UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _______________________
COMMISSION FILE NO. 0-10581
----------------------
TRIMEDYNE, INC.
---------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 36-3094439
------ ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
25901 COMMERCENTRE DRIVE 92630
LAKE FOREST, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code:
(949) 951-3800
----------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value per Share
(Title of Class)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act of 1934). Yes [ ] No [X]
As of August 13, 2010, there were outstanding 18,365,960 shares of
registrant's Common Stock.
TRIMEDYNE, INC.
Page Number
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PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited)
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 of Financial
Condition and Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk - N/A 19
ITEM 4. Controls and Procedures 19
PART II. Other Information 20
ITEM 1. Legal Proceedings 20
ITEM 1A. Risk Factors - N/A 20
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. [Removed and Reserved] 20
ITEM 5. Other Information 20
ITEM 6. Exhibits 20
SIGNATURES 21
2
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, 2010 September 30, 2009
------------------ ------------------
Current assets:
Cash and cash equivalents $ 406,000 $ 1,621,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 at June 30, 2010
and September 30, 2009 720,000 988,000
Inventories 2,981,000 2,266,000
Other current assets 189,000 226,000
------------------ ------------------
Total current assets 4,296,000 5,101,000
Property and equipment, net 950,000 1,168,000
Other 91,000 87,000
Goodwill 544,000 544,000
------------------ ------------------
Total Assets $ 5,881,000 $ 6,900,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 298,000 $ 449,000
Accrued expenses 488,000 497,000
Deferred revenue 91,000 100,000
Accrued warranty 26,000 54,000
Income tax payable 21,000 20,000
Current portion of note payable and capital leases 190,000 209,000
------------------ ------------------
Total current liabilities 1,114,000 1,329,000
Note payable and capital leases, net of current portion 123,000 232,000
Deferred rent 41,000 51,000
Long term warrant liability 4,000 --
------------------ ------------------
Total liabilities 1,282,000 1,612,000
------------------ ------------------
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 at June 30, 2010 and
September 30, 2009, 18,365,960 shares outstanding at
June 30, 2010 and September 30, 2009 186,000 186,000
Additional paid-in capital 51,235,000 51,461,000
Accumulated deficit (46,109,000) (45,646,000)
------------------ ------------------
5,312,000 6,001,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------------ ------------------
Total stockholders' equity 4,599,000 5,288,000
------------------ ------------------
Total liabilities and stockholder's equity $ 5,881,000 $ 6,900,000
================== ==================
See accompanying notes to condensed consolidated financial statements
3
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Net revenues $ 1,515,000 $ 2,068,000 $ 4,896,000 $ 5,310,000
Cost of revenues 771,000 1,250,000 2,973,000 3,400,000
------------ ------------ ------------ ------------
Gross profit 744,000 818,000 1,923,000 1,910,000
Operating expenses:
Selling, general and administrative 628,000 653,000 1,916,000 2,042,000
Research and development 254,000 317,000 875,000 931,000
------------ ------------ ------------ ------------
Total operating expenses 882,000 970,000 2,791,000 2,973,000
------------ ------------ ------------ ------------
Loss from operations (138,000) (152,000) (868,000) (1,063,000)
Other income, net 79,000 74,000 211,000 199,000
------------ ------------ ------------ ------------
Loss before provision for income taxes (59,000) (78,000) (657,000) (864,000)
Provision for income taxes 3,000 4,000 12,000 8,000
------------ ------------ ------------ ------------
Net loss $ (62,000) $ (82,000) $ (669,000) $ (872,000)
============ ============ ============ ============
Net loss:
Basic $ (0.00) $ (0.00) $ (0.04) $ (0.05)
============ ============ ============ ============
Diluted $ (0.00) $ (0.00) $ (0.04) $ (0.05)
============ ============ ============ ============
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)
Nine Months Ended
June 30,
2010 2009
----------- -----------
Cash flows from operating activities:
Net loss $ (669,000) $ (872,000)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Stock-based compensation 13,000 29,000
Depreciation and amortization 246,000 271,000
Change in fair value of warrant liability (29,000) --
(Gain) loss on disposal of property and equipment 2,000 (12,000)
Changes in operating assets and liabilities:
Trade accounts receivable 268,000 259,000
Inventories (715,000) 502,000
Other assets 93,000 (106,000)
Accounts payable (151,000) 143,000
Accrued expenses (9,000) 83,000
Income tax payable 1,000 --
Deferred revenue (9,000) 40,000
Accrued warranty (28,000) (4,000)
Deferred rent (10,000) (15,000)
----------- -----------
Net cash provided by (used in) operating activities (997,000) 318,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (30,000) (127,000)
----------- -----------
Net cash used in investing activities (30,000) (127,000)
----------- -----------
Cash flows from financing activities:
Payments on debt (188,000) (122,000)
----------- -----------
Net cash used in financing activities (188,000) (122,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,215,000) 69,000
Cash and cash equivalents at beginning of period 1,621,000 2,007,000
----------- -----------
Cash and cash equivalents at end of period $ 406,000 $ 2,076,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes during the nine months ended June 30, 2010 and 2009
was $12,000 and $8,000, respectively. Cash paid for interest during the nine
months ended June 30, 2010 and 2009 was approximately $26,000 and $36,000,
respectively.
Supplemental disclosure of non-cash investing activity:
During the nine months ended June 30, 2010, the Company financed the purchase of
certain insurance policies with a $60,000 note. During the nine months ended
June 30, 2009, the Company financed the purchase of certain insurance policies
with a $85,000 note.
See accompanying notes to condensed consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Trimedyne, Inc., a Nevada corporation, its wholly owned subsidiary,
Mobile Surgical Technologies, Inc. ("MST"), a Texas corporation, and its 90%
owned inactive subsidiary, Cardiodyne, Inc. ("Cardiodyne"), a Nevada
corporation, (collectively, the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
Management's Plans
The Company's working capital has declined and it has incurred losses during
the past four years from operations and the development of its new VaporMAX(R)
side firing optical fiber device for use with Holmium Lasers for the treatment
of enlarged prostates in men and to treat herniated or ruptured discs, both
customarily in outpatient procedures. There can be no assurance that the
Company will be able to maintain or achieve sales growth to offset these
losses, or that the Company will again become profitable.
On August 20, 2010, the Company sold to Marvin P. Loeb, the Company's Chairman
and CEO, $500,000 of 6% Senior Secured Convertible Notes ("the Notes"), which
are secured by all of the assets of the Company, and are redeemable by the
holder on written notice to the Company, to pay the Company's ongoing expenses
and those costs of the Company's intended legal action against Lumenis, Ltd.,
of Yokneam, Isreal ("Lumenis") not covered by a contingent fee agreement (see
"Liquidity and Capital" in "Management Discussion and Analysis"). The Company
intends to file a Form 8(K) to disclose the details of the Company's intended
legal action against Lumenis the aforesaid purchase of Notes. purchase.
The Company has taken various steps to reduce its costs through a significant
reduction in personnel positions and overhead costs and the Company's Chairman
deferring all of his salary and the Company's President deferring 15% of his
salary.
The Company renegotiated its lease on its facility in Lake Forest, California
and signed a new lease agreement which will result in a savings of over $111,000
in rent expense through the next twelve months. The Company plans to raise
additional capital through the sale of notes, debentures, equity capital or
other Company assets. There is no assurance that these efforts will be
successful.
Based on its current cash flow projections, the Company expects its existing
resources will be sufficient to fund operations through December 31, 2010. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. However, management is unsure if the Company's
liquidity and anticipated revenues will be sufficient to meet its obligations as
they become due for the next 12 months from the balance sheet date. This raises
substantial doubt about the Company's ability to continue as a going concern.
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 June 30, 2010 and the
results of its operations and its cash flows for the nine months ended June 30,
2010 and 2009. Results for the nine months ended June 30, 2010 are not
necessarily indicative of the results to be expected for the year ending
September 30, 2010.
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 2009
annual report on Form 10-K for the year ended September 30, 2009.
6
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 June 30, 2010,
there were no stock options granted.
As of June 30, 2010, there was approximately $9,865 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 three years.
The following table summarizes stock-based compensation expense related to
employee and director stock options under ASC No. 718 for the nine months
ended June 30, 2010 and 2009, which was allocated as follows:
Three Months Ended Nine Months Ended
June 30, 2010 June 30, 2009 June 30, 2010 June 30, 2009
-------------- -------------- ------------- -------------
Stock-based compensation included in:
Cost of revenues $ 1,000 $ 3,000 $ 3,000 $ 9,000
Research and development expenses $ 1,000 $ 1,000 $ 3,000 $ 3,000
Selling, general, and administrative expenses $ 1,000 $ 3,000 $ 8,000 $ 18,000
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
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements", which has been codified into Accounting Standards Codification
825 ("ASC 825"). The standard defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair value
measurements. ASC 825 does not require any new fair value measurements, but
provides guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. In February 2008, the
FASB deferred the effective date of ASC 825 by one year for certain
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On October 1, 2008, we adopted the provisions of ASC
825, except as it applies to those nonfinancial assets and nonfinancial
liabilities for which the effective date has been delayed by one year, which we
adopted on October 1, 2009. The adoption of ASC 825 did not have a material
effect on our financial position or results of operations. The book values of
cash, accounts receivable inventory, accounts payable and notes payable
approximate their respective fair values due to the short-term nature of these
instruments. At June 30, 2010, the warrant liability was recorded under a level
two assumption; see Note 4 for discussion of the valuation techniques used to
measure the fair value of the warrant liability.
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. No customer concentrations noted as of June 30,
2010.
At June 30, 2010, the Company had cash balances of $63,000 in excess of
federally insured limits.
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 nine months ended June 30, 2010 and
2009, outstanding options of 47,000 and 25,000, 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 or Adopted Accounting Pronouncements
In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, "Determination
of the Useful Life of Intangible Assets" ("FSP 142-3"). This pronouncement
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 Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). This pronouncement aims to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R). The provisions of FSP 142-3 were incorporated into the
Codification within ASC Subtopic 350-30 "General Intangibles other than
Goodwill" and are effective for fiscal years beginning after December 15, 2008.
On October 1, 2009, the Company adopted the standard with no impact on its
financial statements.
Effective October 1, 2009, the Company adopted the provisions of Emerging
Issues Task Force 07-5, "Determining Whether an Instrument (or Embedded Feature)
is Indexed to an Entity's Own Stock" ("EITF 07-5"), which has been codified into
ASC 815. The guidance applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(which was codified into ASC 815) and to any freestanding financial instruments
that are potentially settled in an entity's own common stock. The guidance
had an impact on the Company's financial statements and position
due to certain warrants in which the exercise price resets upon certain events.
See Note 4 for discussion.
In January 2010, the FASB amended authoritative guidance for improving
disclosures about fair-value measurements. The updated guidance requires new
disclosures about recurring or nonrecurring fair-value measurements including
significant transfers into and out of Level 1 and Level 2 fair-value
measurements and information on purchases, sales, issuances, and settlements on
a gross basis in the reconciliation of Level 3 fair-value measurements. The
guidance also clarified existing fair-value measurement disclosure guidance
about the level of disaggregation, inputs, and valuation techniques. The
guidance became effective for interim and annual reporting periods beginning on
or after December 15, 2009, with an exception for the disclosures of purchases,
sales, issuances and settlements on the roll-forward of activity in Level 3
fair-value measurements. Those disclosures will be effective for fiscal years
beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company does not expect that the adoption of this guidance will have
a material impact on the consolidated financial statements.
NOTE 2 - Composition of Certain Balance Sheet Captions
Inventories, net of reserves, consist of the following:
June 30, September 30,
2010 2009
----------- -----------
Raw materials $ 1,067,000 $ 848,000
Work-in-process 707,000 800,000
Finished goods 1,207,000 618,000
----------- ------------
$ 2,981,000 $ 2,266,000
=========== ============
For the six months ended June 30, 2010 and 2009, 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:
June 30, September 30,
2010 2009
----------- -----------
Royalty receivable $ 64,000 $ 93,000
Prepaid insurance 72,000 66,000
Other receivables -- 34,000
Prepaid other 42,000 20,000
Prepaid income tax 1,000 5,000
Prepaid Rent 2,000 --
Short-term deposits 8,000 8,000
----------- -----------
Total other current assets $ 189,000 $ 226,000
=========== ===========
Property and equipment consist of the following:
June 30, September 30,
2010 2009
----------- -----------
Furniture and equipment $ 3,358,000 $ 3,354,000
Leasehold improvements 642,000 619,000
Other 244,000 244,000
------------ -----------
4,244,000 4,217,000
Less accumulated depreciation and amortization (3,294,000) (3,049,000)
------------ -----------
Total property and equipment $ 950,000 $ 1,168,000
============ ===========
Accrued expenses consist of the following:
June 30, September 30,
2010 2009
------------ -------------
Accrued vacation $ 185,000 $ 182,000
Accrued salaries and wages 87,000 62,000
Sales and use tax 71,000 75,000
Customer deposits 5,000 4,000
Accrued commissions 93,000 145,000
Accrued bonuses 31,000 --
Accrued payroll taxes 5,000 11,000
Accrued 401(k) -- 9,000
Other 11,000 9,000
----------- -----------
Total accrued expenses $ 488,000 $ 497,000
=========== ===========
NOTE 3 - Notes Payable and Capital leases
Notes payable and capital leases consists of the following at June 30, 2010 and
September 30, 2009:
June 30, September 30,
2010 2009
----------- ------------
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. $ 45,000 $ 69,000
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. 133,000 170,000
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. 15,000 19,000
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. 45,000 64,000
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. 5,000 27,000
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. 28,000 53,000
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 6.5% per annum and require monthly
principal and interest payments of $8,018 through March 2010. -- 39,000
9
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 4.7% per annum and require monthly
principal and interest payments of $6,042 through January 2011. 42,000 --
----------- ----------
$ 313,000 $ 441,000
Less: current portion (190,000) (209,000)
----------- ----------
$ 123,000 $ 232,000
=========== ==========
NOTE 4 - Outstanding Warrant Liability
Effective October 1, 2009 we adopted the provisions of EITF 07-5, "Determining
Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and to any freestanding financial instruments that are potentially settled in an
entity's own common stock. Both standards were codified into ASC 815. As a
result of adopting EITF 07-5, 212,000 of our issued and outstanding common stock
purchase warrants previously treated as equity pursuant to the derivative
treatment exemption were no longer afforded equity treatment. These warrants
have an exercise price of $1.14 and expire in January 2012. As such, effective
October 1, 2009 we reclassified the fair value of these common stock purchase
warrants, which have exercise price reset features, from equity to liability
status as if these warrants were treated as a derivative liability since their
date of issue in January 2007. On October 1, 2009, we reclassified from
additional paid-in capital, as a cumulative effect adjustment, $204,000 to
beginning retained earnings and $35,000 to a long-term warrant liability to
recognize the fair value of such warrants on such date. The fair value of these
common stock purchase warrants declined to $4,000 as of June 30, 2010. As
such, we recognized a gain of approximately $29,000 from the change in fair
value of these warrants for the nine months ended June 30, 2010.
These common stock purchase warrants were initially issued in connection with
our January 2007 issuance and sale of 2.65 million shares of common stock. The
common stock purchase warrants were not issued with the intent of effectively
hedging any future cash flow, fair value of any asset, liability or any net
investment in a foreign operation. The warrants do not qualify for hedge
accounting, and as such, all future changes in the fair value of these warrants
will be recognized currently in earnings until such time as the warrants are
exercised or expire. These common stock purchase warrants do not trade in an
active securities market, and as such, we estimate the fair value of these
warrants using the Black-Scholes option pricing model using the following
assumptions:
June 30, October 1,
2010 2009
------------ -----------
Annual dividend yield -- --
Expected life (in years) 1.51 2.26
Risk free interest rate 0.61% 2.20%
Expected annual volatility 78.9% 103.0%
Expected volatility is based primarily on historical volatility. Historical
volatility was computed using weekly pricing observations for recent periods
that correspond to expected remaining life of the warrant. We believe this
method produces an estimate that is representative of our expectations of future
volatility over the expected term of these warrants. We currently have no reason
to believe future volatility over the expected remaining life of these warrants
is likely to differ materially from historical volatility. The expected life is
based on the remaining term of the warrants. The risk-free interest rate is
based on U.S. Treasury securities.
NOTE 5 - Commitments and Contingencies
Litigation
We are subject to various claims and actions that arise in the ordinary course
of business. The litigation process is inherently uncertain, and it is possible
that the resolution of any future litigation may adversely affect us.
The Company had no product liability lawsuits commenced against it during the
nine months ended June 30, 2010. The Company has insurance to cover product
liability claims. This insurance provides the Company with $5,000,000 of
coverage for each occurrence with a general aggregate coverage of $5,000,000.
Trimedyne's liability is limited to a maximum of $50,000 per occurrence unless
the judgment against the Company exceeds the $5,000,000 insurance coverage. In
such case, Trimedyne would be liable for any liability in excess of $5,000,000.
10
In February, 2008, the Company and six other laser manufacturers were sued in
the District Court of Massachusetts by CardioFocus, Inc. ("CardioFocus"),
alleging infringement of three of their now expired U.S. Patents, which limits
their claim for royalties to six years prior to their date of expiration. The
Company and two other laser companies joined in a petition to the U.S. Patent &
Trademark Office ("USPTO") to re-examine these patents and declare them invalid.
The other four defendants likewise individually requested a re-examination of
these patents and a declaration of invalidity by the USPTO. One of Cardiofocus'
patents was declared invalid and an aggregate of three claims of the other two
patents were declared valid by the USPTO, which may or may not pertain to the
type of laser and fiber-optic devices the Company manufactures.
The court issued a stay of the proceedings until October 14, 2009. On October
14, 2009, the defendants (including Trimedyne) sought to extend the stay of the
proceedings until October 14, 2010, or until the USPTO's reexamination
proceedings have concluded. In March 2010, the court refused to extend the stay
and allowed the lawsuit to proceed. The lawsuit is currently in discovery and no
amounts have been accrued as of June 30, 2010.
While the Company has commenced settlement negotiations with CardioFocus, there
is no assurance any settlement can be reached on terms acceptable to the
Company. The Company believes it has adequate defenses to this lawsuit and
intends to defend itself vigorously and thus has not provided a provision for
losses.
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, does not reimburse for thermal
intradiscal procedures to treat spinal discs including the use of the Company's
pulsed Holmium Lasers. Since most people suffering from a herniated or ruptured
spinal disc are below Medicare age, we do not believe CMS's decision will have
an adverse impact on our business.
NOTE 6 - Other Income
During the three month period ended June 30, 2010 and 2009, the Company recorded
$64,000 and $80,000, respectively, in royalties in connection with the terms of
a settlement agreement. During the nine month period ended June 30, 2010 and
2009 the Company recorded $205,000 and $202,000, respectively, in royalties in
connection with the terms of the same settlement agreement. These royalties are
included in other income in the accompanying condensed consolidated financial
statements.
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.
11
Data with respect to these operating activities for the three and six months
ended June 30, 2010 and 2009 are as follows:
For the Three Months Ended June 30, 2010 For the Three Months Ended June 30, 2009
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- ----------------------------------------
Net revenues $ 766,000 $ 749,000 $ 1,515,000 $ 1,364,000 $ 704,000 $ 2,068,000
Cost of revenues 398,000 373,000 771,000 858,000 392,000 1,250,000
--------------------------------------- ----------------------------------------
Gross profit 368,000 376,000 744,000 506,000 312,000 818,000
Operating expenses:
Selling, general and
administrative 453,000 175,000 628,000 501,000 152,000 653,000
Research and development 254,000 -- 254,000 317,000 -- 317,000
--------------------------------------- ----------------------------------------
Income (loss) from operations $ (339,000) $ 201,000 (138,000) $ (312,000) $ 160,000 (152,000)
========================= ==========================
Other:
Interest income -- 4,000
Interest expense (9,000) (11,000)
Loss on disposal of equipment (2,000) --
Royalty income 64,000 80,000
Gain in fair market value of warrant liability 24,000 --
Settlements and recoveries 2,000 1,000
Income taxes (3,000) (4,000)
----------- -----------
Net loss $ (62,000) $ (82,000)
=========== ===========
For the Nine Months Ended June 30, 2010 For the Nine Months Ended June 30, 2009
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- ---------------------------------------
Net revenues $ 2,784,000 $ 2,112,000 $ 4,896,000 $ 3,386,000 $ 1,924,000 $ 5,310,000
Cost of revenues 1,826,000 1,147,000 2,973,000 2,228,000 1,172,000 3,400,000
--------------------------------------- ---------------------------------------
Gross profit 958,000 965,000 1,923,000 1,158,000 752,000 1,910,000
Expenses:
Selling, general and
administrative 1,407,000 509,000 1,916,000 1,585,000 457,000 2,042,000
Research and development 875,000 -- 875,000 931,000 -- 931,000
--------------------------------------- ---------------------------------------
Income (loss) from operations $(1,324,000) $ 456,000 (868,000) $(1,358,000) $ 295,000 (1,063,000)
========================= =========================
Other:
Interest income 1,000 11,000
Interest expense (26,000) (36,000)
Gain (loss) on disposal of equipment (2,000) 12,000
Royalty income 205,000 202,000
Settlements and recoveries 2,000 10,000
Gain in fair market value long-term warrant liability 31,000 --
Income taxes (12,000) (8,000)
----------- ----------
Net loss $ (669,000) $(872,000)
=========== ===========
12
Sales and gross profit to customers by similar products and services for the
three and nine months ended June 30, 2010 and 2009 were as follows:
For the three months ended June 30, For the nine months ended June 30,
(Unaudited) (Unaudited)
2010 2009 2010 2009
----------- ----------- ------------ -----------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 105,000 $ 467,000 $ 618,000 $ 1,107,000
Delivery and disposable devices 661,000 897,000 2,166,000 2,279,000
Service and rental 749,000 704,000 2,112,000 1,924,000
----------- ----------- ------------ -----------
1,515,000 $ 2,068,000 $ 4,896,000 $ 5,310,000
=========== =========== ============ ===========
Gross profit
Products:
Laser equipment and accessories $ 2,000 $ 147,000 $ 35,000 $ 253,000
Delivery and disposable devices 366,000 359,000 923,000 905,000
Service and rental 376,000 312,000 965,000 752,000
----------- ----------- ------------ -----------
Total $ 744,000 $ 818,000 $ 1,923,000 $ 1,910,000
=========== =========== ============ ===========
Sales in foreign countries for the quarters ended June 30, 2010 and June 30,
2009 accounted for approximately 8% and 29% of the Company's total sales,
respectively. Sales in foreign countries for the nine months ended June 30, 2010
and June 30, 2009 accounted for approximately 17% and 26% of the Company's total
sales, respectively. The breakdown by geographic region is as follows:
Three months Three months Nine months Nine months
ended June ended June ended June ended June
30, 2010 30, 2009 30, 2010 30, 2009
------------ ------------ ------------- ------------
Asia $ 58,000 $ 327,000 $ 526,000 $ 873,000
Europe 30,000 235,000 138,000 335,000
Latin America 14,000 15,000 54,000 19,000
Middle East 1,000 2,000 5,000 3,000
Australia 16,000 18,000 119,000 127,000
Other -- 1,000 2,000 1,000
------------ ------------ ------------- ------------
$ 119,000 $ 598,000 $ 844,000 $ 1,358,000
============ ============ ============= ============
With the exception of one 80 watt laser located in Canada, all the Company's
remaining long-lived assets were located in the United States at June 30, 2010.
All long-lived assets were located in the United States at June 30, 2009. Total
segment assets for the Products segment were $4,236,000 and Service and Rental
were $1,623,000 at June 30, 2010. 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.
The Company evaluated subsequent events through the issuance date of the
financial statements, August 22, 2010, and has disclosed the events identified
within this filing.
NOTE 8 - Related Party Transactions
As of June 30, 2010, the Company has a receivable of $11,000 in connection with
services performed for Cardiomedics, Inc., of which the Company's Chairman is
Chairman and a controlling shareholder.
NOTE 9 - Subsequent Events
On August 20, 2010, the Company sold to Marvin P. Loeb, the Company's Chairman
and CEO, $500,000 of 6% Senior Secured Convertible Notes ("the Notes"), which
are secured by all of the assets of the Company, and are redeemable by the
holder on written notice to the Company, to pay the Company's ongoing expenses
and the Company's intended legal action against Lumenis not covered by a
contingent fee agreement (see "Liquidity and Capital" in "Management Discussion
and Analysis"). The Company intends to file a Form 8(K) to disclose the details
of the Company's intended legal action against Lumenis and the aforesaid
purchase of Notes.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This information should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1 of Part I of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended September 30, 2009 contained in our
2009 Annual Report on Form 10-K.
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. We do not
undertake any duty to update forward-looking statements after the date they are
made or to conform them to actual results or to changes in circumstances or
expectations.
OVERVIEW
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 and 30 watt Holmium "cold" pulsed
lasers ("Lasers") and a variety of disposable and reusable, fiber optic laser
energy delivery devices ("Fibers", "Needles" and "Tips") for use in a broad
array of medical applications.
Our Lasers, Fibers, Needles and Tips have been cleared for sale by the U.S. Food
and Drug Administration for use in orthopedics, urology, ear, nose and throat
surgery, gynecology, gastrointestinal surgery, general surgery and other medical
specialties. Many of the medical procedures in which our Lasers, Fibers, Needles
and Tips are used are being reimbursed by Medicare and many insurance companies
and health plans.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is
engaged in the rental of lasers, along with the services of a trained operator
and, if requested, the provision of applicable Fibers, Needles or Tips, on a
"fee per case" basis to hospitals, surgery centers, group practices and
individual physicians in Texas and nearby areas.
The principal market for our Lasers and Side Firing Needles is presently in
orthopedics to treat herniated (bulging) and ruptured lumbar, thoracic and
cervical discs in the spine, two of the four major causes of lower back, neck
and leg pain, typically on an outpatient basis. Our Lasers and Tips are also
used in orthopedics to treat damage in joints, such as the knee, shoulder,
elbow, hip, ankle and wrist, in outpatient, arthroscopic procedures.
The Company's Lasers and Fibers are also used in Urology to fragment stones in
the Kidney, ureter or bladder. The Company's new VaporMAX(R) Side Firing Optical
Fiber device is also used to vaporize a portion of the male prostate to treat
benign prostate hyperplasia of "BPH", commonly referred to as an "enlarged
prostate."
On August 1, 2010, Wade B. Hampton joined the Company, as Director of U.S.
Sales, and Baron Minor Group, Inc. ("BMG") of which Mr. Hampton is a principal,
entered into a Sales Manager Agreement with the Company to market the Company's
lasers and fiber-optic devices on a commission basis through its 15 laser sales
representatives in the U.S., many of whom are former employees of Lumenis. Mr.
Hampton previously served as a Senior Vice President of Accuray, Inc. and
Lumenis, Ltd.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
14
The methods, estimates, and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined "critical accounting policies" as
those accounting policies that are most important to the portrayal of our
financial condition and results, and require us to make our most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based upon this definition, our most critical
estimates relate to the fair value of warrant liabilities. We also have other
key accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 2, "Summary of Significant Accounting Policies" in the
notes to our reviewed financial statements appearing elsewhere in this quarterly
report and our annual audited financial statements appearing on Form 10-K.
Although we believe that our estimates and assumptions are reasonable, they are
based upon information presently available, and actual results may differ
significantly from these estimates.
RESULTS OF OPERATIONS
Method of Presentation
The unaudited condensed consolidated financial statements include the accounts
of Trimedyne, Inc., MST and its 90% owned subsidiary, Cardiodyne.
Quarter Ended June 30, 2010 Compared to Quarter ended June 30, 2009
During the quarter ended June 30, 2010, net revenues were $1,515,000 as compared
to $2,068,000 for the same period of the previous year, a $553,000 or 27%
decrease largely due to the current worldwide recession that is impacting sales
of medical products used in elective procedures. Net sales from lasers and
accessories decreased by $362,000 or 78% to $105,000 during the three months
ended June 30, 2010 from $467,000 in the same period of the prior year. Net
sales from delivery and disposable devices decreased by $236,000 or 26% to
$661,000 during the three months ended June 30, 2010 from $897,000 in the same
period of the prior year. Export sales decreased by $479,000 or 80% to $119,000
from $598,000 for the same quarter of the prior year. The decreases in export
sales was primarily due to a decrease in laser sales to the international market
primarily for use in spine procedures. Net sales from service and rental
increased by $45,000 or 6% to $749,000 from $704,000 for the same quarters. This
increase was primarily due to an increase in case revenues from MST as a result
of the addition of sales personnel and the continued expansion of its service
business.
Cost of sales during the quarter ended June 30, 2010 was $771,000 or 51% of net
revenues as compared to $1,250,000 or 60% the prior year quarter. The reduction
in cost of sales as a percentage of net revenues was primarily the result of
reductions in manufacturing staff and the reduction of overhead resulting from
the favorable renegotiation of the lease related to our facility. Gross profit
from the sale of lasers and accessories was 2% as compared to 31% for the prior
year three-month period. The decrease in gross profit for lasers and accessories
was primarily the result of a volumizing difference due to a lower production of
units created by the 78% decrease in sales during the current year quarter as
compared to the prior year quarter. Gross profit from the sale of delivery and
disposable devices was 55% as compared to 40% for the prior year three-month
period. This was primarily the result of the reduction in manufacturing staff
and the reduction of overhead resulting from the favorable renegotiation of the
lease related to our facility. Gross profit from revenue received from service
and rentals was 50% as compared to 44% for the prior year three-month period.
The higher gross profit for the current nine-month period was primarily
attributable to a lower cost of sales for our subsidiary, MST, which was the
result of decreased repairs to MST's laser fleet combined with higher margins
received from increases in procedures which have a higher bill rate.
Selling, general and administrative expenses decreased in the current quarter to
$628,000 from $653,000 in the prior year quarter, a decrease of $25,000 or 4%.
The decrease in selling, general and administrative expenses during the current
three-month period was primarily due to decreases of $37,000 in commission
expense, which was the result of an decrease in commissionable revenues,
insurance expense of $30,000, administrative expenses of $16,000, $10,000 in bad
debt expense, offset by increases of $15,000 of marketing and sales expense,
$11,000 in bonus expense earned from the increase in business from MST, audit
and tax expense of $7,000, legal expense of $5,000 and approximately $29,00 in
allocated expenses.
Research and development expenditures for the quarter ended June 30, 2010
decreased $63,000 or 20% to $254,000 as compared to $317,000 in the quarter
ended June 30, 2009. This decrease was primarily the result of staff reductions.
Other income, net, increased by $5,000 or 7% to $79,000 in the quarter ended
June 30, 2010 from $74,000 in the same quarter of the prior year. The increase
in other income was primarily the result of gain of $24,000 from the fair market
value of warrant liability offset set by a reduction in royalty income of
$20,000.
For the current quarter, the Company had a net loss of $62,000 or $0.00 per
share, based on 18,365,960 basic weighted average number of common shares
outstanding, as compared to a net loss of $82,000 or $0.00 per share, based on
18,365,960 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
16
Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
During the nine months ended June 30, 2010, net revenues were $4,896,000 as
compared to $5,310,000 for the same period of the previous year, a $414,000 or
8% decrease. Net revenues from lasers and accessories decreased by $489,000 or
44% to $618,000 during the nine months ended June 30, 2010 from $1,107,000 in
the same period of the prior year. Net revenues from delivery and disposable
devices decreased by $113,000 or 5% to $2,166,000 during the nine months ended
June 30, 2010 from $2,279,000 for the same period of the prior year. During the
nine months ended June 30, 2010 export sales decreased by $516,000 or 38% to
$842,000 as compared to $1,358,000 in the same period of the prior year. The
decreases in export sales was primarily due to a decrease in laser sales to the
international market primarily for use in spine procedures. Net sales from
service and rental increased by $188,000 or 10% to $2,112,000 from $1,924,000
for the same quarters in the prior year. This increase was primarily due to an
increase in case revenues from MST as a result of the addition of sales
personnel and the expansion of its service business.
Cost of sales during the nine months ended June 30, 2010 was $2,973,000 or 61%
of net revenues as compared to $3,400,000 or 64% for the same period of the
prior year. The reduction in cost of sales as a percentage of net revenues was
primarily the result of reductions in manufacturing staff and the reduction of
overhead resulting from the favorable renegotiation of the lease related to our
facility. Gross profit from the sale of lasers and accessories was 6% as
compared to 23% for the prior year nine-month period. The decrease in gross
profit for lasers and accessories was primarily the result of a volumizing
difference due to a lower production of units created by the 44% decrease in
sales during the current nine-month period as compared to the prior nine-month
period. Gross profit from the sale of delivery and disposable devices was 43% as
compared to 40% for the prior year nine-month period. The increase in gross
profit was primarily the result of reductions in manufacturing staff and the
reduction of overhead resulting from the favorable renegotiation of the lease
related to our facility. Gross profit from revenue received from service and
rentals was 46% as compared to 39% for the prior year nine-month period. The
higher gross profit for the current nine-month period was primarily attributable
to a lower cost of sales for our subsidiary, MST, which was the result of
decreased repairs to MST's laser fleet combined with higher margins received
from increases in procedures which have a higher bill rate.
For the nine months ended June 30, 2010, selling, general and administrative
expenses totaled $1,916,000 as compared to $2,042,000 for the same period of the
previous year, a $126,000 or 6% decrease. The decrease in selling, general and
administration expense was primarily due to decreases in commissions expense of
$117,000, which was the result of a decrease in commissionable revenues,
insurance expense of $48,000, administrative outside services of $35,000
accounting and audit expense of $19,000, and bad debt of $17,000, offset by
increases in marketing and sales expense of $54,000, bonus expense of $29,000
earned from the increase in business from MST, payroll related expenses of
$12,000 for MST, and $9,000 in other administrative expenses.
During the nine months ended June 30, 2010, research and development expenses
decreased to $875,000 from $931,000 in the prior year nine-month period, a
decrease of $56,000 or 6%.
Other income increased by $12,000 or 6% to $211,000 in the current nine-month
period from $199,000 in the previous nine-month period of fiscal 2009. During
the nine months ended June 30, 2010, royalty income increased $3,000 to $205,000
or 1% as compared to $202,000 in the prior year nine-month period. Interest
income decreased $10,000 or 91% to $1,000 as compared to $11,000 during the same
prior year period due to lower bank interest rates combined with a lower cash
balance in interest bearing accounts. Interest expense decreased by $10,000 to
$26,000 or 28% during the current nine-month period as compared to $36,000
during the same period during the prior year. The reduction in interest expense
was the result of the reduction of principal due to payments on capital leases
and equipment loans.
For the nine months ended June 30, 2010, the Company had net loss of $669,000 or
$0.04 per share, based on 18,365,960 basic weighted average number of common
shares outstanding, as compared to a net loss of $872,000, or $0.05 per share,
based on 18,365,960 basic weighted average number of common shares outstanding
in the same period of the previous year, resulting from the above mentioned
factors.
Liquidity and Capital
At June 30, 2010, the Company had working capital of $3,182,000 compared to
$3,772,000 at the end of the fiscal year ended September 30, 2009. Cash
decreased by $1,215,000 to $406,000 from $1,621,000 at the fiscal year ended
September 30, 2009. During the nine month period ended June 30, 2010, net cash
used in operating activities was $997,000. In the quarter ended June 30, 2010,
although the net loss for this period was $62,000, net cash used in operating
activities was $353,000. For the nine month period ending June 30, 2010, net
cash used in investing activities was $30,000 for the purchase of equipment and
net cash used in financing activities was $188,000, which was the result of
payments on debt incurred for the servicing of loans for equipment and certain
insurance policies.
17
The Company's working capital has declined and it has incurred losses during the
past four years from operations and the development of its new side firing
optical fiber device for use with Holmium Lasers for the treatment of enlarged
prostates in men and to treat herniated or ruptured discs, both customarily in
outpatient procedures. There can be no assurance that the Company will be able
to maintain or achieve sales growth to offset these losses, or that the Company
will again become profitable.
Lumenis is one of the world's largest manufacturers of medical lasers with
annual sales of approximately $250 million. Lumenis markets certain of its
products through Boston Scientific Corporation in the United States and Japan
and through Lumenis' direct sales force and distributors in other countries.
The Company has spent a significant amount of money to complete the development
of its new, reliable, durable and fast-vaporizing side firing optical fiber
device, primarily for sale to Lumenis under the above Agreements. As of the date
of this report, however, Lumenis has not fulfilled certain of its promises and
obligations under its Settlement Agreements with the Company and has not
completed certain of the requirements called for under the OEM Agreement with
the Company necessary to the Company's commencing sales of its devices to
Lumenis, including the testing of 30 of the Company's devices and reporting the
results to the Company within the proscribed time period, and Lumenis has not
commenced its audit of the Company's quality system.
Since November 2009, the Company has been negotiating an extention of its OEM
Agreement with Lumenis and, since June 2010, an amicable settlement of its
dispute with Lumenis, which to date has not been successful. The Company has
spent a significant amount of money to complete the development of its new
reliable, durable and fast-vaporizing side firing optical fiber device,
primarily for sale to Lumenis under the above Agreements. As of the date of this
report, however, Lumenis has not completed certain of the requirements called
for under the OEM Agreement necessary to the Company's commencing sales of its
devices to Lumenis, including the testing of 30 of the Company's devices and
reporting the results to the Company within the proscribed time period, and
Lumenis has not commenced its audit of the Company's quality system.
On August 20, 2010, the Company sold to Marvin P. Loeb, the Company's Chairman
and CEO, $500,000 of 6% Senior Secured Convertible Notes ("the Notes") which are
secured by all of the assets of the Company, and are redeemable by the holder on
written notice to the Company, to pay the Company's ongoing expenses and, if an
amicable settlement with Lumenis is not promptly reached, to fund those costs of
the Company's intended legal action against Lumenis which are not covered by a
contingent fee agreement. Up to $200,000 of the proceeds of the Notes will be
used for operations and the balance will be used for such legal expenses, if the
Company is unable to settle its claims against Lumenis. The Company intends to
file a Form 8(K) to disclose the details of the Company's intended legal action
against Lumenis and the aforesaid purchase of Notes.
The Company has taken various steps to reduce its costs through a significant
reduction in personnel positions and overhead costs and the Company's Chairman
deferring all of his salary and the Company's President deferring 15% of his
salary.
The Company renegotiated its lease on its facility in Lake Forest, California
and signed a new lease agreement which will result in a savings of over $111,000
in rent expense through the next twelve months. The Company plans to raise
additional capital through the sale of notes, debentures, equity capital or
other Company assets. There is no assurances that these efforts will be
successful.
Based on its current cash flow projections, the Company expects its existing
resources will be sufficient to fund operations through December 31, 2010. The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. However, management is unsure if the Company's
liquidity and anticipated revenues will be sufficient to meet its obligations as
they become due for the next 12 months from the balance sheet date. This raises
substantial doubt about the Company's ability to continue as a going concern.
18
OFF BALANCE SHEET ARRANGEMENTS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our management has evaluated, under the
supervision and with the participation of our chief 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 principal 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 principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There have been no 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.
19
PART II Other Information
ITEM 1. Legal Proceedings
In February, 2008, the Company and six other laser manufacturers were sued in
the District Court of Massachusetts by CardioFocus, Inc.("CardioFocus"),
alleging infringement of three of their now expired U.S. Patents, which limits
their claim for royalties to six years prior to their date of expiration. The
Company and two other laser companies joined in a petition to the U.S. Patent &
Trademark Office ("USPTO") to re-examine these patents and declare them invalid.
The other four defendants likewise individually requested a re-examination of
these patents and a declaration of invalidity by the USPTO. One of Cardiofocus'
patents was declared invalid and an aggregate of three claims of the other two
patents were declared valid by the USPTO, which may or may not pertain to the
type of laser and fiber-optic devices the Company manufactures.
The court issued a stay of the proceedings until October 14, 2009. On October
14, 2009, the defendants (including Trimedyne) sought to extend the stay of the
proceedings until October 14, 2010, or until the USPTO's reexamination
proceedings have concluded. In March 2010, the court refused to extend the stay
and allowed the lawsuit to proceed.
While the Company has commenced negotiations with CardioFocus, there is no
assurance any settlement can be reached on terms acceptable to the Company. The
Company believes it has adequate defenses to this lawsuit and intends to defend
itself vigorously and thus has not provided a provision for losses.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. [Removed and Reserved]
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 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Principal Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
20
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: August 23, 2010 /s/ Marvin P. Loeb
------------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: August 23, 2010 /s/ Jeffrey S. Rudner
------------------- -----------------------------------
Jeffrey S. Rudner
Principal Financial Officer
21