================================================================================
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: MARCH 31, 1998
--------------
( ) 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 06-1339248
- --------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer ID #)
of incorporation or organization)
49 LEAVENWORTH 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___ NO___
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: MAY 10, 1998
------------
COMMON STOCK: 2,962,640
================================================================================
<PAGE>
<TABLE>
<CAPTION>
DIASYS CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
March 31 June 30
1998 1997
---------- ----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and equivalents $1,015,216(2) $1,123,486
Accounts Receivable, less allowance for doubtful accounts
of $19,000 at 3/31/98 and $345,031 at 6/30/97 169,513 197,763
Inventories 490,884 366,106
Prepaid expenses and other assets 20,303 19,353
---------- ----------
Total Current Assets 1,695,916 1,706,708
---------- ----------
Equipment, Furniture and Fixtures less accumulated depreciation 87,330 79,866
Patent, less accumulated amortization 61,632 72,914
Deferred Offering Cost 43,654 14,003
---------- ----------
TOTAL ASSETS $1,888,532(2) $1,873,491
========== ==========
LIABILITIES AND STOCKHOLDER EQUITY
Current Liabilities
Accounts Payable 82,509 124,910
Accrued Expenses 25,078 388
---------- ----------
Total Current Liabilities 107,587 125,298
---------- ----------
Stockholder's Equity
Common Stock $.001 par value: Authorized 10,000,000,
issued 2,655,750 at 3/31/98 and 2,364,000 at 6/30/97 2,656 2,364
Additional Paid in Capital 7,287,307 5,802,036
Deficit Accumulated during the development stage (5,509,018) (4,056,207)
---------- ----------
Total Stockholder's Equity 1,780,945 1,748,193
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $1,888,532 $1,873,491
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENT OF OPERATIONS
(Unaudited)
March 27,
Nine Nine Three Three 1992 date of
months months months months inception
ended ended ended ended through
March 31 March 31 March 31 March 31 March 31
1998 1997 1998 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales of workstations and
Related supplies 318,724 705,331 98,838 489,819 1,568,111
Rental/Lease Revenue 17,328 20,713 4,315 10,938 43,633
--------- --------- --------- --------- ---------
Net sales 336,052 726,044 103,153 500,757 1,611,744
Cost of Goods Sold 99,310 164,418 30,070 96,380 524,880
--------- --------- --------- --------- ---------
Gross Profit 236,742 561,626 73,083 404,377 1,086,864
% of Gross Profit 70.45% 77.35% 70.85% 80.75% 67.43%
OPERATING EXPENSES
Selling 700,544 674,013 221,685 200,648 2,759,627
General & Administrative. 333,693 352,267 86,330 103,422 1,966,447
Investment banking advisory
services 397,500 345,000 75,000 172,500 915,000
Research/Development 284,437 243,805 63,427 93,762 1,334,608
--------- --------- --------- --------- ---------
1,716,174 1,615,085 446,442 570,332 6,975,682
--------- --------- --------- --------- ---------
Income(Loss)
from operations (1,479,432) (1,053,459) (373,359) (165,955) (5,888,818)
Interest expense to stockholders
and related party 0 (1,885) 0 0 (4,500)
Interest income 26,621 78,575 10,628 23,680 384,300
--------- --------- --------- --------- ---------
Net Income (Loss) (1,452,811) (976,769) (362,731) (142,275) (5,509,018)
========== ========= ========= ========= =========
Weighted average number of
outstanding common shares 2,655,750 2,364,000 2,655,750 2,364,000
========== ========= ========= =========
Net Loss per Common share:
Basic and diluted ($0.55) ($0.41) ($0.14) ( $ 0.06)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(Unaudited)
For the For the
nine months nine months
Ended Ended
March 31 March 31
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($1,452,811) ($976,769)
Adjustments to reconcile net loss to net cash flows from
operating activities
Investment Banking Advisory Services 397,500 345,000
Amortization of patents 18,950 16,600
Depreciation of equipment, furniture & fixtures 12,626 9,000
Changes in operating assets and liabilities
Accounts Receivable 28,250 (469,995)
Inventory (124,778) (74,517)
Prepaid expenses and other current assets (950) (11,404)
Accounts payable and accrued expenses (17,711) (7,778)
---------- ----------
Net cash flows from operating activities (1,138,924) (1,169,683)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (20,090) (34,299)
Cost of Patents (7,668) 0
---------- ----------
Net Cash flows from investing activities (27,758) 0
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Offering Costs (29,651) 0
Net Proceed from exercise of warrants 1,088,063 0
---------- ----------
Net Cash flows from financing 1,058,412 0
---------- ----------
NET CHANGE IN CASH AND EQUIVALENTS (108,270) (1,204,162)
CASH AND EQUIVALENTS-BEG. OF PERIOD 1,123,486 2,772,468
---------- ----------
CASH AND EQUIVALENTS-END OF PERIOD $1,015,216 $1,568,306
========== ==========
SUPPLEMENTAL CASH FLOW ACTIVITIES
Interest paid $0 $1,885
Income taxes paid $0 $0
NON CASH FINANCING ACTIVITIES
Issuance of common stock for investment
Banking Advisory Services $300,000 $345,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DIASYS CORPORATION
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Deficit
Accumulated
Common Stock During the
-------------------------- Paid-in Development
Shares Par Value Capital Stage
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE JUNE 30, 1995 2,240,000 $2,240 $5,209,660 $(1,012,606)
YEAR ENDED JUNE 30, 1996:
Net Loss -- -- -- (1,039,026)
--------- ------ ---------- -----------
BALANCE, JUNE 30, 1996 2,240,000 2,240 5,209,660 (2,051,632)
YEAR ENDED JUNE 30, 1997:
Issuance of common stock for Investment Banking
Advisory Services at $5.75 per share, 120,000
shares issued 120,000 120 517,380 --
Exercise of 4,000 warrants at $7.00 per share 4,000 4 27,996 --
Issuance of common stock for directors
services rendered -- -- 47,000
Net Loss -- -- -- (2,004,575)
--------- ------ ---------- -----------
BALANCE JUNE 30, 1997 2,364,000 $2,364 $5,802,036 $(4,056,207)
========= ====== ========== ===========
YEAR ENDED JUNE 30, 1998:
Issuance of common stock for Investment Banking
Advisory Services at $5.75 per share, 120,000
shares issued -- -- 172,500 --
Issuance of common stock for Investment Banking
Advisory Services at $6.00 per share, 50,000
shares issued 50,000 50 224,950 --
Exercise of 250 warrants at $5.25 per share 250 1,312 --
Exercise of 241,500 warrants at $4.50 per share 241,500 242 1,086,509 --
Net Loss -- -- -- (1,452,811)
--------- ------ ---------- -----------
BALANCE MARCH 31, 1998 2,655,750 $2,656 $7,287,307 $(5,509,018)
========= ====== ========== ===========
</TABLE>
<PAGE>
DIASYS CORPORATION
(A Developmental Stage Company)
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of the Business and Basis of the Presentation:
Nature of the Report: The balance sheet for the end of the preceding fiscal year
has been derived from the Company's last audited balance sheet 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.
Certain information and footnote disclosure normally included in financials
prepared in accordance with generally accepted accounting principles have been
omitted. The condensed financial statements should be read in conjunction with
the financial statements and notes thereto included in the company's annual
report to shareholders for the year ended June 30, 1997.
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. On April 10, 1998, the Company received proceeds of $1,381,005 from the
exercise of 306,890 of its publicly traded Redeemable Common Share Purchase
Warrants. Any Redeemable Warrants unexercised by April 10, 1998 expired under
the terms of the warrant.
Note 3. The Company has filed a number of actions in arbitration against
Intelligent Medical Imaging Inc.(NASD:IMII) pursuant to a certain product
integration agreement made with the parties effective November 1, 1996 (See:
Legal Proceedings below).
<PAGE>
PART I
DiaSys Corporation (the "Company") was organized in 1992 in the State of
Connecticut and effected a statutory merger into a Delaware Corporation of the
same name in 1993. The Company's first product family is the "R/S" series
workstations used to automate and standardize routine urine sediment analysis
conducted in hospitals, private clinics and physician group practices. The "R/S"
series has three workstations products, each serving distinct market segments.
In addition to urinalysis, the Company manufactures workstations which automate,
standardize and reduce the cost of microscopic analysis of fecal concentrates.
The target market for the "FE" series of products for fecal concentrates and the
"R/S" series of urine sediment workstations are substantially the same. The
Company expects to announce additional workstation products designed to automate
and standardize the testing of most human and some non-human fluids.
The Company is in its developmental stage and since its inception on March 27,
1992 has engaged in organizational activities, development of several
proprietary products, and establishment of sales and distribution channels. As
planned, the Company has operated at a loss since its inception.
In January of 1995, the Company completed its initial public offering
("Offering) of 1,000,000 shares of its Common Stock, par value $.001 ("Common
Shares") and 500,000 Common Stock Purchase warrants, each exercisable at a fixed
price into one Common Share ("Warrants"). The Company received net proceeds
after expenses of $3,961,179 from the Offering. In addition, on February 2,
1995, the Company's underwriter exercised its option to purchase 130,000
additional Common Shares and 70,000 Warrants from the Company pursuant to an
over-allotment option granted to the underwriter as part of the Offering. The
Company received an additional $561,425 in net proceeds from the exercise.
Accordingly, the Company realized $5,735,500 in proceeds from its Offering with
net proceeds after expenses of $4,522,604.
On July 24, 1997 the Company filed a post effective amendment consisting of
566,000 shares of Common Stock, par value $.001 (the "Common Stock"), issuable
upon the exercise of 566,000 Redeemable Common Share Purchase Warrants, (the
"Redeemable Warrants"). The Redeemable Warrants were issued in connection with
the Company's initial public offering in January 1995 and subsequently amended
as to the expiration date and exercise price. Each Redeemable Warrant as amended
entitles the registered holder thereof to purchase one share of Common Stock at
a price of $4.50 per share, subject to adjustment in certain circumstances. Any
Redeemable Warrant unexercised as of April 10, 1998 expired. As of April 10,
1998, 552,640 Redeemable Warrants were exercised. Accordingly, the Company
received $2,497,068 in proceeds from the exercise of such Warrants.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT'S
OF OPERATION:
OVERVIEW:
DiaSys Corporation ("the Company") was organized in 1992 in the State of
Connecticut and effected a statutory merger into a Delaware Corporation of the
same name in 1993. Since inception, the Company has engaged primarily in
organizational activities and implementing its strategic product development and
distribution plan.
PRODUCT STRATEGY:
The Company's product strategy is to develop workstation products and systems
that improve accuracy and reduce the costs to perform routine medical testing
procedures.
"R/S" SERIES: The Company's first family of products is the "R/S" series of
urine sediment workstations. These workstations increase the accuracy,
productivity and safety of the numerous laboratories which routinely analyze
urine sediment. The "R/S" family is comprised of three models: The R/S 1000
serves the needs of laboratories conducting fewer than 20 urine tests at a time
such as doctor office laboratories, out patient clinics, and "stat" labs where
accuracy, standardization and quick turnaround are of utmost importance. The
R/S 2000 serves mid-sized laboratories such as general hospitals. The R/S 2003
accommodates high volume laboratories such as clinical reference labs.
<PAGE>
Users of the "R/S" series workstations include hospital laboratories performing
as few as 10 urine tests per day and clinical laboratory chains performing in
excess of 10,000 urine tests per night. The "R/S" series workstations have also
been the subject of numerous favorable evaluations and publications including
the Journal of Laboratory Medicine, American Clinical Laboratory magazine,
European Clinical Laboratory magazine, and College Of American Pathology Today.
The "R/S" series workstations are the preferred practice for major laboratory
networks such as SmithKline Beecham, and was recently profiled in 1997 Spinoff,
the annual report of technology published by the National Aeronautical And Space
Administration (NASA).
The Company has also entered into a strategic cooperation agreement regarding
the promotion and sale of its "R/S" series workstations with and by Bayer
Corporation in the United States and with and by Bayer Incorporated in Canada
(See: STRATEGIC RELATIONSHIPS below).
"FE" SERIES: The Company's fourth workstation product, the FE-2, is the first of
a new family of products designed by the Company for use in microbiology. More
specifically, the FE-2 is a counter top instrument which automates and reduces
the cost of microscopic analysis of fecal concentrates. Microscopic analysis of
feces is performed by thousands of hospital, public health and private
commercial laboratories world wide in order to detect the presence of ova
(eggs), cysts, and parasites in the lower intestinal tract of humans and
animals. The presence of such organisms is critical to the proper care of the
patient. The test is non-invasive, can be performed on an out-patient basis, and
quickly provides confirmatory results.
The FE-2 increases the level of safety and precision by automating the
aspiration, resuspension, staining or diluting, transfer, presentation and
disposal of fecal concentrates. It also eliminates the need and cost of
disposable pipettes, microscope slides, and cover slips. The FE-2 reduces
analysis time and increases accuracy by establishing strict physical parameters
of the viewing area. Moreover, since the fecal concentrate is contained in and
manipulated through a sealed system, the technologist is no longer exposed to
prolonged inhalation of the noxious nature of the fecal material.
ADDITIONAL PRODUCT DEVELOPMENT: The Company is aggressively developing
several additional workstation products for its current markets and for
additional market applications.
SALES PLAN:
NORTH AMERICA: The Company sells and services its workstation-products
through its headquarter offices in Waterbury, CT and eight (8) regional sales
offices located throughout the United States and Canada. Each sales office is
staffed by a manager and each manager is responsible for coordinating sales
efforts with the dealers and independent sales representatives in and for the
region. The regional sales offices are supported by a manager of marketing
information systems, a director of strategic accounts, a customer service
technician and a vice president of sales and marketing, each located at the
Company's headquarter office.
Each sales manager earns a base salary and an incentive bonus based upon
achievement of a quarterly and annual sales quota.
Sales in North America are facilitated by a series of marketing programs which
include telemarketing, direct mail campaigns, advertising in key trade journals,
participation in technical workshops, and exhibitions at national trade shows.
INTERNATIONAL: The Company is commencing distribution operations in Europe,
South America, Central America, China and parts of Pacific-Asia. The Company has
appointed a country manager in England and another in Japan to assist with and
oversee European and Pacific-Asian operations, respectively. Neither country
manager is an employee of the Company and each is compensated on a percentage of
territorial sales only.
<PAGE>
The Company has installed workstations in Portugal, Spain, France,
Belgium/Luxembourg, Italy, Switzerland, Israel, Qatar, Mexico, Brazil, and
Bolivia. The Company has started to implement its distribution plan for China,
Japan, Taiwan and Singapore. In this connection, on April 17, 1998, the Company
and TWC BioSearch International announced a multi-year distribution agreement
under which TWC will sell and service DiaSys' fecal concentrate and urinalysis
workstations in China and Hong Kong. TWC, headquartered in Hong Kong is a major
supplier of biomedical reagents and instruments to the several thousand
hospitals and university medical centers in China and Hong Kong.
STRATEGIC RELATIONSHIPS:
BAYER CORPORATION: On December 29, 1997, the Company announced that it
entered into a Strategic Cooperation Agreement with the Diagnostics Division of
Bayer Corporation, the United States subsidiary of the international chemical
and health care conglomerate, Bayer AG headquartered in Germany. Under the
Cooperation Agreement, Bayer and DiaSys recommend and refer each other's
urinalysis workstations to hospital and commercial laboratory customers in the
United States. The companies also confer on account strategy and provide unified
network standardization plans through Bayer at the request of the customer. Each
company installs and services its own equipment.
BAYER INCORPORATED: On June 27, 1996 the Company entered into a strategic
cooperation agreement with Bayer Inc. of Canada. Under the agreement, Bayer's
Health Care Division and the Company jointly market their urine analysis
workstations to hospitals and clinical reference laboratories in Canada. The two
companies have also agreed to engage in joint product development if and as
mutually advisable. Bayer Inc. is the Canadian subsidiary of the health care
giant Bayer A.G. headquartered in Germany.
OTHER SIGNIFICANT CONTRACTS: The Company has established a number of
important relationships with large scale customers. These relationships include:
SMITHKLINE BEECHAM CLINICAL LABORATORIES; MID-ATLANTIC GROUP NETWORK OF SHARED
SERVICES, INC. (MAGNET); KAISER PERMENENTE, Southern California region; and,
AMERINET, INC. of St. Louis Missouri.
PROPRIETARY RIGHTS:
PATENTS: The Company has been granted two patents from the United States
Department of Commerce: one effective May 28, 1992; the other, February 28,
1995. The first patent pertains to the concept and overall function of the "R/S"
series workstation. The second patent pertains to the unique and novel features
of the optical slide assembly.
The Company was also granted patent protection in Taiwan effective September 10,
1993 and in Australia effective December 16, 1994.
On February 18, 1997, the Company announced that its technology was granted
patent protection in Austria, Belgium, Denmark, England, France, Germany,
Greece, Ireland, Italy, Luxembourg, Monaco, the Netherlands, Portugal, Spain,
Sweden, Switzerland, Liechtenstein, and Singapore.
The Company is pursuing similar patents in Japan, Canada and Brazil.
The Company has applied for patent protections for its FE-2 fecal concentrate
workstation and other novel inventions.
TRADE NAMES: The Company has four applications pending for trade names: two
in the United States, one in Europe and one in Japan. The Company was recently
granted trademark protection for the name "UriZyme" which is an enzyme-based
reagent used in the routine maintenance of the Company's workstation products.
MANUFACTURING:
The Company manufactures and tests all of its own workstation products against
drawings and other documentation devised by the Company's Engineering
Department. It is the Company's plan to promote self sufficiency and exclusive
<PAGE>
dominion over its workstation products. Management believes that it has taken
those steps necessary and appropriate to build the Company's foundation for long
term growth and viability.
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES:
The Company received proceeds of $1,086,750 and $1,381,005 from the exercise of
241,500 and 306,890 Redeemable Warrants on March 13, 1998 and April 10, 1998,
respectively (See: discussion under PART I above). As of March 31, 1998 the
Company had cash and equivalents of $1,015,216, a decrease of $108,269 from
$1,123,486 as of June 30, 1997. The decrease in cash and equivalents was
primarily due to continued expenditures for sales and marketing-related
activities and new product development.
The Company's inventory increased by $124,778 from $366,106 as of June 30, 1997
to $490,884 as of March 31, 1998 in anticipation of increased sales.
Management believes that it has sufficient funds to meet its obligations when
due for more than the next twelve months.
RESULTS OF OPERATIONS
NET REVENUE AND BACKLOG:
The Company's Net Revenue decreased by $397,604 and $389,992 for the three month
and nine month periods ended March 31, 1998 as compared to the same periods in
the previous year. The decrease in Net Revenue was caused by, what the Company
believes to be, a wrongful termination by Intelligent Medical Imaging
(NASD:IMII) of an agreement to purchase two hundred workstations, one hundred of
which were delivered to IMI prior to March 31, 1997 (See LEGAL PROCEEDINGS
below).
Management expects that Net Revenue will increase as the Company implements its
strategic cooperation plan with Bayer (See: STRATEGIC RELATIONSHIPS above) and
continues to shrug off the adverse effects of the IMI publicity (See: LEGAL
PROCEEDINGS below).
GROSS PROFIT:
The Company's gross profit and margins were essentially unchanged at 70.85% and
70.45% for the three month and nine month periods ended March 31, 1998,
respectfully. Management believes that gross margins and gross margin
percentages will continue to increase as the combined savings realized through
greater economies of scale and further success of the Company's strategic growth
plan are fully realized.
SELLING GENERAL AND ADMINISTRATIVE (SG&A):
For the three month period ended March 31, 1998, the Company's expenses
decreased from $476,570 to $383,015 over the same three month period in 1997, a
decrease of $93,555 or 19.6%. The decrease in SG&A expenses was due primarily to
the completion of the Company's obligations under a certain investment banking
relationship ("Agreement") made with Lester Morse, Esq. P.C., as assigned to WR
Consulting, Inc. ("Investment Banker"). The Agreement expires on December 31,
1998.
Under the terms of the Agreement, the Investment Banker provides the Company
with the following services and/or undertake the following tasks, as the case
may be, ("Services"):
a. Attract and maintain reputable market makers of and for the Company's
common stock and common stock purchase warrants;
<PAGE>
b. Posture and present the Company in the investment community through
means including but not limited to: (i) implementation of a national
investor relations program; (ii) assistance with format, layout,
presentation and timeliness of the Company's financial results in each
Annual Report to Shareholders, press release, proxy statement and
report on form 10-K and 10-Q; (iii) attraction of media and trade
publication coverage of the Company and/or its products; and, (iv)
arranging and managing presentation of the Company by its senior
management to strategic members of the investment community such as
brokers, stockholders, financial analysts, other investment bankers,
and institutions; and,
c. Assist the Company with implementing its strategic plan including but
not limited to: (i) design and development of merger and acquisition
(M&A) strategies; (ii) identification and introduction of M&A
candidates for such strategies; (iii) analysis of M&A proposals and
counter-proposals; (iv) development and implementation of a cash
investment and management program; (v) analysis of and advice in
relation to the Company's anticipated cash needs; and, (vi)
identification and introduction to potential joint venture and/or
trading partners.
In return for Services, the Company agreed to issue to the Investment Banker
120,000 shares of the Company's common stock of which 60,000 shares have been
issued to Morse and 60,000 shares have been issued to WR Consulting. Under
applicable accounting principles, the stock was valued at $5.75 per share and
recognized as a "non-cash" SG&A expense of $172,500 for each of the four
quarters commencing October 1, 1996 and ending September 30, 1997.
In July 1997, WR Consulting notified the Company that the contemporaneous
developments with IMI (See LEGAL PROCEEDINGS below) greatly and adversely
impacted WR's ability to adequately perform its services under a certain
investment banking agreement with the Company, and that WR would have to devote
substantially more time and resources necessary to build an environment of
higher liquidity and investor awareness. WR thereafter required 50,000
additional shares of common stock as compensation or they would opt to rescind
the transaction. In light of the damaging effect of IMI's press release(s), the
Company elected to issue the additional 50,000 shares to WR as required. The
stock was valued at $6.00 per share and recognized as an additional "non cash"
SG&A expense of $75,000 for each of the four quarters commencing July 1, 1997.
The Company is not required to issue any additional shares. The Investment
Banker is entitled to no other compensation for Services under its Agreement.
For the nine month period ended March 31, 1998, the Company's SG&A expenses of
$1,431,737 remained relatively the same as compared to $1,371,280 for the same
period of 1997. The slight increase in SG&A expense was primarily "non cash" in
nature and is a result of the accounting effect for the issuance of the
additional 50,000 shares to WR Consulting (See: "AGREEMENT" above).
Without the effect of the Agreement, SG&A expenses would have remained
essentially unchanged from $304,070 to $308,015 over the same three month period
for 1997, and from $1,026,280 to $1,034,237 over the same nine month period in
1997.
RESEARCH AND DEVELOPMENT:
For the three month period ended March 31, 1998, research and development
expenses decreased from $93,762 to $63,427 over the same three month period for
1997, a decrease of $30,335 or 33.3%. For the nine month period ended March 31,
1998, research and development expense increased from $243,805 to $284,437 over
the same nine month period for 1997, an increase of $40,632 or 16.7%.
NET (LOSS) OR GAIN:
The Company reported a net loss of (i) $362,731 for the three month period ended
March 31, 1998 compared to a net loss of $142,275 for the same period ended
March 31, 1997; and (ii) $1,452,811 for the nine month period ended March 31,
1998 compared to a net loss of $976,769 for the same period ended March 31,
1997. Management attributes the increase in net loss for the both periods to:
(i) the effect of $391,091 of revenue recognized by the Company for the
<PAGE>
periods ended March 31, 1997 but thereafter reversed (See: LEGAL PROCEEDINGS
below); and, (ii) "non cash" effect of the investment banking agreement
relationship as described in SELLING GENERAL AND ADMINISTRATIVE (SG&A) above.
Management anticipated a loss for the three and nine month period ended March
31, 1998 as part of the Company's over-all strategic business plan.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
As previously disclosed, the Company announced on November 19, 1996, that it
entered into a product integration agreement ("Agreement") with Intelligent
Medical Imaging, Inc. (NASD: IMII). Under the Agreement, IMI was to purchase 200
of the Company's workstation products by June 30, 1997 and integrate such
products into IMI's new core laboratory workstation for further resale by IMI to
its customers. On March 27, 1997 the Company completed delivery of the first 100
workstations to IMI. The remaining 100 units were pending the assignment of a
delivery date. On June 16, 1997, IMI advised the Company that it was rejecting
all workstations as non-conforming under the terms of the Agreement. On July 3,
1997 and following several communications between the parties, the Company
notified IMI that it had suspended the Agreement pending the resolution of the
outstanding disputes including any issues of conformity of goods and non-payment
for the goods delivered. On July 17, 1997, IMI notified the Company that it had
terminated the IMI agreement due to the Company's alleged breach(es) of the
Agreement.
The Company believes that it did not breach the Agreement; and has filed for
arbitration against IMI as prescribed by the Agreement. While pursuing its legal
remedies, the Company elected to write down to "0" the receivable of $391,091
owed to the Company by IMI under the Agreement and to retrieve 94 units of R/S
2003 workstations previously delivered to IMI as part of the initial 100 unit
order.
The Company believes that it will ultimately prevail in any such action against
IMI, although there can be no assurances of success and if successful no
assurances that IMI will have the ability to meet the judgment. In addition, it
is likely that IMI will pursue a counter-claim against DiaSys, the success of
which could have adverse effects on the Company's liquidity.
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
/s/ TODD M. DEMATTEO
----------------------------------
Date: May 20, 1998 Todd M. DeMatteo
President, Chief Executive Officer
/s/ MICHAEL F. PRIMINI
----------------------------------
Michael F. Primini
Vice President/Finance & Administration
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1015
<SECURITIES> 0
<RECEIVABLES> 188
<ALLOWANCES> (19)
<INVENTORY> 491
<CURRENT-ASSETS> 1696
<PP&E> 137
<DEPRECIATION> (50)
<TOTAL-ASSETS> 1,889
<CURRENT-LIABILITIES> 108
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 1,778
<TOTAL-LIABILITY-AND-EQUITY> 1,889
<SALES> 319
<TOTAL-REVENUES> 336
<CGS> 99
<TOTAL-COSTS> 1,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,453)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,453)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,453)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
