SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
December 31, 2008 0-10581
----------------- -------
TRIMEDYNE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 36-3094439
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
25901 Commercentre Dr., Lake Forest, CA 92630
(Address of principal executive offices) (Zip Code)
(949/951-3800)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report).
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), (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
(Issuers involved in bankruptcy proceedings during the past five years)
Not applicable
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the last practicable date.
Class Outstanding at February 20, 2009
- ----------------------------- ------------------------------------
Common Stock, $0.01 par value 18,365,960 shares
TRIMEDYNE, INC.
Page Number
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PART I. Financial Information 4
ITEM 1. Condensed Consolidated Financial Statements (Unaudited) 4
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or
Plan of Operation 14
ITEM 3. Controls and Procedures 18
PART II. Other Information 18
SIGNATURE PAGE 20
CERTIFICATIONS 21
2
EXPLANATORY NOTE
This Amendment No. 1 to Form 10-Q for the three months ended December 31, 2008
is being filed to amend to disclosure revisions to Exhibit 31.1 and 31.2 to be
in compliance with the exact form prescribed by Item 601(b)(31) of Regulation
S-K. In addition, certain segment information has been modified to accurately
reflect the allocation of assets.
3
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, 2008 September 30, 2008
------------------ ------------------
Current assets:
Cash and cash equivalents $ 1,677,000 $ 2,007,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 and
$12,000, respectively 950,000 954,000
Inventories 2,478,000 2,584,000
Other current assets 126,000 171,000
------------------ ------------------
Total current assets 5,231,000 5,716,000
Property and equipment, net 1,314,000 1,382,000
Other 81,000 83,000
Goodwill 544,000 544,000
------------------ ------------------
Total Assets $ 7,170,000 $ 7,725,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 248,000 $ 256,000
Accrued expenses 436,000 469,000
Deferred revenue 78,000 75,000
Accrued warranty 51,000 54,000
Current portion of note payable and capital leases 197,000 237,000
------------------ ------------------
Total current liabilities 1,010,000 1,091,000
Note payable and capital leases, net of current portion 363,000 400,000
Deferred rent 68,000 73,000
------------------ ------------------
Total liabilities 1,441,000 1,564,000
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock - $0.01 par value; 30,000,000 shares authorized,
18,467,569 shares issued, 18,365,960 shares outstanding at
December 31, 2008 and September 30, 2008 186,000 186,000
Additional paid-in capital 51,438,000 51,425,000
Accumulated deficit (45,182,000) (44,737,000)
------------------ ------------------
6,442,000 6,874,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------------ ------------------
Total stockholders' equity 5,729,000 6,161,000
------------------ ------------------
Total liabilities and stockholder's equity $ 7,170,000 $ 7,725,000
================== ==================
See accompanying notes to condensed consolidated financial statements
4
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
December 31,
2008 2007
------------ ------------
Net revenues $ 1,610,000 $ 1,186,000
Cost of revenues 1,076,000 831,000
------------ ------------
Gross profit 534,000 355,000
Operating expenses:
Selling, general and administrative 716,000 551,000
Research and development 296,000 253,000
------------ ------------
Total operating expenses 1,012,000 804,000
------------ ------------
(Loss) from operations (478,000) (449,000)
Other income, net 38,000 72,000
------------ ------------
(Loss) before income taxes (440,000) (377,000)
Provision for income taxes 5,000 --
------------ ------------
Net (loss) $ (445,000) $ (377,000)
============ ============
Net (loss) per share:
Basic $ (0.02) $ (0.02)
============ ============
Diluted $ (0.02) $ (0.02)
============ ============
Weighted average number of shares outstanding:
Basic 18,365,960 18,365,960
============ ============
Diluted 18,365,960 18,365,960
============ ============
See accompanying notes to condensed consolidated financial statements
5
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2008 2007
----------- -----------
Cash flows from operating activities:
Net (loss) (445,000) (377,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Stock-based compensation 11,000 15,000
Depreciation and amortization 90,000 65,000
Changes in operating assets and liabilities:
Trade accounts receivable 4,000 (2,000)
Inventories 106,000 (164,000)
Other assets 47,000 (41,000)
Accounts payable (8,000) (3,000)
Note from related party -- 2,000
Accrued expenses (31,000) (77,000)
Deferred revenue 3,000 10,000
Accrued warranty (3,000) (3,000)
Deferred rent (5,000) (3,000)
----------- -----------
Net cash (used in) operating activities (231,000) (578,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (22,000) (25,000)
----------- -----------
Net cash (used in) investing activities (22,000) (25,000)
----------- -----------
Cash flows from financing activities:
Payments on debt (77,000) (8,000)
----------- -----------
Net cash (used in) financing activities (77,000) (8,000)
----------- -----------
Net (decrease) in cash and cash equivalents (330,000) (611,000)
Cash and cash equivalents at beginning of period 2,007,000 3,179,000
----------- -----------
Cash and cash equivalents at end of period $ 1,677,000 $ 2,568,000
=========== ===========
Supplemental disclosure of cash flow information:
During the three months ended December 31, 2007, the Company financed the
purchase of equipment for $127,000.
Cash paid for income taxes during the three months ended December 31, 2008 was
$5,000 and no cash was paid for income taxes during the three months ended
December 31,2007. Cash paid for interest during the three months ended December
31, 2008 and 2007 was approximately $13,000 and $3,000,respectively.
See accompanying notes to condensed consolidated financial statements
6
TRIMEDYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Trimedyne, Inc., its wholly owned subsidiary, Mobile Surgical
Technologies, Inc. ("MST"), and its 90% owned inactive subsidiary, Cardiodyne,
Inc. ("Cardiodyne") (collectively, the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
Managements' Plans
The Company has incurred losses from operations for the past two years. However,
the Company believes that existing cash flows are sufficient enough to fund
operations through December 31, 2009. There can be no assurance that we will be
able to maintain or achieve sales growth in the next 12 months, or that the
Company will be profitable. Thus, it is possible that additional working capital
in the next 12 months may be required. If necessary, the Company will raise
additional debt and/or equity capital, reduce its costs by eliminating certain
personnel positions and reducing certain overhead costs in order to fund
operations. There is no assurance that management's plans will be successful.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information, and
pursuant to the instructions to Form 10-Q promulgated by the Securities and
Exchange Commission (SEC). Accordingly, they do not include all information and
disclosures required by generally accepted accounting principles for complete
financial statement presentation. In the opinion of management, the accompanying
condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of December 31, 2008 and the results of its
operations and its cash flows for the three months ended December 31, 2008 and
2007. Results for the three months ended December 31, 2008 are not necessarily
indicative of the results to be expected for the year ending September 30, 2009.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the condensed
consolidated financial statements and the notes included in the Company's 2008
annual report on Form 10-K for the year ended September 30, 2008.
Stock-Based Compensation
The fair value of stock-based awards is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions
regarding future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the Company's historical volatilities of its common stock. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods. During the three months ended December 31, 2008,
there were no stock options granted.
As of December 31, 2008, there was approximately $111,000 of total unrecognized
compensation cost, net of estimated expected forfeitures, related to employee
and director stock option compensation arrangements. This unrecognized cost is
expected to be recognized on a straight-line basis over the next 4.75 years.
The following table summarizes stock-based compensation expense related to
employee and director stock options under SFAS No. 123(R) for the three months
ended December 31, 2008 and 2007, which was allocated as follows:
Three Months Ended Three Months Ended
December 31, 2008 December 31, 2007
------------------ -----------------
Stock-based compensation included in:
Cost of revenues $ 3,000 $ 3,000
Research and development expenses $ 1,000 $ 1,000
Selling, general, and administrative expenses $ 7,000 $ 11,000
7
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions include inventory valuation, allowances
for doubtful accounts and deferred income tax assets, recoverability of goodwill
and long-lived assets, losses for contingencies and certain accrued liabilities.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and
long-term debt. The carrying amounts of the Company's financial instruments
generally approximate their fair values as of December 31, 2008 because of the
short maturity of these instruments.
Effective October 1, 2008, the first day of the Company's fiscal year 2009, the
Company adopted SFAS 157 and SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement No.
115," for financial assets and liabilities. The Company did not record an
adjustment to retained earnings as a result of the adoption of SFAS 157, and the
adoption did not have a material effect on the Company's results of operations.
SFAS 159 provides companies the irrevocable option to measure many financial
assets and liabilities at fair value with changes in fair value recognized in
earnings. The Company has not elected to measure any financial assets or
liabilities at fair value that were not previously required to be measured at
fair value.
Concentration of Credit Risk and Customer Concentration
The Company generates revenues principally from sales of products in the medical
field. As a result, the Company's trade accounts receivable are concentrated
primarily in this industry. As of December 31, 2008 two customers accounted for
18% and 14% of the Company's receivables.
At December 31, 2008, the Company had cash balances in excess of federally
insured limits.
Goodwill
The Company accounts for goodwill and acquired intangible assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets", whereby goodwill is not amortized, and is tested for
impairment at the reporting unit level annually during the fourth quarter and in
interim periods if certain events occur indicating that the carrying value of
goodwill may be impaired. A reporting unit is an operating segment for which
discrete financial information is available and is regularly reviewed by
management. The Company has one reporting unit, our service and rental group, to
which goodwill is assigned.
SFAS 142 requires a two-step approach to test goodwill for impairment for each
reporting unit. The first step tests for impairment by applying fair value-based
tests to a reporting unit. The second step, if deemed necessary, measures the
impairment by applying fair value-based tests to specific assets and liabilities
within the reporting unit. Application of the goodwill impairment tests require
judgment, including identification of reporting units, assignment of assets and
liabilities to each reporting unit, assignment of goodwill to each reporting
unit, and determination of the fair value of each reporting unit. The
determination of fair value for a reporting unit could be materially affected by
changes in these estimates and assumptions.
As part of the first step, the Company generally estimates the fair value of the
reporting unit based on market prices (i.e., the amount for which the assets
could be bought by or sold to a third party), when available. When market prices
are not available, we estimate the fair value of the reporting unit using the
income approach. The income approach uses cash flow projections. Inherent in our
development of cash flow projections are assumptions and estimates derived from
a review of our historical operating results, future business plans, expected
growth rates, cost of capital, future economic conditions, etc. Many of the
factors used in assessing fair value are outside the control of management, and
these assumptions and estimates can change in future periods. During the fourth
quarter of the year ended September 30, 2008, the Company conducted a goodwill
impairment test for its service and rental group using a combination of the
market and income approach. As a result of the first step analysis, the expected
cash flows to be generated by the service and rental were sufficient enough to
support the carrying value of the goodwill. Thus, the Company determined there
was no impairment of the goodwill as of September 30, 2008.
Shipping and Handling Costs
Costs incurred for shipping and handling are included in cost of equipment and
services revenues at the time the related revenue is recognized. Amounts billed
to a customer for shipping and handling are reported as revenues. Previously the
Company included such revenues as an offset to costs of goods sold. The change
in classification did not have a significant impact on the presentation of the
Company's financial statements for the three months ended December 31, 2008.
8
Per Share Information
Basic per share information is computed based upon the weighted average number
of common shares outstanding during the period. Diluted per share information
consists of the weighted average number of common shares outstanding, plus the
dilutive effects of options and warrants calculated using the treasury stock
method. In loss periods, dilutive common equivalent shares are excluded as the
effect would be anti-dilutive. During the three months ended December 31, 2008
and 2007, outstanding options of 75,056 and 473,538, respectively, were excluded
from the diluted net loss per share as the effects would have been
anti-dilutive.
Segment Information
The Company reports information about operating segments, as well as disclosures
about products and services, geographic areas and major customers (see Note 7).
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." SFAS No. 141R established principles and requirements for how an
entity which obtains control of one or more businesses (1) recognizes and
measures the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination and (3) determines what
information to disclose regarding business combinations. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual report period beginning on or after
December 15, 2008. SFAS No. 141R will be effective for the Company's fiscal 2010
beginning October 1, 2009. The Company is currently assessing the potential
impact of SFAS No. 141R on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about assets and liabilities measured at fair value in the
financial statements. In February 2008, the FASB issued FASB Staff Position
157-2 ("FSP 157-2") which allows the delay of the effective date of SFAS No. 157
for one year for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company adopted FAS 157 for financial assets and liabilities
effective October 1, 2008 but elected a partial deferral under the provision of
FSP 157-2 related to nonfinancial assets and liabilities that are measured at
fair value on a nonrecurring basis, including goodwill, other intangible and
long-lived assets. The Company is in the process of determining the effects, if
any, SFAS No. 157's application to such nonfinancial assets and liabilities will
hav e on its financial statements.
In April 2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life
of Intangible Assets". FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. Therefore, we will be required to adopt FSP
142-3 for the fiscal year beginning October 1, 2010. We are currently evaluating
the impact of FSP No. 142-3 on our consolidated financial position and results
of operations.
NOTE 2 - Composition of Certain Balance Sheet Captions
Inventories, net of reserves, consist of the following:
December 31, September 30,
2008 2008
----------- -----------
Raw materials $ 950,000 $ 1,036,000
Work-in-process 748,000 722,000
Finished goods 780,000 826,000
----------- ------------
$ 2,478,000 $ 2,584,000
=========== ============
For the three months ended December 31, 2008 and 2007, the aggregate net
realizable value of demonstration and evaluation lasers did not comprise a
material amount in inventories.
9
Other current assets consist of the following:
December 31, September 30,
2008 2008
----------- -----------
Royalty receivable $ 45,000 $ 58,000
Prepaid insurance 55,000 86,000
Prepaid other 12,000 13,000
Prepaid income tax 5,000 5,000
Short-term deposits 9,000 9,000
----------- -----------
Total other current assets $ 126,000 $ 171,000
=========== ===========
Property and equipment consist of the following:
December 31, September 30,
2008 2008
----------- -----------
Furniture and equipment $ 3,236,000 $ 3,216,000
Leasehold improvements 619,000 619,000
Other 282,000 282,000
------------ -----------
4,137,000 4,117,000
Less accumulated depreciation and amortization (2,823,000) (2,735,000)
------------ -----------
Total property and equipment $ 1,314,000 $ 1,382,000
============ ===========
Accrued expenses consist of the following:
December 31, September 30,
2008 2008
----------- -----------
Accrued vacation $ 174,000 $ 187,000
Accrued salaries and wages 72,000 130,000
Sales and use tax 70,000 67,000
Accrued professional expenses -- 4,000
Customer deposits 16,000 13,000
Accrued commissions 82,000 51,000
Accrued payroll taxes 14,000 8,000
Other 8,000 9,000
----------- -----------
Total accrued expenses $ 436,000 $ 469,000
=========== ===========
NOTE 3 - Notes Payable and Capital leases
Notes payable and capital leases consisted of the following at December 31, 2008
and September 30, 2008:
December 31, September 30,
2008 2008
----------- ------------
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.69% per annum. The lease requires monthly
payments of $3,147 through September 2012. $ 92,000 $ 99,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 9.25% per annum. The lease requires monthly
payments of $4,979 through January 2013. 203,000 213,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 9.23% per annum. The lease requires
monthly payments of $526 through February 2013. 22,000 23,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.82% per annum. The lease requires monthly
payments of $2,403 through March 2012. 81,000 87,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.66% per annum. The lease requires monthly
payments of $2,386 through October 2010. 44,000 52,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 8.51% per annum. The lease requires
monthly payments of $3,195 through April 2011. 81,000 89,000
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 6.8% per annum and require monthly
principal and interest payments of $12,631 through March 2009. 37,000 74,000
----------- ------------
560,000 637,000
Less: current portion (197,000) (237,000)
----------- ------------
$ 363,000 $ 400,000
=========== ============
10
NOTE 4 - Commitments and Contingencies
Litigation
In February 2008, the Company and other manufacturers of lasers were named as
defendants in a lawsuit in the State Court of Massachusetts by CardioFocus, Inc.
as allegedly infringing three of their now expired patents in 2002 -2006. The
Company and two of the other defendants submitted a petition to the U.S. Patent
and Trademark Office ("USPTO") to re-examine the patents to determine if they
are valid, as did several of the other defendants. The Company and the other
defendants petitioned the Court to stay the action, which is commonly done in
patent cases, to save the court time in conducting a case on patents which may
be later invalidated by the USPTO. The court granted the request of the Company
and other defendants to stay the case for at least one year. The USPTO usually
takes two to three years to reach a decision on the validity of patents. If the
USPTO should find any of the patents to be valid, the Company has other defenses
that we believe will enable it to successfully defend against any claims b y
CardioFocus, Inc.
The Company is subject to various claims and actions which arise in the ordinary
course of business. The litigation process is inherently uncertain, and it is
possible that the resolution of any of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters which are not reflected in the condensed consolidated statements of
operations that may have material impact on the Company's financial position,
results of operations or cash flows.
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its users of lasers for certain
claims arising from the use of the lasers. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
condensed consolidated balance sheet.
Risks and Uncertainties
The Centers for Medicare and Medicaid Services (CMS), the agency of the U.S.
Government that administers the Medicare Program, recently announced a decision
to deny reimbursement for thermal intradiscal procedures (TIPs). Thermal
procedures to treat spinal discs typically entail the use of electrothermal (ET)
or radiofrequency (RF) energy to heat or coagulate the nucleus of the disc, a
spongy, gelatinous material that absorbs shocks when people run, jump or are
injured, to prevent damage to the vertebra.
CMS, however, included the use of laser energy in its denial of reimbursement,
as the early lasers used in spinal disc treatment, Nd:YAG and KTP lasers, emit
continuous wave (CW) energy at a constant level, which is thermal, like ET or RF
energy. The Company's pulsed Holmium Lasers emit pulsed energy, which is highly
absorbed by water in the cells, which is rapidly turned to steam, vaporizing the
tissue. The tissue cools between the pulses, which last a few hundred
microseconds (millionths of a second), and only a small amount of heating or
coagulation occurs.
The Company filed an objection to CMS' lumping its pulsed Holmium Lasers with
ET, RF and older, thermal Nd:YAG and KTP lasers, few if any of which are still
in use in the treatment of spinal discs, and the Company attached ten (10)
published papers on clinical studies of Holmium laser energy that support our
position.
While the Company disagrees with CMS' decision, very few disc treatments with
its lasers are performed, as herniated and ruptured discs typically affect
people of an average age of about 45.
NOTE 5 - Other Income
During the three months ended December 31, 2008 and 2007, the Company recognized
$45,000 and $44,000, respectively, in royalties in connection with the terms of
a 2005 OEM agreement from Lumenis, Inc. These royalties are included in other
income in the accompanying statements of operations.
11
NOTE 6 - Related Party Transactions
On April 7, 2006, the Company entered into an agreement to employ Cardiomedics
as a consultant to provide graphics arts services, since the Company did not
have any employees with experience in the design and production of brochures and
other marketing materials. Under this agreement, Cardiomedics will provide the
services of a graphics art specialist at a rate comparable to those presently
prevailing in the market in the design and production of marketing materials.
During the three months ended December 31, 2008 and 2007, the Company incurred
$3,000 and $2,000, respectively in expense for the services provided under the
agreement.
NOTE 7 - Segment Information
The Company's segments consist of individual companies managed separately with
each manager reporting to the Chief Executive Officer. Revenues, and operating
or segment profit, are reflected net of inter-segment sales and profits. Segment
profit is comprised of net sales less operating expenses. Other income and
expense and income taxes are not allocated and reported by segment since they
are excluded from the measure of segment performance reviewed by management.
Data with respect to these operating activities for the three months ended
December 31, 2008 and 2007 are as follows:
For the Three Months Ended For the Three Months Ended
December 31, 2008 December 31, 2007
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- -----------------------------------------
Revenue $ 984,000 $ 626,000 $ 1,610,000 $ 771,000 $ 415,000 $ 1,186,000
Cost of sales 662,000 414,000 1,076,000 481,000 350,000 831,000
--------------------------------------- -----------------------------------------
Gross profit 322,000 212,000 534,000 290,000 65,000 355,000
Expenses:
Selling, general and
administrative 561,000 155,000 716,000 434,000 117,000 551,000
Research and development 296,000 -- 296,000 253,000 -- 253,000
--------------------------------------- -----------------------------------------
Income (loss) from operations $ (535,000) $ 57,000 (478,000) $ (397,000) $ (52,000) (449,000)
========================= ==========================
Other:
Interest income 4,000 26,000
Interest expense (13,000) (3,000)
Royalty income 45,000 44,000
Settlements and recoveries 2,000 5,000
Provision for income tax (5,000) --
----------- -----------
Net (loss) $ (445,000) $ (377,000)
=========== ===========
12
Sales and gross profit to customers by similar products and services for the
three months ended December 31, 2008 and 2007 were as follows:
For the Three Months
Ended December 31,
2008 2007
---------- ----------
By similar products and services:
Revenues:
Laser equipment and accessories $ 325,000 $ 89,000
Delivery and disposable devices 659,000 682,000
Service and rental 626,000 415,000
---------- ----------
Total $1,610,000 $1,186,000
========== ==========
Gross profit
Laser equipment and accessories $ 83,000 $ --
Delivery and disposable devices 239,000 290,000
Service and rental 212,000 65,000
---------- ----------
Total $ 534,000 $ 355,000
========== ==========
Sales in foreign countries for the quarters ended December 31, 2008 and 2007
accounted for approximately 26% and 21%, respectively, of the Company's total
sales. The breakdown by geographic region is as follows:
Three Months Ended Three Months Ended
December 31, 2008 December 31, 2007
----------------- -----------------
Asia $ 364,000 $ 50,000
Europe 49,000 102,000
Latin America -- 11,000
Australia 10,000 1,000
Other -- 80,000
------------- ------------
$ 423,000 $ 244,000
============= ============
All long-lived assets were located in the United States during the three months
ended December 31, 2008 and 2007. Total segment assets for the Products segment
were $5,550,000 and Service and Rental were $1,602,000 at December 31, 2008.
Total segment assets differ from total assets on a consolidated basis as a
result of unallocated corporate assets primarily comprised of immaterial amounts
of property and equipment, etc.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company's net revenues include revenues from the sale of delivery and
disposable devices, the sale and rental of laser equipment and accessories, and
service contracts for lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices and lasers are
recognized upon shipment and passage of title of the products, provided that all
other revenue recognition criteria have been met. Generally, customers are
required to insure the goods from the Company's place of business. Accordingly,
the risk of loss transfers to the customer once the goods have been shipped from
the Company's warehouse. The Company sells its products primarily through
commission sales representatives in the United States and distributors in
foreign countries. In cases where the Company utilizes distributors, it
recognizes revenue upon shipment, provided that all other revenue recognition
criteria have been met, and ownership risk has transferred. In general, the
Company does not have any post shipment obligations such as installation or
acceptance provisions. All domestic laser systems are sold with a one year
warranty which includes parts and labor. All international lasers systems are
sold with a one year parts only warranty. As each laser sale is recognized, a
liability is accrued for estimated future warranty costs.
The Company utilizes distributors for international sales only. All laser system
sales are non-returnable. Our international distributors typically locate
customers for laser systems before ordering and in general do not maintain
inventories. The Company's return policy for laser accessories, delivery and
disposable devices sold to distributors is as follows: 1) The Company will
accept returns of any unopened, undamaged, standard catalogue items (except
laser systems) within sixty (60) days of invoice date. Acceptable returned
products will be subject to a 20% restocking fee. 2) A return authorization
number is required for all returns. The number can be obtained by contacting the
Customer Service Department. 3) Should a product be found defective at the time
of initial use, the Company will replace it free of charge.
The Company offers service contracts on its lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve month term, the revenue of
each service contract is deferred and recognized ratably over the term of each
service contract.
Trimedyne, Inc. rents its lasers for a flat monthly charge for a period of
years, on a month-to-month basis, or on a fee-per-case basis, sometimes with a
minimum monthly rental fee. During the three months ended December 31, 2008 and
2007, two lasers were being rented from Trimedyne, Inc., each on a
month-to-month basis, respectively. For these lasers, rental revenue is recorded
ratably over the rental period. MST generally enters into rental service
contracts with customers for a two year period, which unless cancelled, are
renewed on an annual basis after the initial period. During the rental service
contract period customers do not maintain possession of any rental equipment
unless it is for the Company's convenience. Customers are billed on a
fee-per-case basis for rentals, which includes the services of the laser
operator and, in some cases, the use of a reusable or disposable (single use)
laser delivery device. Revenue from these rental service contracts is recognized
as the cases are performed.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of our receivables at least quarterly. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
differences could be material and could significantly impact cash flows from
operating activities.
Inventories
Inventories consist of raw materials and component parts, work in process and
finished good lasers and dispensing systems. Inventories are recorded at the
lower of cost or market, cost being determined principally by use of the
average-cost method, which approximates the first-in, first-out method. Cost is
determined at the actual cost for raw materials, and at production cost
(materials, labor and indirect manufacturing overhead) for work-in-process and
finished goods.
14
Goodwill
The Company accounts for goodwill and acquired intangible assets in accordance
with Statement of Financial Accounting Standards ("SFAS")No. 142 "Goodwill and
Other Intangible Assets", whereby goodwill is not amortized, and is tested for
impairment at the reporting unit level annually during the fourth quarter and in
interim periods if certain events occur indicating that the carrying value of
goodwill may be impaired. A reporting unit is an operating segment for which
discrete financial information is available and is regularly reviewed by
management. The Company has one reporting unit, our service and rental group, to
which goodwill is assigned.
SFAS 142 requires a two-step approach to test goodwill for impairment for each
reporting unit. The first step tests for impairment by applying fair value-based
tests to a reporting unit. The second step, if deemed necessary, measures the
impairment by applying fair value-based tests to specific assets and liabilities
within the reporting unit. Application of the goodwill impairment tests require
judgment, including identification of reporting units, assignment of assets and
liabilities to each reporting unit, assignment of goodwill to each reporting
unit, and determination of the fair value of each reporting unit. The
determination of fair value for a reporting unit could be materially affected by
changes in these estimates and assumptions.
As part of the first step, the Company generally estimates the fair value of the
reporting unit based on market prices (i.e., the amount for which the assets
could be bought by or sold to a third party), when available. When market prices
are not available, we estimate the fair value of the reporting unit using the
income approach. The income approach uses cash flow projections. Inherent in our
development of cash flow projections are assumptions and estimates derived from
a review of our historical operating results, future business plans, expected
growth rates, cost of capital, future economic conditions, etc. Many of the
factors used in assessing fair value are outside the control of management, and
these assumptions and estimates can change in future periods. During the fourth
quarter of the year ended September 30, 2008, the Company conducted a goodwill
impairment test for its service and rental group using a combination of the
market and income approach. As a result of the first step analysis, the expected
cash flows to be generated by the service and rental were sufficient enough to
support the carrying value of the goodwill. Thus, the Company determined there
was no impairment of the goodwill as of December 31, 2008.
Deferred Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
Research and Development Costs
All research and development costs, including licensing costs, are charged to
expense as incurred. In accordance with this policy, all costs associated with
the design, development and testing of the Company's products have been expensed
as incurred.
Stock-based Compensation
The fair value of stock-based awards is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions
regarding future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility for the
nine months ended June 30, 2008 is based on the Company's historical
volatilities of its common stock. These factors could change in the future,
affecting the determination of stock-based compensation expense in future
periods.
15
RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts may contain forward-looking statements that involve a number of
known and unknown risks and uncertainties that could cause actual results to
differ materially from those discussed or anticipated by management. Potential
risks and uncertainties include, among other factors, general business
conditions, government regulations governing medical device approvals and
manufacturing practices, competitive market conditions, success of the Company's
business strategy, delay of orders, changes in the mix of products sold,
availability of suppliers, concentration of sales in markets and to certain
customers, changes in manufacturing efficiencies, development and introduction
of new products, fluctuations in margins, timing of significant orders, and
other risks and uncertainties currently unknown to management.
Method of Presentation
The unaudited condensed consolidated financial statements include the accounts
of Trimedyne, Inc., its wholly owned subsidiary Mobile Surgical Technologies,
Inc. ("MST") and its 90% owned subsidiary, Cardiodyne.
Quarter ended December 31, 2008 compared to quarter ended December 31, 2007
During the quarter ended December 31, 2008, net revenues were $1,610,000 as
compared to $1,186,000 for the same period of the previous year, a $424,000 or
35.8% increase. Net sales from lasers and accessories increased by $236,000 or
265.2% to $325,000 during the three months ended December 31, 2008 from $89,000
in the same period of the prior year. Net sales from delivery and disposable
devices decreased by $23,000 or 3.4% to $659,000 in the current quarter from
$682,000 in the same quarter of the prior year. The net increase in revenues was
due to the increase in export sales which increased by $179,000 or 73.4% to
$423,000 from $244,000 in the prior year quarter. Net sales from service and
rental increased by $211,000 or 50.8% to $626,000 from $415,000 for the same
quarters. The increase in service and rental revenue was primarily the result of
a 46.8% increase fee per case revenue from MST.
Cost of sales during the quarter ended December 31, 2008 was 66.8% of net
revenue as compared to 70.1% of net revenues for the prior year quarter. Gross
profit from the sale of lasers and accessories was 25.5% as compared to 0.0% of
net revenues for the prior year three-month period. The increase in gross profit
was due to a lower percentage of overhead being absorbed in a higher production
level as a result of increasing sales. Gross profit from the sale of delivery
and disposable devices was 36.3% as compared to 42.5% for the prior year period.
This decrease was due to a higher percentage of overhead being absorbed in lower
production as a result of decreasing sales. Gross profit from revenue received
from service and rentals was 33.9% in the current quarter, as compared to 15.7%
for the prior three-month period. This increase in gross profit was primarily
due to an increase in MST's sales changing its product mix to offer higher
revenue services, while maintaining its existing overhead.
Selling, general and administrative expenses increased in the current quarter to
$716,000 from $551,000 in the prior year quarter, an increase of $165,000 or
29.9%. The increase in selling, general and administrative expenses was
primarily the result of increases in the following: $12,000 in payroll related
expense due to increasing staff, $50,000 in expense for outside services
resulting from our planned conversion to a new manufacturing and accounting
records processing system,$43,000 in professional fees incurred for auditing and
preparation of tax returns, $41,000 in commission expense primarily for
international sales, $15,000 in legal expense and $3,000 in insurance expense.
Research and development expenditures for the quarter ended December 31, 2008,
increased $43,000 or 17.0% to $296,000 as compared to $253,000 in the quarter
ended December 31, 2007. This increase was a result the Company increasing its
product development efforts and staff in readying its new VaporMAX(TM)
Side-Firing Device for the market.
Other income, net decreased by $34,000 or 47.2% to $38,000 in the first quarter
ended December 31, 2008 from $72,000 in the first quarter of the prior year.
Other income during the quarter ended December 31, 2008 primarily consisted of
$45,000 of royalty income and $4,000 in interest income, offset by $13,000 in
interest expense. In the period ended December 31, 2007, other income primarily
consisted of $44,000 of royalty income and $26,000 in interest income, offset by
$3,000 in interest expense. The decrease in other income was primarily the
result of decreasing interest rates the Company realized on its interest bearing
investments, offset by an increase in interest resulting from servicing of
equipment loans for purchases during the later part of the fiscal year ended
September 30, 2008.
For the current quarter, the Company had a net loss of $445,000 or $0.02 per
share, based on 18,365,960 basic weighted average number of common shares
outstanding, as compared to net loss of $377,000, or $0.02 per share, based on
18,365,960 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
16
Liquidity and Capital Resources
At December 31, 2008, the Company had working capital of $4,221,000 compared to
$4,625,000 at the end of the fiscal year ended September 30, 2008. Cash
decreased by $330,000 to $1,677,000 from $2,007,000 at the fiscal year ended
September 30, 2008. During the three month period ended December 31, 2008, net
cash used in operating activities was $231,000. Net cash used in investing
activities was $22,000 for the purchase of equipment. Net cash used in financing
activities during the same three month period was $77,000, which was the result
of payments on debt incurred for the servicing of equipment loans. We believe
our existing working capital will be sufficient to meet Trimedyne's operating
needs for the next twelve months. We could incur losses in the future if we fail
to generate revenues sufficient to offset the costs associated with
manufacturing and marketing our current products, our overhead, and the
development of new products. If we continue to incur losses, or if we undertake
the development, testing and marketing of additional new products in the
future, we will likely need to raise substantial additional capital, which may
not be available at an acceptable cost, if and when needed. There can be no
assurance that we will be able to operate profitably in the future.
17
ITEM 3. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. As defined in Rule 13a-15(f) under the
Exchange Act, internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive officer (PEO) and
principal financial officer (PFO) and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Under the supervision and with the participation of our management including our
PEO and PFO, we evaluated the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on the framework and criteria
established by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"), and we concluded that our Internal controls over financial
reporting were not effective.
Our management, including our PEO and our PFO, concluded that our disclosure
controls and procedures were not effective as of December 31, 2008, to ensure
that information required to be disclosed by us in the reports filed or
submitted by us under the Exchange Act (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and (ii)
is accumulated and communicated to our management, including our PEO and our
PFO, as appropriate, to allow timely decisions regarding required disclosure.
A material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness was identified:
1. Procedures were not in place to insure that our Principal Executive Officer
and Principal Financial Officer certifications were filed in the exact
prescribed form set forth in Item 601(B) (31) of Regulation S-K and include the
introductory language of Paragraph 4 of Item 601(B) (31) of Regulation S-K
Changes In Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during
the quarter ended September 30, 2008 that materially affected or are reasonably
likely to materially affect, our internal control over financial
reporting. During 2009, the Company, with the assistance of an external finance
and accounting advisory firm with relevant SEC compliance experience has
established additional procedures to strengthen the Company's financial and
disclosure controls and has taken the following action:
Procedures have been put in place, which includes the review by our external
securities attorney, to properly review our future filings to insure that there
are no omissions of required disclosures and certifications do not contain
language that does not conform to Item (601)(31) of Regulation S-K.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The Company's management, including the Chief Executive Officer, does not
expect that our disclosure controls and procedures or our internal control over
financial reporting will necessarily prevent all fraud and material error. An
internal control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of the control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.
18
PART II Other Information
ITEM 1. Legal Proceedings
In February 2008, the Company and other manufacturers of lasers were named as
defendants in a lawsuit in the State Court of Massachusetts by CardioFocus, Inc.
as allegedly infringing three of their now expired patents in 2002 -2006. The
Company and two of the other defendants submitted a petition to the U.S. Patent
and Trademark Office ("USPTO") to re-examine the patents to determine if they
are valid, as did several of the other defendants. The Company and the other
defendants petitioned the Court to stay the action, which is commonly done in
patent cases, to save the court time in conducting a case on patents which may
be later invalidated by the USPTO. The court granted the request of the Company
and the other defendants to stay the case for at least one year. The USPTO
usually takes two to three years to reach a decision on the validity of patents.
If the USPTO should find any of the patents to be valid, the Company has other
defenses that we believe will enable it to successfully defend against any clai
ms by CardioFocus, Inc.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for Marvin P. Loeb
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for Jeffrey S. Rudner
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Marvin P. Loeb
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Jeffrey S. Rudner
19
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRIMEDYNE, INC.
Date: March 20, 2009 /s/ Marvin P. Loeb
------------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: March 20, 2009 /s/ Jeffrey S. Rudner
------------------- -----------------------------------
Jeffrey S. Rudner
Principal Accounting Officer
20