SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
March 31, 2009 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 May 19, 2009
- ----------------------------- ------------------------------------
Common Stock, $0.01 par value 18,365,960 shares
TRIMEDYNE, INC.
Page Number
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PART I. Financial Information 3
ITEM 1. Condensed Consolidated Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
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 13
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 15
ITEM 4T Controls and Procedures
PART II. Other Information 17
SIGNATURE PAGE 18
CERTIFICATIONS 19
2
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, 2009 September 30, 2008
------------------ ------------------
Current assets:
Cash and cash equivalents $ 1,781,000 $ 2,007,000
Trade accounts receivable, net of allowance
for doubtful accounts of $15,000 and
$12,000, respectively 813,000 954,000
Inventories 2,310,000 2,584,000
Other current assets 101,000 171,000
------------------ ------------------
Total current assets 5,005,000 5,716,000
Property and equipment, net 1,325,000 1,382,000
Other 69,000 83,000
Goodwill 544,000 544,000
------------------ ------------------
Total Assets $ 6,943,000 $ 7,725,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 375,000 $ 256,000
Accrued expenses 491,000 469,000
Deferred revenue 88,000 75,000
Accrued warranty 45,000 54,000
Current portion of note payable and capital leases 163,000 237,000
------------------ ------------------
Total current liabilities 1,162,000 1,091,000
Note payable and capital leases, net of current portion 324,000 400,000
Deferred rent 63,000 73,000
------------------ ------------------
Total liabilities 1,549,000 1,564,000
------------------ ------------------
Commitments and contingencies (Note 4)
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
March 31, 2009 and September 30, 2008 186,000 186,000
Additional paid-in capital 51,448,000 51,425,000
Accumulated deficit (45,527,000) (44,737,000)
------------------ ------------------
6,107,000 6,874,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------------ ------------------
Total stockholders' equity 5,394,000 6,161,000
------------------ ------------------
Total liabilities and stockholder's equity $ 6,943,000 $ 7,725,000
================== ==================
See accompanying notes to condensed consolidated financial statements
3
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2009 2008 2009 2008
------------ ------------ ------------ ------------
Net revenues $ 1,632,000 $ 1,519,000 $ 3,242,000 $ 2,705,000
Cost of revenues 1,074,000 1,049,000 2,150,000 1,880,000
------------ ------------ ------------ ------------
Gross profit 558,000 470,000 1,092,000 825,000
Operating expenses:
Selling, general and administrative 673,000 627,000 1,389,000 1,178,000
Research and development 318,000 322,000 614,000 575,000
------------ ------------ ------------ ------------
Total operating expenses 991,000 949,000 2,003,000 1,753,000
------------ ------------ ------------ ------------
Loss from operations (433,000) (479,000) (911,000) (928,000)
Other income, net 87,000 187,000 125,000 259,000
------------ ------------ ------------ ------------
Loss before provision for income taxes (346,000) (292,000) (786,000) (669,000)
Provision for income taxes (1,000) -- 4,000 --
------------ ------------ ------------ ------------
Net loss $ (345,000) $ (292,000) $ (790,000) $ (669,000)
============ ============ ============ ===========
Net loss per share:
Basic $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============ ============ ============ ============
Diluted $ (0.02) $ (0.02) $ (0.04) $ (0.04)
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 18,365,960 18,365,960 18,365,960 18,365,960
============ ============ ============ ============
Diluted 18,365,960 18,365,960 18,365,960 18,365,960
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
2009 2008
----------- -----------
Cash flows from operating activities:
Net (loss) (790,000) (669,000)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Stock-based compensation 23,000 30,000
Depreciation and amortization 181,000 140,000
Gain on disposal of assets (12,000) --
Changes in operating assets and liabilities:
Trade accounts receivable 141,000 (147,000)
Inventories 274,000 (73,000)
Other assets 84,000 (4,000)
Note from related party -- 9,000
Accounts payable 119,000 133,000
Accrued expenses 22,000 15,000
Deferred revenue 13,000 38,000
Accrued warranty (9,000) 4,000
Deferred rent (10,000) (8,000)
----------- -----------
Net cash provided by (used in) operating activities 36,000 (532,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (112,000) (48,000)
----------- -----------
Net cash (used in) investing activities (112,000) (48,000)
----------- -----------
Cash flows from financing activities:
Payments on debt (150,000) (26,000)
----------- -----------
Net cash (used in) financing activities (150,000) (26,000)
----------- -----------
Net (decrease) in cash and cash equivalents (226,000) (606,000)
Cash and cash equivalents at beginning of period 2,007,000 3,179,000
----------- -----------
Cash and cash equivalents at end of period $ 1,781,000 $ 2,573,000
=========== ===========
Supplemental disclosure of cash flow information:
During the six months ended March 31, 2008, the Company financed the
purchase of equipment for $127,000.
Cash paid for income taxes during the six months ended March 31, 2009 was
$5,000 and no cash was paid for income taxes during the six months ended
March 31, 2008. Cash paid for interest during the six months ended March
31, 2009 and 2008 was approximately $25,000 and $11,000, respectively.
See accompanying notes to condensed consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
(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 March 31, 2010. 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 March 31, 2009 and the results of its
operations and its cash flows for the six months ended March 31, 2009 and
2008. Results for the six months ended March 31, 2009 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 six months ended March 31, 2009,
there were no stock options granted.
As of March 31, 2009, there was approximately $101,620 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 4.50 years.
The following table summarizes stock-based compensation expense related to
employee and director stock options under SFAS No. 123(R) for the three and six
months ended March 31, 2009 and 2008, which was allocated as follows:
Three Months Ended Six Months Ended
March 31, 2009 March 31, 2008 March 31, 2009 March 31, 2008
-------------- -------------- -------------- --------------
Stock-based compensation included in:
Cost of revenues $ 3,000 $ 3,000 $ 6,000 $ 6,000
Research and development expenses $ 1,000 $ 1,000 $ 2,000 $ 2,000
Selling, general, and administrative expenses $ 8,000 $ 11,000 $ 15,000 $ 22,000
6
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 March 31, 2009 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 March 31, 2009 one customer accounted for
23% of the Company's receivables.
At March 31, 2009, 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.
7
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 March 31, 2009
and 2008, outstanding options of 21,043 and 75,056, 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/Adopted Accounting Pronouncements
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.
In May 2008, the FASB issued SFAS No. 162 (SFAS 162), The Hierarchy of Generally
Accepted Accounting Principles. SFAS 162 sets forth the level of authority to a
given accounting pronouncement or document by category. Where there might be
conflicting guidance between two categories, the more authoritative category
will prevail. SFAS 162 becomes effective 60 days after the SEC approves the
PCAOB's amendments to AU Section 411 of the AICPA Professional Standards. SFAS
162 is not expected to have a material impact on our financial statements.
In June 2008, FASB issued EITF Issue No. 07-5 (EITF 07-5), Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock. EITF
No. 07-5 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
application is not permitted. Paragraph 11(a) of SFAS No. 133 - specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company's own stock and (b) classified in stockholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. The adoption of EITF 07-5 is not expected to
have a material impact on our financial statements.
NOTE 2 - Composition of Certain Balance Sheet Captions
Inventories, net of reserves, consist of the following:
March 31, September 30,
2009 2008
----------- -----------
Raw materials $ 895,000 $ 1,036,000
Work-in-process 715,000 722,000
Finished goods 700,000 826,000
----------- ------------
$ 2,310,000 $ 2,584,000
=========== ============
For the six months ended March 31, 2009 and 2008, the aggregate net
realizable value of demonstration and evaluation lasers did not comprise a
material amount in inventories.
8
Other current assets consist of the following:
March 31, September 30,
2009 2008
----------- ------------
Royalty receivable $ 77,000 $ 58,000
Short-term deposits 8,000 9,000
Prepaid insurance -- 86,000
Prepaid other 14,000 13,000
Prepaid income tax 2,000 5,000
----------- -----------
Total other current assets $ 101,000 $ 171,000
=========== ===========
Property and equipment consist of the following:
March 31, September 30,
2009 2008
----------- ------------
Furniture and equipment $ 3,333,000 $ 3,216,000
Leasehold improvements 619,000 619,000
Other 244,000 282,000
------------ -----------
4,196,000 4,117,000
Less accumulated depreciation and amortization (2,871,000) (2,735,000)
------------ -----------
Total property and equipment $ 1,325,000 $ 1,382,000
============ ===========
Accrued expenses consist of the following:
March 31, September 30,
2009 2008
----------- ------------
Accrued vacation $ 180,000 $ 187,000
Accrued salaries and wages 132,000 130,000
Sales and use tax 59,000 67,000
Accrued professional expenses -- 4,000
Customer deposits 7,000 13,000
Accrued commissions 82,000 51,000
Accrued payroll taxes 12,000 8,000
Accrued 401(k) 9,000 --
Other 10,000 9,000
----------- -----------
Total accrued expenses $ 491,000 $ 469,000
=========== ===========
NOTE 3 - Notes Payable and Capital leases
Notes payable and capital leases consisted of the following at March 31, 2009
and September 30, 2008:
March 31, September 30,
2009 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. $ 85,000 $ 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. 192,000 213,000
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. 21,000 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. 76,000 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. 38,000 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. 75,000 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. -- 74,000
----------- ------------
487,000 637,000
Less: current portion (163,000) (237,000)
----------- ------------
$ 324,000 $ 400,000
=========== ============
9
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 by
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 six months ended March 31, 2009 and 2008, the Company recognized
$122,000 and $220,000, 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.
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 six months ended March 31, 2009 and 2008, the Company incurred
$6,000 and $3,000, respectively in expense for the services provided under the
agreement.
10
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 and six months
ended March 31, 2009 and 2008 are as follows:
For the Three Months Ended March 31, 2009 For the Three Months Ended March 31, 2008
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ----------------------------------------
Revenue $ 1,038,000 $ 594,000 $ 1,632,000 $ 1,054,000 $ 465,000 $1,519,000
Cost of sales 708,000 366,000 1,074,000 681,000 368,000 1,049,000
---------------------------------------- ----------------------------------------
Gross profit 330,000 228,000 558,000 373,000 97,000 470,000
Expenses:
Selling, general and
administrative 523,000 150,000 673,000 515,000 112,000 627,000
Research and development 318,000 -- 318,000 322,000 -- 322,000
---------------------------------------- ----------------------------------------
Income (loss) from operations $ (511,000) $ 78,000 (433,000) $ (464,000) $ (15,000) (479,000)
========================== =========================
Other:
Interest income 3,000 16,000
Interest expense (12,000) (8,000)
Royalty income 77,000 176,000
Gain on disposal of assets 12,000 --
Settlements and recoveries 7,000 3,000
Income taxes (1,000) --
----------- ----------
Net (loss) $ (345,000) $ (292,000)
=========== ==========
For the Six Months Ended March 31, 2009 For the Six Months Ended March 31, 2008
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- ----------------------------------------
Revenue $ 2,022,000 $ 1,220,000 $ 3,242,000 $ 1,825,000 $ 880,000 $ 2,705,000
Cost of sales 1,370,000 780,000 2,150,000 1,162,000 718,000 1,880,000
--------------------------------------- ----------------------------------------
Gross profit 652,000 440,000 1,092,000 663,000 162,000 825,000
Expenses:
Selling, general and
administrative 1,084,000 305,000 1,389,000 949,000 229,000 1,178,000
Research and development 614,000 -- 614,000 575,000 -- 575,000
--------------------------------------- ----------------------------------------
Income (Loss) from operations $(1,046,000) $ 135,000 (911,000) $ (861,000) $ (67,000) (928,000)
========================== =========================
Other:
Interest income 7,000 42,000
Interest expense (25,000) (11,000)
Royalty income 122,000 220,000
Gain on disposal of equipment 12,000 --
Settlements and recoveries 9,000 8,000
Income taxes 4,000 --
----------- ----------
Net (loss) $ (790,000) $ (669,000)
=========== ==========
11
Sales and gross profit to customers by similar products and services for the
three and six months ended March 31, 2009 and 2008 were as follows:
For the Three Months Ended March 31, For the Six Months Ended March 31,
(Unaudited) (Unaudited)
2009 2008 2009 2008
------------ ------------ ------------ ------------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 315,000 $ 342,000 $ 640,000 $ 431,000
Delivery and disposable devices 723,000 712,000 1,382,000 1,394,000
Service and rental 594,000 465,000 1,220,000 880,000
------------ ------------ ------------ ------------
Total $ 1,632,000 $ 1,519,000 $ 3,242,000 $ 2,705,000
============ ============ ============ ============
Gross profit
Products:
Laser equipment and accessories $ 35,000 $ 54,000 $ 118,000 $ 54,000
Delivery and disposable devices 295,000 319,000 534,000 609,000
Service and rental 228,000 97,000 440,000 162,000
------------ ------------ ------------ ------------
Total $ 558,000 $ 470,000 $ 1,092,000 $ 825,000
============ ============ ============ ============
Sales in foreign countries for the quarters ended March 31, 2009 and 2008,
accounted for approximately 20% and 28%, respectively, of the Company's total
sales. Sales in foreign countries for the six months ended March 31, 2009 and
2008 accounted for approximately 23% and 25%, respectively, of the Company's
total sales. The breakdown by geographic region is as follows:
Three Months Three Months Six Months Six Months
Ended March Ended March Ended March Ended March
31, 2009 31, 2008 31, 2009 31, 2008
----------- ------------ ------------ ------------
Asia $ 183,000 $ 267,000 $ 547,000 $ 317,000
Europe 51,000 36,000 100,000 138,000
Latin America 4,000 14,000 4,000 25,000
Middle East 1,000 80,000 1,000 80,000
Australia 98,000 12,000 109,000 13,000
Other -- 19,000 -- 99,000
----------- ----------- ------------ ------------
$ 337,000 $ 428,000 $ 761,000 $ 672,000
=========== =========== ============ ============
All long-lived assets were located in the United States during the six months
ended March 31, 2009 and 2008. Total segment assets for the Products segment
were $5,371,000 and Service and Rental were $1,550,000 at March 31, 2009.
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The statements, other than statements of historical fact, included in this
report are forward-looking statements. Forward-looking statements generally can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "intend," "estimate," "anticipate," "plan," "seek," or "believe." We
believe that the expectations reflected in such forward-looking statements are
accurate. However, we cannot assure you that such expectations will occur. Our
actual future performance could differ materially from such statements. You
should not unduly rely on these forward-looking statements, which speak only as
of the date of this report. Except as required by law, we are not obligated to
release publicly any revisions to these forward-looking statements to reflect
events or circumstances occurring after the date of this report or to reflect
the occurrence of unanticipated events.
This section should be read in conjunction with our condensed unaudited
consolidated financial statements and the related notes thereto as of March 31,
2009 and for the three and six months then ended, which are included elsewhere
in this report, with the audited consolidated financial statements and related
notes thereto as of September 30, 2008 and for the year then ended, included in
our Form 10-K filed with the Securities and Exchange Commission ("SEC") on
January 13, 2009 and with other company filings made with the SEC.
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 March 31, 2009 compared to quarter ended March 31, 2008
During the quarter ended March 31, 2009, net revenues were $1,632,000 as
compared to $1,519,000 for the same period of the previous year, a $113,000 or
7.4% increase. Net sales from lasers and accessories decreased by $27,000 or
7.9% to $315,000 during the three months ended March 31, 2009 from $342,000 in
the same period of the prior year. Lasers carry a high selling price and are
subject to a longer, less predictable, closing period which, as a result, can
create larger variances between periods. Net sales from delivery and disposable
devices increased by $11,000 or 1.5% to $723,000 in the current quarter from
$712,000 in the same quarter of the prior year. Net sales from service and
rental increased by $129,000 or 27.7% to $594,000 from $465,000 for the same
quarters. Export sales decreased by $91,000 or 21.3% primarily as a result of
current economic conditions.
Cost of sales during the quarter ended March 31, 2009 was $1,074,000 or 65.8% of
net revenues as compared to $1,049,000 or 69.1% the prior year three-month
period. Gross profit from the sale of lasers and accessories was 11.1% as
compared to a gross profit of 15.8% for the prior year three-month period. The
lower margin was the result of the extraordinary replacement of a damaged new
laser, along with increasing material costs. The gross profit from the sale of
delivery and disposable devices was 40.8% as compared to 44.8% for the prior
year three-month period. This decrease in gross profit was primarily due to an
increase in the cost of raw materials along with excess overhead being absorbed
as a result of lower production rates of delivery and disposable systems. Gross
profit from revenue received from service and rentals were 38.3% as compared to
20.9% for the prior year three-month period. The higher gross profit from
service and rentals during the current year quarter as compared to the prior
year's quarter was primarily the result increases revenues from services
performed on a fee-per-case basis carrying a higher margin and decreases in
repair costs to MST's laser fleet as maintenance and upgrades were performed
during the prior year quarter.
Selling, general and administrative expenses increased in the current quarter to
$673,000 from $627,000 in the prior year quarter, an increase of $46,000 or
7.33%. The increase in selling, general and administrative expenses during the
current three-month period compared to the prior year quarter was primarily the
result of increases in expenses of $19,000 for professional fees for accounting
and SOX compliance, $18,000 for support fees incurred for the Company's
conversion to a new ERP system, $15,000 for administrative payroll, $10,000 to
increase accounts receivable reserve, and $7,000 related to insurance, offset by
reductions in commissions expense of $12,000 and marketing expense of $16,000.
13
Research and development expenditures for the quarter ended March 31, 2009,
decreased $4,000 or 1.2% to $318,000 as compared to $322,000 in the quarter
ended March 31, 2007. The continuing expenditure for research and development
was primarily a result of the Company continuing its product development efforts
in developing its new Side-Firing Laser Fibers for sale by the Company, Lumenis,
Ltd. and Boston Scientific Corporation.
Other income, net, decreased by $100,000 or 53.4% to $87,000 in the quarter
ended March 31, 2009 from $187,000 in the same quarter of the prior year. The
decrease in other income during the quarter ended March 31, 2009 was primarily
result a decreases in bank interest income of $13,000 due to lower maintained
balances in interest bearing accounts combined with declining interest rates and
$99,000 in royalty income, offset by a gain in the disposal of fixed assets of
$12,000.
For the quarters ended March 31, 2009 and 2008, the Company had a net loss of
$345,000 or $0.02 per share, as compared to a net loss of $292,000 or $0.02 per
share, respectively, based on 18,365,960 basic weighted average number of common
shares outstanding, resulting from the above mentioned factors.
Six months ended March 31, 2009 compared to six months ended March 31, 2008
During the six months ended March 31, 2009, net revenues increased to $3,242,000
as compared to $2,705,000 for the same period of the previous year, a $537,000
or 19.9% increase. Net sales from lasers and accessories increased by $209,000
or 48.5% to $640,000 during the six months ended March 31, 2009 from $431,000 in
the same period of the prior year. Lasers carry a high selling price and are
subject to a longer, less predictable, closing period which, as a result, can
create larger variances between periods. Net revenues from delivery and
disposable devices decreased by $12,000 or 0.9% to $1,382,000 during the six
months ended March 31, 2009 from $1,394,000 for the same period of the prior
year. During the six months ended March 31, 2009 export sales increased by
$89,000 or 13.2% to $761,000 as compared to $672,000 in the same period of the
prior year. Net sales from service and rental increased by $340,000 or 38.6% to
$1,220,000 from $880,000 for the same quarter of the prior year. The higher
gross profit from service and rentals during the current year quarter as
compared to the prior year's quarter was primarily the result of increases in
revenues from services performed on a fee-per-case basis carrying a higher
margin by MST.
Cost of sales during the six months ended March 31, 2009 were $2,150,000 or
66.3% of net revenues as compared to $1,880,000 or 69.5% for the same period of
the prior year. Gross profit from the sale of lasers and accessories was 18.5%
as compared to 12.5% for the prior year six-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 laser sales. Gross profit from the
sale of delivery and disposable devices was 38.6% as compared to 43.7% for the
prior year six-month period. This decrease was primarily due to an increase in
the cost of raw materials for the production of delivery and disposable systems
along with a higher absorption of overhead due to decreasing production. Gross
profit from revenue received from service and rentals were 36.1% as compared to
18.4% for the prior year six-month period. The higher gross profit from service
and rentals during the current year was primarily the result increases in
fee-per-case revenue from procedures carrying a higher margin.
For the six months ended March 31, 2009, selling, general and administrative
expenses totaled $1,389,000 as compared to $1,178,000 for the same period of the
previous year, a $211,000 or 17.9% increase. The increase in selling, general
and administrative expenses during the current six-month period was primarily
the result of increases in accounting fees of $62,000, primarily as a result of
audit and SOX compliance support, outside services of $60,000 for the conversion
of the Company's ERP system, commissions expense of $46,000, payroll related
expenses of $34,000 due to increasing staff, legal expense of $14,000 and
$10,000 to increase the reserve for bad debt, offset by a reduction in marketing
expense of $20,000.
During the six months ended March 31, 2009, research and development expenses
increased to $614,000 from $575,000 in the prior year six-month period, an
increase of $39,000 or 6.8%. This increase was a result the Company continuing
its product development efforts in developing its new Side-Firing Laser
Fibers for sale by the Company, Lumenis, Ltd. and Boston Scientific Corporation.
Other income decreased by $134,000 or 51.7% to $125,000 in the current six-month
period from $259,000 in the previous six-month period. During the six months
ended March 31, 2009, royalty income decreased $98,000 to $122,000 as compared
to $220,000 in the prior year six-month period. Interest income decreased
$35,000 to $7,000 as compared to $42,000 during the same prior year period as a
result of lower maintained balances in interest bearing accounts along with
declining interest rates. The above decreases were offset by a gain on the
disposal of fixed assets of $12,000.
For the six months ended March 31, 2009 and 2008, the Company had a net loss of
$790,000 or $0.04 per share, as compared to a net loss of $669,000 or $0.04 per
share, respectively, based on 18,365,960 basic weighted average number of common
shares outstanding, resulting from the above mentioned factors.
14
Liquidity and Capital Resources
At March 31, 2009, the Company had working capital of $3,843,000 compared to
$4,625,000 at the end of the fiscal year ended September 30, 2008. Cash
decreased by $226,000 to $1,781,000 from $2,007,000 at the fiscal year ended
September 30, 2008. During the six month period ended March 31, 2009, net cash
provided by operating activities was $36,000. Net cash used in investing
activities was $112,000, primarily for the purchase of new equipment for MST.
Net cash used in financing activities during the current six month period was
$150,000, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold any derivative instruments and do not engage in any hedging
activities.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation
of our principal executive officer and principal financial officer, the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our chief
executive officer and chief financial officer have concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures are
effective in ensuring that information required to be disclosed in our Exchange
Act reports is (1) recorded, processed, summarized and reported in a timely
manner, and (2) accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes In Internal Control Over Financial Reporting
There have been changes in our internal control over financial reporting that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Previously, we disclosed in our Form 10-Q for the period ending December 31,
2008, that our internal control over financial reporting was not effective as of
December 31, 2008 to ensure that information required to be disclosed by us in
our Exchange Act reports was (1) recorded, processed, summarized and reported in
a timely manner, and (2) accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
The following material weakness was identified at that time:
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.
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.
During the period covered by this report, the Company, with the assistance of an
external finance and accounting advisory firm with relevant SEC compliance
experience resolved this material weakness by establishing additional procedures
to strengthen the Company's financial and disclosure controls and has taken the
following specific 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.
15
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.
16
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
claims 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
17
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: May 19, 2009 /s/ Marvin P. Loeb
------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: May 19, 2009 /s/ Jeffrey S. Rudner
------------- -----------------------------------
Jeffrey S. Rudner
Principal Accounting Officer
18