UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-QSB
-----------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 Identification No.)
or organization)
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 September 30, 2002, there were 14,200,000 shares of common stock, par
value $0.001 outstanding (excluding 50,000 shares of common stock issued as of
October 24, 2002 and 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 Period Ended September 30, 2002
Table of Contents
Item
Number Page
Caption Number
Part I - Financial Information
1 Unaudited Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 2
Unaudited Condensed Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 2002 and 2001 3
Unaudited Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5
2 Management's Discussion and Analysis or Plan of Operations 15
3 Controls and Procedures 24
Part II - Other Information
2 Changes in Securities and Use of Proceeds 24
4 Submission of Matters to a Vote of Security Holders 25
5 Other Information 25
6 Exhibits and Reports on Form 8-K 27
Signatures and Certifications 28
EXHIBITS
Exhibit No. 99.1 Statement Under Oath of Principal Financial Officer Regarding
Facts and Circumstances Relating to Exchange Act Filings
Exhibit No. 99.2 Statement Under Oath of Principal Executive Officer Regarding
Facts and Circumstances Relating to Exchange Act Filings
1
Diomed Holdings, Inc.
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and
December 31, 2001
SEPTEMBER 30,
Assets 2002 DECEMBER 31,
(unaudited) 2001
Current Assets:
Cash and cash equivalents $ 1,056,862 $ 322,566
Accounts receivable, net of allowance for doubtful accounts of
$213,000 and $217,000 in 2002 and 2001, respectively 1,141,844 869,231
Inventories 2,198,655 2,402,182
Prepaid expenses and other current assets 421,559 201,429
------------ ------------
Total current assets 4,818,920 3,795,408
------------ ------------
Property and Equipment:
Office equipment and furniture and fixtures 1,209,900 1,209,649
Manufacturing equipment 713,827 740,000
Leasehold improvements 636,137 631,900
------------ ------------
2,559,864 2,581,549
Less--Accumulated depreciation and amortization 1,713,549 1,519,607
------------ ------------
846,315 1,061,942
Intangible Assets, net of accumulated amortization of $368,000 and
$221,000 in 2002 and 2001, respectively 613,338 760,542
------------ ------------
Other Assets:
Deposits 637,303 590,600
Deferred offering costs -- 387,133
Deferred acquisition costs -- 39,981
$ 6,915,876 $ 6,635,606
============ ============
Liabilities and Stockholders' EQUITY (DEFICIT)
Current Liabilities:
Bank loan $ 278,698 $ 874,449
Current maturities of convertible debt -- 1,786,640
Current maturities of capital lease obligations 38,414 46,383
Accounts payable 1,456,547 2,866,346
Accrued expenses 890,081 883,769
Customer advance -- 293,463
------------ ------------
Total current liabilities 2,663,740 6,751,050
------------ ------------
Promissory Note Payable 936,000 936,000
------------ ------------
Capital Lease Obligations, less current maturities 13,555 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 - 20,000,000 shares
Issued and outstanding - 15,461,750 shares at September 30,
2002 15,462 --
Common stock, $0.001 par value
Authorized - 80,000,000 and 40,000,000 shares at September
30, 2002 and December 31, 2001, respectively
Issued and outstanding - 14,200,000 and 9,179,955 shares at
September 30, 2002 and December 31, 2001, respectively 14,200 9,180
Additional paid-in capital 39,985,178 30,324,556
Cumulative translation adjustment (114,383) 130
Accumulated deficit (36,597,876) (31,452,377)
------------ ------------
Total stockholders' equity (deficit) 3,302,581 (1,091,261)
------------ ------------
$ 6,915,876 $ 6,635,606
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
Diomed Holdings, Inc.
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2002
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
Revenues $ 1,945,333 $ 1,314,555 $ 4,070,478 $ 6,427,800
Cost of Revenues 1,287,064 1,285,502 3,480,650 4,952,000
------------ ------------ ------------ ------------
Gross profit 658,269 29,053 589,828 1,475,800
------------ ------------ ------------ ------------
Operating Expenses:
Research and development 280,532 244,439 663,775 1,009,000
Selling and marketing 1,019,101 701,644 2,096,154 1,873,000
General and administrative 890,181 587,868 2,658,259 1,936,000
------------ ------------ ------------ ------------
Total operating expenses 2,189,814 1,533,951 5,418,188 4,818,000
------------ ------------ ------------ ------------
Loss from operations (1,531,545) (1,504,898) (4,828,360) (3,342,200)
Interest Expense, net (29,192) (48,616) (317,139) (2,879,000)
------------ ------------ ------------ ------------
Net loss (1,560,737) (1,553,514) (5,145,499) (6,221,200)
Value Ascribed to Call Option and
Beneficial
Conversion Feature Related to Preferred
Stock -- (423,180) -- (423,180)
Net loss applicable to common
stockholders $ (1,560,737) $ (1,976,694) $ (5,145,499) $ (6,644,380)
============ ============ ============ ============
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.11) $ (0.22) $ (0.38) $ (0.83)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding 14,200,00 9,179,955 13,399,361 8,003,994
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
3
Diomed Holdings, Inc.
Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 2002
(Unaudited)
Nine Months Ended
September 30, September 30,
2002 2001
Cash Flows from Operating Activities:
Net loss $(5,145,499) $(6,221,200)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 250,635 524,049
Noncash interest expense on convertible.debt 225,260 2,700,000
Issuance of stock options to a third party 63,318 55,000
Changes in operating assets and liabilities
Accounts receivable (272,613) 2,461,837
Inventories 203,527 (155,339)
Prepaid expenses and other current assets (7,152) (88,997)
Accounts payable (1,409,799) 353,166
Accrued expenses 6,312 (727,604)
Customer advance (293,463) 488,500
----------- -----------
Net cash used in operating activities (6,379,474) (610,588)
----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (157,326) (374,398)
Increase in other assets -- (225,196)
----------- -----------
Net cash used in investing
activities (157,326) (599,594)
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings (595,751) (1,162,364)
Proceeds from issue of common stock, net 8,381,999 --
Proceeds from issue of preferred stock, net -- 2,532,470
Proceeds from convertible debt 500,000
Payments on convertible debt (700,000) (225,000)
Payments on capital lease obligations (34,231) (38,445)
----------- -----------
Net cash provided by financing activities 7,052,017 1,606,661
----------- -----------
Effect of Exchange Rate Changes 219,078 (222,251)
----------- -----------
Net Increase in Cash and Cash Equivalents 734,296 174,228
Cash and Cash Equivalents, beginning of period 322,566 118,872
----------- -----------
Cash and Cash Equivalents, end of period $ 1,056,862 $ 293,100
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 104,035 $ 186,432
=========== ===========
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Conversion of convertible debt and interest
into common stock $ 908,355 $ 2,475,000
=========== ===========
Reclassification of offering costs incurred in
2001 to APIC $ 387,133 $ --
=========== ===========
Value ascribed to warrants issued in connection
with issuance of debt to stockholders $ -- $ 43,000
=========== ===========
Value ascribed to call option and beneficial
conversion feature related to preferred stock $ -- $ 423,180
=========== ===========
Fair value of options granted to consultants $ 212,978 $ --
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002
-------------------------------------------------------------
(1) Operations
Diomed Holdings, Inc. and subsidiaries (the Company) specialize in
developing and commercializing minimal and micro-invasive medical
procedures that use its laser technologies and disposable products.
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.
As discussed in Note 7, on August 5, 2002, the Company entered into an
agreement with QLT, Inc. ("QLT") to convert the Second Promissory Note, in
connection with the acquisition of manufacturing rights to the Optiguide(R)
fibers from QLT, in the amount of $835,664 plus accrued interest of $72,691
into Convertible Preferred Stock at the conversion price of $1.50 per
share. Thus, resulting in nominal short-term debt, including the bank line
of credit in the UK and capital equipment leases, in the amounts of
$279,000 and $52,000 as of September 30, 2002, respectively. The Company's
long-term debt, in the amount of $936,000, is not due until January 1,
2004.
The Company anticipates that it will have sufficient cash or access to
additional funding sources to fund operations through December 2002, based
on the proceeds of the private placement financing related to the Merger
and dependent upon the Company's ability to achieve its business plan
pertaining to the commercial success of EVLT(TM) post-FDA clearance. To
fund operations in 2003, the Company will need to complete a debt or equity
financing or put in place a credit facility. The Company will require the
proceeds of any such financing or credit facility, together with its
current cash resources, to continue as a going concern, and will use these
proceeds to fund its operations and commercialize its products in 2003.
Additional financing and/or a new credit facility may not, however, be
available on acceptable terms or at all. The inability to obtain additional
financing or a new credit facility would cause the Company to reduce or
cease operations, sell all or a portion of its assets, seek a sale of the
Company or enter into a business combination with a third party.
The accompanying consolidated financial statements at September 30, 2002
and for the three-month and nine-month periods ended September 30, 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-KSB, 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-KSB, as amended, for the year ended December 31, 2001. The
results of operations for the three-month and nine-month period ended
September 30, 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
5
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.
(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 became 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.
6
(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:
September 30, 2002 December 31, 2001
Raw materials $ 1,243,407 $ 1,211,870
Work-in-progress 327,973 1,016,236
Finished goods 627,275 174,076
--------------- ---------------
$ 2,198,655 $ 2,402,182
=============== ===============
(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 furniture and
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 September 30, 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.
(j) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
7
(k) 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:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Net loss $(1,560,737) $(1,976,694) $(5,145,499) $(6,644,380)
Foreign currency translation
adjustment 39,439 54,432 (114,513) (4,200)
----------- ----------- ------------ -----------
Comprehensive loss $(1,600,176) $(1,922,262) $(5,260,012) $(6,648,580)
============ ============ ============ ============
(l) 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.
(m) 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 adoption of this new
accounting standard did not have a material impact on the Company's
financial statements. As of September 30, 2002, the carrying value of the
Company's intangible assets is $613,338. Related to those intangible
assets, the Company recorded amortization expense of $49,068 and $42,703
the three months ended September 30, 2002 and 2001, respectively, and
$147,204 and $100,000 for the nine months ended September 30, 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
8
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 and nine months ended September 30, 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.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Common stock options and warrants 1,906,802 1,871,308 1,906,802 1,871,308
========== ========== ========== ==========
Convertible preferred stock 15,461,750 5,450,000 15,461,750 5,450,000
========== ========== ========== ==========
Convertible debt - 1,165,000 - 1,165,000
========== ========== ========== ==========
(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:
9
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 $43,000 for the three months ended September 30, 2002 and 2001,
respectively, and approximately $147,000 and $100,000 for the nine months
ended September 30, 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 ($1,884,000 at September 30, 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 September 30, 2002
and 4.00% at December 31, 2001) and borrowings are due upon collection of
receivables from customers.
(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.
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 First Promissory Note in the amount of
$339,336 and the Second Promissory Note in the amount of $835,664 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.
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.
10
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 believed that
QLT may have been asserting that it was entitled up to an additional
542,940 shares. The Company disputed 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.
From that time, the Company engaged in discussions with QLT to resolve the
dispute amicably, and on August 5, 2002, the Company entered into an
agreement with QLT whereby in effect we re-valued the conversion price of
the First Promissory Note in the amount of $339,336 to $1.50 per share, and
converted the Second Promissory Note in the amount of $835,664 plus accrued
interest of $72,691 into Convertible Preferred Stock at the conversion
price of $1.50 per share. In so doing, the Company (i) issued an additional
90,489 shares of Convertible Preferred Stock in respect of the First
Promissory Note, and (ii) issued 605,570 shares of Convertible Preferred
Stock in satisfaction of the Second Promissory Note. In consideration for
the issuance of these shares, QLT released the Company from any claims
under both of these promissory notes, as well as a related registration
rights agreement and relevant portions of the 2000 OPTIGUIDE(R) asset
purchase agreement.
In October 2000, a customer, Axcan Pharma, 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.
(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 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.
11
This table presents revenues by reportable segment:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Laser systems $ 1,404,664 $ 757,614 $ 2,540,724 $ 5,156,983
Fibers and other
accessories 540,669 556,941 1,529,754 1,270,817
----------- ----------- ----------- -----------
Total $ 1,945,333 $ 1,314,555 $ 4,070,478 $ 6,427,800
=========== =========== =========== ===========
The following table represents percentage of revenues by geographic destination:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
North America 57% 64% 54% 53%
Asia/Pacific 31% 13% 27% 22%
Europe 10% 19% 16% 23%
Other 2% 4% 3% 2%
---------- ---------- ---------- ----------
Total 100% 100% 100% 100%
========== ========== ========== ==========
The following table represents long-lived assets by geographic location:
September30, 2002 December 31, 2001
North America $ 863,325 $ 1,457,662
Europe 1,233,631 1,382,536
--------------- ---------------
Total $ 2,096,956 $ 2,840,198
=============== ===============
(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
12
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
note's 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 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
13
offering are not subject to refund, redemption or rescission and, accordingly,
are 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 was 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 $2.0 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.
14
Item 2. Management's Discussion and Analysis or Plan of Operations
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 actual
results could differ materially from those discussed in these statements. The
Descriptive Memorandum included in our Current Report on Form 8-K filed October
22, 2002 (the "Descriptive Memorandum") contains a discussion of certain of the
risks and uncertainties that affect our business. We refer you to the "Risk
Factors" on pages 8 through 20 of the Descriptive Memorandum 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 September 30, 2002, we had an accumulated deficit of approximately $36.6
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, the Descriptive Memorandum and our 2001 Annual Report on Form 10-KSB (as
amended).
Overview
Diomed specializes in developing and commercializing minimal and
micro-invasive medical procedures that use its laser technologies and disposable
products. 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 clinical 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 seek to develop
medical applications for our laser technology, to incorporate disposable
products into these applications and to sell our products to physicians who
perform medical procedures using our products and the techniques that we
develop. 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, gynecology and dermatology.
15
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 product line) for use in cancer
treatments, and endovenous laser treatment (our EVLT(TM) product line), for use
in varicose vein treatments and other clinical applications. 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.
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 compared 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 office-based and
hospital-based physicians in responding to the demand for treatment of varicose
veins in a minimally invasive manner. In addition, Diomed has developed a health
insurance reimbursement guide as a sales and marketing tool to assist physicians
in the reimbursement submission process.
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). Diomed is targeting a balance between
private office-based physicians, hospital-based physicians, and clinics, and
will continue to target the top leading hospitals to help spread the message
about EVLT(TM). For example, in the third quarter, Diomed sold EVLT(TM) to six
hospitals. University of California at Los Angeles Medical Center in Los
Angeles, California, and Massachusetts General Hospital in Boston, Massachusetts
are among the hospitals currently performing EVLT(TM) procedures.
Diomed has developed a website - www.evlt.com - to implement its push /
pull strategy to attract the interest of both patients and physicians. EVLT.com
provides patients with education about treatment options and benefits of
EVLT(TM) and provides physicians with education about the EVLT(TM) procedure.
Also, patients can inquire about the nearest physician performing EVLT by
entering in their city and state.
The sales cycle for selling capital equipment, such as medical lasers,
is a dynamic one that can be prolonged by several factors, including:
. the customer's internal approval process;
. the determination by hospitals as to the specialty of physician
performing the EVLT(TM) procedure and the facility where these
procedures will be performed, including a vascular surgeon in a
hospital setting or an interventional radiologist in a private office
setting;
16
. the physician's desire to observe an EVLT(TM)procedure and ask an
experienced EVLT(TM)physician questions pertaining to the procedure,
prior to making a purchase decision;
. the physician's desire to ask an experienced EVLT(TM) physician
questions pertaining to the physician's EVLT(TM) business, including
but not limited to the volume of procedures being performed, types of
vein problems requiring a combination EVLT(TM) procedure and other
form of treatment, reimbursement by third party payors, and marketing
initiatives to attract patients, prior to making a purchase decision;
and
. budget constraints for capital equipment.
Also, the length of the sales cycle may vary according to the type of
customer. For example, a sale to a private physician could take just a few
weeks, where as a sale to a hospital could take two months or longer. Diomed is
providing hospital-based and office-based physicians, and clinics with marketing
guidance as to how they can build an EVLT(TM) business, which plays an
instrumental role in facilitating the sales closing process and in some cases
may reduce the sales cycle. Also, Diomed is directing interested patients to the
nearest performing physician via its website www.evlt.com.
Based on the dynamics of the selling process, Diomed made the decision
to hire a direct sales force in the US to maximize the commercialization of
EVLT(TM). At the end of May 2002, Diomed had hired, trained and deployed eight
direct sales representatives in key strategic markets across the US to
supplement its existing sales infrastructure of independent sales
representatives.
In the third quarter of 2002, EVLT(TM) sales increased 116% as compared
to the second quarter of 2002, and included lasers and associated disposable
products totaling revenue of approximately $1.1 million as compared to lasers
and associated disposable products totaling revenue of approximately $530,000 in
the second quarter of 2002. In addition, through the efforts of the direct sales
force Diomed deployed in the second quarter of 2002, Diomed is establishing
relationships with new customers and prospective customers. Diomed anticipates
that these relationships will expand through the fourth quarter of this year.
As a result of the Company's continuing efforts to expand its EVLT(TM)
sales infrastructure, at the beginning of October, Diomed nearly doubled the
size of its direct sales force by hiring seven additional direct sales
representatives and two regional sales managers, thereby expanding into
territories that did not historically have sales coverage and by adding new
sales representatives in existing key strategic markets. Also, at the end of
September 2002, Diomed engaged Sigmacon, a distributor, to expand EVLT(TM) in
the Canadian market.
Diomed's sales of its PDT product line are dependent to an extent upon
the clinical development process and the commercialization of PDT drugs by PDT
drug companies. As a result, our sales may fluctuate in relation to the timing
of PDT drug companies, achieving their strategic initiatives. For the nine
months ended September 30, 2002, our sales of PDT lasers were approximately
$285,000, and our sales of PDT disposable items were approximately $494,000.
Diomed works jointly and early on with photodynamic therapy (PDT) drug
companies in their clinical development process in order to design a laser that
optimizes the most effective wavelength in combination with their PDT 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
17
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 a letter dated July 15, 2002, the Food and Drug Administration
notified Diomed that its premarket approval application (or, "PMA") supplement
covering its 630nm diode laser and OPTIGUIDE(R) fiber optic diffuser were
sufficiently complete to permit a substantive review and therefore accepted for
filing. Diomed's 630nm diode laser and OPTIGUIDE(R) fiber optic diffuser are (in
conjunction with Axcan Pharma Inc's Photfrin drug) under review for the
treatment of Barrett's Esophagus. The letter reflects only the current progress
of the FDA's review of the Company's application. The FDA's decision to file the
PMA does not imply that the agency had performed an in-depth evaluation of the
safety and effectiveness of the laser and fiber optic diffuser or that the
agency had made any decision regarding the approvability of the PMA.
In the US, regulatory approval by the FDA is given for each specific
treatment in response to a specific PMA. Each PMA is generally addressed to a
use for the device that the PMA specifies. Our PDT line is a delivery system of
laser technology, services and fiber disposables to the global photodynamic
therapy industry. The FDA considers PDT a modality that requires a combination
PMA approval, where the PDT 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.
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 - it will have
the potential to create recurring sales. Diomed's plan is that each future
procedure will be accompanied with a disposable component.
Results of Operations
Three Months Ended September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Revenues
Revenues for the three months ended September 30, 2002 were $1.9
million, a $0.6 million, or 48%, increase from $1.3 million for the three months
ended September 30, 2001.
This increase was principally due to a 1700% increase (or $1.1 million)
in sales of the Company's new EVLT(TM) product line, offset by a 34% decrease
(or $0.3 million) in other laser sales, and a 37% decrease (or $0.2 million) in
sales of other disposable products and accessories.
The increase in EVLT(TM) sales includes $0.8 million that is
principally due to the commercialization of EVLT(TM) in the US by a direct sales
force following FDA clearance in January 2002. Prior to FDA clearance, EVLT(TM)
was sold off-label primarily by independent sales representatives.
The decrease in other laser sales was primarily attributable to the
following factors: (1) a 71% decrease (or, $117,000) in sales of PDT lasers, (2)
an 95% decrease (or, $486,000) in other surgical laser sales, and (3) the
Company's withdrawal from the aesthetic laser market (which had represented
$40,000 in revenues in the third quarter of 2001), all of which were offset by
$359,000 in OEM laser sales to Olympus in the third quarter of 2002 that did not
occur in the third quarter of 2001.
18
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 decrease in sales of other surgical lasers, and related disposable
products and accessories is principally due to EVLT(TM) being the product line
that the Company has chosen to emphasize in its sales efforts during 2002, with
sales of other surgical lasers and related disposable products and accessories
being incidental to EVLT(TM) and PDT sales.
Cost of Revenues
Cost of revenues for the three months ended September 30, 2002 was $1.3
million, which remained unchanged from $1.3 million for the three months ended
September 30, 2001. This is principally due to the cost of revenues associated
with the increase in sales volume in the third quarter of 2002 being offset by
the headcount reduction in manufacturing resulting from the restructuring in
December 2001 of our subsidiary operations in the UK.
Gross Profit
Gross profit for the three months ended September 30, 2002 was
$658,000, a $629,000, or 2166%, increase from $29,000 in gross profit for the
three months ended September 30, 2001. This increase was principally due to the
increased sales volume in the third quarter of 2002 resulting from the
commercialization of EVLT(TM) following regulatory clearance in the US (January
2002) and the European Economic Union (September 2001) as compared to the third
quarter of 2001. As a result, more fixed costs for production, quality, and
service were covered in the third quarter of 2002 as compared to the third
quarter in 2001.
Research and Development Expenses
Research and development expenses for the three months ended September
30, 2002 were $280,000, a $36,000, or 15%, increase from $244,000 for the three
months ended September 30, 2001. The increase was principally due to new R&D
initiatives offset by a headcount reduction resulting from the restructuring in
December 2001 of our subsidiary operations in the UK.
Selling and Marketing Expenses
Selling and marketing expenses for the three months ended September 30,
2002 were $1.0 million, a $0.3 million, or 45%, increase from $0.7 million for
the three months ended September 30, 2001. The increase was principally due to
staff and recruiting costs for sales and marketing resources in the US,
including the hiring of a direct sales force, and other marketing initiatives
that were incurred in the US in the third quarter of 2002 post FDA clearance for
EVLT(TM) that were not incurred in the third quarter of 2001. These costs were
offset by a headcount reduction resulting from the restructuring in December
2001 of our subsidiary operations in the UK.
General and Administrative Expenses
General and administrative expenses for the three months ended
September 30, 2002 were $0.9 million, a $0.3 million, or 51%, increase from $0.6
million for the three months ended September 30, 2001. The increase was
principally due to staffing costs in the US in the third quarter of 2002 that
were not incurred in the third quarter of 2001, and incremental legal, investor
relations, financial advisory, 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 September 30, 2002 was
$29,000, a $19,000, or 40%, decrease from $49,000 for the three months ended
September 30, 2001. This decrease was principally caused by our satisfaction of
a note payable to QLT, Inc. on August 5, 2002. On that date, we entered into an
19
agreement with QLT, Inc. to convert the note we issued to QLT in connection with
our acquisition of manufacturing rights to the Optiguide(R) fibers from QLT, in
the amount of $835,664 plus accrued interest of $72,691 into 605,570 shares of
our Convertible Preferred Stock at the conversion price of $1.50 per share. As a
result, that note is no longer outstanding.
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Revenues
Revenues for the nine months ended September 30, 2002 were $4.1
million, a $2.3 million, or 37%, decrease from $6.4 million for the nine months
ended September 30, 2001.
This decrease was principally due to a 341% increase (or $1.5 million)
in sales of the Company's new EVLT product line(TM) and 300% increase (or $0.3
million) in service and other income, offset by an 80% decrease (or $3.8
million) in other laser sales and a 32% decrease (or $0.3 million) in sales of
other surgical disposable products and accessories.
The increase in EVLT(TM) sales includes $0.9 million that is
principally due to the commercialization of EVLT(TM) in the US by a direct sales
force following FDA clearance in January 2002. Prior to FDA clearance, EVLT(TM)
was sold off-label primarily by independent sales representatives.
The decrease in other laser sales was primarily attributable to the
following factors: (1) an 86% decrease (or, $1.8 million) in sales of PDT
lasers, (2) an 58% decrease (or, $0.7 million) in OEM sales, (3) the Company's
withdrawal from the aesthetic laser market (which had represented $458,000 in
revenues in the nine months ended September 30, 2001), and (4) an 83% decrease
(or, $0.9 million) in sales of other surgical lasers.
The decrease in sales of our PDT lasers was principally due to the
additional time needed by Axcan Pharma to sell the $1.7 million in lasers it
purchased in the first nine months 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 nine months 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, and $0.3 million in
2001 sales to Dentek that did not recur in 2002.
We abandoned our Laserlite business when we withdrew from the aesthetic
laser market. Diomed had 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.
The decrease in sales of other surgical lasers, and related disposable
products and accessories is principally due to EVLT(TM) being the product line
that the Company has chosen to emphasize in its sales efforts during 2002, with
sales of other surgical lasers and related disposable products and accessories
being incidental to EVLT(TM) and PDT sales.
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2002 was $3.5
million, a $1.5 million, or 30% decrease from $5.0 million for the nine months
ended September 30, 2001. This decrease was principally due to the decreased
sales volume in the first half 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
20
subsidiary operations in the UK, offset by regulatory costs incurred in the US
in the first half of 2002 that were not incurred in the same period in 2001.
Gross Profit
Gross profit for the nine months ended September 30, 2002 was $0.6
million, a $0.9 million, or 60%, decrease from $1.5 million in gross profit for
the nine months ended September 30, 2001. This decrease was principally due to
the decreased sales volume in the first half of 2002 as compared to the same
time period in 2001, and 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 nine months ended September
30, 2002 were $0.7 million, a $0.3 million, or 34%, decrease from $1.0 million
for the nine months ended September 30, 2001. The decrease was principally due
to a headcount reduction resulting from the restructuring in December 2001 of
our subsidiary operations in the UK, and new R&D initiatives in 2002, offset by
costs incurred in the first half 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 nine months ended September 30,
2002 were $2.1 million, a $0.2 million, or 12%, increase from $1.9 million for
the nine months ended September 30, 2001. The increase was principally due to
staff and recruiting costs for sales and marketing resources in the US,
including the hiring of a direct sales force, and costs associated with
participation in industry trade shows and other marketing initiatives that were
incurred in the US in 2002 post FDA clearance for EVLT(TM) that were not
incurred in the same period in 2001, offset by a headcount reduction resulting
from the restructuring in December 2001 of our subsidiary operations in the UK.
General and Administrative Expenses
General and administrative expenses for the nine months ended September
30, 2002 were $2.6 million, a $0.7 million, or 37%, increase from $1.9 million
for the nine months ended September 30, 2001. The increase was principally due
to staffing costs in the US in 2002 that weren't incurred in the same period in
2001, and incremental legal, investor relations, financial advisory, 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 nine months ended September 30, 2002 was $0.3
million, a $2.6 million, or 89%, decrease from $2.9 million in the nine months
ended September 30, 2001.
Interest expense in the nine months ended September 30, 2002 includes
non-cash charges totaling approximately $225,000. In 2001, the Company issued
Promissory Notes, in the aggregate principal amount of $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.
Interest expense in the nine months ended September 30, 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
21
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.
Liquidity and Capital Resources
The Company anticipates that it will have sufficient cash or access to
additional funding sources to fund operations through December 2002, based on
the proceeds of the private placement financing related to the Merger and
dependent upon the Company's ability to achieve its business plan pertaining to
the commercial success of EVLT(TM) post-FDA clearance. To fund operations in
2003, the Company will need to complete a debt or equity financing or put in
place a credit facility. The Company will require the proceeds of any such
financing or credit facility, together with its current cash resources, to
continue as a going concern, and will use these proceeds to fund its operations
and commercialize its products in 2003. Additional financing and/or a new credit
facility may not, however, be available on acceptable terms or at all. The
inability to obtain additional financing or a new credit facility would cause
the Company to reduce or cease operations, sell all or a portion of its assets,
seek a sale of the Company or enter into a business combination with a third
party.
Since inception through September 30, 2002, we have incurred a
cumulative loss of approximately $36.6 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 had cash of approximately $1.1 million as of September 30, 2002.
Cash as of December 31, 2001 was approximately $323,000.
On August 5, 2002, we entered into an agreement with QLT, Inc. to
convert a note we issued to QLT in connection with our acquisition of
manufacturing rights to the Optiguide(R) fibers from QLT, in the amount of
$835,664 plus accrued interest of $72,691 into 605,570 shares of our Convertible
Preferred Stock at the conversion price of $1.50 per share. This reduced our
short-term debt, which, including the bank line of credit in the UK and capital
equipment leases, was approximately $279,000 and $52,000 as of September 30,
2001 and 2002, respectively. Our long-term debt, in the amount of $936,000, is
not due until January 1, 2004.
Cash used in operations for the nine months ended September 30, 2002
was approximately $6.4 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 prepaid expenses of approximately
$500,000 for insurance premiums and other fees. In addition, the low sales
volume in 2002 has resulted in excess production capacity. As a result, the
Company has had to use its cash resources to cover fixed costs, including rent,
salaries, benefits and taxes.
Cash used in investing activities for the nine months ended September
30, 2002 was approximately $157,000. The net cash used by investing activities
was principally related to demo equipment within property, plant and equipment,
and software licenses.
Cash provided by financing activities for the nine months ended
September 30, 2002 was approximately $7.1 million. Cash provided by financing
activities is attributable to approximately $8.0 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
22
Promissory Notes issued to two stockholders in October and December 2001 in
exchange for bridge loans ($0.7 million), and paid down the Barclays bank line
of credit ($0.6 million).
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 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 Diomed Holdings 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 retired and returned to the status of
authorized and unissued shares 400,000 shares of common stock owned by Anthony
Mulhall, a former director of Natexco.
On February 5, 2002 Natexco retired and returned to the status of
authorized and unissued shares 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 $1,884,000 at
September 30, 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 September 30, 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
September 30, 2002 borrowings of approximately (pound)177,514 (approximately
$278,698) were outstanding under this line. The lower balance under the line of
credit for the period ended September 30, 2002 is largely 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 supported by a letter of credit, advance payment
or payment upon installation, which reduces our reliance on our line of credit.
23
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 did not
have a material impact on our financial statements.
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.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Within the 90-day period prior to the filing of this report, the Company's
principal executive officer and principal financial officer evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) and have concluded, based on such
evaluation, that the design and operation of the Company's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Company, including its consolidated subsidiaries, was made known
to them by others within those entities, particularly during the period in which
this Quarterly Report on Form 10-QSB was being prepared.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or material
weaknesses in the Company's internal controls. Accordingly, no corrective
actions were required or undertaken.
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds
During the third quarter of 2002, the Company issued options to
purchase up to 3,000 shares of its Class A Stock, and upon conversion of those
shares 3,000 shares of its common stock, at a purchase price of $1.04 per
underlying share to an employee, and 330 shares of its Class A Stock, and upon
conversion of those shares 330 shares of its common stock, at a purchase price
of $2.00 per underlying share to two consultants, as follows:
24
OPTIONS GRANTED
OPTIONEE (EXPRESSED IN SHARES OF COMMON STOCK)
--------- -------------------------------------
Employee 3,000
Robert Min (consultant) 475
Steven Zimmet (consultant) 95
Diomed issued options to 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.
On August 5, 2002, we entered into an agreement with QLT, Inc. to (i)
resolve a dispute as to the number of shares of stock we issued when we
previously-converted note in favor of QLT, and (ii) convert a separate note in
favor of QLT. As a result, we issued a total of 696,059 shares of Convertible
Preferred Stock to QLT on August 5, 2002, consisting of (i) an additional 90,489
shares of Convertible Preferred Stock in respect of the previously converted
note, and (ii) 605,570 shares of Convertible Preferred Stock in satisfaction of
the then-outstanding note. The issuance of these shares is discussed further
under Item 5, below.
Diomed issued these shares of Convertible Preferred Stock to QLT in
reliance upon the exemption from registration set forth under Section 4(2) of
the Securities Act. QLT represented and warranted in writing to Diomed that it
is an "accredited investor" within the definition provided by Rule 501 of
Regulation D promulgated under the Securities Act, and further acknowledged
that, unless and until registered for sale under the Securities Act, such shares
may not be transferred or sold in the absence of an applicable exemption from
the registration requirements of the Securities Act. Prior to making any offer
or sale of the Convertible Preferred Stock to QLT, Diomed had reasonable grounds
to believe and believed that QLT 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 Convertible Preferred Stock.
Item 4. Submission of Matters to a Vote of Security Holders
In the third quarter of 2002, there were no submissions of matters to a vote of
security holders.
Item 5. Other
Change in Accountants
On August 5, 2002, our Board of Directors resolved to change the
Corporation's independent accountants. Accordingly, on that date we dismissed
Arthur Andersen LLP and appointed BDO Seidman LLP to serve as our independent
public accountants for the fiscal year ending December 31, 2002. Having
completed its standard client acceptance procedures with respect to its
engagement by us, BDO Seidman, LLP accepted its appointment as of August 5,
2002.
25
QLT, Inc.
On August 5, 2002, we settled a potential dispute with QLT, Inc. and
converted indebtedness of $835,664 plus accrued interest of $72,691 into
Convertible Preferred Stock. The potential dispute arose from our conversion in
January 2002 of convertible debt we had issued to QLT in 2000. We issued this
convertible debt to QLT when we acquired certain assets, primarily manufacturing
rights and inventory related to our OPTIGUIDE/R/ optical fibers product. The
total purchase price was $1.2 million. We paid QLT $25,000 in cash and issued to
QLT $1,175,000 of convertible debt in the form of two promissory notes. The
principal amounts of the promissory notes were $339,336 and $835,664, they were
payable within two years from issuance and Diomed had the option of paying them
in cash or in stock. In January, 2002, Diomed issued 135,735 shares of its
common stock in payment of the first of these notes (in the principal amount of
$339,336), based on a conversion price of $2.50 per share. In February 2002, QLT
informed Diomed that it disagreed with the per share conversion price Diomed had
used in calculating the number of shares issued to QLT.
From that time, we engaged in discussions with QLT to resolve the
dispute amicably, and on August 5, 2002, we entered into an agreement with QLT
whereby in effect we re-valued the conversion price of the first promissory note
to $1.50 per share, and converted the second promissory note into Convertible
Preferred Stock at the conversion price of $1.50 per share. In so doing, the
Company (i) issued 90,489 shares of Convertible Preferred Stock in respect of
the first promissory note, and (ii) issued 605,570 shares of Convertible
Preferred Stock in satisfaction of the second promissory note. In consideration
for our issuance of these shares, QLT released us from any claims under both of
these promissory notes, as well as a related registration rights agreement and
relevant portions of the 2000 OPTIGUIDE(R) asset purchase agreement.
Chairman of the Board
On August 5, 2002, Mr. James Arkoosh, the Company's Chairman of the
Board, informed the Company of his intention to retire at the end of this year,
and has tendered his resignation as our chairman and a director, effective
December 31, 2002.
Natexco Corporation Annual Report
On October 22, 2002, the Company, at the request of the Securities and
Exchange Commission ("SEC") in connection with the approval of its Registration
Statement initially filed with the SEC on June 18, 2002, filed an annual report
on Form 10-KSB/A for Natexco Corporation, to which the Company is a successor
registrant, for the fiscal year ended December 31, 2001.
Registration Statement and Issuance of Common Stock
On October 24, 2002, the SEC declared effective Diomed's Registration
Statement, which was initially filed with the SEC on June 18, 2002. This
registration statement registers for resale by the selling stockholders named
therein a total of up to 20,919,470 shares of common stock. The Company will not
receive any proceeds from the sale of common stock by the selling stockholders.
The shares registered under this registration statement include
5,000,000 shares of common stock purchased on February 14, 2002 by investors in
a private placement offering. The terms of that offering provided that the
Company would use its reasonable best efforts to both file the registration
statement within 120 days and obtain an approved registration statement within
240 days. The terms also provided that the Company would be required to issue
additional shares to each of the private placement investors at the rate of 1%
of the private placement shares purchased on February 14, 2002 for each month or
portion of each month after the 240 day period during which the Company did not
obtain an effective registration statement covering the shares purchased in the
private placement.
The Company met its initial filing obligation, and responded in a
timely and diligent fashion to all of the SEC's questions and requests during
the review process. However, as a result of the lengthy approval process by the
SEC, the Company was unable to obtain an effective registration statement within
the 240 day period anticipated by the terms of the private placement, (or, by
October 13, 2002), and accordingly, as of October 24, 2002, we issued an
aggregate of 50,000 additional shares of common stock to the February 14, 2002
private placement investors. We filed a short-form registration statement
regarding these additional 50,000 shares on November 1, 2002, which became
effective immediately upon its filing.
Investor Relations Group, Inc.
In April 2002, we entered into an agreement with The Investor Relations
Group, Inc. ("IRG") for investor relations and public relations services. In
connection therewith, we granted to IRG Options to purchase up to 150,000 shares
of Class A Stock at an exercise price of $5.35 per share. These Options were not
granted under the 2001 Plan, but are subject to the terms and conditions of the
2001 Plan as if granted thereunder. IRG's Options shall vest and become
exercisable ratably at the end of each month beginning May
26
2002, over 24 months (1/24 per month) from April 2002, when IRG began providing
services to us, so long as our agreement with IRG remains in effect, and these
Options shall expire on the earlier of 48 months from the date of the IRG
agreement or 24 months after the termination of the IRG agreement. Any unvested
Options shall terminate upon the termination of the IRG agreement.
The Company gave written notice to IRG stating that effective November
31, 2002, the Company is terminating the agreement for investor relations and
public relations services in an effort to reduce its operating expenses. Going
forward, investor relations and public relations initiatives will be managed
in-house. As of November 31, 2002, IRG will have stock options to purchase up to
43,750 shares of Class A Stock at an exercise price of $5.35 per share by or on
October 31, 2004.
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS
Exhibit No. 99.1 Statement Under Oath of Principal Financial Officer Regarding
Facts and Circumstances Relating to Exchange Act Filings
Exhibit No. 99.2 Statement Under Oath of Principal Executive Officer Regarding
Facts and Circumstances Relating to Exchange Act Filings
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.
On August 6, 2002, the Company filed a Current Report on Form 8-K in
connection with its change in auditors on August 5, 2002 from Arthur Andersen,
LLP to BDO Seidman, LLP.
On October 11, 2002, the Company filed a Current Report on Form 8-K
to describe the current status of the independent accountants performing audit
services on behalf of the Company. The Company's independent accountant is BDO
Seidman, LLP ("BDO"). Accordingly, BDO will audit the Company's annual financial
statements for the period ending December 31, 2002, and will review the
Company's interim quarterly financial statements. In addition, the Company
engaged Spicer, Jeffries & Co. for the limited purpose of auditing the financial
statements as of December 31, 2001 of Natexco Corporation, to which the Company
is a successor registrant. Spicer's engagement was limited to conducting an
audit of Natexco's financial statements for 2001 and issuing a report thereon.
BDO will continue to act as the independent accountant for the Company.
On October 22, 2002, the Company filed a Current Report on Form 8-K
with an attached Exhibit 99.1 as the Descriptive Memorandum of Diomed Holdings,
Inc. The Descriptive Memorandum contains certain information regarding the
business, operations and management of Diomed Holdings, Inc., as of March 29,
2002 or such earlier date as referenced therein. The Company filed this
Descriptive Memorandum to make readily available information regarding the
Company, given that the Company contemporaneously filed an Annual Report on Form
10-KSB/A for 2001, which provided information regarding Natexco Corporation, to
which the Company is a successor registrant.
27
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: November 14, 2002
By: /s/ Lisa M. Bruneau
Name: Lisa M. Bruneau
Title: Principal Financial Officer, Vice President,
Finance, Secretary and Treasurer
Date: November 14, 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C 1350, AS
ADOPTED AND THE REQUIREMENTS OF SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Peter Klein, Chief Executive Officer and President of Diomed Holdings, Inc.
(the "Company") do hereby certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of the Company;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this Quarterly Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Peter Klein
Peter Klein
President and Chief Executive Officer
November 14, 2002
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C 1350, AS
ADOPTED AND THE REQUIREMENTS OF SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lisa M. Bruneau, Principal Financial Officer of Diomed Holdings, Inc. (the
"Company") do hereby certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of the Company;
2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Quarterly
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this Quarterly Report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Lisa M. Bruneau
Lisa M. Bruneau
Principal Financial Officer
November 14, 2002
28