payors but it is uncertain whether third party payors will provide adequate coverage for our device. To reduce healthcare costs, third party payors may deny coverage or limit the level of reimbursement for our device making it more expensive for patients to use. Without insurance coverage and reimbursement, patients may not purchase the Delta-2 preferring instead, to use invasive devices that are covered by Medicare and third party payors.
Invasive Glucose Sensors
Currently, the majority of diabetics measure their blood glucose levels by using invasive glucose meters. The devices require the user to draw a blood sample and place the blood on a chemically-treated test strip. The user places the test strip in the glucose meter which will display a readout of the blood glucose level. Invasive glucose meters require a disposable test strip each time a blood glucose measurement is taken.
Adequate control of blood glucose levels generally requires several measurements each day and drawing blood can be an unpleasant experience for the user, particularly for children. The ongoing cost of repeated testing can be significant to the average user because of the cost of test strips, lancets, swabs, antiseptics, test solutions and other supplies that may be needed. The Delta-2 is not expected to require any disposable supplies with the exception of periodic battery replacement. If the Delta-2 is successfully developed, manufactured and marketed, diabetic patients using the Delta-2 will not have to draw blood samples each time they monitor their blood glucose and if Delta-2 is priced low enough, the expense of monitoring over three to five years will be significantly lower than the cost of test strips and other disposable supplies needed for invasive glucose meters.
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. We invested approximately $987,500 in Diabecore in return for 1,470,000 shares of common stock or approximately 24% of Diabecore's stock. In May 2005, we sold our entire interest in Diabecore back to Diabecore at a price of $0.05 Canadian per share or $73,500 Canadian. After conversion, the total proceeds to the Company were $57,242. $42,355 was received on May 5, 2005 and $14,887 was received on October 6, 2005
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. 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
On May 19, 2005 we entered into consulting agreements with Jeremy Grata and Michael Pitsakis. Both Grata and Pitsakis were employees at BICO prior to November 2002 in the positions of Research Department Manager & Senior Physicist, and Manager of Product Development, respectively. Grata and Pitsakis were involved with the ongoing research and development of the Diasensor and the technical leads on several aspects of the Delta project.
Pursuant to the terms of the consulting agreement, the consultants are contracted to complete the development of the Delta-2 in return for hourly compensation and warrants to purchase 1,227,000 shares of Diasense common stock. The original consulting agreements dated May 19, 2005 provided that the warrants vest as certain milestones are achieved in the development of the prototype Delta-2 with 727,000 warrants vesting upon completion of the prototype. The consulting agreements were amended on November 11, 2005 to extend the term of the agreement to four years through May 19, 2009 and increase the number of warrants to purchase up to 4,000,000 shares of Diasense common stock. The additional 2,273,000 warrants vest upon FDA approval to market the Delta-2.
On June 14, 2005 we filed a patent application entitled "Method and Apparatus for the Non-Invasive Sensing of Glucose in a Human subject" with the U.S. Patent and Trade Office. This patent application bears Application Number 60/690,418 and was filed to protect the new invention specific to the Delta-2.
Diasense entered into a consulting agreement with Stuart D. Fine, MD. on November 14, 2005. Dr. Fine held the position of Chief Endocrinologist with Diasense in 1996 and 1997. Pursuant to the consulting agreement Dr. Fine is contracted to assist in the development of the Delta-2 in return for warrants to purchase 150,000 shares of Diasense common stock. The warrants vest as certain milestones are achieved in the development of the prototype Delta-2 with 80,000 warrants vesting upon FDA approval to market the Delta-2. We are in discussions with several individuals that may be able to provide certain expertise that could benefit our efforts to complete the Delta-2 and it is likely we will enter into at least one more consulting agreement that will entail hourly compensation and warrants to purchase Diasense common stock.
Certain components critical to the new engineering and design of the Delta-2 will be contracted to companies that specialize in those particular areas. The development of these components would require significant investment in equipment and personnel to produce internally and we believe it is cost effective to contract the development under the supervision of our consultants. With the completion of these components, we may need to hire two to four engineers to complete the prototype.
Continued development of the Delta-2 will require additional funding to pay for the development of the components and salaries for the engineers in addition to the compensation due to the consultants for their work. If we are not able to raise additional funds we will not be able to progress toward completion of the Delta-2.
Product Development
We are in development of the Diasensor Delta-2 exclusively. There are no immediate plans to begin development of any other medical devices or products.
Manufacturing
We currently have no facilities to manufacture any products. We plan to contract the manufacturing of the prototype Delta- 2 and the units needed for clinical trials. If we receive FDA approval to market the Delta-2 we will continue to contract the manufacturing until sales reach a level that would warrant consideration of investing in a manufacturing facility.
Marketing and Distribution
Without FDA approval, we are unable to begin marketing or distribution of the Diasensor.
Patents, Trademarks and Licenses
We own 14 U.S. patents which cover certain aspects of our intellectual property and technology to measure blood glucose non-invasively. The patents will expire, if all maintenance fees are paid and they are successfully revived, between 2008 and 2018. Prior to July 2004, ten of our patents expired for failure to pay maintenance fees and two more expired during 2005. Since July 2004, we have filed petitions to revive seven of the twelve patents that expired. Two of the patents are revived. We intend to file petitions to revive the remaining five patents and fully expect the U.S. Patent and Trademark Office will grant our petition to revive all of our patents but that cannot be predicted with certainty. We estimate it will cost approximately $15,000 to revive the remaining five patents and if we are unable to raise additional funding before the patents are considered abandoned we may not be able to revive them and we will lose the protection provided by the patents to certain aspects of our technology. On June 14, 2005 we filed a patent application entitled "Method and Apparatus for the Non-Invasive Sensing of Glucose in a Human Subject" with the U.S. Patent and Trade Office. This patent application bears Application Number 60/690,418 and was filed to protect the new invention specific to the Delta-2.
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 our noninvasive glucose sensor or the underlying processes relating to our noninvasive glucose sensor, to obtain licenses, or to cease certain activities.
We 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 is no guarantee that a third party will not independently develop substantially equivalent proprietary information or techniques, otherwise gain unauthorized access to, or obtain some unauthorized disclosure our trade secrets or disclose such technology.
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 that can 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. Competitive success in the medical device field is dependent upon product characteristics including performance, reliability, and design innovations. We are aware that other research groups are trying to develop noninvasive glucose sensors, 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 another company successfully develops a noninvasive glucose sensor, obtains FDA approval, and reaches the market before we do, it would have a negative affect on our efforts to generate sales and there is a significant chance that even if we receive FDA approval, our sensor will not be successful because marketing efforts will start too late. We are not aware of any other company currently producing and marketing a noninvasive sensor for the measurement of blood glucose that uses the same technology as we do.
If we are able to bring our Diasensor to the market, it will compete with existing invasive glucose meters. Although we believe that the features of our noninvasive glucose sensor, particularly its convenience and that no blood samples or disposable supplies are required, will compete favorably with existing invasive glucose sensors, we cannot 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.
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. 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, eliminate the need for blood glucose monitoring.
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. The FDA's Quality System Regulation specifies various requirements for our manufacturing processes and the way we must maintain certain records. The FDA has authority to inspect our manufacturing facilities and operations and may also audit our record keeping procedures at any time.
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 market to other countries, our products may also be subject to additional foreign regulatory approval before we can sell our devices.
Human Resources
Anthony Paterra, the CEO of Diasense as of September 30, 2005 is our only full time employee.
Financial Information About Foreign and Domestic Operations and Export Sales
Our operations are located in the United States of America.
Item 2.
Item 2. Properties
We sold our office condominium in 1999, and we leased the same space for our administrative offices. On May 19, 2005 we entered into an agreement with our landlord to terminate our lease and release any claim for unpaid rent 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. To complete the prototype of the Delta-2 we will require additional space to conduct the development and we believe such space will be available at reasonable commercial rates, however we will not be able to maintain our existing space or acquire additional space unless we can raise additional funding.
Item 3.
Item 3. Legal Proceedings
In May 1996, Diasense, 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.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
PART II
Item 5.
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 September 30, 2005, 22,980,051 shares of common stock were outstanding. No shares of preferred stock are outstanding. As of September 30, 2005, there were currently exercisable warrants outstanding to purchase 700,000 shares of our common stock at exercise prices ranging from $0.01 to $0.50. Of the 700,000 warrants outstanding, 500,000 warrants to purchase shares of our common stock at an exercise price of $0.50 will expire on April 23, 2006 and 200,000 warrants, issued in May 2005, to purchase shares of our common stock at an exercise price of $0.01 will expire on May 19, 2010.
As of September 30, 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 non- assessable.
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 September 30, 2005 there were outstanding warrants, all of which are currently exercisable, to purchase 700,000 shares of our common stock at exercise prices ranging from $0.01 to $0.50 per share and having expiration dates through May 19, 2010. The warrants were issued to our former 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 former 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.
Item 6. Selected Financial Data
The selected financial data presented herein has been derived from our audited financial statements. These financial statements have been audited by Goff Backa Alfera & Company, LLC, for the twelve-month periods ended September 30, 2005, 2004, 2003, 2002, and 2001; 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.
Item 7.
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, 2004 through September 30, 2005 is referred to as fiscal 2005.
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
Our funding for the fiscal year 2005 came from the sale of our shares of Diabecore Medical, Inc. for $57,242 and $72,000 in loans from Dominion Assets, LLC.
We had no operations 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 remaining 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.
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 have no sources of revenue, we will have to find additional funding to complete the development of our noninvasive glucose sensor, obtain FDA approval, manufacture the device and begin marketing. In prior years, we were dependent upon BICO to support our operations, but BICO stopped funding Diasense in 2002. We had no operations from November 2002 through September 2004. In April 2005 we resumed development of our noninvasive glucose sensor, the Diasensor Delta-2 with the proceeds from the sale of our stock in Diabecore and loans from Dominion Assets, LLC, our largest shareholder.
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. Beginning in 1997, we became dependent on BICO to fund our operations, but beginning in late 2001, BICO began to have difficulty raising cash, stopped funding our operations in 2002, filed bankruptcy in March 2003 and sold its interest in Diasense in May 2004. We no longer receive funding from BICO and otherwise have no affiliation with them. Because it is uncertain whether we can continue to raise additional funding, 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 $6,000,000 or if that additional financing is insufficient, we will not be able to complete the prototype of the Delta-2 and begin clinical trials.
Results of Operations
We had no revenue from operations and a one time gain of $57,242 from the sale of our stock in Diabecore in the fiscal year 2005. General and administrative expenses totaled $98,889 and accrued interest expense totaled $164,933 resulting in a net loss of $206,580 as compared to no activity during fiscal 2004.
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 some of our MicroIslet stock. Those funds were used primarily to offset the amounts we owed to 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, 2005, 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.
Item 8. Financial Statements and Supplementary Data.
Our financial statements appear on pages through.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
The Chief Executive Officer of the Company conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. There were no significant changes in internal controls over financial reporting that occurred during the year ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
PART III
Item 10.
Item 10. Directors and Executive Officers
As of September 30, 2005, our directors and executive officers were as follows:
Director Name Age Since Positions Held
Anthony Paterra 55 2003 Chief Executive Officer/Director
ANTHONY PATERRA, age 55, joined BICO in 1999 as Director of Public Affairs. He then began to consult on BICO and Diasense corporate insurance issues. In April 2003 he was appointed to our board of directors and was made CEO. On October 25, 2005 Mr. Paterra resigned as CEO of Diasense and accepted the position of Executive Vice President of Diasense. 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.
On October 25, 2005 pursuant to the terms of an agreement to convert our debt owed to Dominion Assets, LLC, Keith R. Keeling was appointed to the position of CEO and appointed to the Board of Directors.
Keith R. Keeling, age 49, has been the President and a principal of Dominion Asset Finance Corporation since 2003. Dominion Asset Finance Corporation purchased and liquidated certain assets of BICO. Since 2004, Mr. Keeling has been the Managing Member of Dominion Assets LLC. Dominion Assets, LLC purchased 11,975,000 shares of Diasense and other assets of BICO. Dominion Assets, LLC is a majority stockholder of Diasense and has made several loans to the Company to fund operations. From 1994 to 2003, Mr. Keeling was a principal and the Executive Vice President of Dynamics Commercial Funding Corporation, an equipment leasing and finance company he founded in 1994.
Item 11.
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, 2005, 2004, and 2003 of those persons who were, at September 30, 2005: (i) the Chief Executive Officer, and (ii) the other most highly compensated executive officers whose remuneration exceeded $100,000.
Anthony Paterra received $5,000 in total compensation from Diasense in fiscal 2005.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term All Other Compensation (1) Compensation ($)(2) - ------------------------------------------------------------ Name and Year Salary ($) Bonus (2)Other Awards Principal ($) ($) Warrants Position (number of shares)(#) - ------------------------------------------------------------ Anthony D. 2005 $5,000 $ 0 $ 0 0 $ 0 Paterra, CEO - ------------------------------------------------------------
(1) We do not currently have a Long-Term Incentive Plan or LTIP, and no payouts were made under any LTIP during the years 2005, 2004 or 2003. We have no retirement, pension or profit-sharing programs for the benefit of our directors, officers or other employees.
(2) We did not pay any other compensation to the named executives during Fiscal 2005, 2004, or 2003..
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 2005.
Employment Agreements. We no longer have any employment agreements.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
________________________
(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, 2005, 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, 2005. For individual computation purposes, the total number of shares of common stock outstanding as of September 30, 2005 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.
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 was to assist in the sale of Diasense assets including our patents and Diabecore stock and would have received upon funding of any such sale a fee equal to 5% of the sale proceeds. This agreement was terminated by mutual agreement in April, 2005 and no compensation was paid to Mr. Keeling pursuant to the agreement.
Employment Relationships
Anthony Paterra, who was our CEO until October 25, 2005 and is currently our Executive Vice President and a member of our board of directors, was also the CEO and chairman of the board for BICO.
Keith Keeling, who was appointed our CEO on October 25, 2005 is also the Managing Member of Dominion Assets, LLC, our largest shareholder.
Investments and Loans
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.
On October 24, 2005, Diasense entered into a Note Conversion Agreement with Dominion Assets, LLC (the "Conversion Agreement") which provides that the entire principal amount of the Note, including all accrued and unpaid interest through the date of conversion, will convert into shares of Common Stock of Diasense at a conversion price of $.04 per share (the "Conversion Shares") if Diasense raises a minimum of $3,000,000 in gross proceeds from a private offering of its equity securities on or before March 31, 2006, at a price per share of at least $.10 (the "Qualified Offering"). If the Qualified Offering takes place, Dominion will accept these Conversion Shares as full satisfaction of any and all obligations of Diasense under the Note. Assuming the Qualified Offering had already taken place and the Conversion Shares had been issued on October 1, 2005, this conversion would result in the acquisition by Dominion of 52,965,154 shares of Diasense Common Stock. In the event the Qualified Offering does not take place by March 31, 2006, the Note will remain outstanding and Diasense's assets will continue to be subject to Dominion's security interest in the Note.
PART IV
Item 14.
Item 14. Principal Accountant Fees and Services
Fees for professional services rendered by Goff Backa Alfera & Company, LLC for the audits of year end financial statements and reviews of quarterly interim financial statements were $13,000 for fiscal year 2005. There were no tax, or other fees during fiscal 2005, and there were no audit, audit related, tax, or other fees during fiscal years 2004 and 2003.
Item 15.
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
1. Financial Statements
The financial statements, together with the report thereon of the Company's independent accountants, are included in this report on the pages listed below.
(a) Financial Statements Page
Report of Independent Accountants Goff Backa Alfera & Company, LLC.
Balance Sheets as of September 30, 2005; September 30, 2004.
Statements of Operations For the Fiscal Years Ended September 30, 2005, 2004, 2003; and July 5, 1989 (inception) through September 30, 2002.
Statements of Changes in Stockholders' Equity for the period and from July 5, 1989 (inception)through September 30, 2005.
Statements of Cash Flows for the Fiscal Years Ended September 30, 2005, 2004, 2003; and July 5, 1989 (inception) through September 30, 2002.
Notes to Financial Statements for the Fiscal Year Ended September 30, 2005.
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, (7) Incorporated by reference from Exhibit with this title filed with the Company's Form 8-K filed July 29, (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 (10) Incorporated by reference from Exhibit with this title filed with the Company's Form 8-K filed May 24, (11) Incorporated by reference from Exhibit with this title filed with the Company's Form 8-K filed October 31, 2005 (12) Incorporated by reference from Exhibit with this title filed with the Company's Form 8-K filed November 16, 2005
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 28th day of December, 2005.
DIASENSE, INC.
By: /s/ Keith R.Keeling Keith R.Keeling, CEO, principal executive officer,principal accounting officer and principalfinancial 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 datesindicated.
Signature Title Date
/s/Keith R. Keeling CEO December 28, 2005 Keith R. Keeling
Goff, Backa, Alfera & Company, LLC CERTIFIED PUBLIC ACCOUNTANTS ________________________
3325 Saw Mill Run Blvd. Pittsburgh, Pa
Report of Independent Registered Public Accountants
Board of Directors Diasense, Inc.
We have audited the accompanying balance sheets of Diasense, Inc. (a development stage company) as of September 30, 2005 and 2004, 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, 2005, and for the period from July 5, 1989 (inception) through September 30, 2005. 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 Standardsof 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 financial position of Diasense, Inc. as of September 30, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2005, and for the period from July 5, 1989 (inception) through September 30, 2005, in conformity with accounting principles generally accepted in the United States of America.
The accompanying 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, 2005 and from July 5, 1989 (inception) through September 30, 2005 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 4, 2006
DIASENSE,INC. (A Development Stage Company)
Consolidated Balance Sheets
September 30, September 30, ASSETS 2005 2004 ----------- ----------- Current assets Cash $ 1,545 $ - Due from Diabecore 14,887 -
Other Assets Investment - - ----------- ---------- - - ----------- ---------- TOTAL ASSETS $ 16,432 $ - =========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities Accounts payable $ 19,479 $ 5,000 Note payable to majority shareholder 1,996,936 1,954,936 Accrued interest payable to majority shareholder 164,933 - ----------- ----------- Total current liabilities 2,181,348 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, 2005 and Sep. 30, 2004 229,801 229,801 Additional paid-in capital 44,612,895 41,509,449 Warrants 725,682 3,827,478 Deficit accumulated during the development stage(47,733,294) (47,526,714) ----------- ----------- (2,164,916) (1,959,936) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY (DEFICIENCY) $ 16,432 $ - =========== ===========
The accompanying notes are an integral part of this statement.
Diasense, Inc. (A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of this statement.
DIASENSE, INC. (A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS September 30, 2005
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 Biocontrol Technology, Inc., which later changed its name to BICO, Inc. (BICO). BICO owned approximately 52% of the stock ofDiasense 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.
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, 2005 and September 30, 2004 and September 30, 2003. 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, 2005, 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, 2005 amounted to 21,062,009.
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
Prior to July 23, 2004 certain expenses were allocated by management between Diasense, BICO and BICO's subsidiaries. These expenses were 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
In April 2005, Diasense resumed development of the Sensor but 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 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. Since the sale of BICO's interest in Diasense to Dominion Assets, LLC (Dominion) funding has been provided by $72,000 in demand loans from Dominion and from $42,355 proceeds from the sale of Diasense's interest in Diabecore.
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, 2005 and has a significant accumulated deficit as of September 30, 2005, raising substantial doubt about its ability to continue as a going concern.Since 1997, Diasense had been financially dependent upon BICO and 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. Limited funding has been provided by Dominion but it is uncertain to what extent Dominion will be able and/or willing to continue such funding.
NOTE C - GAIN ON SALE OF INVESTMENTS
In December 2002, Diasense sold the balance of its ownership in MicroIslet, Inc. (706,679) stock for an aggregate of $691,340 which was used to reduce its payable to BICO. The investment had been carried at a value of $160,460 and a gain of $530,880 was recognized on the sale.
In May 2005, the Company sold its entire interest in Diabecore back to Diabecore for a total purchase price of $57,242 ($73,500 Canadian). Diasense received $42,355 in May 2005 and the balance in October 2005.
NOTE D - 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 were $69,000 for the fiscal years ending on September 30, 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 E - 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.
During the fiscal year ended September 30, 2005, Dominion loaned Diasense an additional $72,000 to provide funding for general and administrative expenses and to resume the development of the Sensor. This amount is also payable on demand with interest accrued at a rate of 8%. Prior to September 30, 2005, $30,000 was repaid on this note payable.
NOTE F - OTHER INCOME
Diasense had no other income for the years ended September 30, 2004 or 2005.
Other income for the year ended September 30, 2003 includes $269,449 in forgiveness of debt and $15,525 of rental income. The total rental income for the year ended September 30, 2003 was from BICO and its subsidiaries for office space.
NOTE G - INCOME TAXES
As of September 30, 2005, 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 2006 through 2022. 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, 2005 and 2004:
2005 2004
Net Operating Loss $ 8,961,860 $ 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 ---------- ---------- 16,104,510 16,040,510 Valuation Allowance (16,104,510) (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:
Increase Deferred (Decrease) Tax in Valuation Benefit Allowance Net
Year Ended September 30, 2005 $ (64,000) $ 64,000 $0 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 From July 5, 1989 (inception) through September 30, 2005 $(16,104,510) $16,104,510 $0
NOTE H - RELATED PARTY 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). 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. In April 2005 this Non Circumvention and Consulting Agreement was terminated by mutual agreement.
NOTE I - STOCKHOLDERS' EQUITY
Common Stock
Diasense has had no sales of its common stock since 1997 and there is no known market for its 22,980,051 shares outstanding.
Common Stock Warrants
At September 30, 2005, Diasense has reserved 700,000 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
2006 500,000 2010 200,000 ---------- 700,000 ==========
The following is a summary of warrant transactions during fiscal years ended September 30,
In the quarter ended June 30, 2005 Diasense entered into two Independent Consulting Agreements related to its efforts to develop the Sensor. Upon execution of the agreements, each of the independent consultants received warrants to purchase up to 1,227,000 shares of the Company's common stock at an exercise price of $.01 per share. Of each 1,227,000 warrant, 100,000 warrants were immediately exerciseable with the remaining warrants vesting upon completion of various stages of the Sensor development.
There were no warrants issued or extended during the fiscal years ended September 30, 2004 and 2005.
NOTE J- 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) Sept. 30 Sept.30 Sept. 30 through September 2005 2004 2003 30,2005
Interest Paid $ 0 $ 0 $ 0 $11,725 ====== ====== ====== ====== Income Taxes Paid $ 0 $ 0 $ 0 $ 0 ====== ====== ====== ======
NOTE K - SUBSEQUENT EVENTS
Note Conversion Agreement
On October 24, 2005 Diasense entered into a Note Conversion Agreement (the "Conversion Agreement") with Dominion Assets LLC ("Dominion"), the holder of a $1,954,936 principal amount note of Diasense (the "Note"). The material terms of the Conversion Agreement are described in Item 1.01 of a Current Report on Form 8- K/A filed on October 31, 2005 and are incorporated herein by reference. On October 1, 2005, the outstanding balance of the Note, including interest, was $2,118,606.19.
Pursuant to the Conversion Agreement, the entire principal amount of the Note, including all accrued and unpaid interest through the date of conversion, will convert into shares of common stock of Diasense at a conversion price of $.04 per share (the "Conversion Shares") if Diasense raises a minimum of $3,000,000 in gross proceeds from a private offering of its equity securities on or before March 31, 2006, at a price per share of at least $.10 (the "Qualified Offering"). If the Qualified Offering takes place, Dominion will accept these Conversion Shares as full satisfaction of any and all obligations of Diasense under the Note.
Pursuant to the Conversion Agreement, the Board of Directors of Diasense appointed Keith R. Keeling as Chief Executive Officer of Diasense on October 25, 2005 and the Board of Directors appointed Keith R. Keeling as a Director of Diasense on October 25, 2005, to serve until the next annual meeting of the shareholders of Diasense or until his successor is duly elected and qualified. Mr. Keeling was appointed as a Director of Diasense in connection with the Conversion Agreement.
Since 2003, Mr. Keeling has been the President and a principal of Dominion Asset Finance Corporation. Dominion Asset Finance Corporation purchased and liquidated certain assets of BICO. Since 2004 Mr. Keeling has been the Managing Member of Dominion Assets LLC. Dominion Assets, LLC purchased 11,975,000 shares of Diasense and other assets of BICO. Dominion Assets, LLC is a majority stockholder of Diasense and has made several loans to the Company to fund operations. From 1994 to 2003, Mr. Keeling was a principal and the Executive Vice President of Dynamics Commercial Funding Corporation, an equipment leasing and finance company he founded in 1994.
In addition, pursuant to the Conversion Agreement Diasense agreed to take all corporate action necessary to amend its Articles of Incorporation to increase the number of shares of authorized common stock so that there is a sufficient number of authorized common stock available for the issuance of the Conversion Shares in accordance with the terms of the Conversion Agreement and to take all corporate action necessary, as soon as practicable in a manner consistent with any required regulatory filings, to appoint two nominees of Dominion to the Diasense Board of Directors. These appointments to the Diasense Board of Directors will be deemed to be effective when all required regulatory filings have been made.
Pursuant to the Conversion Agreement, if a Qualified Offering takes place the Note will automatically convert and Diasense will issue the Conversion Shares to Dominion and the Note will be canceled. Assuming the Qualified Offering had already taken place and the Conversion Shares had been issued on October 1, 2005, this conversion would result in the acquisition by Dominion of 52,965,154 shares of Diasense common stock. In the event the Qualified Offering does not take place by March 31, 2006, the Note will remain outstanding and Diasense's assets will continue to be subject to Dominion's security interest in the Note. In addition, Dominion owns 11,975,000 shares of Common Stock acquired in a previous acquisition. In the aggregate, Dominion may be deemed to beneficially own 64,940,154 shares of Common Stock, representing 85.5% of the outstanding Common Stock.
If a Qualified Offering takes place, the issuance of the Conversion Shares as described above will be exempt from the registration requirements under the Securities Act of 1933 pursuant to Sections 4(2) and 4(6) thereof.
Departure of Principal Officer and Director; Appointment of Principal Officers and Director.
On October 25, 2005, Anthony Paterra, Director and Chief Executive Officer of Diasense, voluntarily resigned as Chief Executive Officer.
On October 25, 2005, the Board of Directors appointed Keith R. Keeling, age 49, as Chief Executive Officer of Diasense. Mr. Keeling was appointed as Chief Executive Officer of Diasense in connection with the Conversion Agreement.
On October 25, 2005, the Board of Directors appointed Keith R. Keeling as a Director of Diasense, to serve until the next annual meeting of the shareholders of Diasense or until his successor is duly elected and qualified. Mr. Keeling was appointed as a Director of Diasense in connection with the Conversion Agreement.
On October 25, 2005, Anthony Paterra, Director of Diasense, voluntarily resigned from Diasense's Board of Directors. There was no disagreement between Mr. Paterra and Diasense regarding any matter relating to Diasense's operations, policies or practices.
On October 25, 2005, the Board of Directors appointed Anthony Paterra, age 55, as Executive Vice President of Diasense.
Mr. Paterra joined BICO Inc. in 1999 as Director of Public Affairs and also assisted with corporate insurance issues for BICO and Diasense. In May 2003 he was appointed to the Diasense Board of Directors and was made Chief Executive Officer. He also served as a director and Chief Executive Officer of BICO, Inc. until November 8, 2004. Prior to joining the Company, he worked as an Insurance Agent.
On November 10, 2005, the Diasense Board of Directors appointed Steven L. McDonald as Secretary of Diasense. Mr. McDonald is a principal of Dominion.
Entry into a Material Definitive Agreement
Amendments to Existing Independent Consultant Agreements:
(a) On November 11, 2005, Diasense, Inc. ("Diasense" or the "Company") and Jeremy Grata amended the independent consultant agreement into which they had entered on May 19, 2005 (the "Grata Consulting Agreement"). The material terms of the original Grata Consulting Agreement are described in Item 1.01 of a Current Report on Form 8-K filed with the Securities and Exchange Commission (the "SEC") on May 24, 2005, and are incorporated herein by reference. The Grata Consulting Agreement has been amended as follows:
(i) The initial term of the Grata Consulting Agreement has been extended two additional years and will now expire on May 19, 2009. After the expiration date, the agreement may be extended on a month to month basis upon written agreement of Diasense and Mr. Grata.
(ii) The five-year warrant certificate that the Company had issued to Mr. Grata as consideration under the Grata Consulting Agreement has been amended and restated and reissued as of November 11, 2005. The amended and restated warrant certificate grants Mr. Grata the right to acquire an additional 2,773,000 shares (4,000,000 shares in total) of the common stock of Diasense prior to the expiration date under the original warrant certificate granted to him (May 19, 2010). Descriptions of the material terms of the aforementioned warrant (including the vesting provisions thereof) are set forth in Item 3.02 of a Current Report on Form 8-K filed on November 16, 2005, which descriptions are incorporated by reference.
(b) On November 11, 2005, Diasense and Michael Pitsakis amended the independent consultant agreement into which they had entered on May 19, 2005 (the "Pitsakis Consulting Agreement"). The material terms of the original Pitsakis Consulting Agreement are described in Item 1.01 of a Current Report on Form 8-K filed with the SEC on May 24, 2005, and are incorporated herein by reference. The Pitsakis Consulting Agreement has been amended as follows:
(i) The initial term of the Pitsakis Consulting Agreement has been extended two additional years and will now expire on May 19, 2009. After the expiration date, the agreement may be extended on a month to month basis upon written agreement of Diasense and Mr. Pitsakis.
(ii) The five-year warrant certificate that the Company had issued to Mr. Pitsakis as consideration under the Pitsakis Consulting Agreement has been amended and restated and reissued as of November 11, 2005. The amended and restated warrant certificate grants Mr. Pitsakis the right to acquire an additional 2,773,000 shares (4,000,000 shares in total) of the common stock of Diasense prior to the expiration date under the original warrant certificate granted to him (May 19, 2010). Descriptions of the material terms of the aforementioned warrant (including the vesting provisions thereof) are set forth in Item 3.02 of a Current Report on Form 8-K filed November 16, 2005, which descriptions are incorporated by reference in this Item 1.01.
Entry into New Independent Consultant Agreement:
On November 14, 2005, Diasense entered into an independent consultant agreement with Dr. Stuart A. Fine (the "Fine Consulting Agreement"). Pursuant to the Fine Consulting Agreement, Dr. Fine will perform various consulting services for the Company in connection with the development of the Company's non-invasive glucose sensor intellectual property, including: (i) advising the Company on medical issues related to the Diasensor non-invasive glucose sensor; (ii) assisting the Company in its efforts to sell or license its intellectual property by providing technical expertise as required to interested parties; and (iii) assisting the Company in its efforts to complete the development of the next generation of the Diasensor. Dr. Fine shall not receive any monetary compensation or additional benefits (including health and welfare benefits) under the Fine Consulting Agreement and has instead received a stock purchase warrant certificate to purchase up to 150,000 shares of the Company's common stock at an exercise price of $0.10 per share, exercisable for a period of ten (10) years. Descriptions of the material terms of the aforementioned warrant certificate are set forth in Item 3.02 (subparagraph (d) thereof) of a Current Report on Form 8-K filed November 16, 2005, which descriptions are incorporated by reference in this Item 1.01. The initial term of the Fine Consulting Agreement expires on November 14, 2008, and may be extended on a month to month basis upon written agreement of the Company and Dr. Fine. The agreement may be terminated by the Company or Dr. Fine at any time upon fifteen (15) days written notice. The Fine Consulting Agreement also imposes (A) customary protections regarding the Company's proprietary rights in, and assigns Dr. Fine's rights with respect to, any work products or materials with which Dr. Fine will work pursuant to his duties under the agreement, (B) confidentiality obligations on the part of Dr. Fine relating to the protection of the Company's proprietary and confidential information and (C) customary non-competition and non-solicitation restrictions upon Dr. Fine that extend for a period of twelve (12) months past the termination of the agreement.
Unregistered Sales of Equity Securities.
(a) On November 11, 2005, in conjunction with the amendment of the Grata Consulting Agreement (as described in Item 1.01 of a Current Report on Form 8-K filed November 16, 2005 and incorporated herein by reference) and as consideration paid by the Company thereunder, Diasense issued to Jeremy Grata an amended and restated warrant certificate, representing Mr. Grata's right to acquire an additional 2,773,000 shares (4,000,000 shares in total) of the Company's common stock. The warrants represented by the amended and restated certificate have an exercise price of $0.01 per share and expire on May 19, 2010. The warrants vest (and become exercisable) according to the following schedule:
(i) 100,000 warrants are exercisable immediately on or after the issuance date;
(ii) 150,000 warrants and an additional 250,000 warrants will be exercisable at such times as phases 1 and 2, respectively, of the development of the non-invasive glucose sensor by the Company are completed, provided that Mr. Grata is providing services to the Company under the Grata Consulting Agreement at such time;
(iii) 727,000 warrants will be exercisable at such time as a working prototype of the non-invasive glucose sensor has been completed and is functional, provided that Mr. Grata is providing services to the Company under the Consulting Agreement at such time; and
(iv) 2,773,000 warrants will be exercisable at such time that the non-invasive glucose sensor is approved by the U.S. Food and Drug Administration (the "FDA") or other regulatory body, provided that Mr. Grata is providing services to the Company under the Consulting Agreement at such time.
In addition, all warrants represented by the certificate granted to Mr. Grata will vest immediately upon either (x) a change of control of Diasense or (y) the sale or license of the Company's non-invasive glucose sensor intellectual property.
(b) On November 11, 2005, in conjunction with the amendment of the Pitsakis Consulting Agreement (as described in Item 1.01 of a Current Report on Form 8-K filed November 16, 2005 and incorporated herein by reference) and as consideration paid by the Company thereunder, Diasense issued to Michael Pitsakis an amended and restated warrant certificate, representing Mr. Pitsakis' right to acquire an additional 2,773,000 shares (4,000,000 shares in total) of the Company's common stock. The warrants represented by the amended and restated certificate have an exercise price of $0.01 per share and expire on May 19, 2010. The warrants vest (and become exercisable) according to the following schedule:
(i) 100,000 warrants are exercisable immediately on or after the issuance date;
(ii) 150,000 warrants and an additional 250,000 warrants will be exercisable at such times as phases 1 and 2, respectively, of the development of the non-invasive glucose sensor by the Company are completed, provided that Mr. Pitsakis is providing services to the Company under the Pitsakis Consulting Agreement at such time;
(iii) 727,000 warrants will be exercisable at such time as a working prototype of the non-invasive glucose sensor has been completed and is functional, provided that Mr. Pitsakis is providing services to the Company under the Consulting Agreement at such time; and
(iv) 2,773,000 warrants will be exercisable at such time that the non-invasive glucose sensor is approved by the FDA or other regulatory body, provided that Mr. Pitsakis is providing services to the Company under the Consulting Agreement at such time.
In addition, all warrants represented by the certificate granted to Mr. Pitsakis will vest and become exercisable immediately upon either (x) a change of control of Diasense or (y) the sale or license of the Company's non-invasive glucose sensor intellectual property.
(c) On November 11, 2005, Diasense issued to Anthony Paterra a warrant certificate representing Mr. Paterra's right to purchase 3,250,000 shares of the Company's common stock. The certificate was issued in conjunction with, and as part of the consideration for, Mr. Paterra's acceptance of employment with Diasense beginning October 25, 2005. The warrants represented thereby have an expiration date of November 11, 2010 and an exercise price of $0.01 per share. The warrants vest (and become exercisable) according to the following schedule:
(i) 1,000,000 warrants are exercisable immediately on or after the issuance date; and
(ii) an additional 93,750 warrants will become exercisable on the first day of each month for twenty-four (24) consecutive months beginning December 1, 2005 and ending November 1, 2007, provided that Mr. Paterra is employed by the Company during such period.
In addition, all warrants represented by the certificate granted to Mr. Paterra will vest and become exercisable immediately upon either (x) a change of control of Diasense or (y) the sale or license of the Company's non-invasive glucose sensor intellectual property.
(d) On November 14, 2005, in conjunction with the Company's entry into an Independent Consulting Agreement with Dr. Stuart A. Fine (as described in Item 1.01 of a Current Report on Form 8-K file November 16, 2005 and incorporated herein by reference) and as consideration paid by the Company for Dr. Fine's services thereunder, the Company issued a warrant certificate to Dr. Fine, representing Dr. Fine's right to acquire 150,000 shares of the Company's common stock. The warrants represented by the certificate have an exercise price of $0.10 per share and expire on November 14, 2015. The warrants vest (and become exercisable) according to the following schedule:
(i) 35,000 warrants are exercisable immediately on or after the issuance date;
(ii) 35,000 warrants are exercisable at such time as a working prototype of the Company's non-invasive glucose sensor is complete and functional; and
(iii) 80,000 Warrants are exercisable at such time as the Diasensor non-invasive glucose sensor is approved by the FDA.
In addition, all warrants represented by the certificate granted to Dr. Fine will vest and become exercisable immediately upon either (x) a change of control of Diasense or (y) the sale or license of the Company's non-invasive glucose sensor intellectual property.
(e) On November 15, 2005, the Company issued 6% secured convertible notes ("Convertible Notes") in principal amounts of $25,000 to each of St. Claire Capital Management and Lisa A. Paterra (each, a "Holder"), in consideration of the loans of equal amount made to the Company by each such Holder as of such date. Each of the Convertible Notes issued on November 15, 2005 is due October 31, 2010 (the "Maturity Date"), and will accrue interest at a rate of 6% per annum. Each Convertible Note is secured by all assets of the Company and ranks pari passu in such security interest with (A) each of the other Convertible Notes that may be issued by the Company from time to time and (B) the demand note dated July 23, 2004 issued by the Company to BICO, Inc. and assigned to Dominion Assets, LLC. Each Convertible Note is convertible in whole (not in part) into common stock of the Company at a conversion price of $0.10 per share under the following circumstances:
(i) Optional Conversion: The Convertible Note is convertible at the Holder's option upon either (A) the receipt by the Holder of a notice of prepayment of the principal of the Convertible Note by the Company, or (B) in the event all outstanding principal and accrued interest due and owing on the Convertible Note is not paid in full as of the Maturity Date.
(ii) Mandatory Conversion: The Convertible Note, including all accrued and unpaid interest thereon, must be converted by the Holder if the Company raises a minimum of $3,000,000 in gross proceeds from the private offering and sale of its equity securities on or before March 31, 2006 at a price per share of at least $0.10.
The issuances of (A) the warrant certificates to each of Mr. Grata, Mr. Pitsakis, Mr. Paterra and Dr. Fine, (B) the Convertible Notes to the Holders and (C) the shares of Diasense's common stock that may be issued upon conversion of the warrant certificates and/or the Convertible Notes are each exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Sections 4(2) and 4(6) thereof.