UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 000-32045
DIOMED HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-140636
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER
OR ORGANIZATION) IDENTIFICATION NO.)
1 DUNDEE PARK
ANDOVER, MA 01810
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(978) 475-7771
(REGISTRANT'S TELEPHONE NUMBER)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (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
--- ---
As of March 31, 2002, there were 14,200,000 shares of common stock, par value
$0.001 outstanding (excluding securities which, subject to applicable
conditions, are convertible into shares of common stock).
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 2002
TABLE OF CONTENTS
ITEM NUMBER CAPTION PAGE NUMBER
PART I - FINANCIAL INFORMATION
1 Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2
2001
Condensed Consolidated Statements of Operations - Three Months Ended March 3
31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 4
31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 5
2 Management's Discussion and Analysis or Plan of Operation 13
PART II - OTHER INFORMATION
2 Changes in Securities and Use of Proceeds 20
4 Submission of Matters to a Vote of Security Holders 20
5 Other Information 20
6 Exhibits and Reports on Form 8-K 20
Signatures 22
Diomed Holdings, Inc.
Consolidated Balance Sheets
(unaudited)
ASSETS MARCH 31, 2002 DECEMBER 31, 2001
Current Assets:
Cash and cash equivalents $ 4,747,875 $ 322,566
Accounts receivable, net of allowance for doubtful accounts of
$225,000 and $217,000 in 2002 and 2001, respectively 605,921 869,231
Inventories 2,154,960 2,402,182
Prepaid expenses and other current assets 735,239 201,429
--------------- ---------------
Total current assets 8,243,995 3,795,408
--------------- ---------------
Property and Equipment:
Office equipment and furniture and fixtures 1,270,190 1,209,649
Manufacturing equipment 740,000 740,000
Leasehold improvements 637,900 631,900
--------------- ---------------
2,648,090 2,581,549
Less--Accumulated depreciation and amortization 1,621,295 1,519,607
--------------- ---------------
1,026,795 1,061,942
--------------- ---------------
Intangible Assets, net of accumulated amortization of $270,000 and
$221,000 in 2002 and 2001, respectively 711,474 760,542
--------------- ---------------
Other Assets:
Deposits 585,301 590,600
Deferred offering costs - 387,133
Deferred acquisition costs - 39,981
--------------- ---------------
$ 10,567,565 $ 6,635,606
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Bank loan $ 275,557 $ 874,449
Current maturities of convertible debt 835,664 1,786,640
Current maturities of capital lease obligations 46,053 46,383
Accounts payable 1,402,383 2,866,346
Accrued expenses 1,196,692 883,769
Customer advance - 293,463
--------------- ---------------
Total current liabilities 3,756,349 6,751,050
--------------- ---------------
Promissory Note Payable 936,000 936,000
--------------- ---------------
Capital Lease Obligations, less current maturities 26,747 39,817
--------------- ---------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $0.01 par value-
Authorized--3,500,000 shares
Issued and outstanding--2,725,000 shares at December 31, 2001 -- 27,250
Class A convertible preferred stock., $0.001 par value
Authorized - 5,000,000 shares
Issued and outstanding - 3,691,422 shares at March 31, 2002
Common stock, $0.001 par value 3,692 --
Authorized - 80,000,000 and 40,000,000 shares at March 31,
2002 and December 31, 2001, respectively
Issued and outstanding - 14,200,000 and 9,179,955 shares at
March 31, 2002 and December 31, 2001, respectively 14,200 9,180
Additional paid-in capital 39,077,721 30,324,556
Cumulative translation adjustment 2,200 130
Accumulated deficit (33,249,344) (31,452,377)
--------------- ---------------
Total stockholders' equity (deficit) 5,848,469 (1,091,261)
--------------- ----------------
$ 10,567,565 $ 6,635,606
=============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
2
Diomed Holdings, Inc.
Consolidated Statements of Operations
(unaudited)
THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
Revenues $ 956,637 $ 3,484,704
Cost of Revenues 1,154,890 2,232,497
----------------- -------------
Gross profit (198,253) 1,252,207
----------------- -------------
Operating Expenses:
Research and development 171,000 343,561
Selling and marketing 342,728 608,329
General and administrative 820,647 611,739
----------------- -------------
Total operating expenses 1,334,375 1,563,629
----------------- -------------
Loss from operations (1,532,628) (311,422)
Interest Expense, net (264,339) (2,784,619)
---------------- -------------
Net loss $ (1,796,967) $ (3,096,041)
================ =============
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.15) $ (0.51)
================ =============
Basic and diluted weighted average common
shares outstanding 11,771,395 6,093,059
================= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
3
Diomed Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
Cash Flows from Operating Activities:
Net loss $(1,796,967) $ (3,096,041)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 150,756 133,000
Noncash interest expense on convertible debt 225,260 2,700,000
Changes in operating assets and liabilities
Accounts receivable 263,310 102,510
Inventories 247,222 354,701
Prepaid expenses and other current assets (533,810) (434,595)
Deposits (5,299) -
Accounts payable (1,463,963) (296,206)
Accrued expenses 376,923 (272,962)
Customer advance (293,463) -
----------- ------------
Net cash used in operating activities (2,830,031) (809,593)
----------- ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (66,541) (338,250)
----------- ------------
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings (598,892) (338,116)
Proceeds from issue of common stock, net 8,646,399 -
Proceeds from issue of preferred stock, net - 1,846,365
Payments on convertible debt (700,000) (225,000)
Payments on capital lease obligations (13,000) (16,000)
------- ------------
Net cash provided by financing activities 7,334,507 1,267,249
----------- ------------
Effect of Exchange Rate Changes (12,626) 29,849
------------ ------------
Net Increase in Cash and Cash Equivalents 4,425,309 149,255
Cash and Cash Equivalents, beginning of period 322,566 118,872
----------- ------------
Cash and Cash Equivalents, end of period $ 4,747,875 $ 268,127
=========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 48,039 $ 123,418
=========== ============
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Conversion of convertible debt into common stock $ - $ 2,475,000
=========== ============
Reclassification offering costs incurred in 2001
to APIC $ 387,133 $ -
=========== ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
(1) OPERATIONS
Diomed Holdings, Inc. and subsidiaries (the Company) provides innovative
clinical modalities and specializes in developing and distributing
equipment and disposables used in minimal and micro-invasive medical
procedures.
Some of the Company's medical laser products and applications are in
various stages of development, and as such, the success of future
operations is subject to a number of risks similar to those of other
companies in similar stages of development. Principal among these risks are
the continued successful development and marketing of the Company's
products, proper regulatory approval, the need to achieve profitable
operations, competition from substitute products and larger companies, the
need to obtain adequate financing to fund future operations and dependence
on key individuals. The Company has incurred significant losses since
inception and is devoting substantially all its efforts towards research
and development, regulatory approvals, manufacturing and marketing its
products.
As discussed in Note 10, during the quarter ended March 31, 2002, the
Company merged with another company, raised $10 million in additional
funding through a private placement offering and paid certain of its debt
outstanding at December 31, 2001. Management believes that this additional
capital, along with its cash flows from operations, will be sufficient to
fund its operations through December 2002, depending on the Company's
ability to achieve its business plan pertaining to the commercial success
of EVLT(TM) post-FDA clearance. In addition, the Company anticipates
seeking a global banking relationship to support the anticipated commercial
success of EVLT(TM).
The accompanying consolidated financial statements at March 31, 2002 and
for the three-month periods ended March 31, 2002 and 2001 are unaudited. In
management's opinion, these unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 2001, and include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results for such interim periods. These financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K,
as amended, for the year ended December 31, 2001. The results of operations
for the three-month period ended March 31, 2002 are not necessarily
indicative of the results expected for the fiscal year ending December 31,
2002.
Certain footnote disclosures normally included in financial statements
prepared with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures in these financial statements are adequate to
make the information presented not misleading.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these
notes to consolidated financial statements.
(a) PRINCIPLES OF CONSOLIDATION
These financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany transactions
have been eliminated.
5
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could
differ from those estimates.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of short-term, highly liquid
investments with original maturity dates of 90 days or less. Cash
equivalents are carried at cost, which approximates fair value.
(d) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiaries are translated at
the rate of exchange in effect at year-end. Results of operations are
translated using the weighted average exchange rate in effect during
the period. Translation adjustments, resulting from changes in the
rate of exchange between the subsidiaries' functional currency and the
U.S. dollar, are recorded as a separate component of stockholders'
equity in the accompanying consolidated balance sheets. Transaction
gains and losses, resulting from the revaluations of assets and
liabilities denominated in other than the functional currency of the
Company or its subsidiaries, are included in operating expenses for
all periods presented.
(e) REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment to
the customer as long as there is persuasive evidence of an
arrangement, the sales price is fixed and determinable and collection
of the related receivable is probable. The Company provides for
estimated product returns and warranty costs at the time of product
shipment. In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin (SAB) No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, which establishes guidance in
applying generally accepted accounting principles to revenue
recognition in financial statements and is effective beginning with
the Company's fourth quarter of the year ended December 31, 2000. The
Company has determined that its existing revenue recognition practices
comply with the requirements of SAB No. 101 for all periods presented.
(f) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-progress and finished goods consist of materials,
labor and manufacturing overhead. Inventories consist of the
following:
MARCH 31, 2002 DECEMBER 31, 2001
Raw materials $ 991,201 $ 1,211,870
Work-in-progress 1,044,656 1,016,236
Finished goods 119,103 174,076
--------------- ---------------
$ 2,154,960 $ 2,402,182
=============== ===============
6
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
(g) DEPRECIATION AND AMORTIZATION
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in
amounts that allocate the cost of the assets over their estimated
useful lives as follows:
ESTIMATED
DESCRIPTION USEFUL LIFE
Office equipment and furnitureand
fixtures 2-5 years
Manufacturing equipment 2-5 years
Lesser of estimated useful
Leasehold improvements life or life of lease
(h) LONG-LIVED ASSETS
The Company assesses the realizability of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No.
144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS.
Under SFAS No. 144, if qualitative factors suggest that an impairment
may have occurred, the Company is required to assess the valuation of
its long-lived assets. As of December 31, 2001 and March 31, 2002, the
Company has determined that no material adjustment to the carrying
value of its long-lived assets was required.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, cash equivalents, accounts
receivable, accounts payable and various debt instruments approximate
fair value due to the short-term nature of these instruments. The
carrying amounts of debt issued pursuant to agreements with banks
approximate fair value as the interest rates on these instruments
fluctuate with market interest rates.
(l) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(m) COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of
all components of comprehensive income. Comprehensive income is
defined as the change in stockholders' equity of a business enterprise
during a period from transactions and other events and circumstances
from nonowner sources. For all periods presented, comprehensive income
consists of the Company's net loss and changes in cumulative
translation adjustment account as follows:
MARCH 31, MARCH 31,
2002 2001
Net loss $(1,796,967) $(3,096,041)
Foreign currency translation
adjustment 2,070 (15,202)
----------- -----------
Comprehensive loss $(1,794,897) $(3,111,243)
=========== ===========
7
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
(n) INCOME TAXES
The Company follows the provisions of SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred income taxes are provided on temporary
differences that arise in the recording of transactions for financial
and tax reporting purposes and result in deferred tax assets and
liabilities. Deferred tax assets are reduced by an appropriate
valuation allowance if it is management's judgment that part of the
deferred tax asset will not be realized. Tax credits are accounted for
as reductions of the current provision for income taxes in the year in
which the related expenditures are incurred.
(o) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS.
SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. This statement
is effective for all business combinations initiated after June 30,
2001.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. This statement applies to goodwill and intangible
assets acquired after June 30, 2001, as well as goodwill and
intangible assets previously acquired. Under this statement, goodwill
as well as certain other intangible assets determined to have an
infinite life will no longer be amortized; instead, these assets will
be reviewed for impairment on a periodic basis. This statement is
effective for the Company for the first quarter in the fiscal year
ended December 2002. The Company has not yet completed its assessment
of whether the adoption of this new accounting standard will have a
material impact on the Company's financial statements. As of March 31,
2002, the carrying value of the Company's intangible assets is
$711,474. Related to those intangible assets, the Company recorded
amortization expense of approximately $49,000 and $99,000 for the
three months ended March 31, 2002 and 2001, respectively.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supercedes SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144 further refines the
requirements of SFAS No. 121 that companies (i) recognize an
impairment loss only if the carrying amount of a long-lived asset is
not recoverable based on its undiscounted future cash flows and (ii)
measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. In addition, SFAS No. 144
provides guidance on accounting and disclosure issues surrounding
long-lived assets to be disposed of by sale. The Company's adoption of
this statement has not had a material impact on its financial position
or results of operations.
(3) NET LOSS PER SHARE
Net loss per share is computed based on the guidance of SFAS No. 128,
EARNINGS PER SHARE. SFAS No. 128 requires companies to report both basic
loss per share, which is based on the weighted average number of common
shares outstanding, and diluted loss per share, which is based on the
weighted average number of common shares outstanding and the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for the
three months ended March 31, 2002 and 2001 all potential common shares were
antidilutive and were excluded from the diluted net loss per share
calculations.
The following table summarizes securities outstanding as of each period-end
which were not included in the calculation of diluted net loss per share since
their inclusion would be antidilutive.
8
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
MARCH 31, MARCH 31,
2002 2001
Common stock options and warrants 1,915,832 876,994
========== ==========
Convertible preferred stock 14,765,690 5,450,000
========== ==========
Convertible debt 167,000 165,000
========== ==========
(4) ACQUISITION OF MANUFACTURING RIGHTS
Effective October 16, 2000, the Company acquired certain manufacturing
rights and inventory of QLT, Inc. (QLT) necessary or useful to
commercialize certain series of its OPTIGUIDE(R) fibers for $1.2 million in
the form of two promissory notes, payable within two years. The first
promissory note is payable in cash or in shares of common stock. The second
promissory note is payable, at the election of the Company, in cash or in
shares of common stock. In the event that the Company closes an initial
public offering (IPO) of its securities within two years of the closing
date, the due date of the balance payment would be accelerated to the time
of completion of the IPO and QLT would receive payment in full in the form
of common stock, at a 40% discount on the offering price per share to the
public. This contingent beneficial conversion feature, valued at $556,667
and computed in accordance with Emerging Issues Task Force (EITF) 00-27,
APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS,
would be recorded upon the occurrence of an IPO as a discount to the debt
and amortized ratably to interest expense over the remaining term of the
debt, unless converted earlier. The Company has determined that the merger
and private offering of common stock, as discussed in Note 10, does not
qualify as an IPO. The aggregate purchase price of $1,200,000 was allocated
based on the fair value of the tangible and intangible assets acquired as
follows:
Inventory $ 218,623
Manufacturing rights 981,377
-------------
$ 1,200,000
=============
Amounts allocated to manufacturing rights are being amortized on the
straight-line basis over a five-year period. Included in general and
administrative expenses is amortization expense of approximately $49,000
and $99,000 for the months ended March 31, 2002 and 2001, respectively.
(5) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd., the Company's subsidiary in the United Kingdom, has a line of
credit with Barclays Bank, which is limited to the lesser of
(pound)1,200,000 ($1,728,840 at March 31, 2002 and $1,745,160 at December
31, 2001) or 80% of eligible accounts receivable. This line bears interest
at 3% above Barclays Bank's base rate (4.00% at March 31, 2002 and 4.00% at
December 31, 2001) and borrowings are due upon collection of receivables
from customers. As of March 31, 2002, there were borrowings of
(pound)191,289 ($275,557) outstanding under this line and available future
borrowings of approximately $137,000.
(6) CONVERTIBLE LOAN NOTES
Between March and June 2000, the Company issued $2.7 million of 9%
convertible subordinated notes (the Notes), which were due on March 31,
2001. The original conversion rate for the Notes was $3.50 per share of
common stock. The conversion rate was subject to adjustment in the event of
certain circumstances occurring, including certain issues of common stock
at a price below $3.50 per share.
9
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
Pursuant to the Stock Purchase and Recapitalization Agreement (the
Agreement), dated March 5, 2001, which provided certain existing
shareholders with additional shares of common stock which had the effect of
reducing their purchase price to $1.00 per share, the Company agreed to
adjust the conversion price from $3.50 per share to $1.00 per share.
Concurrent with the Agreement, the noteholders agreed to convert principle
of $2,475,000 into 2,475,000 shares of common stock. The balance due of
$225,000 was repaid in cash.
In accordance with EITF 00-27, the Company recorded noncash interest
expense totaling approximately $2.7 million in March 2001 due to the
adjustment of the original conversion price.
(7) DEBT
As of December 31, 2001, the two promissory notes due to QLT for the
acquisition of the manufacturing rights to the OPTIGUIDE(R) fibers (see
Note 4) are shown on the consolidated balance sheet as convertible debt. As
of March 31, 2002, the second promissory note due to QLT is shown on the
consolidated balance sheet as convertible debt.
With respect to the First QLT Promissory Note, by letter dated June 7,
2001, QLT formally requested payment of the $339,336 balance due under that
note. QLT also indicated that it would exercise its option under the
Optiguide Asset Purchase Agreement to require the Company to issue to QLT
shares of Company Common Stock having a value equal to $339,336. On October
1, 2001 the Company advised QLT that it was prepared to issue 135,735
shares based on a per share price of $2.50. The Company asked QLT to
respond if the calculation was acceptable to it and also asked that, if the
calculation was not acceptable, that the matter be referred to arbitration
pursuant to the applicable provisions of the Optiguide Asset Purchase
Agreement. On January 28, 2002, the Company issued QLT 135,735 shares of
Company Common Stock. On February 11, 2002, QLT informed the Company it was
accepting the 135,735 shares issued to it under protest as it disagreed
with the per share price the Company had used in calculating the number of
shares issued to it. It also asserted that the Company had failed, in
connection with the issuance of those shares, to confirm certain
registration rights and deliver a legal opinion. The Company believes that
QLT may be asserting that it is entitled up to an additional 542,940
shares. The Company disputes this position based on the express terms of
its agreement with QLT and the relevant facts. The terms of the agreement
between the Company and QLT require senior management of both companies to
meet for a period of 60 days to attempt to resolve disputes arising
thereunder.
In October 2000, a customer advanced the Company $936,000 to secure certain
key materials. In September 2001, the Company issued a promissory note to
this customer in the amount of the advance. The note matures on January 1,
2004 and bears interest at a rate of 8.5% per year. The note does not
provide for conversion rights.
A summary of the debt at March 31, 2002 is as follows:
CURRENT LONG-TERM
Convertible debt--QLT $ 835,664 $ -
Promissory note payable - 936,000
------------ -----------
$ 835,664 $ 936,000
============ ===========
(8) SEGMENT REPORTING
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be
presented in interim financial
10
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
reports issued to stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision making group, in making
decisions on how to allocate resources and assess performance. The
Company's chief decision making group, as defined under SFAS No. 131, is
the Executive Management Committee.
The Company's reportable segments are determined by product type: laser
systems and fibers and other accessories. The accounting policies of the
segments are the same as those described in Note 2. The Executive
Management Committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and are
not allocated to segments. Also, the Executive Management Committee does
not assign assets to its segments.
This table presents revenues by reportable segment:
MARCH 31,2002 MARCH 31, 2001
Laser systems $ 518,242 $ 3,043,406
Fibers and other
accessories 438,395 441,299
----------- -----------
Total $ 956,637 $ 3,484,705
=========== ===========
The following table represents percentage of revenues by geographic
destination:
MARCH 31, 2002 MARCH 31, 2001
North America 48% 47%
Asia/Pacific 25% 27%
Europe 23% 25%
Other 4% 1%
--------- ---------
Total 100% 100%
========= =========
The following table represents long-lived assets by geographic location:
MARCH 31, DECEMBER 31,
2002 2001
North America $ 1,005,733 $ 1,417,681
Europe 1,317,837 1,382,536
------------ ------------
Total $ 2,323,570 $ 2,800,217
============ ============
11
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
(9) BRIDGE LOANS FROM STOCKHOLDERS
In September 2001, the Company received an aggregate of $500,000 from two
stockholders of the Company in exchange for a bridge loan in the form of
two secured promissory notes ("notes"), dated October 5, 2001. The notes
mature on January 1, 2003 and bear an annual interest rate of 7.5%.
The notes are convertible, at the election of the noteholders, into common
stock prior to the maturity date under the following scenarios: 1) in the
event the Company does not complete a reverse merger by October 31, 2001,
the noteholders may exercise their call option issued in the March 2001
Series A Preferred Stock financing and deliver their notes as payment, 2)
in the event the Company completes a reverse merger, the notes are
convertible into common stock at the lesser of $2.25 per share and the
price per share in the reverse merger, 3) in the event of another type of
financing transaction, as defined, the notes are convertible into common
stock at the lesser of $2.25 per share and the price per share in the
transaction, and 4) in the event of a merger or consolidation, excluding a
reverse merger, the notes are convertible into common stock at the lesser
of $2.25 per share and the price per share of any warrants issued in the
transaction. However, if the Company successfully completes a reverse
merger with a public company, where such public company has raised $10
million in gross proceeds in a private placement financing prior to the
reverse merger, the notes become due and payable in cash within 10 days of
the effective closing date. The call option expired on October 31, 2001.
In addition, the Company granted fully exercisable warrants to purchase an
aggregate of 50,000 shares of common stock at a price per share equal to a
maximum of $2.25, adjustable for certain events, as defined. The value of
such warrants, calculated using the Black-Scholes option pricing model, was
recorded as a debt discount totaling $43,000 and will be amortized to
interest expense over the life of the note. In addition, the beneficial
conversion feature attributable to the warrants, totaling $43,000, will be
recorded as interest expense upon the occurrence of an event which will
trigger the note's right to convert. In January 2002, due to the Company's
delay in completing the reverse merger by December 31, 2001, the Company
was required to issue up to an additional aggregate of 10,000 warrants,
with terms identical to the initial grant. The warrants expire two years
from the date of issuance. The value ascribed to these 10,000 warrants was
$8,200 and was calculated using the Black Scholes option pricing model. The
$8,200 was recorded as a debt discount and will be amortized to interest
expense over the life of the notes. In addition, the beneficial conversion
feature attributable to the warrants totaling $8,200 will be recorded as
interest expense upon the occurrence of an event which will trigger the
notes' right to convert.
In December 2001, the Company received an additional aggregate of $200,000
from the same two noteholders through issuance of additional promissory
notes, with terms identical to those specified above, except as noted
below. The maximum conversion price of the notes and the exercise price of
the warrants is $2.00 per share, adjustable for certain events as defined.
In addition, the Company granted fully exercisable warrants to purchase an
aggregate of 20,000 shares of common stock at a price per share equal to a
maximum of $2.00, adjustable for certain events, as defined. The Company
completed a reverse merger by March 31, 2002, and accordingly did not have
to issue any contingent warrants. Under the December 2001 notes, the
conversion price of the notes and the exercise price of the warrants
included under the October 2001 notes were reduced to a maximum of $2.00 to
be consistent with the terms of the December 2001 notes. Such revision
creates an additional beneficial conversion feature attributed to the
reduction of the conversion price, totaling $62,500, to be recorded upon
the occurrence of an event which will trigger the notes' right to convert.
Additionally, such revision created an additional debt discount, attributed
to the establishment of a new measurement date for the amended warrant,
totaling $39,000.
In February 2002, subsequent to the closing of the reverse merger, the
$700,000 aggregate principal amount of the promissory notes, issued in
October and December 2001, was repaid to the two stockholders, including
cumulative interest. During the three month period ended March 31, 2002,
the Company recorded $225,260 as additional non-cash interest expense
related to warrants issued in connection with the bridge loan in 2001
12
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
and 2002, as well as beneficial conversion features discussed above which
were triggered by the acquisition discussed in Note 10.
(10) MERGER AND PRIVATE OFFERING OF COMMON STOCK
On February 14, 2002, Diomed Acquisition Corp. ("Acquisition"), a Delaware
corporation and a wholly-owned subsidiary of Diomed Holdings, Inc., a
Nevada corporation formerly known as Natexco Corporation (the "Parent"),
merged with and into the Company pursuant to an Agreement and Plan of
Merger, dated as of January 29, 2002. In the merger (the "Merger") that
occurred under the Agreement and Plan of Merger, the stockholders of the
Company received shares of Parent. As a condition to the Merger, Parent
raised gross proceeds of $10,000,000 in a private offering of shares of its
common stock. The shares issued in the private offering are not subject to
refund, redemption or rescission and, accordingly, will be included as a
component of stockholders' equity, net of the applicable costs. The merger
agreement provides that the proceeds of that offering will be available to
the Company for payment of its existing obligations and, subject to the
approval of its board of directors, certain future expenses, including the
financing of product developments and acquisitions. Parent is obligated to
use its best efforts to file a registration statement with the Securities
and Exchange Commission to register for resale its common shares that it
issued in the private offering and those of its common shares that it
issued to the Company's former stockholders and to cause the registration
statement to be declared effective. In the event that the Parent fails to
file or cause the registration statement to be declared effective within
240 days of completing the Merger, or remain effective through the first
anniversary of the Merger, the Parent will be required to issue additional
shares of its common stock, up to a maximum of 4% of the shares held by
each party subject to the agreement.
After the Merger, the Company's former stockholders own approximately 51%
of the issued and outstanding shares of Parent (in terms of common share
equivalents). The shares of Parent into which the shares of the Company's
existing common stock and the Company's Series A preferred stock were
converted in the Merger will thereafter automatically convert into Parent's
common stock in installments beginning 60 days after Parent's registration
statement has become effective and continuing, unless interrupted under
certain circumstances, until the second anniversary of the Merger, at which
time all such shares will automatically convert into shares of Parent's
common stock.
The Merger will be accounted for as a recapitalization. The historical
records of the Company are the historical records of Parent. Following the
Merger, the business conducted by Parent is the business conducted by the
Company prior to the Merger.
Costs of approximately $1.7 million related to the issuance of Parent's
shares in the offering and its preparation and negotiation of the
documentation for the Merger were incurred and paid at the closing of the
Merger and subsequent to the Merger.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In this Quarterly Report, the terms "Company" and "Diomed Holdings"
both refer to Diomed Holdings, Inc. The term "Diomed" refers to the Company's
principal subsidiary, Diomed, Inc. and its consolidated subsidiaries. We use the
terms "we," "our" and "us" when we do not need to distinguish among these
entities or their predecessors, or when any distinction is clear from the
context.
This section contains forward-looking statements, which involve known
and unknown risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "may," "will," "should," "potential,"
"expects," "anticipates," "intends," "plans," "believes" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Our
13
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
actual results could differ materially from those discussed in these statements.
Our Annual Report on Form SEC 10-KSB (the "Annual Report") contains a discussion
of certain of the risks and uncertainties that affect our business. We refer you
to the "Risk Factors" on pages 5 through 16 of the Annual Report for a
discussion of certain risks, including those relating to our business as a
medical device company without a significant operating record and with operating
losses, our risks relating to our commercialization of our current and future
products and applications and risks relating to our common stock and its market
value.
In view of our relatively limited operating history, we have limited
experience forecasting our revenues and operating costs. Therefore, we believe
that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
To date, the Company has incurred substantial costs to create our products. As
of March 31, 2002, we had an accumulated deficit of approximately $33.2 million.
We may continue to incur operating losses due to spending on research and
development programs, clinical trials, regulatory activities, marketing and
administrative activities. This spending may not correspond with any meaningful
increases in revenues in the near term, if at all. As such, these costs may
result in negative operating cash flows until such time as the Company generates
sufficient revenue to offset such costs.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes set forth above in this Quarterly
Report and our Annual Report.
OVERVIEW
Diomed provides innovative clinical modalities and specializes in
developing and distributing equipment and disposable items used in minimal and
micro-invasive medical procedures. Minimal and micro-invasive medical procedures
typically result in reduced pain and scarring, shorter recovery periods and
increased effectiveness compared to traditional surgical procedures. Most of the
pain associated with traditional surgical procedures results from the slicing of
the layers of skin and muscle tissue, which also takes time to heal. This can be
diminished by using minimal and micro-invasive procedures instead of traditional
surgical treatments. In developing and marketing our innovative solutions, we
use proprietary technology and we aim to secure strong commercial advantages
over our competitors by gaining governmental approvals in advance of others and
through exclusive commercial arrangements. To participate in the rapidly growing
minimal and micro-invasive medical procedure industry, we integrated disposable
items into our product lines. To optimize our revenues, we focus on clinical
procedures that require the health care provider to own our equipment and also
purchase our disposable products, such as optical fibers. We sell our products
to hospital and office-based physicians, including specialists in vascular
surgery, oncology, interventional-radiology, phlebology and dermatology.
Utilizing our proprietary technology in certain methods of
synchronizing diode light sources and in certain optical fibers, we currently
focus on photodynamic therapy (our PDT(TM) product line) for use in cancer
treatments, and endovenous laser treatment (our EVLT(TM) product line), for use
in varicose vein treatments. We also market our lasers and disposables for other
clinical applications, such as dentistry and cosmetic surgery. If the treating
physician is knowledgeable about the reimbursement system and obtains
preapproval, then typically health insurance payors will reimburse for PDT(TM)
and EVLT(TM) procedures. Using high power semiconductor diodes as their energy
source, our diode lasers combine clinical efficacy, operational efficiency and
cost effectiveness in a versatile, compact, lightweight, easy-to-use and
easy-to-maintain system.
Since the beginning of 2001, the composition of Diomed's product line
has changed. In the first half of 2001, Diomed abandoned its Laserlite business
when we withdrew from the aesthetic laser market. Diomed had acquired Laserlite
LLC, the distributor of Diomed's cosmetic laser systems, in May 1998. Diomed
subsequently migrated to its existing laser platform, and this led to a decision
to discontinue the sale of the Laserlite product line.
14
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
In 2001, Diomed developed endovenous laser treatment (EVLT(TM)), an
innovative minimally invasive laser procedure for the treatment of varicose
veins caused by greater saphenous vein reflux. In September 2001, Diomed was the
first company to receive the CE mark of the European Economic Union for approval
for endovenous laser treatment, with respect to marketing EVLT(TM) in Europe. On
January 22, 2002, Diomed was the first company to receive FDA clearance for
endovenous laser treatment, with respect to marketing EVLT(TM) in the U.S.
Diomed expects that EVLT(TM) will be a primary source of revenue in
2002. Diomed believes that EVLT(TM) will result in a high-level of commercial
acceptance due to its quick recovery period, an immediate return to one's normal
routine barring vigorous physical activities, reduced pain and minimal scarring,
and reduced costs as compaired to vein stripping, the current prevalent clinical
treatment for varicose veins. Also we developed our EVLT(TM) product line as a
complete clinical solution and marketing model, including a laser, disposable
kit, clinical training and a marketing plan, to assist physicians and clinics in
responding to the demand for treatment of varicose veins in a minimally invasive
manner. In addition, Diomed has developed a website - WWW.EVLT.COM - to provide
patients with education about treatment options and benefits of EVLT(TM). Diomed
expects that as the volume of EVLT(TM) procedures performed increases so may its
disposable sales. Diomed believes that the US represents the single largest
market for EVLT(TM). In April 2002, Diomed began actively hiring a direct sales
force to supplement its existing sales infrastructure of independent sales
representatives.
Diomed's sales of its PDT product line are dependent to an extent upon
the clinical development process and the commercialization of PDT(TM) drugs by
PDT(TM) drug companies. As a result, our sales may fluctuate in relation to the
timing of PDT(TM) drug companies achieving their strategic initiatives.
Diomed works jointly and early on with photodynamic therapy drug
(PDT(TM)) companies in their clinical development process in order to design a
laser that optimizes the most effective wavelength in combination with their
PDT(TM) drugs. We have long-term relationships with some of the world's leading
photodynamic therapy drug companies, including Axcan Pharma, DUSA, Pharmacyclics
and QLT, and have sold them lasers in support of their clinical trials for
photodynamic therapy applications. In August 2000, Axcan Pharma and Diomed
together received regulatory approval for Diomed's 630nm laser and OPTIGUIDE(R)
fiber, and Axcan's Photofrin drug used in the treatment for late stage lung and
esophageal cancers. Axcan Pharma is developing other clinical applications using
Photofrin, including treatment for Barrett's Esophagus, a pre-cursor to cancer
of the esophagus. Axcan Pharma is pursuing an application for FDA clearance for
Photofrin and Diomed's lasers and fibers for use in the treatment of Barrett's
Esophagus.
In the US, regulatory approval by the FDA is given for each specific
treatment in response to a specific pre-market approval application, or "PMA."
Each PMA is generally addressed to a use for the device that the PMA specifies.
Our PDT(TM) line is a delivery system of laser technology, services and fiber
disposables to the global photodynamic therapy industry. The FDA considers
PDT(TM) a modality that requires a combination PMA approval, where the PDT(TM)
drug company, laser manufacturer and fiber manufacturer work together to obtain
regulatory approval for the complete medical procedure.
Our technology and manufacturing capability has attracted OEM partners.
In a typical OEM relationship, we produce the laser and other products to the
OEM's specifications, which will then be marketed under the OEM's label. As a
result, sales of our products to OEM partners may fluctuate in relation to the
achievement of their strategic initiatives. Our most prominent OEM relationship
is with Olympus in Japan, which is using our technology for surgical and dental
applications. In addition we have a long-term partnership with Dentek
Lasersystems Vertriebs GmbH, which is using our laser module for dental
applications.
15
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
In 2001, approximately one-third of our revenues were dependent upon a
few of our strategic partners and approximately 50% of our sales were generated
domestically versus internationally. Going forward, we believe that our annual
dependence on any individual customer or group of customers should decrease as
more of our revenues may derive from sales of EVLT(TM) in the U.S. market
directly to individual physician practices and less to large-scale distributors.
In addition, Diomed believes that its percentage of sales generated domestically
should increase as it grows the EVLT(TM) market in the U.S.
Diomed envisions that by developing and marketing procedures to doctors
that involve selling key components - namely lasers and their related
disposables designed for a single use, including fibers and kits - we will have
the potential to create recurring sales. Diomed's plan is that each future
procedure will be accompanied with a disposable component.
In fiscal 2002, Diomed expects to focus on the development and growth
of EVLT(TM) sales worldwide, to support the development and approval of new
applications for PDT products and to continue the development of new minimally
invasive medical procedures that offer long-term opportunities to the Company.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2001
REVENUES Revenues for the three months ended March 31, 2002 were $1.0
million, a $2.5 million, or 73%, decrease from $3.5 million for the three months
ended March 31, 2001.
This decrease was principally due to a $2.5 million decrease in laser
sales. The decrease in laser sales was primarily attributable to three factors:
(1) a 93% decrease (or, $1.2 million) in sales of PDT(TM) lasers, (2) an 89%
decrease (or, $0.9 million) in OEM sales, and (3) the Company's withdrawal from
the aesthetic laser market (which had represented $460,000 in revenues in the
first quarter of 2001).
The decrease in sales of our PDT lasers was principally due to the
additional time needed by Axcan Pharma to sell the $1.0 million in lasers it
purchased in the first quarter of 2001 under our exclusive supply agreement.
Axcan Pharma purchased these lasers in support of its market launch for
Photofrin, the PDT drug used to treat late stage lung and esophageal cancers.
The remaining portion of the decrease results from the fact that certain
customers who purchased PDT lasers in the first quarter of 2001 for use in their
clinical trials have not required additional lasers while these trials are
ongoing.
The decrease in OEM sales is principally due to the additional time
needed by Olympus Japan to sell the $0.8 million in surgical lasers it purchased
in the first quarter of 2001 to support its market launch.
We abandoned our Laserlite business when we withdrew from the aesthetic
laser market. Diomed acquired Laserlite, LLC, the distributor of its cosmetic
laser systems, in May 1998. Diomed subsequently migrated to its existing laser
platform, and this led to a decision to discontinue the sale of the Laserlite
product line.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 2002 was $1.2
million, a $1.1 million, or 50% decrease from $2.2 million for the three months
ended March 31, 2001. This decrease was principally due to
16
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
the decreased sales volume in the first quarter of 2002 as compared to the same
time period in 2001, and a headcount reduction in manufacturing resulting from
the restructuring in December 2001 of our subsidiary operations in the UK,
offset by regulatory costs incurred in the US in the first quarter 2002 that
were not incurred in the same period in 2001.
GROSS PROFIT (LOSS)
Gross Loss for the three months ended March 31, 2002 was approximately
$200,000, a $1.5 million, or 116%, decrease from $1.3 million gross profit for
the three months ended March 31, 2001. This decrease was principally due to the
decreased sales volume in the first quarter of 2002 as compared to the same time
period in 2001. As a result the Company absorbed fixed costs for production
quality, regulatory and service that otherwise would have been covered.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended March 31,
2002 were $171,000, a $173,000, or 50%, decrease from $344,000 for the three
months ended March 31, 2001. The decrease was principally due to a headcount
reduction resulting from the restructuring in December 2001 of our subsidiary
operations in the UK, offset by costs incurred in the first quarter of 2001 to
wind down the aesthetic laser business, which was acquired from Laserlite LLC,
that was subsequently abandoned in the first half of 2001.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three months ended March 31,
2002 were $343,000, a $265,000, or 44%, decrease from $608,000 for the three
months ended March 31, 2001. The decrease was principally due to a headcount
reduction resulting from the restructuring in December 2001 of our subsidiary
operations in the UK, offset by sales and marketing staff costs that were
incurred in the first quarter of 2002 that were not incurred in the same period
in 2001.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March
31, 2002 were $820,000, a $210,000, or 34%, increase from $611,000 for the three
months ended March 31, 2001. The increase was principally due to staffing costs
in the US in the first quarter of 2002 that were not incurred in the same period
in 2001, and incremental legal, accounting and other professional fees
associated with becoming a public company in the first quarter of 2002, offset
by a headcount reduction resulting from a restructuring in December 2001 of our
subsidiary in the UK.
INTEREST EXPENSE, NET
Interest expense for the three months ended March 31, 2002 was
$264,000, a $2.5 million, or 91%, decrease from $2.8 million in the three months
ended March 31, 2001. Interest expense in the three months ended March 31, 2001
reflects a noncash charge totaling $2.7 million. In March 2001, holders of our
9% convertible subordinated notes, with a conversion price of $3.50 per share,
agreed to convert $2.5 million in principal amount of those notes into common
stock. The conversion rate was subject to adjustment in the event of certain
circumstances, including certain issues of common stock at a price below $3.50
per share. Pursuant to our March 5, 2001 Stock Purchase and Recapitalization
Agreement, which provided certain shareholders with additional shares of common
stock at a purchase price of $1.00 per share, we adjusted the conversion price
of the notes from $3.50 per share to $1.00 per share. At the same time, the
holders of the notes converted $2.475 million of the notes into 2,475,000 shares
of common stock. We repaid the remaining $225,000 of notes in cash. In
accordance with Emerging Issues Task Force (EITF) 00-27, Application of EITF
Issue No.98-5 to certain Convertible Instruments, we recorded a non-cash
interest expense charge of $2.7 million due to the adjustment of the conversion
price.
Interest expense in the three months ended March 31, 2002 include
non-cash charges totaling approximately $225,000. In 2001, the Company issued
Promissory Notes, in the aggregate principal amount of
17
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
$700,000, to two stockholders of the Company in exchange for bridge loans and
granted these two stockholders fully exercisable warrants to purchase an
aggregate of 80,000 shares of common stock. We recorded the value of such
warrants, calculated using the Black-Scholes option pricing model, as a debt
discount that would be amortized to interest expense over the life of the notes.
In addition, we recorded the beneficial conversion feature attributable to the
warrants as interest expense upon the closing of the Merger, which triggered the
right to convert the notes.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through March 31, 2002, we have incurred a cumulative
loss of approximately $33.2 million and may continue to incur operating losses
for the next few years, dependent upon the commercial success of EVLT(TM)
post-FDA clearance. We have financed our operations primarily through private
placements of common stock and preferred stock, and private placements of
convertible notes and short-term notes and credit arrangements.
We anticipate that we will have sufficient cash to fund operations
through December 2002, in reliance on the proceeds of the private placement
financing related to the Merger and depending on the Company's ability to
achieve its business plan pertaining to the commercial success of EVLT(TM)
post-FDA clearance. In addition, we anticipate seeking a global banking
relationship to support the anticipated commercial success of EVLT(TM) . If we
are unable to achieve our business plans, we may need to continue to rely on
external sources of financing to meet our cash needs for future acquisitions and
internal expansion, and if necessary, defer certain discretionary expenditures
in order to continue operations. Additional financing, through subsequent public
offerings, or private equity or debt financings, may not, however, be available
on acceptable terms or at all. The inability to obtain additional financing
would cause us to reduce or cease operations because we would not be able to
fund the development of our applications so that they may be commercialized and,
thus, become profitable.
We had cash of approximately $4.7 million as of March 31, 2002. Cash as
of December 31, 2001 was approximately $323,000.
Cash used in operations for the three months ended March 31, 2002 was
approximately $2.8 million. This is principally attributable to the paydown of
trade payables of approximately $1.5 million and repayment of a customer advance
of approximately $300,000 subsequent to completing the private placement
offering in connection with the Merger, and an increase in prepaid expenses of
approximately $500,000 for annual fees.
Cash used in investing activities for the three months ended March 31,
2002 was approximately $66,000. The net cash used in investing activities was
principally related to the purchase of office equipment, furnishings and
fixtures, and leasehold improvements.
Cash provided by financing activities for the three months ended March
31, 2002, was approximately $7.3 million. Cash provided by financing activities
is attributable to approximately $8.3 million in net proceeds from the sale of
Diomed Holdings common stock sold in the private placement offering in
connection with the Merger. Subsequent to closing the Merger, the Company repaid
the Promissory Notes issued to two stockholders in October and December 2001 in
exchange for bridge loans ($700,000), and paid down the Barclays bank line of
credit ($600,000).
CAPITAL TRANSACTIONS IN 2002
On January 1, 2002, in accordance with the terms of the bridge
financing provided to us in October 2001, we issued warrants to purchase an
additional 10,000 (in the aggregate) shares of common stock to the
18
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
two stockholders who provided that financing. The bridge financing agreement
with these stockholders required us to issue an additional 10,000 warrants to in
that bridge financing for each month after December 31, 2001 in which we did not
consummate a reverse merger with a public company. Because the Merger satisfied
that requirement, no additional warrants are issuable in respect of that
financing.
In February 2002, in connection with the Merger, we conducted a private
placement offering of common stock. In the private placement, investors
subscribed to purchase from Diomed an aggregate of 5 million shares of its
common stock at a price per share of $2.00 per share, which resulted in gross
proceeds of $10.0 million and net proceeds of approximately $8.3 million. In the
Merger, the shares of Diomed common stock issued in the private placement were
exchanged for an equal number of shares of the Company's common stock. After
completing the Merger, the Company paid back the $700,000 in convertible
promissory notes issued to two of our stockholders who provided bridge financing
in October and December 2001, including cumulative interest.
As to our predecessor corporation, Natexco Corporation:
On January 23, 2002, Natexco redeemed 400,000 shares of common stock
owned by Anthony Mulhall, a former director of Natexco.
On February 5, 2002 Natexco redeemed all of the shares of preferred
stock owned by R.H. Consulting Group, Inc. and Desert Bloom Investments, Inc.,
which represented all of Natexco's then outstanding preferred stock. All of such
shares of preferred stock were then canceled.
BANK LINE OF CREDIT
During 2001 and 2002, our UK subsidiary has access to a line of credit
with Barclays Bank, which is limited to the lesser of (pound)1,200,000
(approximately $1,745,000 at December 31, 2001 and approximately $1,729,000 at
March 31, 2002) or 80% of eligible accounts receivable. This line bears interest
at 3% above Barclays Bank's base rate (4% at December 31, 2001 and 4% at March
31, 2002), and borrowings are due upon collection of receivables from customers.
As of December 31, 2001, borrowings of approximately (pound)601,000
(approximately $874,000) were outstanding, whereas as of March 31, 2002
borrowings of approximately (pound)191,000 (approximately $276,000) were
outstanding under this line. The lower balance under the line of credit for the
three months ended March 31, 2002 is due to a decrease in accounts receivable
and a change in our customer order policy for financed orders, which we
instituted in the third quarter of 2001. Under this new policy, customer orders
are generally be supported by a letter of credit, advance payment or payment
upon installation, which reduces our reliance on our line of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Accordingly, we will account for the
Merger using the purchase method.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. This statement applies to goodwill and intangible assets
acquired after June 30, 2001, as well as goodwill and intangible assets
previously acquired. Under this statement, goodwill as well as certain other
intangible assets determined to have an infinite life will no longer be
amortized; instead, these assets will be reviewed for impairment on a periodic
basis. This statement is effective for the first quarter in the fiscal year
ended December 2002. The adoption of this new accounting standard is not
expected to have a material impact on our financial statements.
19
Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 144 further refines the requirements of SFAS No. 121
that companies (i) recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable based on its undiscounted future cash flows
and (ii) measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. In addition, SFAS No. 144 provides
guidance on accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The Company has yet to complete its impairment review, but
we do not anticipate adoption of this new accounting standard to have a material
impact on the financial statements.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the first quarter of 2002, the Company issued options to
purchase up to 25,000 shares of its Class A Stock, and upon conversion of those
shares 100,000 shares of its common stock, at a purchase price of $2.00 per
underlying share to a new director, Kim Campbell, and issued options to purchase
up to 15,532.5 shares of its Class A Stock, and upon conversion of those shares
62,130 shares of its common stock, at a purchase price in the range of $2.25 to
$4.18 per underlying share to five employees and two consultants, as follows:
OPTIONS GRANTED
OPTIONEE (EXPRESSED IN SHARES OF COMMON STOCK)
-------- -------------------------------------
Robert Min (consultant) 525
Steven Zimmet 105
Sam Wade 15,000
Susan Campbell 10,000
Carl Simonds 5,000
Jerry Sugars 6,500
Lisa M. Bruneau 25,000
Diomed issued options to Ms. Campbell and the above-listed optionees in reliance
upon the exemption from registration set forth under Section 4(2) of the
Securities Act of 1933, as amended. Each optionee agreed that neither the
options nor the underlying securities would be resold without registration under
the Securities Act or exemption therefrom. Each optionee also represented his or
her intention to acquire the securities for investment only, and not with a view
to the distribution thereof. Prior to making any offer or sale, Diomed had
reasonable grounds to believe and believed that the purchaser was capable of
evaluating the merits and risks of the investment and was able to bear the
economic risk of the investment represented by the options granted.
All other sales of unregistered securities made by the Company during
the first quarter of 2002 are described under Item 5 of our Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about February 6, 2002, our predecessor solicited from its
stockholders a consent to change its name from Natexco Corporation to Diomed
Holdings, Inc. A copy of the amendment to our certificate of incorporation
setting forth the approval obtained from the stockholders in connection with
this name change is included as Exhibit 3.2 to our Current Report on Form SEC
8-K filed on February 14, 2002.
ITEM 5. OTHER
Arthur Andersen was accused of wrongdoing in connection with its
representation of Enron Corp., and was recently indicted on criminal charges. On
March 18, 2002, the SEC adopted temporary rules giving instructions and guidance
to companies affected by this situation. Under these rules, companies who make
filings with the SEC that include accountant's reports issued by Arthur Andersen
after March 14, 2002, such as ourselves, are required to include as an exhibit
to their filings a letter addressed to the SEC that states that Arthur Andersen
has represented to the company that its audit was subject to Arthur Andersen's
quality control system for the U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards and that there was appropriate continuity of Arthur
Andersen personnel working on audits, availability of national office
consultation and availability of personnel at foreign affiliates of Arthur
Andersen to conduct the relevant portions of the audit. We received such a
letter and filed it as Exhibit 99.3 with our Form 10-KSB for 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) REPORTS ON FORM 8-K. State whether any reports on Form 8-K were filed during
the quarter for which this report is filed, listing the items reported, any
financial statements filed and the dates of such reports.
The Company filed a Current Report on Form 8-K on February 14, 2002 in
connection with the Merger and related transactions. This Report included
details regarding the change in control of the Company effected by the Merger,
the issuance of securities in connection with the Merger and other details
regarding the Merger, details regarding the private placement sale of common
stock immediately preceding the Merger, certain documents relating to the Merger
and the private placement, a descriptive memorandum regarding the Company and
certain other Company documents, as well as certain financial data, consisting
of Consolidated
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Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
Balance Sheets as of December 31, 1999 and 2000 and September 30, 2001
(unaudited), Consolidated Statements of Operations for the Years Ended December
31, 1998, 1999, and 2000 and the Nine Months Ended September 30, 2000 and 2001
(unaudited), Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2001 (unaudited), and Consolidated Statements of Cash Flows for
the Years Ended December 31, 1998, 1999, and 2000 and the Nine Months Ended
September 30, 2000 and 2001 (unaudited).
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Diomed Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
DIOMED HOLDINGS, INC.
(Registrant)
By: /s/ PETER KLEIN
--------------------------------------------
Name: Peter Klein
Title: President and Chief Executive Officer,
Director
Date: May 15, 2002
By: /s/ CHARLES T. HOEPPER
--------------------------------------------
Name: Charles T. Hoepper
Title: Chief Financial Officer
By: /s/ LISA M. BRUNEAU
--------------------------------------------
Name: Lisa M. Bruneau
Title: Vice President Finance, Treasurer and
Secretary
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