Cardima (CADMQ) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

OR

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

COMMISSION FILE NUMBER: 000-22419

CARDIMA, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3177883
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

47266 Benicia Street,

Fremont, CA  94538-7330

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (510) 354-0300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files); Yes  o No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Act. Yes  o No   x

There were 143,814,908 shares of the registrant's common stock, par value $0.001, issued and outstanding as of August 5, 2009.

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CARDIMA, INC.

TABLE OF CONTENTS

PART I.  Financial Information

Description		Page
Item 1.	Financial Statements (unaudited)	3
	Condensed Balance Sheets as of June 30, 2009 and December 31, 2008	3
	Condensed Statements of Operations for the Three and Six Months ended June 30, 2009 and 2008	4
	Condensed Statements of Cash Flows for the Six Months ended June 30, 2009 and 2008	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II.  Other Information

Description		Page
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 5.	Other Information	23
Item 6.	Exhibits	23
Signatures		24

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 PART I – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

CARDIMA, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
(unaudited)
ASSETS	June 30, 2009			December 31, 2008
Current assets:
Cash and cash equivalents	$	879		$	5,325
Accounts receivable, net of allowances for doubtful accounts of $196 and $187, as of June 30, 2009 and December 31, 2008, respectively		216			169
Short term investment		11,555			50
Inventories		2,087			1,566
Prepaid expenses		358			687
Other current assets		31			9
Total current assets		15,126			7,806
Property and equipment, net of accumulated depreciation of $3,123 and $2,988 as of June 30, 2009 and December 31, 2008, respectively		1,326			924
Other assets		61			61
TOTAL ASSETS	$	16,513		$	8,791
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	296		$	418
Accrued liabilities		791			1,477
Deferred Revenue		768			112
Loans Payable		14			6,012
Capital leases - current portion		26			25
Notes payable to related-party - current portion		-			100
Total current liabilities		1,895			8,144
Loans payable - net of current portion		34			41
Capital leases - net of current portion		32			45
TOTAL LIABILITIES		1,961			8,230
Shareholders' Equity:
Preferred stock, $0.001 par value, liquidation preference of $0.10, 10,000,000 shares authorized, 5,000,000 issued and outstanding		500			500
Common stock, $0.001 par value, 300,000,000 shares authorized, 143,814,908 and 125,134,721 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		144			125
Additional paid-in-capital		211,492			190,220
Accumulated deficit		(197,584	)		(190,284	)
Total Shareholders' Equity		14,552			561
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	16,513		$	8,791

See accompanying notes to these condensed financial statements

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CARDIMA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
	For The Three Months Ended June 30,						For The Six Months Ended June 30,
	2009			2008			2009			2008
Net sales	$	415		$	280		$	776		$	697
Cost of goods sold		465			878			1,331			1,334
Gross margin deficiency		(50	)		(598	)		(555	)		(637	)
Operating expenses:
Research and development		1,474			1,346			3,179			2,417
Selling, marketing, and general and administrative		1,537			2,262			3,574			3,528
Total operating expenses		3,011			3,608			6,753			5,945
Operating loss		(3,061	)		(4,206	)		(7,308	)		(6,582	)
Other income/(expenses):
Interest income		66			21			8			84
Other income/(expenses)		-			(3	)		1			(6	)
Total other income		66			18			9			78
Loss before income taxes		(2,995	)		(4,188	)		(7,299	)		(6,504	)
Income taxes		-			1			1			1
Net loss	$	(2,995	)	$	(4,189	)	$	(7,300	)	$	(6,505	)
Basic and diluted net loss per share	$	(0.02	)	$	(0.03	)	$	(0.05	)	$	(0.05	)
Shares used in computing basic and diluted net loss per share		143,783			121,419			137,720			118,892

See accompanying notes to these condensed financial statements

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CARDIMA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	For the Six Months Ended June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,300	)	$	(6,505	)
Adjustments to reconcile net loss to net cash used in operating activities provided by operations:
Depreciation and amortization		173			67
Non-cash stock-based compensation		1,033			567
Non-cash compensation		-			868
Excess and obsolete inventory		167			-
Allowance for doubtful accounts		9			54
Changes in operating assets and liabilities:
Accounts receivable		(56	)		(70	)
Inventories		(933	)		(450	)
Prepaid and other assets		90			(433	)
Accounts payable, accrued compensation and other liabilities		(888	)		131
Deferred revenue		656			-
Accrued interest and fees		263			-
Net cash used in operating activities		(6,786	)		(5,771	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investment		(11,505	)		-
Maturity of short-term investment		-			1,958
Purchase of property and equipment		(112	)		(354	)
Net cash provided by/(used in) investing activities		(11,617	)		1,604
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under capital leases and credit facility		(12	)		(15	)
Expense Reimbursement		-			(75	)
Payment on notes payable		(6	)		-
Payments on notes payable to related party		(100	)		(4	)
Net proceeds from sale of common stock		14,075			5,117
Net cash provided by financing activities		13,957			5,023
Change in cash and cash equivalents		(4,446	)		856
Beginning cash and cash equivalents		5,325			4,811
Ending cash and cash equivalents	$	879		$	5,667
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid for income taxes	$	1		$	1
Cash paid for interest	$	7		$	14
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Equipment acquired under capital lease arrangements	$	-		$	45
Conversion of accrued interest into common stock	$	183		$	-
Conversion of $6 million note into common stock	$	6,000		$	-
Warrants issued for loan financing	$	-		$	1,603

See accompanying notes to these condensed financial statements

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CARDIMA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)

1.   NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cardima, Inc., (“we”, “us”, “our”) was incorporated in the State of Delaware on November 12, 1992. We design, develop, manufacture and market minimally invasive, single-use, micro-catheter systems for the mapping and ablation of the two most common forms of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. We have developed the PATHFINDER®, TRACER® and VUEPORT® Series of diagnostic catheters, the NAVIPORT® Series of guiding catheters, the REVELATION® Series of ablation catheters, the Surgical Ablation System with its series of ablation probes, and the INTELLITEMP® Energy Management Device Series for RF (radiofrequency) energy management. These devices are CE marked and/or received United States FDA 510(k) clearance.  The REVELATION Series of ablation catheters with the INTELLITEMP EP Energy Management Device was developed and marketed for the treatment of atrial fibrillation (AF) with CE mark approval in Europe; is not yet commercially approved in the United States. We have licensed our micro-catheter technology for use in the treatment of electrophysiological diseases affecting areas other than the central nervous system. We sell our products worldwide through both direct sales and distribution channels, with a substantial portion of our sales to international customers.

2.   BASIS OF PRESENTATION - INTERIM FINANCIAL INFORMATION

The accompanying unaudited interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The financial statements and notes are presented as permitted on Form 10-Q and do not contain all of the information included in our annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading.

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is suggested that these condensed financial statements be read in conjunction with the December 31, 2008 audited financial statements and the accompanying notes thereto filed on our annual report on Form-10K with the SEC on March 19, 2009. While we believe the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by us later in the year. These results are not necessarily indicative of the results to be expected for the full year.

These unaudited financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes in our significant accounting policies during the six months ended June 30, 2009, compared to what was previously disclosed in our Annual Report on 10-K for the year ended December 31, 2008.

REVENUE RECOGNITION

We recognize revenue from two types of customers, end users and distributors. Revenue is recognized in accordance with Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements” when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of the product has occurred and title of products transferred at the point of shipment, payment of the product is reasonably assured and no substantive obligations to the customer remain. Revenue is presented net of discounts, allowances, and returns. Customers are not entitled to any rights of product return. Payment terms are either open trade credit or cash. We have distributors in Asia and Europe and we record as revenue the wholesale price we charge our distributors. The distributors assume the title and risk of loss at the shipping point.

We typically do not receive advance payments from our customers in connection with the sale of our products. We occasionally enter into an arrangement under which a customer agrees to purchase a large quantity of product that is to be delivered over a period of time. Depending on the size of these arrangements, we may negotiate an advance payment from these customers. Advance payments from a customer aggregating $768,000 as of June 30, 2009 is included in deferred income on our consolidated balance sheets. Revenue recognition for customer orders that include advance payments is consistent with our revenue recognition policy described above.

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INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, and have been provided for all periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the 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. Significant estimates include the fair value of stock-based compensation, the allowance for doubtful accounts inventory reserves, and valuation allowance for deferred tax assets.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ significantly from our estimates. In addition, any significant unanticipated changes in any of our assumptions could have a material adverse effect on its business, financial condition, and results of operations.

COMPREHENSIVE LOSS

Comprehensive loss consists of net loss and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net loss in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income.  We, however, do not have any components of other comprehensive loss as defined by SFAS No. 130 and therefore, for the three and six months ended June 30, 2009 and 2008, comprehensive loss is equivalent to our reported net loss.  Accordingly, a statement of comprehensive loss is not presented.

STOCK-BASED COMPENSATION

We follow Statement of Financial Accounting Standard 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. Also, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS 123(R). We adopted SFAS 123(R) using the modified prospective transition method.

Stock compensation expense recognized during the period is based on the value of share-based awards that are expected to vest during the period. Stock compensation expense recognized in our statements of operations for 2009 and 2008 includes compensation expense related to share-based awards granted prior to January 1, 2006 that vested during the current period based on grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. Stock compensation expense for the share-based awards granted subsequent to January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). As stock compensation expense recognized in the statement of operations is based on awards ultimately expected to vest, it has been adjusted for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the three and six months ended June 30, 2009 and 2008, no excess tax benefits were generated.

Our determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by our stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to; our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.

Since January 2009, we have recognized stock-based compensation expense in our statement of operations in their respective cost centers as compared to recognizing all the compensation costs in general and administrative expense prior to 2009. The table below shows the compensation costs included in the statement of operations for the three and six months ended June 30, 2009 and 2008 by line item. The 2008 statement of operations have been reclassified to reflect the below changes to conform to the current year presentation. (unaudited, in thousands):

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	Three Months Ended June 30,				Six Months Ended June 30,
	2009		2008		2009		2008
Stock-based compensation expense by caption:
Cost of goods sold	$	56	$	18	$	110	$	37
Research and development		272		218		379		306
Selling, general and administrative		257		85		544		225
Total stock-based compensation expense	$	585	$	321	$	1,033	$	568

STOCK WARRANTS ISSUED TO THIRD PARTIES

We account for stock warrants issued to third parties, including customers, in accordance with the provisions of the EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services, and EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). Under the provisions of EITF 96-18, because none of our agreements have a disincentive for nonperformance, we record a charge for the fair value of the portion of the warrants earned from the point in time when vesting of the warrants becomes probable. Final determination of fair value of the warrants occurs upon actual vesting. EITF 01-9 requires that the fair value of certain types of warrants issued to customers be recorded as a reduction of revenue to the extent of cumulative revenue recorded from that customer.  We have not issued any warrants to customers in the three and six months ended June 30, 2009 or 2008.

NET LOSS PER COMMON SHARE

Net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period.  We have excluded all warrants and stock options from the computation of basic and diluted net loss per share because all such securities are anti-dilutive for the periods presented. Excluded common stock equivalent shares included the following:

	June 30,
	2009		2008
Warrants		14,784,211		9,333,241
Stock Options		8,049,630		7,059,005
Preferred Shares, common stock equivalent		1,000,000		1,000,000
Total Warrants, Options and Preferred Shares		23,833,841		17,392,246

RECLASSIFICATIONS

Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.  The reclassifications did not impact net loss or stockholder’s equity.

4.   RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP 157-4)”, and FSP FASB 107-1 and Accounting Principles Board (APB) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (FSP 107-1), which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about the fair value of financial instruments for interim reporting periods, as well as annual reporting periods . These two staff positions relate to fair value measurements and related disclosures. The FASB also issued a third FSP relating to the accounting for impaired debt securities titled FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (FSP 115-2). These standards are effective for interim and annual periods ending after June 15, 2009. We have determined that FSP 157-4 and FSP 115-2 do not currently apply to our activities and have adopted the disclosure requirements of FSP 107-1.

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During May 2009, the FASB issued Statements of Financial Standards No. 165 (“SFAS No. 165”), “Subsequent Events”. SFAS No. 165 requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. SFAS No. 165 defines two types of subsequent events, as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively.  We adopted the provisions of SFAS 165 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140” (SFAS 166). SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We will adopt SFAS 166 in fiscal 2010 and are evaluating the impact it will have on our consolidated results.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167). The amendments include: (1) the elimination of the exemption for qualifying special purpose entities, (2) a new approach for determining who should consolidate a variable-interest entity, and (3) changes to when it is necessary to reassess who should consolidate a variable-interest entity. SFAS 167 is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. We will adopt SFAS 167 in fiscal 2010 and are evaluating the impact it will have on our consolidated results.

In June 2009, through the issuance of SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, the FASB confirmed that the FASB Accounting Standards Codification (the “Codification”) will become the single official source of authoritative US generally accepted accounting principles (“US GAAP”) (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and related literature. After the effective date of the Codification, only one level of authoritative US GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change US GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification becomes effective for interim and annual periods ending on or after September 15, 2009. We will begin to use the new Codification when referring to GAAP in our quarterly report on Form 10-Q for the fiscal quarter ending September 30, 2009. This will not have an impact on the consolidated results of our Company.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by us to have a material impact on our present or future financial statements.

5.   CASH AND CASH EQUIVALENTS

We receive payments from our customers and deposit them in federally insured financial institutions during our normal course of business.  As of June 30, 2009, we had cash and cash equivalents of $879,000.  At times we may exceed the federally insured limits.

6.   SHORT TERM INVESTMENTS

Short-term investments consist of certificates of deposit with maturities of less than a year.  As of June 30, 2009, we had short-term investments of approximately $11.6 million.

7.   INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is based on actual costs computed on a first-in, first-out basis.  Inventories consist of the following (in thousands):

	June 30, 2009			December 31, 2008
Raw Materials	$	812		$	736
Work-In-Process		486			34
Finished Goods		1,183			1,024
Reserve for obsolescence		(394	)		(228	)
	$	2,087		$	1,566

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Prior to 2009, we have included our INTELLITEMP products in inventory. In the first quarter of 2009, we have reclassified our INTELLITEMP products into capital assets as a result of a change in our sales strategy to facilitate sales of our surgical line of products. Depreciation for these capitalized assets will be included in cost of goods sold as the INTELLITEMPs are shipped to our customers. As of December 31, 2008, we had $261,000 worth of INTELLITEMPs included in finished goods inventory.

Inventories are reduced for excess and obsolete inventories. These write-downs are based on our review of inventories on hand on a quarterly basis, compared to our assumptions about future demand, market conditions and anticipated timing of the release of next generation products. If actual conditions for future demand are less favorable than those projected by us or if next generation products are released earlier than anticipated, additional inventory write-downs may be required. Obsolete products removed from gross inventory are physically scrapped.

Pursuant to SAFA No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”), which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material, or spoilage. Under some circumstances, SFAS No. 151 mandates that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. In the first six months of 2009, we have identified $4,000 of idle facility costs as certain plant operating costs as a result of an extended period of production down-time due to facilities maintenance. This was included in general and administrative expenses on our statement of operations.

8.   PROPERTY AND EQUIPMENT

Property and equipment, including equipment under capital leases, are carried at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives, generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the remaining term of the lease. Depreciation expense includes amortization of capital leases and leasehold improvements. Depreciation expense was $94,000 and $173,000 for the three and six months ended June 30, 2009, respectively, as compared to $39,000 and $67,000 for the same periods in 2008, respectively.

Property and equipment consist of the following (in thousands):

	June 30, 2009			December 31, 2008
Equipment	$	4,066		$	3,554
Leasehold improvements		383			358
		4,449			3,912
Less accumulated depreciation and amortization		(3,123	)		(2,988	)
Property and equipment, net	$	1,326		$	924

9.   RELATED PARTY TRANSACTIONS

In February 2008, we entered into a consulting agreement with Richard Gaston Associates, LLC, an entity owned by Richard Gaston who is a member of our Board of Directors.  The agreement was extended in February 2009 through February 2010.  Per the agreement, Dr. Gaston is paid a monthly fee in exchange for advisory services to our Sales and Marketing departments.  During the six months ended June 30, 2009 and 2008, total fees earned under the agreement were $48,000 and $40,000, respectively.

In November 2007, we entered into a consulting agreement with Dr. Sung Chun, who is a member of our Board of Directors. The agreement was extended in September 2008 through September 2009. Dr. Chun is paid a monthly fee in exchange for the services he provides as our Chief Medical Officer. During the six months ended June 30, 2009 and 2008, total fees earned under the agreement were $60,000 and $48,000, respectively.

10.   LOANS PAYABLE

As previously disclosed, in December 2006, a settlement agreement was reached with our former President and Chief Operating Officer, William K. Wheeler, in which we agreed to pay Mr. Wheeler $295,000 and he agreed to reimburse the Company $192,500 for a loan he received from Cardima in June 2000 and May 2001.  We have netted the notes receivable and payable in accordance with FASB Technical Bulletin 88-2.  The short-term and long-term payable balance amounted to $14,000 and $34,000, as of June 30, 2009, respectively.  The short-term and long-term payable balance amounted to $12,000 and $41,000, as of December 31, 2008, respectively.

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11.   COMMITMENTS AND CONTINGENCIES

Commitments

We lease a 29,000 square feet facility in Fremont, California under an operating lease. On May 12, 2009, we extended the lease for sixty two months from June 2009 through July 2014. Under the terms of the extension, we have one option to renew the lease for a term of five more years at the then current fair market rental for comparable space.  We also lease certain equipment under non-cancelable capital leases, which bear interest at the rate of 10% per annum. Following is a schedule of future minimum lease payments under both operating and capital leases at June 30, 2009 (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2009	$	104	$	16
2010		208		31
2011		208		18
2012		208		-
2013		208		-
2014		121		-
Total minimum lease payments	$	1,057	$	65
Less amounts representing interest		-		(7	)
Present value of net minimum lease payments	$	1,057	$	58
Short-Term	$	-	$	(26	)
Long-Term	$	-	$	32

Royalty Agreement

We have an exclusive royalty-free worldwide license to use Target Therapeutics’ technology and to make, use and sell or otherwise distribute products for the diagnosis and treatment of electrophysiological diseases in the body, other than in the central nervous system, including the brain. The exclusive license grant applied to any Target Therapeutics’ technology developed through May 1996 and will expire upon the expiration of the last of the patents relating to Target Therapeutics’ technology. We also have a royalty agreement with SurModics, Inc. for the non-exclusive use of licensed products and patents for products treated with photoreactive polyvinylpyrrolidone copolymer and non-photoreactive polyvinylpyrrolidone.

Consultant Agreement

We have entered into consulting agreements with several individuals.  The agreements are typically for a term of one year and define the scope of services to be provided by the individuals.  The method of compensation for the consultants is either cash, stock options, or a combination of both.

Contingencies

We are subject to numerous risks and uncertainties because of the nature and status of our operations and could be subject to claims and legal actions arising in the ordinary course of business. We are not currently involved in any litigation which, in our opinion, would have a material adverse effect on our business, operating results, cash flow or financial condition. However, there can be no assurance that any such proceeding will not escalate or otherwise become material to our business in the future. We maintain insurance coverage for events in amounts that we deem appropriate. We believe that uninsured losses, if any, will not be materially adverse to our financial position or results of operations.

12.   INCOME TAXES

Historically, we have incurred net operating losses, or NOLs. Because of this history of net operating losses, we do not currently believe that the future realization of the tax benefit associated with these NOL carryforwards is more likely than not; therefore, we have recorded a valuation allowance for the full amount of its net deferred tax assets.  We will continue to evaluate the likelihood that these tax benefits may be realized, and may reverse all or a portion of its valuation allowance in the future if it is determined that realization of these benefits is more likely than not.

Utilization of the NOL carry forwards to offset future taxable income and tax, respectively, may be subject to a substantial annual limitation due to ownership change limitations that may have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change, as defined by Section 382 of the Code, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period.

We have considered these factors in reaching our conclusion as to the valuation allowance for financial reporting purposes. Accordingly, no benefit has been recognized on the net loss as the realization of the net operating loss carryforward cannot be assured.

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13.CONCENTRATIONS OF RISK

To date, product sales have been direct to customers in the United States and to distributors primarily in Europe. The geographic distribution of net sales was as follows (in thousands): 

	Three Months Ended June 30,								Six Months Ended June 30,
	2009				2008				2009				2008
United States	$	295	71	%	$	196	70	%	$	596	77	%	$	462	66	%
Europe		119	29	%		84	30	%		177	23	%		234	34	%
Asia/Pacific		1	-			-	-			3	-			1	-
Total Net Sales	$	415	100	%	$	280	100	%	$	776	100	%	$	697	100	%

Our diagnostic product group, namely the PATHFINDER family of micro-catheter systems, accounted for 57% and 58% of net sales for the three and six months ended June 30, 2009, respectively, as compared to 62% and 67% for the same periods in 2008, respectively.

We purchase certain key components of our products for which there are relatively few alternative sources of supply including the hydrophilic coating for certain of our micro-catheters, from sole or limited source supplies. Establishing additional or replacement suppliers for any of the numerous components used in our products, if required, may not be accomplished quickly and could involve significant additional costs.  Any supply interruption from vendors or failure of our products would limit our ability to manufacture our products and would have a material adverse effect on our business, financial condition and results of operations.

14.   STOCK-BASED COMPENSATION

2007 Stock Option Plan

On September 14, 2007, our Board of Directors adopted the 2007 Stock Option Plan (the “2007 Stock Plan”). The 2007 Stock Plan authorizes the Board of Directors or one or more of its members to grant options to purchase shares of our Company to eligible individuals.  Eligible individuals may be employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary, and consultants who provide valuable service to us or our Parent or Subsidiary. Options to purchase Common Stock granted under the plan may be incentive stock options or non-statutory stock options as determined by the Board of Directors or its delegate. 30,000,000 shares of Common Stock were reserved for issuance over the term of the 2007 Stock Plan.

Under the plan in no event shall the option price per share be less than 85% of the fair market value of a share of Common Stock on the date of the grant. In case of incentive stock option, except options to 10% stockholders, the exercise price of the option will not be less than 100% of the fair value of the Common Stock at the grant date. Each option agreement specifies the term as to when the option is to become exercisable. Standard options vest at a rate of at least 33% of the underlying shares per year over 3 years and have a maximum term of 10 years. However, in no event shall an incentive stock option granted to a 10% stockholder under the plan shall have a maximum term in excess of more than 5 years from the date of the grant, Any optionee (as determined under Section 424 (d) of the Internal Revenue Code) who owns more than 10% of the combined voting power of all classes of outstanding stock of the Company, its Parent or Subsidiary is not eligible for the grant unless the exercise price of the option is at least 110% of the fair market value of the Common Stock on the date of the grant.  

2003 Stock Option Plan

On April 17, 2003, our Board of Directors adopted the 2003 Stock Option Plan (the “Stock Plan”). The Stock Plan authorizes the Board of Directors or one or more of its members to grant to employees, consultants and non-employee directors options to purchase Common Stock of the Company. Options granted under the Stock Plan may be incentive stock options or non-statutory stock options as determined by the Board of Directors or its delegate.

Under the 2003 Stock Option Plan, 820,000 shares of Common Stock were reserved for issuance. Under the plan, any optionee who owns more than 10% of the combined voting power of all classes of outstanding stock is not eligible for the grant of an incentive stock option unless the exercise price of the option is at least 110% of the fair market value of the Common Stock on the date of the grant.

Under the Stock Plan, except 10% stockholders, the exercise price of incentive stock option will not be less than 100% of the fair value of the Common Stock at the grant date. Each option agreement specifies the term as to when the option is to become exercisable. Standard option issuances are for grants with vesting periods of four years with six months 12.5% cliff vesting and ratable monthly vesting thereafter. However, in no event shall an incentive stock option granted under the Stock Plan be exercisable more than 10 years from the date of the grant, and in the case of 10% stockholders, no more than 5 years from the date of the grant.

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1993 Stock Option Plan

During 1993, our Board of Directors adopted the 1993 Stock Option Plan, as amended, and reserved 765,069 shares of common stock for issuance under the plan. The plan provides for both incentive and non-statutory stock options to be granted to employees, directors and consultants. Exercisability, option price, fair value and other terms are determined by the Board of Directors; however, the exercise price of each incentive stock option shall be not less than 100% of the fair market value of the stock issuable upon exercise of the option on the date the option is granted. The exercise price of each non-statutory stock option shall not be less than 85% of the fair market value of the stock subject to the option on the date the option is granted. All options granted prior to the initial public offering of shares were generally exercisable upon grant, but shares received upon exercise prior to vesting are subject to repurchase upon the stockholder’s termination of service to the Company. Subsequent to our initial public offering, only fully vested shares are exercisable. Shares purchased upon exercise of options generally vest at the rate of 12.5% after six months from the date of grant, and monthly thereafter over the following 42 months. No option shall have a maximum term in excess of ten years from the grant date and no option granted to a 10% stockholder shall have a maximum term in excess of five years from the grant date. The 1993 plan expired on June 10, 2003, and no additional grants would be made under this plan.

1997 Directors' Stock Option Plan

In March 1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan and reserved 90,000 shares of common stock for issuance. The plan provides for the grant of non-statutory stock options to non-employee directors of the Company. The 1997 plan expired in March 2007 and no additional grants would be made under this plan.

Valuation Assumptions

We estimate the forfeiture rate based on past turnover data.  The rate used in the three and six months ended June 30, 2009 and 2008 was minimal.  Forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested.

The assumptions used for the three and six months ended June 30, 2009 and 2008 and the resulting estimates of weighted-average fair value per share of options granted and shares purchased during these periods were as follows:

	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Employee stock options:
Dividend yield		0.0%		0.0%		0.0%		0.0%
Volatility factor		155.0%		163%		154.9%		163%
Risk-free interest rate		2.5%		4.05%		2.5%		4.05%
Expected term (years)		7		7		7		7
Weighted-average fair value of options granted during the periods		$1.06		$1.28		$1.15		$0.73

In estimating the expected term, we considered our historical stock option exercise experience including forfeitures, our post vesting termination pattern and the term of the options outstanding. The annual risk free rate of return was based on the U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards. We based our determination of expected volatility on our historical stock price volatility over the expected term.

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The stock based compensation expense under SFAS123R that has been reported in the statements of operations is as follow:

	Three Months ended June 30,				Six Months ended June 30,
	2009		2008		2009		2008
Stock-based compensation expense by caption:
Cost of sales	$	56	$	18	$	110	$	37
Research and development		272		218		379		306
Selling, general and administrative		257		85		544		225
Total stock-based compensation expense	$	585	$	321	$	1,033	$	568

For stock subject to graded vesting, we have utilized the “straight-line” method for allocating compensation cost by period. As of June 30, 2009, there was $4.1 million of total unrecognized compensation cost related to non-vested stock option awards which is expected to be recognized over a weighted-average period of 2.1 years.  There were approximately 289,000 and 27,000 options that became vested during the six months ended June 30, 2009 and 2008, respectively.

Since we have a full valuation allowance for our deferred tax assets, there was no impact to our cash flows related to excess tax benefits associated with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R, Share-Based Payment.

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The following is a summary of stock option activity under all plans:

		Shares Available			Options Outstanding			Average Exercise Price		Intrinsic Value
Option Plan	Status
2007	Outstanding December 31, 2008		20,618,333			9,167,222		$	0.86	$	7,034,211
	Granted		(250,000	)		250,000
	Exercised		-			(115,001	)
	Cancelled/expired		-			-
	Outstanding March 31, 2009		20,368,333			9,302,221		$	0.87	$	4,106,660
	Granted		(45,000	)		45,000
	Exercised		-			(46,668	)
	Cancelled/expired		1,381,666			(1,381,666	)
	Outstanding June 30, 2009		21,704,999			7,918,887		$	0.88	$	2,567,132
2003	Outstanding December 31, 2008		747,638			67,571		$	3.69		43,191
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		-			-
	Outstanding March 31, 2009		747,638			67,571		$	3.69	$	23,753
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		3,646			(3,646	)
	Outstanding June 30, 2009		751,284			63,925		$	3.87	$	15,024
1993	Outstanding December 31, 2008		-			41,243		$	12.03		-
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		-			-
	Outstanding March 31, 2009		-			41,243		$	12.03	$	-
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		-			(25	)
	Outstanding June 30, 2009		-			41,218		$	12.02	$	-
1997 Director's Plan	Outstanding December 31, 2008		-			25,600		$	1.02	$	21,560
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		-			-
	Outstanding March 31, 2009		-			25,600		$	1.02	$	10,400
	Granted		-			-
	Exercised		-			-
	Cancelled/expired		-			-
	Outstanding June 30, 2009		-			25,600		$	1.02	$	6,288

As of June 30, 2009, there were 2,403,201 vested and exercisable shares and 5,646,429 unvested and expected to vest shares.

During the three months ended June 30, 2009, 46,668 options to purchase shares of common stock were exercised. No options were exercised in the three months ended June 30, 2008.

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The following is a summary of information relating to stock options outstanding and exercisable by price range as of June 30, 2009:

		Options Outstanding			Options Exercisable
Option Plan	Range of exercise prices	As of June 30, 2009	Weighted avg. remaining contractual life	Weighted avg. exercise price	As of June 30, 2009	Weighted avg. remaining contractual life	Weighted avg. exercise price
2007	$0.41-$0.62	5,038,887	8.63	$0.47	2,215,580	8.68	$0.49
	$1.10-$1.62	810,000	9.13	$1.28	-	-	-
	$1.65-$1.85	2,070,000	9.39	$1.70	60,001	9.22	$1.85
	Total	7,918,887	8.88	$0.88	2,275,581	8.70	$0.52
2003	$0.55-$2.50	39,950	6.65	$0.62	37,827	6.64	$0.62
	$3.50-$12.40	23,975	5.02	$9.29	23,975	5.02	$9.29
	Total	63,925	6.04	$3.87	61,802	6.01	$3.98
1993	$3.40-$10.30	19,651	3.57	$8.95	19,651	3.57	$8.95
	$11.60-$19.40	21,567	2.57	$14.82	21,567	2.57	$14.82
	Total	41,218	3.04	$12.02	41,218	3.04	$12.02
1997 Director's	$0.50-$1.00	24,800	7.01	$0.73	23,800	7.02	$0.74
Plan	$8.40-$14.50	800	3.67	$10.10	800	3.67	$10.10
	Total	25,600	6.91	$1.02	24,600	6.91	$1.04

Non-employee Compensation

The Company accounts for options and warrants issued to non-employees under SFAS 123 and EITF 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, using the Black-Scholes option-pricing model. The value of such non-employee options and warrants are periodically re-measured over their vesting terms and the Company must recognize compensation as the option vests.  During the first six months of 2009, we reversed $164,000 of accrued stock compensation expense for an option granted in 2008 to a consultant.  The option had a performance based vesting which was not met.  During the first six months of 2009, we did not grant options to purchase shares of our common stock to non-employees.

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15.   WARRANTS

The following table summarizes warrants for the years 2009 and 2008:

	Outstanding Warrants
	Number of Warrant Shares			Exercise Price Per Warrant Share		Weighted-Average Exercise Price
Balance as of 12/31/2007		6,561,994		$	0.55 - $14.00	$	1.30
Warrant Shares Granted in 2008		2,771,247		$	0.60 - $0.65	$	0.62
Warrant Shares Cancelled  in 2008		(104,585	)	$	7.79 - $12.38	$	0.88
Warrant Shares Exercised in 2008		-			-		-
Balance as of 12/31/2008		9,228,656		$	0.55 - $4.30	$	0.88
Warrant Shares Granted		5,555,555		$	1.25	$	1.25
Warrant Shares Cancelled		-			-		-
Warrant Shares Exercised		-			-		-
Balance as of 3/31/2009		14,784,211		$	0.55 - $4.30	$	1.02
Warrant Shares Granted		-			-		-
Warrant Shares Cancelled		-			-		-
Warrant Shares Exercised		-			-		-
Balance as of 6/30/2009		14,784,211		$	0.55 - $4.30	$	1.02

 The following table summarizes information about warrants outstanding and exercisable at June 30, 2009:

Range of Exercise Price		Number of Warrants Outstanding and Exercisable		Weighted Avg. Remaining Contractual Life (Yrs.)		Weighted Avg. Exercise Price
$	4.30		757,409		0.3	$	4.30
$	0.55 - $1.25		14,026,802		4.0	$	0.84
			14,784,211		3.8	$	1.02

No warrants were exercised during the six months ended June 30, 2009 and 2008.

16.   PREFERRED SHARES

In 2007 we issued five million shares of convertible preferred stock to APIX Corporation.  APIX, at its sole discretion, may convert the five million Preferred Shares it owns into 1 million shares of our common stock.  The Series A Preferred votes together with the Common Stock and will continue to carry 28 votes for each share of Preferred Stock. APIX International is an entity that is solely owned by Robert Cheney, who is also our CEO, CFO and a Director.

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ITEM 2. Management’s Discussion and Analysis and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue”, the negative of the terms or other comparable terminology. Unless the context otherwise requires, references in this Form 10-Q to “we,” “us,” “our,” or the “Company” refer to Cardima, Inc. Forward-looking statements in this Report may also include references to anticipated sales volume and product margins, efforts aimed at establishing new or improving existing relationships with customers, other business development activities, anticipated financial performance, business prospects and similar matters. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statements. We disclaim any obligation to publicly update these statements, or disclose any difference between actual results and those reflected in these statements.

Overview

We design, develop, manufacture and market minimally invasive, single-use, micro-catheter systems for the mapping and ablation of the two most common forms of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. We have developed the PATHFINDER®, TRACER® and VUEPORT® Series of diagnostic catheters, the NAVIPORT® Series of guiding catheters, the REVELATION® Series of ablation catheters, the Surgical Ablation System with its series of ablation probes, and the INTELLITEMP® Energy Management Device Series for RF (radiofrequency) energy management. These devices are CE marked and/or received United States FDA 510(k) clearance.  The REVELATION Series of ablation catheters with the INTELLITEMP EP Energy Management Device was developed and marketed for the treatment of atrial fibrillation (AF) with CE mark approval in Europe; is not yet commercially approved in the United States. We have licensed our micro-catheter technology for use in the treatment of electrophysiological diseases affecting areas other than the central nervous system. We sell our products worldwide through both direct sales and distribution channels, with a substantial portion of our sales to international customers.

Our corporate strategy involves attaining certain key goals in the following areas:

Product Commercialization

We are committed to the commercialization of our surgical and electrophysiological products worldwide.  In order to attain this goal, we have and will continue to add key marketing resources and personnel in the US and align ourselves with sales organizations capable of representing our products in other markets. In the second quarter of 2008, we received product registration approval from the State Food and Drug Administration in China for the INTELLITEMP product.  In the third quarter of 2008, we received product registration approval in Thailand for all of our products. In the first quarter of 2009, we received CE Mark approval for our Surgical Ablation System with Stabilization Sheath. All components of our Surgical Ablation System are now approved for marketing in European countries recognizing CE Mark approval.

In the immediate term, domestically, we are focusing our efforts on the commercialization of our FDA 510K cleared Surgical Ablation System.  In the European Union, we are in the process of developing Surgical Centers of Excellence, which specialize in special procedures and programs.  Management believes that the Chinese market is promising for us as it has a large population of untreated patients, a significant body of trained electrophysiologists and cardiac surgeons, and several cardiac centers that routinely perform both EP and surgical ablations.  In the second half of 2009, subject to obtaining regulatory approval,we intend to re-enter the Japanese diagnostic market and are reviewing Japanese regulatory requirements for our surgical and EP ablation products. 

As we commercialize our products, we intend to identify key opinion leaders to become “product champions” and to certify certain leading cardiology programs as Cardima Centers of Excellence.  We intend to also continue to add leading electrophysiologists and cardiac surgeons as consultants and advisors to improve our products and the procedure designs.  We are also identifying appropriate independent distributors that will be engaged to train, support and distribute our products in key markets.

Manufacturing Capabilities

We have focused on improving our ability to manufacture, in commercial quantities, high quality reliable products and are committed to providing the best surgical and EP products possible.  This has entailed adding key individuals, improving design processes, adding test and quality control measures above those required and implementing training and support systems to ensure high levels of staff performance and product quality.  We believe we have made great strides in achieving new manufacturing goals and standards in 2009 and beyond.

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Research and Development

We continued to evaluate the present INTELLITEMP design, and have also been developing improvements for its use in cardiac electrophysiology applications, based on in vitro and in vivo testing results.  We are also in the process of developing and formalizing hardware and software specifications for this next generation Energy Management Device, and focusing resources to engage in this project launch.

We are in the process of implementing a number of product improvements to improve the quality, robustness and user-friendliness of the Surgical Ablation Probe.  Other probe improvements will be slated for the product pipeline, in answer to user needs that we are learning from the field, as our customer base increases.

Sales and Marketing

We have continued to follow our strategic sales and marketing plans as previously reported.  Also, staffing for clinical site and case support for US surgical procedures has been increased. Our redesigned Web site allows patients, doctors and investors to view a broad range of clinical and product information including company milestones that have been met.  We are continuing to bolster our resources and personnel in sales and marketing as well as customer training/support throughout 2009.

We will continue to identify higher volume surgical ablation centers whose surgeons are experienced in the techniques of ablation.  Some of these sites will become Cardima Centers of Excellence and conduct peer-to peer physician training. Our management anticipates that this strategy will aid our U.S. commercial efforts for surgical ablation, both open chest and minimally invasive, throughout 2009 and beyond.

We continue to appoint distribution partners worldwide. We have engaged distributors covering major markets in the United Kingdom, Europe, Japan, and Thailand. We anticipate strategic contracts will be in place prior to registration approvals of products in all key world markets throughout 2009. In Europe, Dot Medical and other strategic regional sales agents have been engaged to partner with us in developing centers of excellence. These centers will also serve as training sites for other surgeons in the EU.

We are in discussions with potential marketing partners for the China market to cover both electrophysiology and surgical products. We have also met with key physicians and opinion leaders in the industry to prepare for an appropriate market launch in China. Furthermore, in June 2008, we received approval from China’s State Food and Drug Administration to market the INTELLITEMP Energy Management Device in the People’s Republic of China.

We received product registration in Thailand and selected a key distribution partner to start Centers of Excellence in Thailand.  Dr. Li Poa has completed surgeon training at the Ramathibodi Hospital in Bangkok. This center will serve as a teaching institution for other surgeons. We are also working with the Thai Ministry of Health to achieve implementation of the Cardima surgical ablation procedure into their healthcare system.

In the field of electrophysiology, we are focusing on developing the next generation technologies of our probes and energy management device, with the goal of attaining an effective EP ablation procedure completed in less than 2 hours. In the meantime, we will be working with a few key European EP centers using our current system to develop procedures and protocols. We hope to receive CE Mark approval in late 2009 or early 2010. We are in the process of selecting marketing partners, training the field representatives and supporting customer centers that will develop into EP Centers of Excellence. These Centers of Excellence will also conduct peer-to peer physician training; aiding Cardima in EP sales and marketing efforts.

Results of Operations

Net Sales

	(unaudited, in thousands)
	Three months ended				Six months ended
Net sales	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008
United States	$	295	$	196	$	596	$	462
Europe		119		84		177		234
Asia/Pacific		1		-		3		1
Total net sales	$	415	$	280	$	776	$	697

Sales for the three months ended June 30, 2009 were $415,000 as compared to $280,000 for the same period in 2008.  For the six months ended June 30, 2009, net sales were $776,000 as compared to $697,000 for the same period in 2008.

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Domestic sales of $295,000 and $596,000, for the three and six months ended June 30, 2009, respectively, represents 71% and 77% of total sales.  Domestic sales of $196,000 and $462,000, for the three and six months ended June 30, 2008, respectively, represent 70% and 66% of total sales.  The slight increase in domestic sales over the same periods last year was primarily due to higher shipments of our surgical ablation products.

We had no sales to Japan during 2008 and in the first six months of 2009, as our former Japanese distributor failed to maintain the legal documentation standard required to sell our PATHFINDER products in Japan. Together with our new Japanese distributor, we have filed a “Shonin Application” to obtain the necessary regulatory approval to re-start PATHFINDER sales in the Japanese market. We anticipate resuming commercial sales in Japan in the second half of 2009.

Cost of goods sold; gross margin (deficiency)

	(unaudited, in thousands)
	Three months ended						Six months ended
	June 30, 2009			June 30, 2008			June 30, 2009			June 30, 2008
Sales	$	415		$	280		$	776		$	697
Cost of sales		465			878			1,331			1,334
Gross margin (deficiency)	$	(50	)	$	(598	)	$	(555	)	$	(637	)

Cost of goods sold for the three months ended June 30, 2009 were $465,000, or 112% of sales, as compared to $878,000, or 314% of sales for the same period in 2008. The improved cost of goods sold percentage was mainly due to cost controls, better utilization of labor and higher output of our PATHFINDER line of diagnostic catheters. Cost of goods sold for the three months ended June 30, 2009 also included $145,000 of materials scrapped during the quarter.  For the six months ended June 30, 2009, costs of goods sold were $1.3 million, or 172% of sales, as compared to $1.3 million, or 191% of sales. The improvement was mainly due to the efficiencies achieved in the second quarter of 2009, offset partially by the $145,000 of scrapped materials.

Research and Development Expenses

	(unaudited, in thousands)
	Three months ended				Six months ended
	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008
Research and development	$	1,474	$	1,346	$	3,179	$	2,417

Research and development expenses for the three months ended June 30, 2009 were $1.5 million, or 355% of sales, as compared to $1.3 million, or 481% of sales, for the same period in 2008. The increase was primarily related to higher compensation expenses of $424,000 due to headcount increase of 13 additional employees to support our new product commercialization initiative, partially offset by lower outside consulting expenses of $310,000. For the six months ended June 30, 2009, research and development expenses were $3.2 million, or 410% of sales, as compared to $2.4 million, or 347% of sales, in the same period of 2008. The higher expenses were largely attributable to increased compensation expenses of $850,000 due to increased headcount, offset in part by lower outside consulting expenses of $187,000.

Selling, Marketing, General and Administrative Expenses

	(unaudited, in thousands)
	Three months ended				Six months ended
	June 30, 2009		June 30, 2008		June 30, 2009		June 30, 2008
Selling, general and administrative	$	1,537	$	2,262	$	3,574	$	3,528

Selling, marketing, general and administrative expenses for the three months ended June 30, 2009 were $1.5 million, or 370% of sales, as compared to $2.3 million, or 808% of sales, for the same period in 2008. Selling and marketing expenses were primarily flat for the three months period in 2009 as compared to 2008. General and administrative expenses for the three months ended June 30, 2009 were lower by $831,000 as compared to the same period in 2008 due mainly to a non-cash compensation cost of $868,000, accounted for under the Black-Scholes option-pricing model, for warrants granted to APIX in consideration of their services provided in the arrangement of the funding during the second quarter of 2008 of $5.1 million from accredited investors, and payment of $80,000 to APIX to facilitate the funding arrangement.

Selling, marketing, general and administrative expenses for the six months ended June 30, 2009 were $3.6 million, or 461% of sales, as compared to $3.5 million, or 506% of sales, for the same period in 2008. Selling and marketing expenses were essentially the same for the six months period in 2009 as compared to 2008. General and administrative expenses were also flat for the six months period in 2009 as compared to 2008 with higher compensation, due to higher headcount, and consulting expenses of $596,000, and higher legal expenses of $200,000, offset partially by lower non-cash compensation cost of $868,000, which was incurred in the second quarter of 2008.

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Total other income/(expense)

Total other income for the three months ended June 30, 2009 was $66,000 as compared to an income of $18,000 for the same period in 2008 mainly due to interest income from our $11.6 million short-term investment. Total other income for the six months ended June 30, 2009 was $9,000 as compared to $78,000 for the same period in 2008 due mostly to an interest income of $109,000 from short-term investment, offset in part by $100,000 of interest expense recorded in the first quarter of 2009 on the November 2008 $6 million loan. The loan was converted to equity in February 2009.

Liquidity and Capital Resources

We had cash and cash equivalents of approximately $879,000 and $5.3 million as of June 30, 2009 and December 31, 2008, respectively. We also had $11.6 million in short-term investments as of June 30, 2009. Our working capital was $13.2 million as of June 30, 2009 as compared to a negative working capital of $338,000 as of December 31, 2008 due to a $6.0 million note payable, which was executed in November 2008 and converted to equity in February 2009.

The cash used in operating activities in the six months ended June 30, 2009 was $6.8 million, which reflected primarily a net loss of $7.3 million and non-cash charges of $1.2 million consisting primarily of depreciation expense and stock-based compensation, a decrease in accounts payable and accrued liabilities of $625,000 due to the timing of payments and an increase in inventory of $766,000, offset in part by deferred revenue of $656,000. The cash used in operating activities in the six months ended June 30, 2008 was $5.8 million, which was essentially due to a net loss of $6.5 million, non-cash charges of $634,000 consisting primarily of depreciation expense and stock-based compensation, an increase in inventory of $450,000 and prepaid expenses of $433,000, offset in part by the recognition of a non-cash compensation expense of $868,000 resulted from the issuance of warrants for the sales of our common stock in May 2008.

Net cash used in investing activities of $11.6 million in the six months ended June 30, 2009 was primarily for the purchase of short-term investments of $11.5 million consisting of certificates of deposit and our investment in capital expenditures of $113,000. This compares to capital expenditures of $376,000 in the same period of 2008 and a maturity of short-term investment of $2 million, which was liquidated to support our operating needs. We continue to invest in capital expenditures mainly to acquire lab equipment, computer hardware and software to support the growth of our business.

Net cash provided by financing activities was $14.0 million in the six months ended June 30, 2009 as compared to $5.0 million in the same period in 2008. We have funded our operations primarily with proceeds from issuances of common stock, debt financing, and lease financing. In November 2008, we obtained approximately $6 million in debt financing. In February 2009, we obtained an additional $14 million in equity capital financing. The note holder of the $6 million we obtained in November 2008 converted the principal into equity in February 2009.

We believe our existing cash and cash equivalents and the additional capital raised in 2009 will be sufficient to meet our anticipated cash needs for at least nine to twelve months. Our future working capital requirements will depend on many factors, including the rates of our revenue growth, our introduction of new features and complementary services for our products and services, and our expansion of research and development and sales and marketing activities. To the extent our cash and cash equivalents and cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. If additional funding is required, there can be no assurance what we may be able to obtain bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

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ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and changes in interest rates. Since our distributors in the Netherlands and England who distribute our products to the respective countries and invoice in Euros and British Pounds, we have exposure to exchange rate fluctuations between the Euro, British Pounds and the U.S. Dollar. Our foreign-currency-based sales to these countries have been insignificant; as a result, the effect of the foreign exchange fluctuations on our financial results has not been significant.

ITEM 4. Controls and Procedures

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide us only with reasonable assurance with respect to financial statement preparation and presentation.

Our management, including our chief executive officer and chief financial officer, has assessed the effectiveness of our internal control over financial reporting as of June 30, 2009, following the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework, and with further guidance for internal controls for small business provided by the SEC’s new Interpretive Guidance in Release No. 34-55929.

Based on our assessment under the COSO Internal Control framework, the Company's management, including the chief executive officer and chief financial officer, has concluded that our internal control over financial reporting was effective as of June 30, 2009.

Management's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this Quarterly Report on Form 10-Q.

Changes in Internal Controls

There were no changes to the internal controls that have materially affected or that are reasonably likely to affect the internal controls.

Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives. Our Principal Executive Officer and Principal Financial Officer concluded that our company's disclosure controls and procedures are effective at that reasonable assurance level.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 1A. Risk factors

There are no material changes from the risk factors previously disclosed in our Form I0-K for the year ended December 31, 2008 filed with the SEC on March 19, 2009.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Submission of Matters to a Vote of the Security Holders

None.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

31.1*	Certification of the Chief Executive Officer and Chief Financial Officer of Cardima, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer and Chief Financial Officer of Cardima furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  *  Filed herewith

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CARDIMA, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARDIMA, INC.
August 13, 2009	By:	/s/ Robert Cheney
		Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial and Accounting Officer)

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