UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-QSB
___________
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 000-32045
DIOMED HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) 84-140636
(I.R.S. Employer Identification No.)
1 Dundee Park
Andover, MA
(Address of principal executive offices)
01810
(Zip Code)
(978) 475-7771
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
As of March 31, 2003, there were 29,711,749 shares of common stock, par value
$0.001 outstanding and no other shares of capital stock outstanding. As of May
15, 2003, there were 29,711,749 shares of common stock outstanding, 20 shares of
Class C Convertible Preferred Stock, par value $0.001 outstanding (convertible
into 27,117,240 shares of common stock) and 24 shares of Class D Convertible
Preferred Stock, par value $0.001 outstanding (convertible into 3,021,552 shares
of common stock).
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 2003
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
CAPTION
PART I - FINANCIAL INFORMATION
1 Unaudited Condensed Consolidated Balance Sheets - March 31, 2003 and F-1
December 31, 2002
Unaudited Condensed Consolidated Statements of Operations - Three Months F-2
Ended March 31, 2003 and 2002
Unaudited Condensed Consolidated Statements of Cash Flows - Three Months F-3
Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements F-4
2 Management's Discussion and Analysis or Plan of Operations 1
PART II - OTHER INFORMATION
2 Changes in Securities and Use of Proceeds 10
4 Submission of Matters to a Vote of Security Holders 11
5 Other Information 11
6 Exhibits and Reports on Form 8-K 13
Signatures and Certifications 14
EXHIBIT No. 99.1 Statement and Oath of Principal Financial Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings
EHXIBIT No. 99.2 Statement under Oath of Principal Executive Officer
Regarding Facts and Circumstances Relating to Exchange Act Filings
(i)
DIOMED HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, DECEMBER 31,
2003 2002
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 131,193 $ 1,848,646
Restricted cash - 75,000
Accounts receivable, net of allowance for doubtful accounts of
$247,000 and $308,000 in 2003 and 2002, respectively 696,898 676,444
Inventories 1,783,741 2,012,141
Prepaid expenses and other current assets 791,816 214,253
--------------- ------------
Total current assets 3,403,648 4,826,484
--------------- ------------
Property and Equipment:
Office equipment and furniture and fixtures 1,255,297 1,229,307
Manufacturing equipment 735,098 731,787
Leasehold improvements 647,289 652,141
--------------- ------------
2,637,684 2,613,235
Less--Accumulated depreciation and amortization 1,830,280 1,548,085
--------------- -----------
807,404 1,065,150
Intangible Assets, net of accumulated amortization of $466,000 and
$417,000 in 2003 and 2002, respectively 515,201 564,270
--------------- ------------
Other Assets:
Deposits 468,611 597,426
Deferred financing costs, net 60,000 80,000
--------------- ------------
Total other assets 528,611 677,426
--------------- ------------
$ 5,254,864 $ 7,133,330
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank loan $ 149,600 $ 216,306
Related Party Convertible Debt ($2,000,000 face value, net of
$1,500,000 debt discount at March 31, 2003) 500,000 -
Promissory notes 1,375,462 445,208
Deferred revenues 9,999 -
Current maturities of capital lease obligations 34,606 33,993
Accounts payable 1,625,406 1,608,623
Accrued expenses 1,280,872 1,444,100
--------------- ------------
Total current liabilities 4,975,945 3,748,230
--------------- ------------
Promissory Note Payable - 936,000
Related Party Convertible Debt, less current maturities ($2,000,000
face value, net of $2,000,000 debt discount at December 31, 2002) - -
Capital Lease Obligations, less current maturities - 10,018
--------------- ------------
Total liabilities 4,975,945 4,694,248
--------------- ------------
Stockholders' Equity (Deficit):
Series A convertible preferred stock, $0.01 par value-
Authorized--3,500,000 shares
Issued and outstanding--zero shares - -
Preferred stock., $0.001 par value
Authorized - 20,000,000 shares
Designated Class A convertible preferred stock,
$0.001 par value
Authorized--18,000,000 shares
Issued and outstanding--zero shares at March 31,
2003 and 14,688,662
shares at December 31, 2002 - 14,689
Undesignated preferred stock, $0.001 par value
Authorized--2,000,000 shares
Issued and outstanding--zero shares - -
Common stock, $0.001 par value
Authorized - 80,000,000 shares
Issued and outstanding - 29,711,749 and 15,023,087 shares at
March 31, 2003
and December 31, 2002, respectively 29,712 15,023
Additional paid-in capital 41,713,374 41,704,774
Cumulative translation adjustment (13,481) 158,312
Accumulated deficit (41,450,686) (39,453,715)
--------------- ------------
Total stockholders' equity 278,920 2,439,083
--------------- ------------
$ 5,254,864 $7,133,330
=============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
Diomed Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
Revenues $ 2,123,810 $ 956,637
Cost of Revenues 1,399,459 1,154,890
----------------- -----------------
Gross margin 724,351 (198,253)
----------------- -----------------
Operating Expenses:
Research and development 188,093 171,000
Selling and marketing 1,143,214 342,728
General and administrative 800,749 820,647
----------------- -----------------
Total operating expenses 2,132,056 1,334,375
----------------- -----------------
Loss from operations (1,407,705) (1,532,628)
Interest Expense, net (589,373) (264,339)
---------------- ----------------
Net loss $ (1,997,078) $ (1,796,967)
================ ================
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.13) $ (0.15)
================ ================
Basic and diluted weighted average common
shares outstanding 15,959,381 11,771,395
================= =================
The accompanying notes are an integral part of
these consolidated financial statements
F-2
Diomed Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
Cash Flows from Operating Activities:
Net loss $ (1,997,078) $ (1,796,967)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 143,496 150,756
Noncash interest expense on related party
convertible debt 520,000 225,260
Issuance of stock options to a third party 8,600 -
Changes in operating assets and liabilities
Accounts receivable (20,453) 263,310
Inventories 228,400 247,222
Prepaid expenses and other current assets (577,563) (533,810)
Deposits 117,979 (5,299)
Accounts payable 16,785 (1,463,963)
Accrued expenses (163,228) 376,923
Customer advance - (293,463)
------------ ---------------
Net cash used in operating activities (1,723,062) (2,830,031)
------------ ---------------
Cash Flows from Investing Activities:
Purchases of property and equipment (69,859) (66,541)
------------ ---------------
Net cash used in investing activities (69,859) (66,541)
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings (66,707) (598,892)
Proceeds from issue of common stock, net - 8,646,399
Payments on convertible debt - (700,000)
Payments on promissory notes (5,746) -
Payments on capital lease obligations (9,405) (13,000)
------------ ---------------
Net cash (used by) provided by financing
activities (81,858) 7,334,507
------------ ---------------
Effect of Exchange Rate Changes 157,326 (12,626)
------------ ---------------
Net Increase (decrease) in Cash and Cash Equivalents (1,717,453) 4,425,309
Cash and Cash Equivalents, beginning of period 1,848,646 322,566
------------ ---------------
Cash and Cash Equivalents, end of period $ 131,193 $ 4,747,875
=========== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 25,438 $ 48,039
=========== ===============
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Conversion of convertible debt into common stock $ - $ 339,337
============ ===============
Reclassification of offering costs incurred in $ - $ 387,133
2001 to APIC ============ ===============
Value ascribed to warrants issued in connection $ - $ 8,200
with issuance of debt to stockholders ============ ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(1) OPERATIONS
Diomed Holdings, Inc. (the Company) and its subsidiaries specialize in
developing and commercializing minimal and micro-invasive medical procedures
that use its laser technologies and disposable products.
Previously, the operations of the Company were that of Diomed, Inc., which
was incorporated in December 1997 under the laws of the state of Delaware. On
February 14, 2002, Diomed, Inc. became Diomed Holdings, Inc. through a reverse
merger. (see Note 9)
Some of the Company's medical laser products and applications are in
various stages of development, and as such, the success of future operations is
subject to a number of risks similar to those of other companies in similar
stages of development. Principal among these risks are the continued successful
development and marketing of the Company's products, proper regulatory approval,
the need to achieve profitable operations, competition from substitute products
and larger companies, the need to obtain adequate financing to fund future
operations and dependence on key individuals. The Company has incurred
significant losses since inception and is devoting substantially all its efforts
towards research and development, regulatory approvals, manufacturing, and sales
and marketing of its products.
In December 2002, the Company completed a bridge financing with Gibralt US,
Inc. ("Gibralt") in the form of $2.0 million in secured and unsecured
convertible Notes due January 1, 2004, and issued warrants to purchase 8,333,333
shares of Common Stock. In order to fund its operations in 2003, to enable the
Company to expand critical sales and marketing programs and to further
strengthen Diomed's leadership position in the marketplace, the Company will
need to complete an additional debt or equity financing or put in place a credit
facility to supplement the Company's commercialization of EVLT(TM). The Company
anticipates it will have access to additional funding sources and has entered
into discussions that it believes may lead to a financing transaction during the
second quarter of 2003. The Company will require the proceeds of any such
financing, together with its current cash resources, to continue as a going
concern, and will use these proceeds to fund its operations and commercialize
its products in 2003. Additional financing may not, however, be available on
acceptable terms or at all. The inability to obtain additional financing would
cause the Company to reduce or cease operations, sell all or a portion of its
assets, seek a sale of the Company or enter into a business combination with a
third party. As a result of additional financing needed to support operations in
2003, the auditors' opinion for the year ended December 31, 2002 included an
explanatory paragraph raising doubt about the Company's ability to continue as a
going concern.
The accompanying consolidated financial statements at March 31, 2003 and
for the three-month period ended March 31, 2003 and 2002 are unaudited. In
management's opinion, these unaudited consolidated financial statements have
been prepared on the same basis as the audited consolidated financial statements
included in the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 2002, and include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the results for such
interim periods. These financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 2002. The
results of operations for the three-month period ended March 31, 2003, the
auditors' opinion for the fiscal year ending December 31, 2003 are not
necessarily indicative of the results expected for the fiscal year ending
December 31, 2003.
F-4
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these notes
to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
These financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of short-term, highly liquid
investments with original maturity dates of 90 days or less. Cash
equivalents are carried at cost, which approximates fair value.
(D) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiaries are translated at
the rate of exchange in effect at the end of the period. Results of
operations are translated using the weighted average exchange rate in
effect during the period. Translation adjustments, resulting from changes
in the rate of exchange between the subsidiaries' functional currency and
the U.S. dollar, are included in other comprehensive income (loss) with the
cumulative effect included as a separate component of stockholders' equity
in the accompanying consolidated balance sheets. Transaction gains and
losses, resulting from the revaluations of assets and liabilities
denominated in other than the functional currency of the Company or its
subsidiaries, are included in operating expenses for all periods presented.
(E) REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment to
the customer as long as there is persuasive evidence of an arrangement, the
sales price is fixed and determinable and collection of the related
receivable is probable. The Company provides for estimated product returns
and warranty costs at the time of product shipment. The Company follows
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, which establishes guidance in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company has determined that its existing revenue recognition practices
comply with the requirements of SAB No. 101 for all periods presented.
F-5
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(F) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-progress and finished goods consist of materials, labor
and manufacturing overhead. Inventories consist of the following:
MARCH 31, 2003 DECEMBER 31, 2002
Raw materials $ 877,745 $ 982,622
Work-in-progress 383,633 446,820
Finished goods 522,363 582,699
--------------- ---------------
$ 1,783,741 $ 2,012,141
=============== ===============
(G) PROPERTY AND EQUIPMENT
The Company records property and equipment at cost.
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in amounts
that allocate the cost of the assets over their estimated useful lives as
follows:
DESCRIPTION ESTIMATED USEFUL LIFE
- ------------ ---------------------
Office equipment and furniture and fixtures 2-5 years
Manufacturing equipment 2-5 years
Lesser of estimated useful life or
Leasehold improvements life of lease
Depreciation expense for the three-month period ended March 31, 2003
and March 31, 2002 was $94,428 and $101,688, respectively.
(H) INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of
manufacturing rights acquired in 2001. The manufacturing rights are being
amortized over a five-year estimated useful life. (see Note 4)
(I) LONG LIVED ASSETS
The Company evaluates long-lived assets, such as intangible
assets, equipment and certain other assets, for impairment in accordance
with Financial Accounting Standards Board issued Statement of Financial
Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal
of Long-Lived Assets. This statement supersedes Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and amends
Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS 144 retained the fundamental provisions of SFAS 121
for recognition and measurement of impairment, but amended the accounting
and reporting standards for segments of a business to be disposed of. The
Company records an impairment charge whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable through the estimated undiscounted future cash flows from the
use of these assets. When any such impairment exists, the related assets
are written down to fair value. The adoption of SFAS 144 did not have a
material impact on the Company's financial position or results of
operations.
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, cash equivalents,
accounts receivable, accounts payable and various debt instruments
approximate fair value due to the short-term nature of these instruments.
The carrying amounts of debt issued pursuant to agreements with banks
approximate fair value as the interest rates on these instruments
fluctuate with market interest rates.
(K) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company places its cash and cash equivalents in established
financial institutions. The Company has no off-balance-sheet concentration
of credit risk such as foreign exchange contracts, options contracts or
other foreign hedging arrangements. The Company's accounts receivable
credit risk is not concentrated within any one geographic area. The Company
has not experienced any significant losses related to receivables from any
individual customers or groups of customers in any specific industry or by
geographic area. Due to these factors, no additional credit risk beyond
amounts provided for collection losses is believed by management to be
inherent in the Company's accounts receivable.
Accounts receivable are customer obligations due under normal trade
terms. The Company sells its products to private physicians, hospitals,
health clinics, distributors and OEM customers. The Company typically
requires signed sales agreements, non-refundable advance payments and
purchase orders depending upon the type of customer, and letters of credit
may be required in certain circumstances. Accounts receivable is stated at
the amount billed to the customer less a valuation allowance for doubtful
accounts.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables could potentially be uncollectible. The
Company includes specific accounts receivable balances that are determined
to be uncollectible, along with a general reserve, in its overall
allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance. Based on available information, the Company believes its
allowance for doubtful accounts as of March 31, 2003 is adequate. The
allowance for doubtful accounts as of March 31, 2003 and December 31, 2002
was $247,005 and $308,145, respectively.
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(L) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees utilizing the intrinsic value method. Accordingly,
compensation cost for stock options issued to employees is measured as the
excess, if any, of the fair market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the
stock. SFAS No. 123, Accounting for Stock-Based Compensation, establishes
a fair value based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure only alternative under SFAS
No. 123, which requires disclosure of the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted as well as
certain other information (see Note 7).
In December 2002, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure" ("FAS 148"), which (i) amends FAS Statement No.
123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
accounting for stock-based employee compensation (ii) amends
the disclosure provisions of FAS 123 to require prominent
disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to
stock-based employee compensation and (iii) amends APB
Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial
information. Items (ii) and (iii) of the new requirements in
FAS 148 are effective for financial statements for fiscal
years ending after December 15, 2002. The Company has
adopted FAS 148 for the fiscal year ended December 31, 2002.
The Company continues to account for stock-based
compensation utilizing the intrinsic value method. The
additional disclosures required by FAS 148 are as follows:
Three Months Ended
March 31, 2003 March 31, 2002
Net (loss) as reported ($1,997,078) (1,796,967)
Add : Stock-based employee compensation; 0 0
expense included in reported net (loss),
net of tax
Deduct : total stock-based employee compensation;
expense determined under the fair value ($69,609) ($311,254)
based method for all awards, net of tax
Pro forma net (loss) ($2,066,687) ($2,108,221)
Earnings per share :
Basic and diluted - as reported (0.13) (0.15)
Basic and diluted - pro forma (0.13) (0.18)
(M) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations
as incurred.
(N) COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
all components of comprehensive income. Comprehensive income is defined as
the change in stockholders' equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. For all periods presented, comprehensive loss consists of the
Company's net loss and changes in cumulative translation adjustment
account (see Note 2(d)). The Company has disclosed comprehensive income
(loss) for all periods presented in the accompanying consolidated
statements of stockholders' equity (deficit) as follows :
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
THREE MONTHS ENDED
MARCH 31,
2003 2002
Foreign currency translation adjustment (171,793) 2,070
Net loss (1,997,078) (1,796,967)
---------------- ----------------
Comprehensive loss $ (2,168,871) $ (1,794,897)
================ ================
(O) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for
Income Taxes. Deferred income taxes are provided on temporary differences
that arise in the recording of transactions for financial and tax
reporting purposes and result in deferred tax assets and liabilities.
Deferred tax assets are reduced by an appropriate valuation allowance if
it is management's judgment that part of the deferred tax asset will not
be realized. Tax credits are accounted for as reductions of the current
provision for income taxes in the year in which the related expenditures
are incurred.
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
3) NET LOSS PER SHARE
Net loss per share is computed based on the guidance of SFAS No. 128,
Earnings per Share. SFAS No. 128 requires companies to report both basic
loss per share, which is based on the weighted average number of common
shares outstanding, and diluted loss per share, which is based on the
weighted average number of common shares outstanding and the weighted
average dilutive potential common shares outstanding using the treasury
stock method. As a result of the losses incurred by the Company for the
three months ended March 31, 2003 and March 31, 2002; all potential common
shares were antidilutive and were excluded from the diluted net loss per
share calculations.
The following table summarizes securities outstanding as of each
period-end which were not included in the calculation of diluted net loss
per share since their inclusion would be antidilutive.
MARCH 31,
2003 2002
Common stock options 2,321,478 1,803,908
========== ==========
Common stock warrants 8,445,257 (C) 111,924
========== ==========
Convertible preferred stock - (A) 14,765,690 (A)
========== ==========
Convertible debt 14,705,882 (B) 167,000
========== ==========
(A) On February 14, 2002, the Company completed a reverse merger and issued
Diomed Inc. shareholders Diomed Holdings, Inc. Class A Convertible Preferred
Stock ("Class A Stock") that is convertible into Diomed Holdings, Inc. Common
Stock ("Common Stock") by February 14, 2004, the second annual anniversary of
the reverse merger. On December 31, 2002, according to the Class A Convertible
Preferred Stock Certificate of Designation, monthly conversions of the Class A
Stock began converting into Common Stock at the rate of 5% of the initial shares
of the Class A Stock or 773,087 shares, and will continue to occur on the last
day of each month during the period from January 2003 through January 2004. The
remaining 4,638,531 shares of Class A Stock will convert into Common Stock in
February 2004. On March 31, 2003, the Company accelerated the conversions of the
13,142,188 share balance of the Class A Stock into Common Stock. As of March 31,
2003, zero shares of Class A Stock were outstanding after this conversion into
Com- mon Stock.
(B) On December 27, 2002 (the "Closing Date"), the Company completed a $2.0
million bridge financing with Gibralt US, Inc (the "Lender"), whose Principal
Samuel Belzberg is a member of the Company's Board of Directors. The financing
is in the form of Notes, including $1.0 million in Class A secured Notes and
$1.0 million in Class B unsecured Notes (collectively known as the "Notes"),
which are due on January 1, 2004. The Notes accrue interest, at an annual rate
of 8%, over the life of the Notes and is payable upon maturity. The Notes,
including principal and accrued interest, are convertible into Common Stock, at
F-10
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
the election of the Lender, at 80% of the price per share of the Common Stock in
defined transactions. Based on the $0.17 closing price per share of the Common
Stock on March 31, 2003 the Notes were convertible into 14,705,882 shares of
Common Stock.
(C) In connection with the bridge financing, the Company issued the Lender
100% Warrant coverage or 8,333,333 Warrants, based upon the $0.24 closing price
of the Company's Common Stock on December 26, 2002. The warrants are exercisable
for a period of five years, beginning six months from the Closing Date, at an
exercise price of $0.26. If the Company, over the life of the Warrants, issues
Common Stock or Common Stock equivalents at a price per share less than the
$0.26 exercise price of the Warrants, the number of Warrants and the exercise
price of the Warrants are adjustable to the lower price per share (see Note 10).
(4) ACQUISITION OF INTANGIBLE MANUFACTURING RIGHTS
Effective October 16, 2000, the Company acquired certain manufacturing
rights and inventory of QLT, Inc. (QLT) necessary or useful to commercialize
certain series of its OPTIGUIDE(R) fibers for $1,175,000 in the form of two
promissory notes, payable within two years, and $25,000 in cash. The first
promissory note is payable in cash or in shares of common stock. The second
promissory note is payable, at the election of the Company, in cash or in shares
of common stock. In the event that the Company closes an initial
public offering (IPO) of its securities within two years of the closing date,
the due date of the balance payment would be accelerated to the time of
completion of the IPO and QLT would receive payment in full in the form of
common stock, at a 40% discount on the offering price per share to the public.
This contingent beneficial conversion feature, valued at $556,667 and computed
in accordance with Emerging Issues Task Force (EITF) 00-27, Application of EITF
Issue No. 98-5 to Certain Convertible Instruments, would be recorded upon the
occurrence of an IPO as a discount to the debt and amortized ratably to interest
expense over the remaining term of the debt, unless converted earlier. The
merger and private offering of common stock, does not
qualify as an IPO. The aggregate purchase price of $1,200,000 was allocated
based on the fair value of the tangible and intangible assets acquired as
follows:
Inventory.................................................. $ 218,623
Manufacturing rights....................................... 981,377
------------
$ 1,200,000
============
Amounts allocated to manufacturing rights are being amortized on the
straight-line basis over a five-year period. Included in general and
administrative expenses is amortization expense of approximately $49,000 for
each of the three month periods ended March 31, 2003 and March 31, 2002,
respectively.
(5) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd., the Company's subsidiary in the United Kingdom, has a line
of credit with Barclays Bank, which is limited to the lesser of (pound)1,200,000
($1,895,000 at March 31, 2003) or 80% of eligible accounts receivable. This line
bears interest at 3% above Barclays Bank's base rate (4.00% at March 31, 2003)
and borrowings are due upon collection of receivables from customers. As
security interest, Barclay's Bank has a lien on all of the assets of Diomed
Ltd., excluding inventory and certain intellectual property.
As of March 31, 2003, there were borrowings of (pound)94,744 ($149,600)
outstanding under this line and available future borrowings of approximately
$88,000.
F-11
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(6) DEBT
A) QLT, INC.
As of December 31, 2001, the two promissory notes due to QLT, in
the aggregate principal amount of $1,175,000, for the acquisition of the
manufacturing rights to the OPTIGUIDE(R) fibers (see Note 4) are shown on
the consolidated balance sheet as convertible debt.
With respect to the First QLT Promissory Note, by letter dated
June 7, 2001, QLT formally requested payment of the $339,337 balance due
under that note. QLT also indicated that it would exercise its option
under the Optiguide Asset Purchase Agreement to require the Company to
issue to QLT shares of Company Common Stock having a value equal to
$339,337. On October 1, 2001 the Company advised QLT that it was prepared
to issue 135,735 shares based on a per share price of $2.50. The Company
asked QLT to respond if the calculation was acceptable to it and also
asked that, if the calculation was not acceptable, that the matter be
referred to arbitration pursuant to the applicable provisions of the
Optiguide Asset Purchase Agreement. On January 28, 2002 the Company issued
QLT 135,735 shares of Company Common Stock. On February 11, 2002, QLT
informed the Company and stated that it was accepting the 135,735 shares
issued to it under protest as it disagreed with the per share price the
Company had used in calculating the number of shares issued to it. It also
asserted that the Company had failed, in connection with the issuance of
those shares, to confirm certain registration rights and deliver a legal
opinion. The Company believes that QLT may have been asserting that it was
entitled to receive up to an additional 542,940 shares. The Company
disputed this position based on the express terms of its agreement with
QLT and the relevant facts. The terms of the agreement between the Company
and QLT require senior management of both companies to meet for a period
of 60 days to attempt to resolve disputes arising thereunder.
From the time it received notice of QLT's assertions, the Company
engaged in discussions with QLT to resolve the dispute amicably. On August
5, 2002, the Company and QLT entered into an agreement pursuant to which
the Company issued to QLT, and QLT accepted from the Company, a total of
696,059 shares of Convertible Preferred Stock to both resolve the dispute
as to the First Promissory Note and fully satisfy the Company's
obligations under the Second Promissory Note. The Company in effect
re-valued the conversion price of the First Promissory Note to $1.50 per
share, and converted the Second Promissory Note into Convertible Preferred
Stock at the conversion price of $1.50 per share. In consideration for our
issuance of these shares, QLT released us from any claims under both of
these promissory notes, as well as a related registration rights agreement
and relevant portions of the 2000 Optiguide Asset Purchase Agreement.
B) PROMISSORY NOTE ISSUED TO CUSTOMER
In October 2000, a customer advanced the Company $936,000 to
secure certain key materials. In September 2001, the Company issued a
Promissory Note to this customer in the amount of the advance. The
Promissory Note bears interest, at an annual rate of 8.5%, which is
payable quarterly in arrears. The Promissory Note matures on January 1,
2004 and does not provide for conversion rights into equity. As of March
31, 2003 and December 31, 2002, the balance outstanding to this Promissory
Note was $936,000, and accrued interest was $19,618 and $20,053,
respectively. As of March 31, 2003, the Promissory Note became a current
liability as it is due on January 1, 2004.
F-12
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
C) BRIDGE LOANS FROM STOCKHOLDERS
In September 2001, the Company received an aggregate of $500,000
from two stockholders of the Company in exchange for a bridge loan in the
form of two secured promissory notes ("notes"), dated October 5, 2001. The
notes mature on January 1, 2003 and bear an annual interest rate of 7.5%.
The notes were convertible, at the election of the noteholders,
into common stock prior to the maturity date under the following
scenarios: 1) in the event the Company did not complete a reverse merger
by October 31, 2001, the noteholders could have exercised their call
option issued in the March 2001 Series A Preferred Stock financing (see
Note 10(b)) and deliver their notes as payment, 2) in the event the
Company completed a reverse merger, the notes were convertible into common
stock at the lesser of $2.25 per share and the price per share in the
reverse merger, 3) in the event of another type of financing transaction,
as defined, the notes were convertible into common stock at the lesser of
$2.25 per share and the price per share in the transaction, and 4) in the
event of a merger or consolidation, excluding a reverse merger, the notes
were convertible into common stock at the lesser of $2.25 per share and
the price per share of any warrants issued in the transaction. However, if
the Company successfully completed a reverse merger with a public company,
where such public company has raised $10 million in gross proceeds in a
private placement financing prior to the reverse merger, the notes would
have become due and payable in cash within 10 days of the effective
closing date. The call option expired on October 31, 2001.
In addition, the Company granted fully exercisable warrants to
purchase an aggregate of 50,000 shares of common stock at a price per
share equal to a maximum of $2.25, adjustable for certain events, as
defined. The value of such warrants, calculated using the Black-Scholes
option pricing model, was recorded as a debt discount totaling $43,000 and
will be amortized to interest expense over the life of the note. In
addition, the beneficial conversion feature attributable to the warrants,
totaling $43,000, will be recorded as interest expense upon the occurrence
of an event which will trigger the note's right to convert. In January
2002, due to the Company's delay in completing the reverse merger by
December 31, 2001, the Company was required to issue up to an additional
aggregate of 10,000 warrants, with terms identical to the initial grant.
The warrants expire two years from the date of issuance. The value
ascribed to these 10,000 warrants was $8,200 and was calculated using the
Black-Scholes option pricing model. The $8,200 was recorded as a debt
discount and will be amortized to interest expense over the life of the
notes. In addition, the beneficial conversion feature attributable to the
warrants totaling $8,200 will be recorded as interest expense upon the
occurrence of an event which will trigger the note's right to convert.
In December 2001, the Company received an additional aggregate of
$200,000 from the same two noteholders through issuance of additional
promissory notes, with terms identical to those specified above, except as
noted below. The maximum conversion price of the notes and the exercise
price of the warrants is $2.00 per share, adjustable for certain events as
defined. In addition, the Company granted fully exercisable warrants to
purchase an aggregate of 20,000 shares of common stock at a price per
share equal to a maximum of $2.00, adjustable for certain events, as
defined. The warrants expire two years from the date of issuance. The
value ascribed to these 20,000 warrants was $15,000 and was calculated
using the Black-Scholes option pricing model. The $15,000 was recorded as
a debt discount and will be amortized to interest expense over the life of
the notes. In addition, the beneficial conversion feature attributable to
the warrants totaling $15,000 will be recorded as interest expense upon
the occurrence of an event which will trigger the note's right to convert
The Company completed a reverse merger by March 31, 2002, and accordingly
did not have to issue any contingent warrants. Under the December 2001
notes, the conversion price of the notes and the exercise price of the
warrants included under the October 2001 notes were reduced to a maximum
of $2.00 to be consistent with the terms of the December 2001 notes. Such
revision creates an additional beneficial conversion feature attributed to
the reduction of the conversion price, totaling $62,500, to be recorded
upon the occurrence of an event which will trigger the notes' right to
F-13
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
convert. Additionally, such revision created an additional debt discount,
attributed to the establishment of a new measurement date for the amended
warrant, totaling $39,000.
In February 2002, subsequent to the closing of the reverse
merger, the $700,000 aggregate principal amount of the promissory notes,
issued in October and December 2001, was repaid to the two stockholders,
including cumulative interest. During the three month period ended March
31, 2002, the Company recorded $225,260 as additional non-cash interest
expense related to warrants issued in connection with the bridge loan in
2001 and 2002, as well as beneficial conversion features discussed above
which were triggered by the acquisition.
D) PROMISSORY NOTES ISSUED TO SERVICE PROVIDERS
In December 2002, the Company converted fees for legal services,
in the amount of $416,102, into a Promissory Note. Payment terms include a
$100,000 payment due upon completing the $2.0 million bridge financing on
December 27, 2002 and the balance due upon completion of a longer-term
capital financing in fiscal 2003, being the earlier of May 15, 2003 or the
Company completing a debt or equity financing other than a bridge
financing. The Promissory Note bears interest, at an annual rate of 6%,
which accrues over the life of the Promissory Note and is payable upon
maturity. The Promissory Note does not provide for conversion rights into
equity. As of March 31, 2003 and December 31, 2002, the balance
outstanding to this Promissory Note was $316,102, and accrued interest was
$6,287 and $1,611, respectively.
In December 2002, the Company converted fees due a professional
service provider for external marketing initiatives, in the amount of
$183,016, into a Promissory Note. Payment terms include a $50,000 payment
due upon completing the $2.0 million bridge financing on December 27,
2002, a 20% surcharge of monthly services until the Promissory Note is
paid, and the balance due upon completion of a longer-term financing in
fiscal 2003. The Promissory Note does not bear any interest and does not
provide for conversion rights into equity. As of March 31, 2003 and
December 31, 2002, the balance outstanding to this Promissory Note was
$123,360 and $129,106, respectively.
E) BRIDGE LOANS FROM RELATED PARTY
On December 27, 2002 (the "Closing Date"), the Company completed
a $2.0 million bridge financing with Gibralt US, Inc (the "Lender"), whose
Principal Samuel Belzberg is a member of the Company's Board of Directors.
The financing is in the form of Notes, including $1.0 in Class A secured
Notes and $1.0 million in Class B unsecured Notes (collectively known as
the "Notes"), which are due on January 1, 2004. The Notes accrue interest,
at an annual rate of 8%, over the life of the Notes and is payable upon
maturity. The Company and the Lender entered into a Note Agreement, Class
A Secured Note Agreement, Class B Unsecured Note Agreement, Security
Agreement, Pledge Agreement, Registration Rights Agreement and Warrant
Agreement. (collectively known as the "Bridge Financing Agreements") As of
March 31, 2003 and December 31, 2002, the balance outstanding to these
Notes was $2.0 million and accrued interest was $41,205 and zero,
respectively.
As security interest for the Notes, the Company formed a new
subsidiary company ("PDT Co"), transferred its assets for photodynamic
therapy ("PDT") to PDT Co, including intellectual property, manufacturing
rights and trademarks for lasers and disposable Optiguide(R) fibers, and
pledged 100% of the shares of stock in PDT Co to the Lender. As additional
security interest, the Company pledged the following unencumbered assets
of Diomed Inc. to the Lender: equipment, inventory, accounts receivable,
intellectual property, and cash deposit accounts. The Lender's lien on the
inventory is junior and subordinate to Axcan Pharma's lien on inventory as
collateral for the September 2001 Promissory Note in the amount of
$936,000, so long as Axcan Pharma's Promissory Note is outstanding.
F-14
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
The Company issued the Lender 100% warrant coverage or 8,333,333
Warrants based upon the $0.24 closing price of the Company's Common Stock
on December 26, 2002. The Warrants are exercisable for a period of five
years, beginning six months from the Closing Date, at an exercise price of
$0.26, which is 110% of the market price of the stock on December 26,
2002. If the Company, over the life of the Warrants, issues Common Stock
or Common Stock equivalents at a price per share less than the $0.26
exercise price of the Warrants, the number of Warrants and the exercise
price of the Warrants are adjustable to the lower price per share. In the
event of a merger or reorganization, the Warrants are convertible into the
kind and number of shares of Common Stock, other securities or property
into which the Warrants would have been converted into if the Warrants had
been converted into Common Stock based on the provisions of the merger or
reorganization.
The Notes are convertible into Common Stock at the election of
the Note Holder (s) upon the occurrence of : i) a financing transaction,
ii) a liquidity event, iii) in a merger or reorganization, or iv) at any
time during the life of the Notes at the election of at least 66 2/3% of
the outstanding principal amount by the Note Holders. A financing
transaction is defined as a debt or equity financing under which the
Company issues Common Stock or equity securities convertible into Common
Stock, and raises gross proceeds of at least $50,000 in any rolling 30-day
period. A liquidity event is defined as i) any person or group other than
a shareholder at the Closing Date that shall become the beneficial owner,
either directly or indirectly, of capital stock representing 51% of voting
control of the Company, ii) the sale of all or substantially all of the
assets of the Company to one or more persons not an affiliate of the
Company, or iii) the sale of the stock of PDT Co or the sale of all or
substantially all of the business relating to photodynamic therapy
products.
The Notes, including principal and accrued interest, are
convertible into Common Stock at 80% of the Common Stock price, which is
defined as : i) in the event of a financing transaction in which the
Company issues Common Stock or Common Stock equivalents - the price per
share of Common Stock or Common Stock equivalent (the weighted average if
multiple financing transaction in a rolling 30-day period), ii) in the
event of a financing transaction in which the Company does not issue
Common Stock or Common Stock equivalents - the lower of the average of the
closing price of the Common Stock for the fifteen day business period
preceding the date of the public announcement of the financing transaction
or the average of the closing price of the Common Stock for the fifteen
day business period commencing the date after the date of the public
announcement of the financing transaction, iii) in the event of a
liquidity event in which any person or group other than a shareholder at
the Closing Date becomes the beneficial owner, either directly or
indirectly, of capital stock representing 51% of voting control of the
Company - the price per share allocated to each share of Common Stock or
Common Stock equivalent, iv) in the event of all other liquidity events -
the lower of the average of the closing price of the Common Stock for the
fifteen day business period preceding the date of the public announcement
of the liquidity event or the average of the closing price of the Common
Stock for the fifteen day business period commencing the date after the
date of the public announcement of the liquidity event.
In the event of a merger or reorganization, the Notes, including
principal and accrued interest, are convertible into the kind and number
of shares of Common Stock, other securities or property into which the
Notes would have been converted into if the Notes had been converted into
Common Stock on the business day preceding the merger or reorganization.
Under the Registration Rights agreement, the Company agreed to
notify the Lender (s) if the Company proposes to file certain future
registration statements. The Company agreed to use its best efforts to
include the registrable securities held by the Lender (s) in the
registration statement, subject to certain defined limitations, if so
requested by the Lender (s) within 30 days after receipt of said notice.
The Lender (s) agreed to become subject to a "holdback period", by which
it does not effect a public sale of stock for a period of up to 180 days
following the effective date of the registration statement, if so
requested by a managing underwriter of the offering which is the subject
of that registration statement.
F-15
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
The Notes and Warrants, on a pro rata basis to the Notes, are
transferable in part or in whole by the Lender to one or more third
parties, in accordance with all of the same terms granted the Lender by
the Company. The Lender (s) may designate a member to the Company's Board
of Directors while the Notes are outstanding. The Company is required to
obtain the advance approval by the Lender (s) for future financing
transactions during the life of the Notes.
The Company may at its option call for redemption in whole or in
part any of the Class A secured Notes, including principal and accrued
interest, prior to the maturity of the Notes on January 1, 2004. No Class
A Notes may be redeemed while any of the Class B unsecured Notes are
outstanding. If fewer than all of the outstanding Class A Notes are to be
redeemed, then all Class A Notes shall be partially redeemed on a pro-rata
basis. If fewer than all outstanding Class B Notes are to be redeemed,
then all Class A Notes shall be partially redeemed on a pro rata basis.
The Company will be in default if any of the following occurs: i)
the Company fails to make payment of the principal and accrued interest by
January 1, 2004 and the same continues for a period of two days, ii) any
of the representations or warranties made by the Company in the Bridge
Financing Agreements shall have been false or misleading in any material
respect, iii) the Company fails to perform or observe in any material
respect terms under the Bridge Financing Agreements and such failure is
not cured within thirty days after written notice from the Lender (s),
iii) the voluntary or judicial dissolution of the Company, iv) admission
by the Company of its inability to pay its debts as they become due, iv)
any default by the Company under any institutional indebtedness, and v)
commencement of bankruptcy proceedings.
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No.98-5 to Certain Convertible Instruments", the
Company recorded a beneficial conversion feature in the amount of $2.0
million, which has been recorded as a debt discount to the Notes. The debt
discount will be amortized over the term of the Notes through January 1,
2004, with full amortization of any remaining discount to occur if the
Notes are converted to equity prior to the January 1, 2004 maturity date.
Accordingly, the Notes were recorded at zero as of December 31, 2002 and
zero amortization of the debt discount was recognized in the year ended
December 31, 2002 as the corresponding amortization since December 27,
2002 was immaterial. In the three month period ended March 31, 2003, the
Company recognized $500,000 in non-cash interest expense pertaining to
this amortization of the debt discount, and accordingly, the Notes were
recorded at $500,000. As of March 31, 2003, the Notes became a current
liability as they are due on January 1, 2004.
In connection with the bridge financing, the Company incurred
$80,000 in related legal fees. As of December 31, 2002, these costs were
capitalized as deferred financing costs and will be amortized to non-cash
interest expense over the life of the Notes, such that the full amount of
costs are amortized by the earlier of the maturity date of the Notes or by
the month the Notes are converted into equity. In the three month period
ended March 31, 2003, the Company recognized $20,000 in non-cash interest
expense pertaining to this amortization of the deferred financing costs,
and accordingly, the balance of the deferred financing costs was $60,000.
On March 18, 2003, Gibralt US, Inc. sold and transferred to three
investors in a private transaction (i) $500,000 aggregate principal amount
of Notes ($250,000 of which are Class A Notes and $250,000 of which are
Class B Notes), and (ii) 2,083,334 warrants. Accordingly, after the taking
effect of this transfer, Mr. Belzberg beneficially owned 6,249,999
warrants and $1,500,000 aggregate principal amount of Note ($750,000 of
which are Class A Notes and $750,000 of which are Class B Notes).
F-16
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
A summary of the current and long term debt at December 31, 2002 is
as follows :
DECEMBER 31, 2002 DECEMBER 31, 2002
CURRENT LONG-TERM
Promissory notes payable $ 445,208 $ -
Non-convertible debt - 936,000
Related party convertible debt (face value) - 2,000,000
Capital equipment leases 33,993 10,018
----------- ----------
$ 479,201 $2,946,018
=========== ==========
A summary of the current and long term debt at March 31, 2003 is as follows :
MARCH 31, 2003 MARCH 31, 2003
CURRENT LONG-TERM
Promissory notes payable $ 439,462 $ -
Non-convertible debt 936,000 -
Related party convertible debt (face value) 2,000,000 -
Capital equipment leases 34,606 -
----------- -----------
$ 3,410,068 $ -
=========== ===========
(7) STOCK OPTIONS
In November 1998 and May 2001, the Company's Board of Directors
approved the 1998 Incentive Plan (the 1998 Plan) and the 2001 Stock Option
Plan (the 2001 Plan) (collectively, the Plans), respectively, permitting
the granting of stock options to employees, directors, consultants and
advisors, which may be either incentive stock options or nonqualified
options and stock awards. The Board has reserved 750,000 and 1,750,000
shares of Common Stock for issuance under the 1998 Plan and the 2001 Plan,
respectively.
The exercise price and vesting are determined by the Board of
Directors at the date of grant. Options generally vest over two and four
years and expire 10 years after the date of grant. Incentive stock options
under the Plans are granted at not less than fair market value per share
of Common Stock on the date of grant or 110% of fair market value for any
stockholder who holds more than 10% of the total combined voting power of
all classes of stock of the Company.
F-17
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
A summary of stock option activity is as follows:
WEIGHTED
RANGE OF AVERAGE
EXERCISE NUMBER OF EXERCISE
PRICE SHARES PRICE
Outstanding, December 31, 2000 2.24-8.23 840,640 4.37
Granted 1.25-2.25 1,056,653 1.33
Forfeited 3.50-6.36 (123,553) 2.75
------------- ------------- -------------
Outstanding, December 31, 2001 1.25-8.23 1,773,740 2.65
------------- ------------- -------------
Granted 2.00-4.18 450,200 2.35
Forfeited 1.25-5.76 (620,655) 2.87
------------- ------------- -------------
Outstanding, December 31, 2002 $ 0.34-8.23 1,603,285 $ 2.90
============= ============= =============
Granted 0.25-0.34 894,930 0.27
Forfeited 1.25-5.51 (176,737) 3.00
------------- ------------- -------------
Outstanding, March 31, 2003 $ 0.34-8.23 2,321,478 $ 1.87
============= ============= =============
Exercisable, December 31, 2001 $ 1.25-8.23 911,537 $ 3.83
============= ============= =============
Exercisable, December 31, 2002 $ 0.34-8.23 1,150,115 $ 3.49
============= ============= =============
Exercisable, March 31, 2003 $ 0.34-8.23 1,318,652 $ 2.67
============= ============= =============
As of March 31, 2003, 1,046,901 options were available for future grants under
the Plans, including 610,671 options under the 1998 Plan and 436,230 options
under the 2001 Plan. However, in the years ended December 31, 2001 and 2002, and
the three month period ended March 31, 2003 the Company has granted options only
under the 2001 Plan and does not intend to grant options under the 1998 Plan in
the foreseeable future.
F-18
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
The following table summarizes information relating to currently outstanding and
exercisable options as of March 31, 2003.
OUTSTANDING EXERCISABLE
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
NUMBER OF CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICE SHARES LIFE (IN YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
$ 0.34-2.00 1,587,810 8.9 $ 0.67 694,932 $ 0.83
2.25-3.54 310,468 3.7 2.58 267,083 2.56
4.00-6.56 407,200 4.0 5.74 388,450 5.81
8.05-8.23 16,000 2.9 8.06 16,000 8.06
----------- ----------- --------- --------
2,321,478 $ 1.87 1,366,465 $ 2.67
=========== =========== ========== ========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants during the applicable period:
DECEMBER 31 MARCH 31,
2002 2003
Risk-free interest rate 1.84-4.74% 1.63-3.05%
Expected dividend yield -% -%
Expected lives 5 years 5 years
Expected volatility 75% 75%
Weighted average grant date
fair value per share $ 1.05 $ 0.17
Weighted average remaining
contractual life of options
outstanding 6.9 YEARS 7.9 YEARS
F-19
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
ISSUANCE OF STOCK OPTIONS TO CONSULTANTS
In August 2001, the Company granted fully exercisable options to
purchase 60,000 shares of common stock at an exercise price per share
equal to $2.25 to two consultants in exchange for marketing services. The
Company recorded the fair value of such options, based on the
Black-Scholes option pricing model, as stock-based compensation expense
totaling $55,000 in the accompanying statement of operations for year
ended December 31, 2001.
In fiscal 2002, the Company granted fully exercisable options to
purchase 2,700 shares of common stock at exercise prices per share in the
range of $0.55 to $2.87 to the above-mentioned consultants in exchange for
marketing services. The Company recorded the fair value of such options,
based on the Black-Scholes option pricing model, as stock-based
compensation expense totaling $1,743 in the statement of operations for
year ended December 31, 2002.
In January 2003, the Company granted fully exercisable options to
purchase 60,930 shares of common stock at exercise price per share of
$0.34 to the above-mentioned consultants in exchange for marketing
services. The Company recorded the fair value of such options, based on
the Black-Scholes option pricing model, as stock-based compensation
expense totaling $8,600 in the statement of operations for the three month
period ended March 31, 2003.
In April 2002, the Company entered into an agreement with The Investor
Relations Group, Inc., referred to as IRG, for investor relations and
public relations services. In connection therewith, the Company granted to
IRG Options to purchase up to 150,000 shares of Class A Stock at an
exercise price of $5.35 per share. These Options were not granted under the
2001 Plan, but are subject to the terms and conditions of the 2001 Plan as
if granted thereunder. Any unvested Options will be cancelled upon the
termination of the IRG agreement. The Company calculated the fair value of
these stock options, based on the Black-Scholes option pricing model.
In November 2002, the Company terminated its agreement with IRG and
accordingly, IRG has 43,750 stock options that are exercisable until
November 2004. In the statement of operations for the year ended December
31, 2002, the Company recorded stock-based compensation expense in the
amount of $80,586 related to the vested options.
F-20
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
WARRANTS
A summary of warrant activity is as follows:
WEIGHTED
AVERAGE
REMAINING
WEIGHTED CONTRACTUAL
RANGE OF NUMBER OF AVERAGE LIFE (IN
EXERCISE PRICE SHARES EXERCISE PRICE YEARS)
Outstanding, December 31, 2001 2.00-3.50 111,924 2.56 1.6
Granted to stockholders 2.00 10,000 2.00 0.5
Granted to related party 0.26 8,333,333 0.26 5.5
Forfeited - - - -
------------- ------------- -------------
Outstanding, December 31, 2002 $ 0.26-3.50 8,455,257 $ 0.29 5.4
============== ============= =============
Granted to stockholders - - -
Granted to related party - - -
Forfeited - - -
------------- ------------- -------------
Outstanding, March 31, 2003 $ 0.26-3.50 8,455,257 $ 0.29 5.2
============= ============= =============
8) SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS No.
131 also establishes standards for related disclosures about products and
services and geographic areas.
Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making
group, in making decisions on how to allocate resources and assess
performance. The Company's chief decision making group, as defined under
SFAS No. 131, is the Executive Management Committee.
The Company's reportable segments are determined by product type:
laser systems and fibers and other accessories. The accounting policies of
the segments are the same as those described in Note 2. The Executive
Management Committee evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and
are not allocated to segments. Also, the Executive Management Committee
does not assign assets to its segments.
F-21
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
This table presents revenues by reportable segment:
THREE MONTH PERIOD ENDED MARCH 31,
2003 2002
Laser systems $ 1,405,744 $ 518,242
Fibers, accessories and service 718,066 438,395
----------- -----------
Total $ 2,123,810 $ 956,637
=========== ===========
F-22
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
The following table represents percentage of revenues by geographic destination:
THREE MONTH PERIOD ENDED MARCH 31,
2003 2002
North America 61% 48%
Asia/Pacific 26% 25%
Europe 11% 23%
Other 2% 4%
------------ ------------
Total 100% 100%
============ ============
The following table represents long-lived assets by geographic location:
MARCH 31, 2003 DECEMBER 31, 2002
North America $ 899,374 $ 1,175,410
Europe 951,842 1,131,437
-------------- --------------
Total $ 1,851,216 $ 2,306,846
============== ==============
(9) MERGER AND PRIVATE OFFERING OF COMMON STOCK
On February 14, 2002, Diomed Acquisition Corp. ("Acquisition"), a
Delaware corporation and a wholly-owned subsidiary of Diomed Holdings,
Inc., a Nevada corporation formerly known as Natexco Corporation (the
"Parent") merged with and into the Company pursuant to an Agreement and
Plan of Merger, dated as of January 29, 2002. In the merger (the "Merger")
that occurred under the Agreement and Plan of Merger, the stockholders of
the Company received shares of the Parent. As a condition to the Merger,
Parent raised gross proceeds of $10,000,000 in a private offering of
shares of its common stock. The shares issued in the private offering were
not subject to refund, redemption or rescission and, accordingly, were
included as a component of stockholders' equity, net of the applicable
costs. The merger agreement provides that the proceeds of that offering
will be available to the Company for payment of its existing obligations
and, subject to the approval of its board of directors, certain future
expenses, including the financing of product developments and
acquisitions. Parent is obligated to use its best efforts to file a
registration statement with the Securities Exchange Commission to register
for resale its common shares that it issued in the private offering and
those of its common shares that it issued to the Company's former
stockholders and to cause the registration statement to be declared
effective. In the event that the Parent fails to file or cause the
registration statement to be declared effective within 240 days of
completing the Merger, or remain effective through the first anniversary
of the Merger, the Parent will be required to issue additional shares of
its common stock, up to a maximum of 4% of the shares held by each party
subject to the agreement.
After the Merger, the Company's former stockholders own
approximately 51% of the issued and outstanding shares of Parent (in terms
of common share equivalents). The shares of Parent into which the shares
of the Company's existing common stock and the Old Class A Stock were
converted in the Merger and were thereafter automatically convertible into
F-23
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
Parent's common stock in installments beginning 60 days after Parent's
registration statement was to become effective and continuing, unless
interrupted under certain circumstances, until the second anniversary of
the Merger, at which time all such shares were automatically convertible
into shares of Parent's common stock.
The Merger was accounted for as a recapitalization. The historical
records of the Company are the historical records of Parent. Following the
Merger, the business conducted by Parent is the business conducted by
Diomed prior to the Merger.
Costs of approximately $2.1 million related to the issuance of
Parent's shares in the offering and its preparation and negotiation of the
documentation for the Merger were paid by the Company at the closing of
the Merger and subsequent to the Merger.
(10) DECEMBER 2002 BRIDGE FINANCING
On December 27, 2002 (the "Closing Date"), the Company
completed a $2.0 million bridge financing with Gibralt US, Inc (the
"Lender"), whose Principal Samuel Belzberg is a member of the Company's
Board of Directors. The financing is in the form of Notes, including
$1.0 in Class A secured Notes and $1.0 million in Class B unsecured
Notes (collectively known as the "Notes"), which are due on January 1,
2004. The Notes accrue interest, at an annual rate of 8%, over the life
of the Notes and is payable upon maturity. The Company and the Lender
entered into a Note Agreement, Class A Secured Note Agreement, Class B
Unsecured Note Agreement, Security Agreement, Pledge Agreement,
Registration Rights Agreement and Warrant Agreement.
(collectively known as the "Bridge Financing Agreements")
As security for the Notes, the Company formed a new subsidiary
company ("PDT Co"), transferred its assets for photodynamic therapy
("PDT") to PDT Co, including intellectual property, manufacturing
rights and trademarks for lasers and disposable Optiguide(R) fibers,
and pledged 100% of the shares of stock in PDT Co to the Lender. As
additional security, the Company granted a lien on the following
unencumbered assets of Diomed Inc. to the Lender: equipment,
inventory, accounts receivable, intellectual property, and cash
deposit accounts. The Lender's lien on the inventory is junior and
subordinate to Axcan Pharma's lien on inventory as collateral for the
September 2001 Promissory Note in the amount of $936,000, so long as
Axcan Pharma's Promissory Note is outstanding.
The Company issued the Lender 100% warrant coverage or
8,333,333 Warrants based upon the $0.24 closing price of the Company's
Common Stock on December 26, 2002. The warrants are exercisable for a
period of five years, beginning six months from the Closing Date, at an
exercise price of $0.26. If the Company, over the life of the Warrants,
issues Common Stock or Common Stock equivalents at a price per share
less than the $0.26 exercise price of the Warrants, the number of
Warrants and the exercise price of the Warrants are adjustable to the
lower price per share. In the event of a merger or reorganization, the
Warrants are convertible into the kind and number of shares of Common
Stock, other securities or property into which the Warrants would have
been converted into if the Warrants had been converted into Common
Stock based on the provisions of the merger or reorganization.
The Notes are convertible into Common Stock at the election of
the Note Holder (s) upon the occurrence of : i) a financing
transaction, ii) a liquidity event, iii) in a merger or reorganization,
or iv) at any time during the life of the Notes at the election of at
least 66 2/3% of the outstanding principal amount by the Note Holders.
A financing transaction is defined as a debt or equity financing under
which the Company issues Common Stock or equity securities convertible
into Common Stock, and raises gross proceeds of at least $50,000 in any
rolling 30-day period. A liquidity event is defined as i) any person or
group other than a shareholder at the Closing Date that shall become
the beneficial owner, either directly or indirectly, of capital stock
representing 51% of voting control of the Company, ii) the sale of all
or substantially all of the assets of the Company to one or more
persons not an affiliate of the Company, or iii) the sale of the stock
of PDT Co or the sale of all or substantially all of the business
relating to photodynamic therapy products.
The Notes, including principal and accrued interest, are
convertible into Common Stock at 80% of the Common Stock price, which
F-24
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
is defined as : i) in the event of a financing transaction in which the
Company issues Common Stock or Common Stock equivalents - the price per
share of Common Stock or Common Stock equivalent (the weighted average
if multiple financing transaction in a rolling 30-day period), ii) in
the event of a financing transaction in which the Company does not
issue Common Stock or Common Stock equivalents - the lower of the
average of the closing price of the Common Stock for the fifteen day
business period preceding the date of the public announcement of the
financing transaction or the average of the closing price of the Common
Stock for the fifteen day business period commencing the date after the
date of the public announcement of the financing transaction, iii) in
the event of a liquidity event in which any person or group other than
a shareholder at the Closing Date becomes the beneficial owner, either
directly or indirectly, of capital stock representing 51% of voting
control of the Company - the price per share allocated to each share of
Common Stock or Common Stock equivalent, iv) in the event of all other
liquidity events - the lower of the average of the closing price of the
Common Stock for the fifteen day business period preceding the date of
the public announcement of the liquidity event or the average of the
closing price of the Common Stock for the fifteen day business period
commencing the date after the date of the public announcement of the
liquidity event
In the event of a merger or reorganization, the Notes,
including principal and accrued interest, are convertible into the kind
and number of shares of Common Stock, other securities or property into
which the Notes would have been converted into if the Notes had been
converted into Common Stock on the business day preceding the merger or
reorganization.
Under the Registration Rights agreement, the Company agreed
to notify the Lender (s) if the Company proposes to file certain future
registration statements. The Company agreed to use its best efforts to
include the registerable securities held by the Lender (s) in the
registration statement, subject to certain defined limitations, if so
requested by the Lender (s) within 30 days after receipt of said
notice. The Lender (s) agreed to become subject to a "holdback period",
by which it does not effect a public sale of stock for a period of up
to 180 days following the effective date of the registration statement,
if so requested by a managing underwriter of the offering which is the
subject of that registration statement.
The Notes and Warrants, on a pro rata basis to the Notes,
are transferable in part or in whole by the Lender to one or more third
parties, in accordance with all of the same terms granted the Lender by
the Company. The Lender (s) may designate a member to the Company's
Board of Directors while the Notes are outstanding. The Company is
required to obtain the advance approval by the Lender (s) for future
financing transactions during the life of the Notes.
The Company may at its option call for redemption in whole or
in part any of the Class A secured Notes, including principal and
accrued interest, prior to the maturity of the Notes on January 1,
2004. No Class A Notes may be redeemed while any of the Class B
unsecured Notes are outstanding. If fewer than all of the outstanding
Class A Notes are to be redeemed, then all Class A Notes shall be
partially redeemed on a pro-rata basis. If fewer than all outstanding
Class B Notes are to be redeemed, then all Class A Notes shall be
partially redeemed on a pro rata basis.
The Company will be in default if any of the following occurs
: i) the Company fails to make payment of the principal and accrued
interest by January 1, 2004 and the same continues for a period of two
days, ii) any of the representations or warranties made by the Company
in the Bridge Financing Agreements shall have been false or misleading
in any material respect, iii) the Company fails to perform or observe
in any material respect terms under the Bridge Financing Agreements and
such failure is not cured within thirty days after written notice from
the Lender (s), iii) the voluntary or judicial dissolution of the
Company, iv) admission by the Company of its inability to pay its debts
as they become due, iv) any default by the Company under any
institutional indebtedness, and v) commencement of bankruptcy
proceedings.
In connection with the bridge financing, a debt discount
valued at $2.0 million was incurred as a result of the issuance of
warrants and the beneficial conversion feature related to the immediate
convertibility of the Notes to equity. The value ascribed to the
warrants was approximately $1.2 million, as calculated using the
Black-Scholes option pricing model, and the value ascribed to the
beneficial conversion feature was $0.8 million. As of December 31,
F-25
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
2002, the $2.0 million was recorded as a debt discount and will be
amortized ratably to interest expense over the life of the Notes, such
that the full principal amount of $2.0 million is recognized by the
earlier of the maturity date or by the month the Notes are converted
into equity. In the three month period ended March 31, 2003, the
Company recognized $500,000 in non-cash interest expense pertaining to
this amortization of the debt discount, and accordingly, the Notes were
recorded at $500,000.
In connection with the bridge financing, the Company incurred
$80,000 in related legal fees. As of December 31, 2002, these costs
were capitalized as deferred offering costs and will be amortized to
non-cash interest expense over the life of the Notes, such that the
full amount of costs are amortized by the earlier of the maturity date
of the Notes or by the month the Notes are converted into equity. In
the three month period ended March 31, 2003, the Company recognized
$20,000 in non-cash interest expense pertaining to this amortization of
the deferred financing costs, and accordingly, the balance of the
deferred financing costs was $60,000.
(11) CAPITAL RESTRUCTURING AND INTERIM FINANCING
On May 7, 2003 we entered into certain transactions with three of
our directors and four of our existing securityholders. One of these
existing securityholders, Gibralt US, Inc., was, together with its
affiliates, the beneficial owner of approximately 6.6% of our
outstanding shares prior to these transactions. Gibralt US is an
affiliate of one of our directors, Samuel Belzberg. As part of these
transactions, we issued preferred shares convertible into 30,138,792
shares of our Common Stock, representing in the aggregate
approximately 50.36% of our Common Stock and common stock equivalents
outstanding after the transactions, to these directors and
securityholders. The securityholders exchanged both their contractual
rights to convert into shares of Common Stock the $2,000,000 principal
amount of notes that they purchased from us in December 2002 and their
warrants to purchase 8,333,333 shares of Common Stock that they
purchased together with the notes, all for 27,117,240 of the common
share equivalents that we issued. We issued the remaining 3,021,552
common share equivalents on May 7, 2003 as part of an interim
financing in which Gibralt US and two of our directors, James A.
Wylie, Jr. and Peter Norris, committed to provide financing of up to
$1,200,000 in the form of short-term secured notes.
By way of background, in December 2002, we had issued $2,000,000
in aggregate principal amount of short term convertible secured notes
and warrants to purchase 8,333,333 shares of Common Stock to Gibralt
US. In March 2003 Gibralt US transferred $500,000 in aggregate
principal amount of the notes and 2,083,334 of the warrants to
unaffiliated third parties.
During the first quarter of 2003, it became clear that the
successful operations of the company would require additional working
capital. In April 2003 we began discussions with Gibralt US with a
view to its providing early in the quarter interim financing in
addition to that it had provided in December 2002. We also began to
consider a subsequent financing expected to begin later in the quarter
that would address our longer term capital needs. In late April we
elected to obtain interim financing from Gibralt and two of our
directors. At the same time we proposed a restructuring of the
securities issued in December 2002 to improve our access to the
financial markets and enhance the likelihood of a subsequent
financing. Therefore, we offered to repurchase from the December 2002
securityholders certain of their rights that, in light of current
market conditions, might make it more difficult to successfully
complete a subsequent financing in the current market.
Using the Black Scholes valuation methodology, we calculated the
monetary value of the rights of holders of our December 2002 notes to
convert their notes into shares of our Common Stock and the monetary
value of the Common Stock purchase warrants that we issued in December
2002 in connection with the notes. We further engaged a professional
valuation firm to provide a professional opinion as to the valuations
that we had utilized. The price per share that we employed to
calculate the number of shares to equal to the monetary value of the
rights that the securityholders would be surrendering was the presumed
price per share of our Common Stock after giving effect to the
issuance of those shares.
The lenders in our May 2003 interim financing have the right to
participate in our contemplated subsequent financing. Their
participation rights require that if they elect to participate in this
contemplated financing, they will do so on the same terms and
conditions as the investors that participate in the contemplated
financing by redeeming their notes upon our completion of the
contemplated financing on an equivalent basis into the securities that
we sell in that financing. In determining the price at which we sold
our notes to our lenders in May 2003, an independent committee of our
board of directors considered the added risk that the lenders would be
accepting in light of the uncertainty of the completion of the
contemplated financing. The notes issued to Gibralt US and the other
securityholders in December 2002 provided that the noteholders had the
right to participate in the next following financing of the Company at
a discount of 20% to the price to be paid by investors in that next
financing. Using this discount factor, among other things, as a
benchmark for arriving at a value for the risk that our interim
financing lenders would be assuming, the independent committee agreed
to issue to the lenders preferred shares convertible into 3,021,552
shares of our Common Stock, allocated according to the lenders'
respective loan commitments to the Company.
Although we have closed the exchange transaction and the interim
financing, we are in discussions with the holders of the December 2002
notes and the holders of the May 2003 notes regarding further
modifications that may be necessary to commence the contemplated
financing.
F-26
DIOMED HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
F-27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
In this Quarterly Report, the terms "Company" and "Diomed Holdings"
both refer to Diomed Holdings, Inc. The term "Diomed" refers to the Company's
principal subsidiary, Diomed, Inc. and its consolidated subsidiaries. We use the
terms "we," "our" and "us" when we do not need to distinguish among these
entities or their predecessors, or when any distinction is clear from the
context.
This section contains forward-looking statements, which involve known
and unknown risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "may," "will," "should," "potential,"
"expects," "anticipates," "intends," "plans," "believes" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Our actual
results could differ materially from those discussed in these statements. Our
Annual Report on Form SEC 10-KSB (the "Annual Report") contains a discussion of
certain of the risks and uncertainties that affect our business. We refer you to
the "Risk Factors" on pages 5 through 16 of the Annual Report for a discussion
of certain risks, including those relating to our business as a medical device
company without a significant operating record and with operating losses, our
risks relating to our commercialization of our current and future products and
applications and risks relating to our common stock and its market value.
In view of our relatively limited operating history, we have limited
experience forecasting our revenues and operating costs. Therefore, we believe
that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
To date, the Company has incurred substantial costs to create our products. As
of March 31, 2003, we had an accumulated deficit of approximately $41.5 million.
We may continue to incur operating losses due to spending on research and
development programs, clinical trials, regulatory activities, marketing and
administrative activities. This spending may not correspond with any meaningful
increases in revenues in the near term, if at all. As such, these costs may
result in negative operating cash flows until such time as the Company generates
sufficient revenue to offset such costs.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes set forth above in this Quarterly
Report, the Descriptive Memorandum and our 2002 Annual Report on Form 10-KSB (as
amended).
OVERVIEW
Diomed specializes in developing and commercializing minimal and
micro-invasive medical procedures that use its laser technologies and disposable
products. Minimal and micro-invasive medical procedures typically result in
reduced pain and scarring, shorter recovery periods and increased effectiveness
compared to traditional surgical procedures. Most of the pain associated with
traditional surgical procedures results from the slicing of the layers of skin
and muscle tissue, which also takes time to heal. This can be diminished by
using minimal and micro-invasive procedures instead of traditional surgical
treatments. In developing and marketing our clinical solutions, we use
proprietary technology and we aim to secure strong commercial advantages over
our competitors by gaining governmental approvals in advance of others and
through exclusive commercial arrangements. To participate in the rapidly growing
minimal and micro-invasive medical procedure industry, we seek to develop
medical applications for our laser technology, to incorporate disposable
products into these applications and to sell our products to physicians who
perform medical procedures using our products and the techniques that we
develop. To optimize our revenues, we focus on clinical procedures that require
the health care provider to own our equipment and also purchase our disposable
products, such as optical fibers. We sell our products to hospital and
office-based physicians, including specialists in vascular surgery, oncology,
interventional-radiology, phlebology, gynecology and dermatology.
1
Using our proprietary technology in certain methods of synchronizing
diode light sources and in certain optical fibers, we currently focus on
endovenous laser treatment (our EVLT(TM) product line) for use in varicose vein
treatments, photodynamic therapy (our PDT product line) for use in cancer
treatments, and other clinical applications. Using high power semiconductor
diodes as their energy source, our diode lasers combine clinical efficacy,
operational efficiency and cost effectiveness in a versatile, compact,
lightweight, easy-to-use and easy-to-maintain system.
Since the beginning of 2001, the composition of Diomed's product line
has changed. In the first half of 2001, Diomed abandoned its Laserlite business
when we withdrew from the aesthetic laser market. Diomed had acquired Laserlite
LLC, the distributor of Diomed's cosmetic laser systems, in May 1998. Diomed
subsequently migrated to its existing laser platform, and this led to a decision
to discontinue the sale of the Laserlite product line.
In 2001, Diomed developed endovenous laser treatment (EVLT(TM)), an
innovative minimally invasive laser procedure for the treatment of varicose
veins caused by greater saphenous vein reflux. In September 2001, Diomed was the
first company to receive the CE mark of the European Economic Union for approval
for endovenous laser treatment with respect to marketing EVLT(TM) in Europe. On
January 22, 2002, Diomed was the first company to receive FDA clearance for
endovenous laser treatment, with respect to marketing EVLT(TM) in the U.S.
EVLT(TM) was a primary source of revenue in 2002. Diomed expects that
EVLT(TM) will continue to be a primary source of revenue in 2003. Diomed
believes that EVLT(TM) will result in a high level of commercial acceptance due
to its quick recovery period, immediate return to one's normal routine barring
vigorous physical activities, reduced pain and minimal scarring, and reduced
costs compared to vein stripping, the current prevalent clinical treatment for
varicose veins. We developed our EVLT(TM) product line as a complete clinical
solution and marketing model, including a laser, disposable kit, clinical
training and marketing plan, to assist office-based and hospital-based
physicians in responding to the demand for treatment of varicose veins in a
minimally invasive manner. Diomed also published a health insurance
reimbursement guide as a sales and marketing tool to assist physicians in the
reimbursement submission process. We believe that these attributes, in addition
to EVLT(TM)'s superior clinical trial results, favorable peer reviews and
comparatively larger and longer follow-up data reports also provide EVLT(TM)
with a competitive advantage over competing traditional and minimally invasive
varicose vein treatment products.
Diomed expects that as the number of EVLT(TM) procedures performed
increases so will its sales of associated disposable items. Diomed believes that
the U.S. represents the single largest market for EVLT(TM). Diomed is targeting
its sales and marketing efforts at hospitals, private physician practices and
clinics, and focuses on leading hospitals.
Diomed has developed a website - WWW.EVLT.COM - to implement its push /
pull strategy to attract the interest of both patients and physicians. EVLT.com
provides patients with education about treatment options and benefits of
EVLT(TM) and provides physicians with education about the EVLT(TM) procedure.
Also, patients can inquire about the nearest physician performing EVLTTM by
inputting their city and state.
The sales cycle for selling capital equipment, such as medical lasers,
is a dynamic one that can be prolonged by several factors, including:
o the customer's internal approval process;
o hospital determinations as to the speciality of physician performing
the EVLT(TM)procedure and the facility where these procedures will be
performed;
o the physician's desire to observe an EVLT(TM)procedure prior to making
a purchase decision; and
o budget constraints for capital equipment.
2
The length of the sales cycle may vary according to the type of customer. For
example, a sale to a private physician may take as little as two to three
months, whereas a sale to a hospital may take six months or longer. Diomed is
providing hospital-based and office-based physicians with marketing guidance as
to how they can build an EVLT(TM) business, which can facilitate the sales
closing process and reduce the sales cycle. Also, Diomed is directing interested
patients to the nearest performing physician via its website WWW.EVLT.COM.
Based on the dynamics of the selling process, in late March 2002 Diomed
made the decision to hire a direct sales force to commercialize EVLT(TM). At the
end of May 2002, Diomed had hired, trained and deployed eight new direct sales
representatives in key strategic markets across the U.S. to supplement its
existing sales infrastructure of independent sales representatives. In October
2002, based on the positive sales performance in the third quarter, the Company
nearly doubled the size of its direct sales force to 17 representatives. In
addition, in September 2002, Diomed engaged Sigmacon Health Products Corporation
of Toronto, Ontario as its distributor in the Canadian market. The Company will
continue to monitor sales activities and sales strategies, and adjust the number
of direct sales representatives and indirect sales representatives to address
market needs and opportunities in the future.
Diomed's sales of its PDT product line are dependent to an extent upon the
clinical development process and the commercialization of PDT drugs by PDT drug
companies. As a result, our sales may fluctuate in relation to the timing of PDT
drug companies achieving their strategic initiatives. In 2002, we changed our
sales strategy with respect to sales of our PDT product line. In 2001, our
collaborative partner, Axcan Pharma, lead the sales effort for PDT in
conjunction with Axcan Pharma's drug, Photofrin. In 2002, Diomed and Axcan
Pharma decided to use Diomed's sales staff in addition to Axcan Pharma's own
efforts to sell Photofrin and our related PDT products. We have not yet had
sufficient time to discern what affect this change in sales strategy will have
on future sales of our PDT product line and whether this change will have a
material impact on our revenues. We are unable to predict any probable impact on
our revenues because EVLT(TM), and not PDT, is our primary source of revenue for
2002 and because Photofrin is the first PDT drug that Axcan Pharma
commercialized. Consequently, there is no relevant historical data on which to
base sales assumptions.
Diomed works jointly and early on with photodynamic therapy drug (PDT)
companies in their clinical development process in order to design a laser that
optimizes the most effective wavelength in combination with their PDT drugs. We
have long-term relationships with some of the world's leading photodynamic
therapy drug companies, including Axcan Pharma, DUSA, Pharmacyclics and QLT, and
have sold them lasers in support of their clinical trials for photodynamic
therapy applications. In August 2000, Axcan Pharma and Diomed together received
regulatory approval for Diomed's 630nm laser and OPTIGUIDE(R) fiber, and Axcan's
Photofrin drug used in the treatment for late stage lung and esophageal cancers.
Axcan Pharma is developing other clinical applications using Photofrin,
including treatment for Barrett's Esophagus, a pre-cursor to cancer of the
esophagus. Axcan Pharma is pursuing an application for FDA clearance for
Photofrin and Diomed's lasers and fibers for use in the treatment of Barrett's
Esophagus. In December 2002, the FDA issued an approvable letter regarding this
application. An FDA approvable letter typically indicates that the FDA intends
to approve the application. In its approvable letter, the FDA states that it has
reviewed the application and requests further clinical information mostly
relating to 24-month follow-up data. Axcan Pharma anticipates that final
approval may be issued by the end of the second quarter in 2003.
In the U.S., regulatory approval by the FDA is given for each specific
treatment in response to a specific pre-market approval application, or "PMA."
Each PMA is generally addressed to a use for the device that the PMA specifies.
Our PDT line is a delivery system of laser technology, services and fiber
disposables to the global photodynamic therapy industry. The FDA considers PDT a
modality that requires a combination PMA approval, where the PDT drug company,
laser manufacturer and fiber manufacturer work together to obtain regulatory
approval for the complete medical procedure.
Our technology and manufacturing capability has attracted OEM partners.
In a typical OEM relationship, we produce the laser and other products to the
OEM's specifications, which will then be marketed under the OEM's label. As a
result, sales of our products to OEM partners may fluctuate in relation to the
achievement of their strategic initiatives. Our most prominent OEM relationship
is with Olympus in Japan, which is using our technology for surgical and dental
3
applications. In addition we have a long-term partnership with Dentek
Lasersystems Vertriebs GmbH, which is using our laser module for dental
applications.
In 2002, approximately 55% of our sales were generated domestically
versus internationally. Diomed believes that its percentage of sales generated
domestically should increase as it grows the EVLT(TM) market in the U.S.
Diomed envisions that by developing and marketing procedures to doctors
that involve selling key components - namely lasers and their related
disposables designed for a single use, including fibers and kits - it will have
the potential to create recurring sales. Diomed's plan is that each future
procedure will be accompanied with a disposable component.
In 2003, Diomed expects to continue to focus on the development and growth
of EVLT(TM) sales in the U.S. while simultaneously pursuing channels for future
sales worldwide, to support the development and approval of new applications for
PDT products, and to continue the development of enhancements to our products in
order to further improve their effectiveness and manufacturing efficiency.
Our historical revenues primarily consist of sales of our lasers and from
sales of disposable fibers. Revenue from product sales is recognized at the time
of shipment to the customer as long as there is persuasive evidence of an
arrangement, the sales price is fixed and determinable and collection of the
related receivable is probable. The Company provides for estimated product
returns and warranty costs at the time of product shipment. In December 1999,
the Securities and Exchange Commission issued a staff accounting bulletin,
referred to as SAB No. 101, Revenue Recognition in Financial Statements, which
establishes guidance in applying generally accepted accounting principles to
revenue recognition in financial statements and is effective beginning with the
Company's fourth quarter of the year ended December 31, 2000. The Company has
determined that its existing revenue recognition practices comply with the
requirements of SAB No. 101 for all periods presented.
Our historic domestic and international product sales were generated
principally through our independent sales representatives, or ISRs, in the U.S.
and through our international distributors. We also have OEM relationships in
Asia and Europe. Historically, a relatively small portion of our sales has been
generated domestically. Through 2000, over half of our revenues have come from
international sales. In 2001, we expanded our domestic sales through the
expansion of ISRs and our U.S. sales have increased as a result of their
activities.
For foreign currency translation purposes, the assets and liabilities of
Diomed Ltd. are translated at the rate of exchange in effect at the Balance
Sheet date, while stockholders' equity, excluding the current year's loss, is
translated at historical rates. Results of operations are translated using the
weighted average exchange rate in effect during the period. Resulting
translation adjustments are recorded as a separate component of stockholders'
equity in our balance sheets.
Our cost of revenue consists primarily of materials, labor, manufacturing,
overhead expenses, warranty and shipping and handling costs. As we grow our
business and realize manufacturing efficiencies and economies of scale, we
expect our cost of revenue to decrease as a percentage of net sales, thereby
increasing our gross margin.
Our operating expenses include selling and marketing, research and
development and general and administrative expenses. Sales and marketing
expenses consist primarily of personnel costs, commissions, clinical training,
marketing, public relations and participation in selected medical conferences
and trade shows. Research and development expenses consist primarily of
personnel costs, clinical and regulatory costs, patent application costs and
supplies. General and administrative expenses consist primarily of personnel
costs, professional fees, and other general operating expenses.
We value our inventories at the lower of cost (first-in, first-out) or
market. Our work-in-progress and finished goods inventories consist of
materials, labor and manufacturing overhead.
4
We have been unprofitable since our founding and have incurred a
cumulative net loss of approximately $41.5 million as of March 31, 2003. We may
continue to incur substantial and possibly increasing operating losses due to
spending on research and development programs, clinical trials, regulatory
activities, and the costs of manufacturing, marketing and administrative
activities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2002
REVENUES
Revenues for the three months ended March 31, 2003 were $2.1 million,
$1.2 million, or 122%, increase from $0.9 million for the three months ended
March 31, 2002.
In the three months ended March 31, 2003, approximately $1.4 million,
or 66%, of our total revenues were derived from laser sales, as compared to
approximately $0.5 million, or 55% in the three months ended March 31, 2002. In
the three months ended March 31, 2003, approximately $0.7 million, or 34%, of
our total revenues were derived from sales of disposable fibers and kits,
accessories and service, as compared to approximately $0.4 million, or 45% in
the three months ended March 31, 2002.
The increase in revenues is principally due to the commercialization of
EVLT(TM) for the treatment of varicose veins, subsequent to receiving FDA
approval in January 2002. In the first quarter of 2003, the Company experienced
an approximate 740% increase in the sale of EVLT related disposable kits and
fibers as compared to the first quarter in 2002. This increase represents a
strong growth trend in a recurring revenue stream from disposable sales, which
is a key element in the Company's business model.
COST OF REVENUES
Cost of revenues for the three months ended March 31, 2003 was $1.4
million, $0.2 million, or 21%, increase from $1.2 million for the three months
ended March 31, 2002. This is principally due to the cost of revenues associated
with the increase in sales volume from the commercialization of EVLT(TM).
GROSS MARGIN
Gross margin for the three months ended March 31, 2003 was $0.7
million, a $0.9 million, or 465%, increase from $0.2 million in loss for the
three months ended March 31, 2002. This increase was principally due to the
increased sales volume from the commercialization of EVLT(TM), and as a result,
more fixed costs for production, quality, and service were covered in 2003 as
compared to 2002.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended March 31,
2003 principally remained unchanged at $188,000, a $17,000, or 10%, increase
from $171,000 for the three months ended March 31, 2002.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses for the three months ended March 31,
2003 were $1.1 million, a $0.8 million, or 234%, increase from $0.3 million for
the three months ended March 31, 2002. The increase was principally due to staff
costs associated with the direct sales force that was hired in the second half
of 2002, including salary, commissions, payroll taxes, benefits and travel, and
heavy trade show participation in 2003 in support of the commercialization of
EVLT(TM), that were not incurred in the three months ended March 31, 2002. In
fiscal 2003, the Company anticipates
investing much of its resources in sales and marketing programs to support the
aggressive commercialization of EVLT(TM).
5
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended March
31, 2003 principally remained unchanged at $801,000, a $20,000, or 2%, decrease
from $821,000 for the three months ended March 31, 2002. In fiscal 2002, the
Company implemented the infra-structure to support becoming a public company via
the reverse merger in February 2002.
INTEREST EXPENSE, NET
Interest expense for the three months ended March 31, 2003 was $0.6
million, a $0.3 million, or 100%, increase from $0.3 million for the three
months ended March 31, 2002.
Interest expense in the three months ended March 31, 2002 includes
non-cash charges totaling approximately $225,000. In 2001, the Company issued
Promissory Notes, in the aggregate principal amount of $700,000, to two
stockholders of the Company in exchange for bridge loans and granted these two
stockholders fully exercisable warrants to purchase an aggregate of 80,000
shares of common stock. We recorded the value of such warrants, calculated using
the Black-Scholes option pricing model, as a debt discount that would be
amortized to interest expense over the life of the notes. In addition, we
recorded the beneficial conversion feature attributable to the warrants as
interest expense upon the closing of the Merger, which triggered the right to
convert the notes.
Interest expense in the three months ended March 31, 2003 includes
non-cash charges totaling approximately $520,000 related to the $2.0 million in
December 2002 Bridge Notes. In accordance with Emerging Issues Task Force (EITF)
00-27, "Application of EITF No.98-5 to Certain Convertible Instruments", the
Company recorded a beneficial conversion feature in the amount of $2.0 million,
which has been recorded as a debt discount to the Notes. The debt discount will
be amortized over the term of the Notes through January 1, 2004, with full
amortization of any remaining discount to occur if the Notes are converted to
equity prior to the January 1, 2004 maturity date. Accordingly, the Notes were
recorded at zero as of December 31, 2002 and zero amortization of the debt
discount was recognized in the year ended December 31, 2002 as the corresponding
amortization since December 27, 2002 was immaterial. In the three month period
ended March 31, 2003, the Company recognized $500,000 in non-cash interest
expense pertaining to this amortization of the debt discount, and accordingly,
the Notes were recorded at $500,000.
Also, in connection with the December 2002 Bridge Notes, the Company
incurred $80,000 in related legal fees. As of December 31, 2002, these costs
were capitalized as deferred financing costs and will be amortized to non-cash
interest expense over the life of the Notes, such that the full amount of costs
are amortized by the earlier of the maturity date of the Notes or by the month
the Notes are converted into equity. In the three month period ended March 31,
2003, the Company recognized $20,000 in non-cash interest expense pertaining to
this amortization of the deferred financing costs.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
Since inception through March 31, 2003, we have incurred a cumulative
loss of approximately $41.5 million and may continue to incur operating losses
for the next few years, dependent upon the commercial success of EVLT(TM)
post-FDA clearance. We have financed our operations primarily through private
placements of common stock and preferred stock, and private placements of
convertible notes and short-term notes and credit arrangements.
In December 2002, the Company completed a bridge financing with Gibralt
US, Inc. ("Gibralt") in the form of $2.0 million in secured and unsecured
convertible Notes due January 1, 2004, and issued warrants to purchase 8,333,333
shares of Common Stock. In order to fund its operations in 2003, to enable the
Company to expand critical sales and marketing programs and to further
strengthen Diomed's leadership position in the marketplace, the Company will
need to complete an additional debt or equity financing or put in place a credit
facility to supplement the Company's commercialization of EVLT(TM). The Company
anticipates it will have access to additional funding sources. The Company will
6
require the proceeds of any such financing, together with its current cash
resources, to continue as a going concern, and will use these proceeds to fund
its operations and commercialize its products in 2003. Additional financing may
not, however, be available on acceptable terms or at all. The inability to
obtain additional financing would cause the Company to reduce or cease
operations, sell all or a portion of its assets, seek a sale of the Company or
enter into a business combination with a third party.
On May 7, 2003 we entered into certain transactions with three of our
directors and four of our existing securityholders. One of these existing
securityholders, Gibralt US, Inc., was, together with its affiliates, the
beneficial owner of approximately 6.6% of our outstanding shares prior to these
transactions. Gibralt US is an affiliate of one of our directors, Samuel
Belzberg. As part of these transactions, we issued preferred shares convertible
into 30,138,792 shares of our Common Stock, representing in the aggregate
approximately 50.36% of our Common Stock and common stock equivalents
outstanding after the transactions, to these directors and securityholders. The
securityholders exchanged both their contractual rights to convert into shares
of Common Stock the $2,000,000 principal amount of notes that they purchased
from us in December 2002 and their warrants to purchase 8,333,333 shares of
Common Stock that they purchased together with the notes, all for 27,117,240 of
the common share equivalents that we issued. We issued the remaining 3,021,552
common share equivalents on May 7, 2003 as part of an interim financing in which
Gibralt US and two of our directors, James A. Wylie, Jr. and Peter Norris,
committed to provide financing of up to $1,200,000 in the form of short-term
secured notes.
By way of background, in December 2002, we had issued $2,000,000 in
aggregate principal amount of short term convertible secured notes and warrants
to purchase 8,333,333 shares of Common Stock to Gibralt US. In March 2003
Gibralt US transferred $500,000 in aggregate principal amount of the notes and
2,083,334 of the warrants to unaffiliated third parties.
During the first quarter of 2003, it became clear that the successful
operations of the company would require additional working capital. In April
2003 we began discussions with Gibralt US with a view to its providing early in
the quarter interim financing in addition to that it had provided in December
2002. We also began to consider a subsequent financing expected to begin later
in the quarter that would address our longer term capital needs. In late April
we elected to obtain interim financing from Gibralt and two of our directors. At
the same time we proposed a restructuring of the securities issued in December
2002 to improve our access to the financial markets and enhance the likelihood
of a subsequent financing. Therefore, we offered to repurchase from the December
2002 securityholders certain of their rights that, in light of current market
conditions, might make it more difficult to successfully complete a subsequent
financing in the current market.
Using the Black Scholes valuation methodology, we calculated the monetary
value of the rights of holders of our December 2002 notes to convert their notes
into shares of our Common Stock and the monetary value of the Common Stock
purchase warrants that we issued in December 2002 in connection with the notes.
We further engaged a professional valuation firm to provide a professional
opinion as to the valuations that we had utilized. The price per share that we
employed to calculate the number of shares to equal to the monetary value of the
rights that the securityholders would be surrendering was the presumed price per
share of our Common Stock after giving effect to the issuance of those shares.
The lenders in our May 2003 interim financing have the right to participate
in our contemplated subsequent financing. Their participation rights require
that if they elect to participate in this contemplated financing, they will do
so on the same terms and conditions as the investors that participate in the
contemplated financing by redeeming their notes upon our completion of the
contemplated financing on an equivalent basis into the securities that we sell
in that financing. In determining the price at which we sold our notes to our
lenders in May 2003, an independent committee of our board of directors
considered the added risk that the lenders would be accepting in light of the
uncertainty of the completion of the contemplated financing. The notes issued to
Gibralt US and the other securityholders in December 2002 provided that the
noteholders had the right to participate in the next following financing of the
Company at a discount of 20% to the price to be paid by investors in that next
financing. Using this discount factor, among other things, as a benchmark for
arriving at a value for the risk that our interim financing lenders would be
assuming, the independent committee agreed to issue to the lenders preferred
shares convertible into 3,021,552 shares of our Common Stock, allocated
according to the lenders' respective loan commitments to the Company.
Although we have closed the exchange transaction and the interim financing,
we are in discussions with the holders of the December 2002 notes and the
holders of the May 2003 notes regarding further modifications that may be
necessary to commence the contemplated financing.
7
We had cash of approximately $131,000 at March 31, 2003 and
approximately $1.9 million as of December 31, 2002.
Cash used in operations for the three months ended March 31, 2003 was
approximately $1.7 million. This is principally attributable to the payment of
prepaid annual business insurance premiums ($400,000) and fixed overhead costs,
including rent, salaries, benefits and taxes that was not covered by sales.
Cash used in investing activities for the three months ended March 31,
2003 was approximately $70,000. The net cash used by investing activities was
principally related to demo equipment within property, plant and equipment, for
customer trial programs and for use by the direct sales force in the field.
Cash used in financing activities for the three months ended March 31,
2003, was approximately $82,000. Cash used in financing activities principally
was for the pay down of the Barclays bank line of credit, as well as nominal
payments for capital equipment leases and payments against a short-term
promissory note to a service provider.
BANK LINE OF CREDIT
Diomed, Ltd., the Company's subsidiary in the United Kingdom, has a line
of credit with Barclays Bank, which is limited to the lesser of (pound)1,200,000
($1,895,000 at March 31, 2003) or 80% of eligible accounts receivable. This line
bears interest at 3% above Barclays Bank's base rate (4.00% at March 31, 2003)
and borrowings are due upon collection of receivables from customers. As
security interest, Barclay's Bank has a lien on all of the assets of Diomed
Ltd., excluding inventory and certain intellectual property.
As of March 31, 2003, there were borrowings of (pound)94,744 ($149,600)
outstanding under this line and available future borrowings of approximately
$88,000.
8
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of the Company's financial condition, results
of operations, and cash flows are based upon Diomed's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate these estimates,
including those related to bad debts, inventory valuation and obsolescence,
intangible assets, income taxes, warranty obligations, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Our critical accounting policies are as follows:
o revenue recognition;
o allowance for doubtful accounts;
o warranty obligation;
o excess and obsolete inventory; and
o valuation of long-lived and intangible assets.
Revenue Recognition. We derive our revenue from primarily two sources (i)
product revenue which includes lasers, instrumentation, and disposables, and
(ii) service revenue. The Company recognizes revenue on products and services
when the persuasive evidence of an arrangement is in place, the price is fixed
or determinable, collectibility is reasonably assured, and title and risk of
ownership has been transferred. Transfer of title and risk of ownership
generally occurs when the product is shipped to the customer or when the
customer receives the product, depending on the nature of the arrangement. The
Company currently provides for the estimated cost to repair or replace products
under warranty at the time of sale. Service revenue is recognized as the
services are performed.
9
Allowance for Doubtful Accounts. Accounts receivable are customer
obligations due under normal trade terms. The Company sells its products to
private physicians, hospitals, health clinics, distributors and OEM customers.
The Company generally requires signed sales agreements, non-refundable advance
payments and purchase orders depending upon the type of customer, and letters of
credit may be required in certain circumstances. Some customers seek equipment
financing from third party leasing agents. Accounts receivable is stated at the
amount billed to the customer less a valuation allowance for doubtful accounts.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables could potentially be uncollectible. The Company
includes specific accounts receivable balances that are determined to be
uncollectible, along with a general reserve, in its overall allowance for
doubtful accounts. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on available information,
the Company believes its allowance for doubtful accounts as of March 31, 2003 is
adequate.
Warranty Obligation. We engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers. In addition to these proactive measures, we also provide
for the estimated cost of product warranties at the time revenue is recognized.
Excess and Obsolete Inventory. We maintain reserves for our estimated
obsolete inventory. The reserves are equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory reserves may be
required.
Valuation of Long-Lived and Intangible Assets. We assess the impairment of
identifiable intangibles and long-lived assets on an annual basis and whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. When we determine that the carrying value of intangibles and
long-lived assets may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. If cash generated in the future by the acquired asset is different from
current estimates, or if the appropriate discount rate were to change, then the
net present value of the asset would be impacted, and this could result in a
charge to earnings.
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the first quarter of 2003, the Company issued options to
purchase up to 800,000 shares of its Class A Stock, and upon conversion of those
shares 800,000 shares of its common stock, at a purchase price of $0.26 per
underlying share to the new President and CEO, 34,000 shares of its Class A
Stock, and upon conversion of those shares 34,000 shares of its common stock, at
a purchase price of $0.25 to $0.33 per underlying share to non-executive
employees, and 60,930 shares of its Class A Stock, and upon conversion of those
shares 60,930 shares of its common stock, at a purchase price of $0.34 per
underlying share to two consultants as follows:
10
OPTIONS GRANTED
OPTIONEE (EXPRESSED IN SHARES OF COMMON STOCK)
---------- ------------------------------------
New President and CEO 800,000
Non-Executive Employees 34,000
Robert Min (consultant) 30,775
Steven Zimmet (consultant) 30,155
Diomed issued options to the above-listed optionees in reliance upon
the exemption from registration set forth under Section 4(2) of the Securities
Act of 1933, as amended. Each optionee agreed that neither the options nor the
underlying securities would be resold without registration under the Securities
Act or exemption therefrom. Each optionee also represented his or her intention
to acquire the securities for investment only, and not with a view to the
distribution thereof. Prior to making any offer or sale, Diomed had reasonable
grounds to believe and believed that the purchaser was capable of evaluating the
merits and risks of the investment and was able to bear the economic risk of the
investment represented by the options granted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the first quarter of 2003, there were no submissions of matters to a vote of
security holders.
ITEM 5. OTHER
CEO TRANSITION AND NEW CHAIRMAN OF THE BOARD
On January 13, 2003, the Company announced that James A. Wylie,
Jr., had been appointed to the position of President & CEO replacing Peter
Klein, who left to pursue personal interests. Mr. Klein will continue to serve
as a member of Diomed's Board of Directors. Diomed also announced that Geoffrey
H. Jenkins had been appointed as Chairman of the Board, effective January 1,
2003 upon the resignation of James Arkoosh, who left the Company to pursue
personal interests. Mr. Jenkins has been serving as a member of Diomed's Board
of Directors since the Spring of 2001.
NEW BOARD MEMBERS
On March 13, 2003, the Company elected Mr. Gary Brooks (CMC, CTP) and
Mr. David H. Swank to the Board of Directors, increasing the size of the Board
to eight Directors. Both gentlemen will serve on the Audit Committee and Mr.
Swank will assume the position of Chairman, Audit Committee.
11
REGULATORY APPROVAL OF EVLT IN CANADA
In February 2003, the Company received regulatory approval from Health
Canada, allowing the Company to immediately market EVLT for the treatment of
varicose veins in the Canadian market.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS.
Exhibit No. 99.1 Statement Under Oath of Principal Financial Officer Regarding
Facts And Circumstances Relating to Exchange Act Filings.
Exhibit No. 99.2 Statement Under Oath of Principal Executive Officer Regarding
Facts And Circumstances Relating to Exchange Act Filings.
REPORTS ON FORM 8-K. State whether any reports on Form 8-K were filed during the
quarter for which this report is filed, listing the items reported, any
financial statements filed and the dates of such reports.
On January 13, 2003, the Company filed a Current Report on Form 8-K
in connection with the Company's new President and CEO, and Chairman of the
Board. Also, included was a copy of James A Wylie Jr.'s employment contract.
On May 15, 2003, the Company filed a Current Report on Form 8-K in
connection with the May 7, 2003 interim financing and the restructuring of the
December 2002 bridge Notes. Included was a copy of the related documents -
Exchange Agreement, Class C Notes Agreement, Class D Notes Agreement, Secured
Loan Agreement, Amended and Restated Pledge Agreement, Amended and Restated
Security Agreement, Amended and Restated Registration Rights Agreement, and
Legal Opinion by McGuirewoods, LLP.
13
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
DIOMED HOLDINGS, INC.
(Registrant)
By: /s/ James A. Wylie, Jr.
------------------------------------------------
Name: James A. Wylie, Jr.
Title: President and Chief Executive Officer,
Director
Date: May 15, 2003
/s/ Lisa M. Bruneau
---------------------------------
Name: Lisa M. Bruneau
Title: Principal Financial Officer,
Vice President,
Finance, Secretary and Treasurer
14
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C 1350, AS
ADOPTED AND THE REQUIREMENTS OF SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James A. Wylie, Jr., Chief Executive Officer and President of Diomed
Holdings, Inc. (the "Company") do hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB for the three months
ended March 31, 2003 of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Company's ability to record, process, summarize
and report financial data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ JAMES A. WYLIE, JR.
James A. Wylie, Jr.
President and Chief Executive Officer
May 15, 2003
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C 1350, AS
ADOPTED AND THE REQUIREMENTS OF SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lisa M. Bruneau, Principal Financial Officer of Diomed Holdings, Inc. (the
"Company") do hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB for the three months
ended March 31, 2003 of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the period presented in this quarterly report;
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
d) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
e) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of
Company's board of directors (or persons performing the equivalent function):
c) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Company's ability to record, process, summarize
and report financial data and have identified for the Company's auditors any
material weaknesses in internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ LISA M. BRUNEAU
Lisa M. Bruneau
Principal Financial Officer
May 15, 2003