UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-QSB
-----------
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 84-140636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Dundee Park
Andover, MA 01810
(Address of principal executive offices) (Zip Code)
(978) 475-7771
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of September 30, 2003, there were 29,711,749 shares of common stock, par
value $0.001, outstanding.
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
Quarterly Report on Form 10-QSB
For the Three Months and Nine Months Ended September 30, 2003
Table of Contents
Item Number Page Number
Part I - Financial Information
1 Consolidated Balance Sheets - F-1
September 30, 2003 (unaudited) and December 31, 2002
Unaudited Consolidated Statements of Operations - F-3
Three Months and Nine Months Ended September 30, 2003 and 2002
Unaudited Consolidated Statements of Cash Flows - F-4
Nine Months Ended September 30, 2003 and 2002
Notes to Consolidated Condensed Financial Statements F-6
2 Management's Discussion and Analysis or Plan of Operation 1
3 Controls and Procedures 11
Part II - Other Information 11
1 Legal Proceedings 11
2 Changes in Securities and Use of Proceeds 12
6 Exhibits and Reports on Form 8-K 17
Signatures 18
Diomed Holdings, Inc.
Consolidated Balance Sheets
Assets SEPTEMBER 30, DECEMBER 31,
2003 2002
(unaudited) (audited)
Current Assets:
Cash and cash equivalents $ 1,537,240 $ 1,848,646
Restricted cash - 75,000
Accounts receivable, net of allowance for doubtful accounts of
$304,000 and $308,000 in 2003 and 2002, respectively 1,166,629 676,444
Inventories 1,580,904 2,012,141
Prepaid expenses and other current assets 555,081 214,253
--------------- ---------------
Total current assets 4,839,854 4,826,484
Property and Equipment:
Office equipment and furniture and fixtures 1,486,519 1,229,307
Manufacturing equipment 829,752 731,787
Leasehold improvements 816,949 652,141
--------------- ---------------
3,133,220 2,613,235
Less--Accumulated depreciation and amortization 2,115,061 1,548,085
--------------- ---------------
Property and Equipment, net 1,018,159 1,065,150
Intangible Manufacturing Asset, net of accumulated amortization of
$564,000 and $417,000 in 2003 and 2002, respectively (Note 2j) 417,059 564,270
Intangible EVLT Technology, net of accumulated amortization of
$24,000 and zero in 2003 and 2002, respectively (Notes 2j, 5f and 11) 4,677,733 -
--------------- ---------------
Total intangible assets, net 5,094,792 564,270
Other Assets:
Deposits 169,088 597,426
Deferred offering costs (Note 10) 605,343 -
Deferred financing costs, net of accumulated amortization of
$133,000 and zero in 2002 and 2003, respectively (Notes 5d, 5e and 10) 609,959 80,000
--------------- ---------------
Total other assets 1,384,390 677,426
$ 12,337,195 $ 7,133,330
=============== ===============
F-1
Diomed Holdings, Inc.
Consolidated Balance Sheets
(continued)
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Bank loan $ 310,754 $ 216,307
Related party redeemable Debt ($1,200,000 face value,
net of $140,000 in debt discount at September 30, 2003) (Note 5d) 1,060,000 -
Promissory notes (Notes 5a and 5b) 1,369,544 445,208
Convertible Debt ($2,000,000 in related party debt)
(Notes 5e and 10) 6,995,000 -
Accounts payable 1,673,500 1,608,621
Accrued expenses 1,983,064 1,444,100
Current maturities of EVLT Technology Payable ($1,000,000 face
value, net of $35,609 debt discount at September 30, 2003)
(Notes 5f and 11) 964,391 -
Other current liabilities 57,483 33,993
--------------- ---------------
Total current liabilities 14,413,736 3,748,229
--------------- ---------------
Promissory Note Payable, less current maturities - 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)(Note 5c) - -
Capital Lease Obligations, less current maturities - 10,018
EVLT Technology Payable, less current maturities ($1,500,000 face value,
net of $207,516 debt discount at September 30, 2003) (Notes 5f and 11) 1,292,484 -
--------------- ---------------
Total liabilities 15,706,220 4,694,247
--------------- ---------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
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 September 30, 2003
and 14,688,662 shares at December 31, 2002 -0- 14,689
Designated Class E preferred stock, $0.001 par value (Note 9)
Authorized--20 shares
Issued and outstanding--20 shares at September 30, 2003
and zero shares at December 31, 2002 2,000,000 -
Designated Class F preferred stock, $0.001 par value (Note 9)
Authorized--24 shares
Issued and outstanding--24 shares at September 30, 2003
and zero shares at December 31, 2002 240,000 -
Common stock, $0.001 par value
Authorized - 80,000,000 shares
Issued and outstanding - 29,711,749 and 15,023,087 shares at
September 30, 2003 and December 31, 2002, respectively 29,712 15,023
Additional paid in capital 40,858,785 41,704,774
Accumulated comprehensive income 263,533 158,312
Accumulated deficit (46,761,055) (39,453,715)
--------------- ---------------
Total stockholders' equity (deficit) (3,369,025) 2,439,083
---------------- ---------------
$ 12,337,195 $ 7,133,330
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
Diomed Holdings, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues $ 2,371,768 $1,945,333 $ 6,644,118 $ 4,070,478
Cost of Revenues 1,540,003 1,287,064 4,211,409 3,480,650
-------------- ------------- ------------ -------------
Gross profit 831,765 658,269 2,432,709 589,828
Operating Expenses:
Research and development 248,467 280,532 635,253 663,775
Selling and marketing 870,403 1,019,101 2,892,381 2,096,154
General and administrative 1,047,705 890,181 2,829,422 2,658,259
-------------- ------------- ------------ -------------
Total operating expenses 2,166,575 2,189,814 6,357,056 5,418,188
-------------- ------------- ------------ -------------
Loss from operations (1,334,810) (1,531,545) (3,924,347) (4,828,360)
Interest Expense, non-cash (Notes 5c and 5d) 1,995,484 0 2,933,333 225,260
Interest Expense, cash (Notes 5c, 5d and 5e) 218,778 29,192 449,661 91,879
-------------- ------------- ------------ -------------
Total interest expense 2,214,262 29,192 3,382,994 317,139
-------------- ------------- ------------ -------------
Net loss $(3,549,072) $(1,560,737) $(7,307,341) $(5,145,499)
============= ============= ============= =============
Net loss per share (Note 3):
Basic and diluted net loss per share
applicable to common stockholders $ (0.12) $ (0.11) $ (0.29) $ (0.38)
============= ============= ============= =============
Basic and diluted weighted average common
shares outstanding 29,711,749 14,200,000 25,178,002 13,399,361
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Diomed Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30, 2003 September 30, 2002
Cash Flows from Operating Activities:
Net loss $(7,307,341) $(5,145,499)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 460,234 250,635
Noncash interest expense on related party
debt 2,933,333 225,260
Issuance of stock options to a third party 8,600 63,318
Changes in operating assets and liabilities
Accounts receivable (490,185) (272,613)
Inventories 431,238 203,527
Prepaid expenses and other current assets (340,828) (7,152)
Deposits 452,094 -
Accounts payable 1,029,270 (1,409,798)
Accrued expenses 538,964 6,312
Customer advance - (293,463)
------------ ----------
Net cash used in operating activities (2,284,621) (6,379,473)
------------ ----------
Cash Flows from Investing Activities:
Purchases of property and equipment (194,627) (157,326)
Acquisition of intangible EVLT Technology (2,144,500) -
------------ ----------
Net cash used in investing activities (2,339,127) (157,326)
------------ ----------
Cash Flows from Financing Activities:
Net proceeds (payments) from bank borrowings 94,447 (595,751)
Proceeds from issue of common stock, net - 8,381,999
Proceeds from convertible debt 6,500,000 -
Proceeds from redeemable debt 1,200,000 -
Increase in deferred financing costs (683,991) -
Increase in deferred offering costs (605,343) -
Payments on related party debt (2,000,000) -
Payments on convertible debt - (700,000)
Payments on promissory notes (11,664) -
Payments on capital lease obligations (15,610) (34,231)
------------ ----------
Net cash provided by financing activities 4,477,839 7,052,017
------------ ----------
Effect of Exchange Rate Changes (165,497) 219,078
------------ ----------
Net Increase (Decrease) in Cash and Cash Equivalents (311,406) 734,296
Cash and Cash Equivalents, beginning of period 1,848,646 322,566
------------ ----------
Cash and Cash Equivalents, end of period $1,537,240 $1,056,862
=========== ============
F-4
Diomed Holdings, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 67,077 $ 104,035
=========== ===========
Supplemental Disclosure of Noncash Investing and Financing
Activities:
Conversion of convertible debt into common stock $ - $ 908,355
=========== ===========
Reclassification of offering costs incurred in 2001 to
APIC $ - $ 387,133
=========== ===========
Fair value options granted to consultants $ - $ 212,978
=========== ==========
Value ascribed to debt discount
related to redeemable debt $ 240,000 $ -
=========== ===========
Value ascribed to debt discount
related to related party debt $ 2,000,000 $ -
=========== ===========
Value ascribed to stock options issued in connection
with acquisition of EVLT Technology $ 312,078 $ -
=========== ===========
Debt associated with EVLT technology acquisition $ 2,245,647 $ -
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(1) OPERATIONS, BASIS OF PRESENTATION
(a) Operations
Diomed Holdings, Inc. (the "Company") and its subsidiaries specialize in
developing and commercializing laser and related disposable product technologies
used in minimally and micro-invasive medical procedures.
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 a wholly owned subsidiary of Diomed
Holdings, Inc. through a reverse merger. (See Note 8)
The Company's medical laser and disposable product technologies 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.
Between December 2002 and May 2003, the Company obtained $3,200,000 of
bridge financing from Gibralt US, Inc., an affiliate of Samuel Belzberg, a
director and significant stockholder of the Company, James A. Wylie, Jr., a
director and the Company's chief executive officer and Peter Norris, a former
director and a stockholder of the Company. (See Notes 5c and 5d) In order to
fund its operations in 2003, the Company requires additional debt or equity
financing to support the Company's commercialization of EVLT(R). The Company
will require the proceeds of any such financing, together with its current cash
resources, to continue as a going concern. As a result of the additional
financing needed to support operations in 2003, the auditors' opinion for the
year ended December 31, 2002 expressed substantial doubt about the Company's
ability to continue as a going concern.
On September 2, 2003, the Company entered into an equity financing
transaction (the "Equity Financing") in which 119 accredited investors (the
"Investors") agreed to purchase 254,437,500 shares of Common Stock for an
aggregate purchase price of $23,200,000. Twenty two million dollars of the
aggregate purchase price is payable in cash, and $1,200,000 will be paid by
conversion of the Company's outstanding debt previously issued in connection
with the Company's May 2003 bridge financing. (See Note 10)
The first closing of the Equity Financing occurred on September 3,
2003. At that time, the Investors funded $6,500,000 of the Equity Financing in
the form of secured bridge loans. The second closing of the Equity Financing
will occur after we satisfy the conditions to the second closing, which we
expect to be within 90 days after the first closing. The notes that the Company
issued in connection with the secured bridge loans at the first closing will
convert into Common Stock at the second closing at a price of $0.08 per share.
Also at the second closing, the remaining $16,700,000 of the Equity Financing
will be provided to us by the Investors for the purchase of Common Stock at a
price of $0.10 per share. Of the $16,700,000 to be provided by the Investors at
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
the second closing, $15,500,000 will be paid by the Investors in cash and
$1,200,000 will be paid by conversion of the Company's outstanding Class D notes
due 2004 that we issued in connection with loans made in its May 2003 interim
financing transaction. The $15,500,000 in cash payable at the second closing is
currently on deposit with a third party acting as our escrow agent.
The Company believes that the Equity Financing is absolutely essential
to its continued existence. If the Company is unable to obtain stockholder
approval and complete the Equity Financing within 90 days of the first closing,
or December 2, 2003, the Company will be obligated to return the $15,500,000
held in escrow for the second closing to the Investors. Our inability to
complete the Equity Financing would cause the Company to reduce or cease
operations, seek a sale of the Company or enter into a business combination with
a third party. If the Company does not complete the Equity Financing, then the
Company will attempt to sell its business and assets, to merge with another
Company or to enter into some other business combination. The Company has not
begun any discussions with any third parties to enter into any such transaction
if the Company does not complete the Equity Financing. If the Company's cash
inflows and cash outflows continue at their historic rate for the remainder of
2003, and if the Equity Financing is not completed, then the Company expects to
exhaust its current cash resources at the end of 2003.
(b) Basis of Presentation
The accompanying consolidated condensed financial statements of the
Company at September 30, 2003 and for the three-month and nine-month periods
ended September 30, 2003 and 2002 are unaudited. In management's opinion, these
unaudited consolidated condensed financial statements have been prepared on the
same basis as the audited consolidated financial statements included in the
Company's Annual Report on Form 10-KSB, as amended, for the year ended December
31, 2002, and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for such interim
periods. These unaudited consolidated condensed financial statements should be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-KSB/A, as amended, for the year ended
December 31, 2002. The results of operations for the three-month and nine-month
periods ended September 30, 2003 are not necessarily indicative of the results
expected for the fiscal year ending December 31, 2003.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies 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.
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(e) Revenue Recognition
Revenue is derived primarily from product revenue, which includes
lasers, instrumentation, and disposables, and 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, collectability 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. Service revenue is recognized as the services are
performed.
(f) Warranty Obligation
The Company engages in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
component suppliers. In addition to these proactive measures, the Company also
provides for the estimated cost of product warranties at the time revenue is
recognized.
(g) Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-progress and finished goods consist of materials, labor and
manufacturing overhead. Inventories consist of the following:
September 30, 2003 December 31, 2002
Raw materials $ 804,602 $ 982,622
Work-in-progress 334,727 446,820
Finished goods 441,575 582,699
------------------------ ----------------------
$ 1,580,904 $ 2,012,141
======================== ======================
(h) Excess and Obsolete Inventory
The Company maintains reserves for its 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.
(i) Property and Equipment
The Company records property and equipment at cost, and 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
Leasehold improvements Lesser of estimated useful life or life of lease
Depreciation expense for the nine-month periods ended September 30,
2003 and 2002 was approximately $289,000 and $103,000, respectively.
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(j) Intangible Assets
Intangible assets are recorded at cost and consist of manufacturing
rights acquired in 2001 and the EVLT(R) patent rights acquired in September 2003
(Note 11). The manufacturing rights are being amortized over a five-year
estimated useful life. Amortization expense relating to these manufacturing
rights of approximately $49,000 is included in general and administrative
expenses for each of the three-month periods ended September 30, 2003 and 2002
and amortization expense relating to these manufacturing rights of approximately
$147,000 is included in general and administrative expenses for each of the
nine-month periods ended September 30, 2003 and 2002. The EVLT(R) patent rights
are being amortized over the remaining 16-year life of the patents, and
amortization expense relating to the EVLT(R) patent rights of $24,000 is
included in the cost of goods sold for the three and nine -month periods ended
September 30, 2003.
(k) Long-Lived Assets
The Company evaluates long-lived assets, such as intangible assets,
equipment and certain other assets, for impairment in accordance with Statement
of Financial Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-Lived Assets." 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.
(l) 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.
(m) Concentration of Credit Risk and Significant Customers
The Company places its cash and cash equivalents in established
financial institutions. The Company has no significant 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 in certain cases, letters of credit. Accounts
receivable are 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 September 30,
2003 is adequate.
(n) Accounting for Stock-Based Compensation
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
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, as follows: (See Note 6)
Three-Months Ended September 30, Nine-Months Ended September 30,
2003 2002 2003 2002
Net (loss)as reported ($3,549,072) ($1,560,737) ($7,307,341) ($5,145,499)
Add : Stock-based employee compensation; -0- -0- -0- -0-
expense included in reported net (loss),
net of tax
Deduct : total stock-based employee compensation;
expense determined under the fair value
based method for all awards, net of tax ($71,060) ($75,847) ($211,729) ($462,949)
-------------- ----------- ----------- ------------
Pro forma net (loss) ($3,620,132) ($1,636,584) ($7,519,070) ($5,608,448)
============== =========== ============ ===========
Earnings per share:
Basic and diluted - as reported (0.12) (0.11) (0.29) (0.38)
Basic and diluted - pro forma (0.12) (0.12) (0.30) (0.42)
(o) Research and Development Expenses
The Company charges research and development expenses to
operations incurred.
(p) 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
resulting from transactions and other events and circumstances from non-owner
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 net income (loss) for all periods
presented in the accompanying consolidated statements of stockholders' equity
(deficit), as follows:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
----------- ----------- ----------- -----------
Net loss $(3,549,072) $(1,560,737) $(7,307,341) $(5,145,499)
Foreign currency translation adjustment 255,591 (39,439) 105,221 (114,513)
----------- ----------- ----------- -----------
Comprehensive loss $(3,293,481) $(1,600,176) $(7,202,120) $(5,260,012)
=========== =========== =========== ===========
F-10
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(q) 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.
(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 and nine months ended
September 30, 2003 and 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:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Convertible Debt 99,437,500(A) -0- 99,437,500(A) -0-
============== ============== ============== ==============
Convertible Preferred Stock -0- 15,461,750(B) -0- 15,461,750(B)
============== ============== ============== ==============
Exchangeable Preferred Stock 30,138,792(C) -0- 30,138,792(C) -0-
============== ============== ============== ==============
Common Stock Options 3,431,838(D) 1,784,878 3,431,838(D) 1,784,878
============== ============== ============== ==============
Common Stock Warrants 41,000,987(E) 121,924(D) 41,000,987(E) 121,924(D)
============== ============== ============== ==============
(A) On September 2, 2003, the Company entered into an equity financing
transaction providing for an aggregate investment of $23,200,000. At the first
closing of the equity financing on September 3, 2003, the Company issued
$6,995,000 in principal amount of Secured Bridge Notes that will convert into
87,437,500 shares of common stock at $0.08 per share at the second closing of
the equity financing. (See Note 10) In addition, the $1,200,000 in principal
amount of notes issued in May 2003 will convert into 12,000,000 shares of common
stock at $0.10 per share in the second closing. (See Note 5d)
F-11
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(B) On February 14, 2002, the Company completed a reverse merger and
issued Diomed Inc. shareholders Diomed Holdings, Inc. Class A Convertible
Preferred Stock (the "Class A Stock") that was convertible into Diomed Holdings,
Inc. Common Stock by February 14, 2004. On December 31, 2002, monthly
installments of the Class A Stock began converting into Common Stock at the rate
of 773,087 shares per month. The remaining 4,638,531 shares of Class A Stock
were to have converted into Common Stock in February 2004. On March 31, 2003,
the Company accelerated the conversion of those shares of Class A Stock that had
not yet been converted into Common Stock. As of the close of business on March
31, 2003, no shares of Class A Stock were outstanding:
(C) On August 22, 2003, the Company issued 20 shares of Class E
Preferred Stock (the "Class E Stock") and 24 shares of Class F Preferred Stock
(the "Class F Stock"). The Class E Stock was issued in exchange for an equal
number of shares of Class C Convertible Preferred Stock (the "Class C Stock')
and the Class F Stock was issued in exchange for an equal number of shares of
Class D Convertible Preferred Stock (the "Class D Stock"). On May 7, 2003, the
Company had issued the Class C Stock to the December 2002 noteholders and issued
the Class D Stock to the May 2003 noteholders. (See Notes 5d and 9)
(D) See Note 6.
(E) On September 3, 2003, the Company issued 40,879,063 warrants to
purchase Common Stock to a placement agent for services rendered in the equity
financing. (See Note 10)
(4) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes
a line of credit with Barclays Bank, limited to the lesser of (pound)350,000
($582,000 at September 30, 2003) or 80% of eligible accounts receivable. The
credit line bears interest at a rate of 3% above Barclays base rate (4.00% at
September 30, 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 September 30, 2003, there were borrowings of (pound)186,976
($310,754) outstanding under this line and available future borrowing capacity
of approximately $16,000.
(5) DEBT
a) Promissory Note Issued to Customer
In October 2000, Axcan Pharma advanced the Company $936,000 to secure
certain key materials. In September 2001, the Company issued a promissory note
to this customer in the amount of the advance. The promissory note matures on
January 1, 2004 and bears interest, at an annual rate of 8.5%, which is payable
quarterly in arrears. As of September 30, 2003 and December 31, 2002, the
balance outstanding to this promissory note was $936,000, and accrued interest
was $20,053.
b) Promissory Notes Issued to Service Providers
In December 2002, the Company converted amounts due for legal
services, in the amount of $416,102, into a promissory note. Payment terms
include $100,000 paid upon completion of the $2,000,000 bridge financing on
December 27, 2002 and the balance due upon completion of a longer-term capital
financing in fiscal 2003. The promissory note bears interest at an annual rate
of 6% and is payable upon maturity. As of September 30, 2003 and December 31,
2002, the balance outstanding to this promissory note was $316,102, and accrued
interest was $15,796 and $1,611, respectively.
F-12
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
In December 2002, the Company converted $183,016 due a professional
service provider for external marketing initiatives into a promissory note.
Payment terms include $50,000 paid upon completion of the $2,000,000 bridge
financing on December 27, 2002, with the balance due upon completion of a
longer-term financing in fiscal 2003. The promissory note is non-interest
bearing. As of September 30, 2003 and December 31, 2002, the note balance was
$117,442 and $129,106, respectively.
c) Bridge Loan from Related Party - December 27, 2002
On December 27, 2002, the Company completed a $2,000,000 bridge note
financing with Gibralt US, Inc (the "December 2002 noteholder" and, together
with the three persons to whom Gibralt US subsequently transferred $500,000 of
the notes, the "December 2002 noteholders"), whose principal, Samuel Belzberg,
is a member of the Company's Board of Directors. The financing included
$1,000,000 in Class A secured notes and $1,000,000 in Class B unsecured notes
due January 1, 2004. The notes accrued interest at an annual rate of 8%, payable
upon maturity.
The notes were convertible into common stock at the election of the
December 2002 noteholders upon the occurrence of: (i) a financing transaction,
(ii) a liquidity event, (iii) a merger or reorganization, or (iv) at any time
during the life of the notes at the election of the holders of at least 66 2/3%
of the outstanding principal amount of the notes. The notes, including principal
and accrued interest, were convertible into common stock at 80% of the common
stock price at the time of conversion.
As security for the notes, the Company formed a new wholly owned
subsidiary ("PDT Co."), transferred its assets for photodynamic therapy to PDT
Co., including intellectual property, manufacturing rights and trademarks for
lasers and disposable Optiguide(R) fibers, and pledged 100% of the shares of PDT
Co. to the December 2002 noteholders. As additional security, the Company
granted a security interest in the following unencumbered assets of Diomed Inc.
to the December 2002 noteholders: equipment, inventory, accounts receivable,
intellectual property and cash deposit accounts. The December 2002 noteholders'
lien on the inventory is subordinate to Axcan Pharma's lien on inventory. (See
Note 5a)
As additional consideration for the financing, the Company issued to
the December 2002 noteholders warrants to purchase 8,333,333 shares of common
stock, based upon the $0.24 closing price of the Company's common stock on
December 26, 2002. The warrants were exercisable for a period of five years
beginning June 27, 2003 at an exercise price of $0.26, which was 110% of the
market price of the stock on December 26, 2002. If, prior to the exercise of the
warrants, the Company issued common stock or common stock equivalents at a price
per share less than the exercise price of the warrants, the number of warrants
and the exercise price of the warrants were to be adjusted to the lower price
per share. In the event of a merger or reorganization, the warrants were
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 and warrants were transferable in part or in whole by the
December 2002 noteholders to one or more third parties in accordance with all of
the same terms granted the noteholder by the Company. The December 2002
noteholders could designate a member to the Company's Board of Directors while
the notes were outstanding. The Company was required to obtain the advance
approval by the December 2002 noteholders for future financing transactions
during the life of the notes.
On March 18, 2003, the initial December 2002 noteholder sold and
transferred to three investors in a private transaction (i) $500,000 aggregate
principal amount of notes ($250,000 of which were Class A notes and $250,000 of
which were Class B notes) and (ii) warrants to purchase 2,083,334 shares of
common stock. Accordingly, after the taking effect of this transfer, the initial
noteholder owned $1,500,000 aggregate principal amount of notes ($750,000 of
which were Class A notes and $750,000 of which were Class B notes) and warrants
to purchase 6,249,999 shares of common stock.
F-13
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No. 98-05 to Certain Convertible Instruments," the Company
recognized the $2,000,000 fair value of the warrants and the beneficial
conversion feature related to the immediate convertibility of the notes to
equity as a discount to the notes. The value ascribed to the warrants was
approximately $1,200,000, as calculated using the Black-Scholes option pricing
model, and the value ascribed to the beneficial conversion feature of the notes
was $800,000. The discount was to be amortized over the term of the notes to
non-cash interest expense, with a corresponding increase in additional paid in
capital, such that the full amount of the discount was to be amortized by the
earlier of the maturity date of the notes or the convertability of the notes to
equity. The net impact on stockholders' equity/(deficit) was to be zero when the
net loss, including the discount, was fully reflected in the accumulated
deficit. Accordingly, the notes were originally recorded at net value of zero
(after the $2,000,000 discount). In the nine-month period ended September 30,
2003, $833,000 was recognized in non-cash interest expense pertaining to this
amortization of the discount due to the May 2003 exchange transaction discussed
below.
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 were to be amortized to general interest expense
over the life of the notes, such that the full amount of costs were amortized by
the earlier of the maturity date of the notes or by the month the notes were
converted into equity. In May 2003, the Company expensed the balance of the
deferred financing costs upon completion of the May 2003 exchange transaction.
In the nine-month period ended September 30, 2003, the Company recognized
$80,000 in general interest expense pertaining to this amortization of the
deferred financing costs, and, accordingly, the balance of the deferred
financing costs was zero as at September 30, 2003.
During the first quarter of 2003, it became clear that the successful
operations of the Company would require additional working capital. In April
2003, the Company began discussions with Gibralt US with a view to its providing
interim financing in addition to that it had provided in December 2002. The
Company also began to consider a subsequent financing expected to begin later in
the quarter that would address its longer term capital needs. In late April, the
Company elected to obtain up to $1,200,000 of interim financing from Gibralt US
and two of its directors. At the same time, the Company proposed a restructuring
of the securities issued in December 2002 to improve its access to the financial
markets and enhance the likelihood of a subsequent financing. Therefore, the
Company offered to repurchase from the December 2002 noteholders certain of
their rights that, in light of current market conditions, might have made it
more difficult to successfully complete a subsequent financing in the current
market.
Using the Black Scholes valuation methodology, the Company calculated
the monetary value of the rights of the December 2002 noteholders to convert
their notes into shares of common stock and the monetary value of the common
stock purchase warrants. The Company further engaged Marshall & Stevens,
Incorporated, a professional valuation firm, to provide an opinion as to the
valuations that it had calculated. The price per share that the Company employed
to calculate the number of shares to equal to the monetary value of the rights
that the December 2002 noteholders would be surrendering was the presumed price
per share of its common stock after giving effect to the issuance of those
shares.
At the time when the Class A secured notes and Class B unsecured notes
were issued, the Company could not issue more than $1,000,000 in secured debt
without obtaining prior approval by its preferred stockholders under the terms
of its Class A Stock. On March 31, 2003, the Company converted all of its Class
A Stock into common stock to eliminate its convertibility feature and its
apparent negative impact on the Company's ability to obtain additional
financing. On May 7, 2003, the December 2002 noteholders exchanged their
$1,000,000 principal amount of secured Class A notes and $1,000,000 principal
amount of unsecured Class B notes for $2,000,000 principal amount of secured
Class C notes due January 1, 2004. On May 7, 2003, the Company issued to the
December 2002 noteholders 20 shares of its Class C Stock, convertible into
27,117,240 shares of common stock in exchange for eliminating the convertibility
feature of the $2,000,000 principal amount of notes and the warrants to purchase
8,333,333 shares of common stock, as well as certain other rights. The Class C
Stock was exchanged for Class E Stock on August 22, 2003. (See Note 9)
F-14
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
On May 28, 2003, the Company and the December 2002 noteholders amended
certain of the terms of the May 7, 2003 capital restructuring to: (i) extend the
due date of the Class C notes from January 1, 2004 until January 1, 2006, (ii)
increase the rate of interest payable on the Class C notes from 8.0% to 12.5%,
(iii) provide for mandatory prepayments of principal of the Class C notes in
amounts up to 50% of positive quarterly cash flow, (iv) limit the security
interest in inventory that secures the Class C notes at $3,271,000, (v) waive
the noteholders' right of approval of future financing transactions and (vi)
extend the deadline by which the financing was to be completed without
triggering the noteholders' right of rescission, from June 30, 2003 to July 31,
2003 (under the terms of the restructuring if the contemplated financing were
not completed by July 31, 2003 the December 2002 noteholders had the right to
rescind the May 7, 2003 exchange transaction). On July 31, 2003, the deadline by
which the financing was to be completed without triggering the noteholders'
right of rescission was extended until November 15, 2003. The Class C notes were
exchanged for Class E notes reflecting these modified terms, in principal
amounts equal to the principal amounts of the Class C notes so exchanged. The
Class E notes were repaid in full with a portion of the proceeds from the first
closing of the equity financing.
The exchange of debt and preferred stock for the elimination of
warrants and modification of the December 2002 notes in May 2003 was treated as
an extinguishment of the $2,000,000 debt. As a result, the fair market value of
the warrants and other consideration, which was limited to the remaining
unamortized discount on the December 2002 notes, was recorded as a reduction in
additional paid in capital in the amount of $1,167,000 and the remaining
unamortized discount was reduced to zero.
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No. 98-05 to Certain Convertible Instruments," the Company
recognized the $2,000,000 fair value of the preferred stock issued with the
Class E notes, which was recorded as a discount to the notes. The discount was
to be amortized over the term of the notes to non-cash interest expense, with
the offset as an increase in preferred stock, such that the full amount of the
discount was to be amortized by the earlier of the maturity date of the notes or
early retirement of the notes. The net impact on stockholders' equity/(deficit)
was to be zero when the net loss, including the discount, was fully reflected in
the accumulated deficit. Accordingly, the notes were originally recorded at net
value of zero (after the $2,000,000 discount). On September 3, 2003 the notes
were fully retired in advance of their January 1, 2006 maturity date in order to
expand the security interest base available to the holders of the September
Secured Bridge Notes while the Company obtained stockholder approval to complete
the Equity Financing. (See Notes 5e and 10) In the three-month and nine-month
periods ended September 30, 2003, the Company recognized $1,935,000 and
$2,000,000, respectively, in non-cash interest expense pertaining to this
amortization of the discount.
d) Bridge Loans from Related Parties - May 7, 2003
On May 7, 2003, Gibralt US and two of the Company's directors, James
A. Wylie, Jr. and Peter Norris (the "May 2003 noteholders"), committed to
provide financing of up to $1,200,000 in the form of Class D secured notes due
May 6, 2004. The Company issued the May 2003 noteholders an aggregate of 24
shares of Class D Stock, convertible into 3,021,552 shares of common stock. The
Class C Stock was exchanged for Class F Stock on August 22, 2003. (see Note 9)
The Class D notes accrue interest at an annual rate of 8%, payable upon
maturity. As of September 30, 2003, the entire $1,200,000 in interim financing
had been funded. At the second closing of the Equity Financing, the $1,200,000
in Class D notes and accrued interest will convert into common stock at $0.10
per share. (See Note 10) The May 2003 noteholders have the same security
interest and registration rights granted to the December 2002 noteholders, as
described in Note 5e. The notes are not transferable without the prior consent
of the Company.
The May 2003 noteholders have the right to participate in the Company's
financing contemplated for the second half of 2003 on the same terms and
conditions as the new investors by redeeming their notes. In determining the
price at which the Company sold its notes, an independent committee of the board
of directors considered the added risk that the May 2003 noteholders would be
accepting in light of the uncertainty of the completion of the contemplated
financing. The December 2002 notes provided that the corresponding noteholders
had the right to participate in the next financing of the Company at a discount
of 20% to the price to be paid by investors. Using this discount factor as a
benchmark for assessing the risk that the May 2003 noteholders would be
assuming, among other factors, the independent committee authorized the issuance
of preferred shares convertible into 3,021,552 shares of common stock, allocated
according to the noteholder's respective loan commitments.
F-15
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
On May 28, 2003, the Company and the May 2003 noteholders amended
certain of the terms of the May 7, 2003 interim financing to: (i) add a
requirement that 100% of the Class D notes be redeemed into common stock in the
contemplated financing at the same price per share and on the same terms as the
new investors if the Company raises $6,000,000 or more in gross proceeds and
(ii) extend the deadline for completion of the contemplated financing without
triggering the right of the May 2003 noteholders to declare the Class D notes
due and payable to July 31, 2003. On July 31, 2003, this date was further
extended to November 15, 2003. On August 21, 2003, this deadline was extended to
the business day following any date after November 15, 2003, which the Company
and the Investors in the Equity Financing agree to as the second closing date.
(See Note 10)
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No. 98-05 to Certain Convertible Instruments," the Company
recognized an amount of $240,000 for the fair value of the preferred stock
issued, which has been recorded as a discount to the Class D notes. The discount
will be amortized over the term of the notes to non-cash interest expense, with
a corresponding increase in preferred stock, such that the full amount of the
discount will be amortized by the earlier of the maturity date of the Class D
notes or by the month the Class D notes are converted into equity. The net
impact on stockholders' equity/(deficit) will be zero when the net loss,
including the discount, is fully reflected in the accumulated deficit. In the
three-month and nine-month periods ended September 30, 2003, the Company
recognized $60,000 and $100,000, respectively, in non-cash interest expense
pertaining to this amortization of the discount and, accordingly, the Class D
notes were recorded at $1,060,000 as of September 30, 2003.
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No. 98-05 to Certain Convertible Instruments," the Company
will recognize a beneficial conversion feature in the amount of $960,000, which
will be recorded as a discount to the notes, upon favorable stockholder approval
of the equity financing at the annual meeting. This contingent discount will be
fully amortized to non-cash interest expense in the period in which the Class D
notes convert to equity, with a corresponding increase in additional paid in
capital. The net impact on stockholders' equity/(deficit) will be zero when the
net loss, including the discount, is fully reflected in the accumulated deficit.
In connection with the interim financing, the Company incurred $51,000
in related legal fees. As of September 30, 2003, these costs were capitalized as
deferred financing costs and will be amortized to general interest expense over
the life of the Class D notes, such that the full amount of costs will be
amortized by the earlier of the maturity date of the Class D notes or by the
month the Class D notes are converted into equity. In the three-month and
nine-month periods ended September 30, 2003, the Company recognized $12,775 and
$21,292, respectively, in general interest expense pertaining to this
amortization of the deferred financing costs, and, accordingly, the balance of
the deferred financing costs was $29,809 as of September 30, 2003.
e) Secured Bridge Notes - September 3, 2003
On September 2, 2003, the Company entered into agreements that provide
for the Equity Financing with 119 Investors who agreed to purchase from the
Company 254,437,500 shares of Common Stock for an aggregate purchase price of
$23,200,000. Twenty two million dollars of the aggregate purchase price is
payable in cash, and $1,200,000 will be paid by conversion of certain of the
Company's Class D notes at the second closing. (See Note 10)
At the first closing of the Equity Financing, the Company issued
$6,995,000 in principal amount of Secured Bridge Notes due September 3, 2004
(the "Secured Bridge Notes"), which accrue interest at an annual rate of 8%. The
notes are secured by a security interest in collateral that includes the
Company's rights to U.S. Patent No. 6,398,777 and related foreign patents for
endovenous laser treatment of varicose veins (the "EVLT Patent"). These patents
relate to the technology that the Company acquired on September 3, 2003
underlying the Company's EVLT(R) product line (See Note 11) and the security
interest previously granted to the December 2002 noteholders (See Notes 5c and
5d). The Class E notes were fully paid at the first closing of the Equity
Financing in advance of the January 1, 2006 maturity date to increase the
collateral available for the September Secured Bridge Notes.
F-16
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
Under the terms of the Equity Financing, at the second closing, the
aggregate principal amount of the Secured Bridge Notes converts into
approximately 87,437,500 shares of Common Stock at a purchase price of $0.08 per
share. Additional shares are to be issued to pay accrued interest on the Secured
Bridge Notes, also at $0.08 per share. Of the Secured Bridge Notes, $6,500,000
in aggregate principal amount was issued at the first closing in exchange for a
purchase price equal to $6,500,000 paid in cash. Gibralt US and the other three
holders of the Company's Class E notes purchased $2,000,000 of Secured Bridge
Notes at $0.08 per share at the same price as the other Investors paid. Each of
the other Investors who subscribed to purchase securities in the Equity
Financing purchased on a pro rata basis $4,500,000 in aggregate principal amount
of the Secured Bridge Notes. The Company also issued $495,000 in principal
amount of the Secured Bridge Notes to the placement agent in partial payment of
its fee.
If the Company defaults on any indebtedness exceeding $500,000, the
holders of at least twenty five (25%) of the outstanding principal amount of the
Secured Bridge Notes may declare the outstanding Secured Bridge Notes, together
with all accrued and unpaid interest thereon, to be immediately due and payable.
In accordance with Emerging Issues Task Force (EITF) 00-27,
"Application of EITF No. 98-05 to Certain Convertible Instruments," the Company
will recognize a beneficial conversion feature in the amount of $6,995,000,
which will be recorded as a discount to the notes, upon favorable stockholder
approval of the Equity Financing at the annual meeting. This contingent discount
will be fully amortized to non-cash interest expense in the period the Secured
Bridge Notes convert to equity, with a corresponding increase in additional paid
in capital. The net impact on stockholders' equity/(deficit) will be zero when
the net loss, including the discount, is fully reflected in the accumulated
deficit. Accordingly, as of September 30, 2003, the Secured Bridge Notes were
recorded at their full face value of $6,995,000.
In connection with the first closing, the Company incurred $632,891 in
placement agent and legal fees, including the fee due to be paid in cash to the
placement agent in the amount of $495,000 that the placement agent invested in
the Secured Bridge Notes. As of September 30, 2003, these costs were capitalized
as deferred financing costs and will be amortized to general interest expense
over the life of the notes, such that the full amount of costs will be 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 September 30, 2003, the
Company recognized $52,741 in general interest expense pertaining to this
amortization of the deferred financing costs, and accordingly, the balance of
the deferred financing costs was $580,150 as of September 30, 2003.
In connection with the first closing, the Company will recognize an
additional placement agent fee, in the amount of approximately $1,800,000, for
6,187,500 warrants issued to a placement agent. The warrant fee will be recorded
as a deferred financing cost upon favorable stockholder approval of the Equity
Financing. This contingent cost will be fully amortized to general interest
expense in the period in which the Secured Bridge Notes convert to equity, with
a corresponding increase in additional paid in capital. The net impact on
stockholders' equity/(deficit) will be zero when the net loss, including the
deferred financing cost, is fully reflected in the accumulated deficit.
f) EVLT(R) Technology Acquisition - September 3, 2003
On September 3, 2003, the Company acquired rights to the EVLT Patent,
which relates to the technology underlying the Company's EVLT(R) product line.
As part of the transaction, the Company entered into an agreement with Endolaser
Associates. On September 3, 2003, the Company paid Endolaser Associates
$1,500,000 in payments in cash in exchange for the exclusive license and is to
make additional payments totaling $2,500,000 in 10 quarterly installments of
$250,000 each, commencing with the quarter following the completion of the
equity financing. (See Note 11)
F-17
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
The following summarizes the Company's current and long term debt at
December 31, 2002 and September 30, 2003:
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
============== =============
September 30, 2003 September 30, 2003
Current Long-Term
--------------- --------------
Promissory notes payable $ 433,554 $ -
Non-convertible debt 936,000 -
Related party redeemable debt (face value) 1,200,000 -
Convertible debt ($2,000,000 related party
debt)(face value) 6,995,000 -
EVLT technology payable (face value) 1,000,000 1,500,000
Capital equipment leases 18,383 -
--------------- --------------
$ 10,582,937 $ 1,500,000
=============== ==============
(6) Stock Options
(a) In November 1998 and May 2001, respectively, 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"), 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
issuer.
A summary of stock option activity is as follows:
Weighted
Average
Range of Number of Exercise
Exercise Price Shares Price
------------- ------------- -------------
Outstanding, December 31, 2002 $ 0.34-8.23 1,603,285 $ 2.90
------------- ------------- -------------
Granted 0.08-0.34 2,126,790 0.14
Forfeited 0.33-5.51 (298,237) 2.40
------------- ------------- -------------
Outstanding, September 30, 2003 $ 0.08-8.23 3,431,838 $ 1.28
============= ============= =============
Exercisable, December 31, 2002 $ 0.34-8.23 1,150,115 $ 3.49
============= ============= =============
Exercisable, September 30, 2003 $ 0.08-8.23 2,510,758 $ 1.53
============= ============= =============
F-18
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
As of September 30, 2003, 849,441 options were available for future
grants under the Plans, including 614,671 options under the 1998 Plan and
321,870 options under the 2001 Plan. However, the Company in the years ended
December 31, 2001 and 2002, and the three and nine -month periods ended
September 30, 2003 has granted options only under the 2001 Plan and does not
intend to grant options under the 1998 Plan.
On June 4, 2003, the board of directors authorized the grant of 2,137,500
stock options to purchase shares of Common Stock to directors and officers,
non-executive employees and a third party service provider. These stock options
were granted pursuant to the Company's 2003 Omnibus Incentive Plan and were
granted with an exercise price of $0.46 per share, the closing price of the
Company's Common Stock on June 4, 2003. The Company will seek stockholder
approval of the 2003 Omnibus Incentive Plan at its 2003 annual meeting of
stockholders, to be held on November 25, 2003.
The following table summarizes information relating to currently
outstanding and exercisable options as of September 30, 2003.
OUTSTANDING EXERCISABLE
Weighted
Average
Remaining
Number of Contractual Weighted Average Number of Weighted Average
Exercise Price Shares Life (in Years) Exercise Price Shares Exercise Price
-------------- ------ --------------- -------------- ------ --------------
$ 0.08-2.00 2,762,170 8.9 $ 0.42 1,885,758 $ 0.40
2.25-3.54 246,468 3.9 2.74 217,426 2.76
4.00-6.56 407,200 3.2 5.92 391,575 5.98
8.05-8.23 16,000 2.4 8.27 16,000 8.27
----------- ----------- ---------- -----------
3,431,838 $ 1.28 2,510,758 $ 1.52
=========== =========== ========== ===========
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, September 30,
2002 2003
Risk-free interest rate 1.84 - 4.74% 1.23-3.37%
Expected dividend yield -% -%
Expected lives 5 years 5 years
Expected volatility 75% 75%
Weighted average grant date
fair value per share $ 1.05 $ 0.15
Weighted average remaining
contractual life of options
outstanding 6.9 years 7.6 years
(b) In January 2003, the Company granted fully exercisable options to
purchase 60,000 shares of Common Stock at the exercise price per share of $0.26
and 930 options to purchase shares of Common Stock at the exercise price of
$0.34 per share 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 $8,600 in the
statement of operations for the three-month period ended March 31, 2003.
On September 3, 2003, the Company acquired rights to the EVLT Patent,
which relates to the technology underlying the Company's EVLT(R) product line.
As part of the transaction, the Company entered into an agreement with Dr.
Robert Min pursuant to which the Company granted Dr. Min options, to purchase
1,000,000 shares of Common Stock. The Company recorded the fair value of these
options, in the amount of $312,078, based on the Black-Scholes option pricing
model, and capitalized this cost as part of the related intangible asset that
will be amortized over the remaining life of the EVLT Patent. The amortization
of the intangible asset will be recorded as a component of cost of goods sold.
(See Note 11)
F-19
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
(c) 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
============= =========== ============= =============
Exchanged (8,333,333) 0.26
Granted to Placement Agent $ 0.001-0.10 40,879,063 0.05 5.0
------------- ----------- ------------- -------------
Outstanding, September 30, 2003 $ 0.001-3.50 41,000,987 $ 0.06 5.0
============= =========== ============= =============
(7) SEGMENT REPORTING
The Company's reportable segments are determined by product type:
laser systems, and fibers, accessories and service. The accounting policies of
the segments are the same as those described in Note 2. The Board of Directors
evaluates segment performance based on revenue. Accordingly, all expenses are
considered corporate level activities and are not allocated to segments. Also,
the Board of Directors does not assign assets to its segments. This table
presents revenues by reportable segment:
Three Month Period Ended Nine Month Period Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Laser systems $ 1,504,234 $ 1,404,664 $ 4,205,931 $ 2,540,724
Fibers, accessories and service 867,534 540,669 2,438,187 1,529,754
----------- ----------- ----------- -----------
Total $ 2,371,768 $ 1,945,333 $ 6,644,118 $4,070,478
=========== =========== =========== ===========
F-20
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
The following table represents percentage of revenues by geographic destination:
Three-Month Period Ended Nine-Month Period Ended
September 30, September 30,
2003 2002 2003 2002
North America 59% 57% 60% 54%
Asia/Pacific 19% 31% 23% 27%
Europe 18% 10% 15% 16%
Other 4% 2% 2% 3%
------------ ------------ ------------ -----------
Total 100% 100% 100% 100%
============ ============ ============ ===========
The following table represents long-lived assets by geographic location:
September 30, 2003 December 31, 2002
North America $ 6,897,157 $ 1,175,410
Europe 600,184 1,131,437
-------------- --------------
Total $ 7,497,341 $ 2,306,847
============== ==============
(8) MERGER AND PRIVATE OFFERING OF COMMON STOCK
The Company is a corporation originally formed under the laws of the
State of Nevada on March 3, 1998 under the name Natexco Corporation. On February
11, 2002, the Company changed its name from Natexco Corporation to Diomed
Holdings, Inc. On February 14, 2002, the Company acquired Diomed, Inc. in a
merger. As a result of the merger, Diomed, Inc. became a wholly-owned subsidiary
of the Company. The merger was accounted for as a recapitalization. Accordingly,
the historical records of Diomed, Inc. became the historical records of Natexco
and, after the merger, the Company. After the merger, the business conducted by
the Company was the business conducted by Diomed, Inc. prior to the merger.
Under the terms of the merger, the Company issued Class A Stock to the
former stockholders of Diomed, Inc. These shares of Class Stock have since
converted into Common Stock, and no Class Stock remains outstanding.
Concurrently with the merger, the Company issued 5,000,000 shares of
Common Stock in a private placement offering at a price of $2.00 per share,
resulting in gross proceeds to the Company of $10,000,000 from the private
offering. The common stock issued in this private offering were not subject to
refund, redemption or rescission and, accordingly, were included as a component
of stockholders' equity, net of applicable costs. The Company registered the
shares of Common Stock issued in the private offering with the SEC in a
registration statement that the SEC declared effective on October 24, 2002.
After the merger, the board of directors of the Company determined that
it was in the best interests of the Company and its stockholders for the Company
to change its state of incorporation from Nevada to Delaware. On May 13, 2002,
after obtaining stockholder approval, the reincorporation was effected by a
migratory merger, and the Company is now a Delaware corporation.
(9) Exchange of Class C Convertible Preferred Stock and Class D Convertible
Preferred Stock
On July 28, 2003, the Company was named as a defendant in a class
action lawsuit, Augenbaum v. Diomed Holdings, Inc. On August 6, 2003, the
Company entered into a stipulation of settlement to resolve this suit. The
stipulation of settlement became final on October 15, 2003.
F-21
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
In connection with the stipulation of settlement, on August 22, 2003,
the Company entered into an agreement with the holders of the Class C Stock by
which the holders tendered all 20 shares of Class C Stock in exchange for an
equal number of shares of Class E Stock, and the Company entered into an
agreement with the holders of the Class D Stock by which the holders tendered
all 24 shares of Class D Stock for an equal number of shares of Class F Stock.
The Class E Stock and the Class F Stock entitle the holders to one vote per
share. Following the exchange of Class C Stock for Class E Stock and Class D
Stock for Class F Stock, both the Class C Stock and Class D Stock were
eliminated.
Following stockholder approval of the issuance of shares of Common
Stock to be issued in exchange for the Class E Stock and Class F Stock, the
Company has the right to purchase from the holders of the Class E Stock, and the
holders of the Class E Stock are obligated to sell, all 20 shares of Class E
Stock in exchange for 27,117,240 shares of Common Stock, and the Company has the
right to purchase from the holders of the Class F Stock, and the holders of the
Class F Stock are obligated to sell, all 24 shares of Class F Stock in exchange
for 3,021,552 shares of Common Stock. Upon a sale, lease, exchange or other
disposition of all or substantially all of the Company's assets, the holders of
the Class E Stock and Class F Stock have the right to tender all shares of their
preferred stock in exchange for the corresponding numbers of shares of Common
Stock noted above.
Shares of Class E Stock and Class F Stock are preferred in liquidation
to the extent that before any distribution is made to the holders of Common
Stock, there must be a distribution to the holders of the Class E Stock in the
amount of $108,469 per share of Class E Stock and a distribution to the holders
of the Class F Stock in the amount of $10,072 per share of Class F Stock. The
holders of Common Stock share pro rata in the remainder of the net liquidation
proceeds.
(10) September 2003 Equity Financing
On September 2, 2003, the Company entered into agreements that provide
for the Equity Financing in which 119 Investors agreed to purchase 254,437,500
shares of Common Stock for an aggregate purchase price of $23,200,000.
Twenty-two million dollars of the aggregate purchase price is payable in cash,
and $1,200,000 will be paid by conversion of the Class D notes issued in
connection with the Company's May 2003 bridge financing.
The first closing of the Equity Financing occurred on September 3,
2003. At that time, the Investors funded $6,500,000 of the Equity Financing in
the form of Secured Bridge Notes. The second closing of the Equity Financing
will occur after the Company satisfies the conditions to the second closing,
which is expected to be within 90 days after the first closing. The Secured
Bridge Notes issued at the first closing will convert into Common Stock at the
second closing at a price of $0.08 per share. Also at the second closing, the
remaining $16,700,000 of the Equity Financing will be provided to the Company by
the Investors for the purchase of Common Stock at a price of $0.10 per share. Of
the $16,700,000 to be provided by the Investors at the second closing,
$15,500,000 will be paid by the Investors in cash and $1,200,000 will be paid by
conversion of the Company's outstanding Class D notes. The $15,500,000 in cash
payable at the second closing is being held by a third party acting as our
escrow agent.
Three of the Investors in the Equity Financing are related to the
Company. These Investors are Gibralt US, Inc., an affiliate of Samuel Belzberg,
a director and significant stockholder of the Company, James A. Wylie, Jr., a
director and the Company's chief executive officer and Peter Norris, a former
director and a stockholder of the Company. Gibralt US loaned $1,500,000 to the
Company at the first closing and, accordingly, the Company issued $1,500,000 in
Secured Bridge Notes to him. Gibralt US also owns $1,100,000 of Class D notes
that will be converted into Common Stock at the second closing, and Mr. Wylie
and Mr. Norris each own $50,000 of Class D notes that will be converted into
Common Stock at the second closing.
Before the Company can complete the Equity Financing, the following
must occur:
o the stockholders must approve an amendment to the Company's
Certificate of Incorporation to increase the number of
authorized shares of Common Stock to 500,000,000,
F-22
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
o the stockholders must approve the issuance of up to
298,500,000 shares of Common Stock to the Investors in the
Equity Financing, and the American Stock Exchange (the "AMEX")
must approve the listing of the shares of Common Stock to be
issued to the Investors in connection with the Equity
Financing, and
o the stockholders must approve the issuance of 30,138,792
shares of Common Stock to be issued in exchange for Class E
Stock and Class F Stock, and the AMEX must approve the listing
of the shares of Common Stock to be issued to the holders of
the Class E Stock and the Class F Stock.
The Company anticipates that, assuming stockholder approval at the
annual meeting, the Equity Financing will be completed within three business
days after the annual meeting.
In connection with the Equity Financing, the Company has issued
warrants to purchase up to 40,879,063 shares of Common Stock to its placement
agent. The warrants issued to the placement agent are exercisable for five years
beginning upon approval by stockholders of the Equity Financing at the annual
meeting, and at exercise prices of $0.001, $0.08 and $0.10. The placement agent
also participated as an investor in the Equity Financing by reinvesting $495,000
of its fee in exchange for Secured Bridge Notes convertible into 6,187,500
shares of Common Stock. The original agreement with the placement agent provided
that the Company pay the placement agent a cash fee equal to 10% of the funds it
raised in a financing and issue to the placement agent warrants to purchase
shares of Common Stock equal to 10% of the aggregate number of shares of Common
Stock that were purchased by the Investors in the Equity Financing.
On August 28, 2003, the agreement with the placement agent was amended
to raise the maximum amount of the financing approved by the board of directors
and to provide for the deposit of all of the Investors' funds into an escrow
pending the second closing. The Company further agreed that it would pay the
cash portion of the fee due to the placement agent in connection with the Equity
Financing in securities rather than in cash. The placement agent agreed to
reinvest its financing fee, and the parties agreed that they would calculate the
financing fee on the total amount invested in the Company, exclusive of amounts
to be invested by the holders of the Class D notes and the Class E notes, but
inclusive of the amount the placement agent reinvested. On September 3, 2003,
the Company amended its agreement with the placement agent to reflect the
increased maximum amount of the offering from $21,200,000 to $23,200,000.
As of September 30, 2003, the Company incurred $1,238,234 in placement
agent and legal fees in connection with the Equity Financing. In connection with
the first closing, the Company incurred $632,891 of these costs, including the
placement agent's investment of its $495,000 in the Secured Bridge Notes. As of
September 30, 2003, these costs were capitalized as deferred financing costs and
will be amortized to general interest expense over the life of the notes, such
that the full amount of costs will be 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 September 30, 2003, the Company recognized $52,741 in
general interest expense pertaining to this amortization of the deferred
financing costs, and as of September 30, 2003, the balance of the deferred
financing costs was $580,150.
In connection with the first closing of the Equity Financing, the
Company will recognize additional placement agent fees of approximately
$1,800,000 for the 6,187,500 Common Stock warrants issued to the placement
agent. The fee related to the warrants will be recorded as a deferred financing
cost upon favorable stockholder approval of the Equity Financing. This
contingent cost will be fully amortized to general interest expense in the
period in which the Secured Bridge Notes convert to equity, with a corresponding
increase in additional paid in capital. The net impact on stockholders'
equity/(deficit) will be zero when the net loss including the deferred financing
cost is fully reflected in the accumulated deficit.
In connection with the second closing, the Company had incurred
$605,343 in legal fees through September 30, 2003. These costs were capitalized
as deferred offering costs and will be offset against additional paid in capital
in stockholders equity upon completion of the second closing of the Equity
Financing.
F-23
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(Unaudited)
The Company entered into a registration rights agreement providing for
the Company to register with the SEC the shares purchased by the investors and
the shares underlying the warrants issued to the placement agent for resale to
the public. The registration rights agreement requires the Company to file a
registration statement for these shares within 5 days after the completion of
the Equity Financing. The Company is obligated to issue additional shares
ratably to the Investors at the rate of 3% of the Investors' shares per month,
subject to a limit of 12%, if the Company does not file the registration
statement timely or if the SEC does not declare the registration effective
within 70 days after filing the registration statement.
(11) Acquisition of Exclusive EVLT(R) Technology
On September 3, 2003, the Company acquired rights to U.S. Patent No.
6,398,777 and related foreign patents for endovenous laser treatment of varicose
veins. The EVLT Patent relates to the technology underlying the Company's
EVLT(R) product line. This acquisition resulted from two transactions.
In the first transaction, the Company purchased the interest in the
EVLT Patent owned by Dr. Robert J. Min, one of the five named inventors of the
EVLT Patent. This transaction was completed under a purchase agreement between
the Company and Dr. Min entered into on July 23, 2003. Pursuant to the
agreement, on September 3, 2003, the Company paid $500,000 in cash and issued
options to purchase 1,000,000 shares of Common Stock in exchange for Dr. Min's
assignment to the Company of his interest in the EVLT Patent. The stock options
are fully vested, have an exercise price of $0.08 per share (the price per share
paid by the Investors in the first closing of the Equity Financing) and are
exercisable for ten years. The Company also has agreed to pay to Dr. Min
variable payments based on the Company's sales of products using the EVLT Patent
over the remaining 16-year life of the EVLT Patent. Dr. Min previously licensed
the EVLT Patent to the Company and had served as a consultant to the Company.
Dr. Min's consulting agreement with the Company was amended to reflect the
changes in the relationship between him and the Company as a result of the
acquisition of his EVLT Patent rights. Dr. Min will continue to act as a
consultant to the Company under the revised consulting agreement.
In the second transaction, the Company licensed, on an exclusive basis
(except for Spain), the EVLT Patent from Endolaser Associates, LLC, the assignee
of interest in the EVLT Patent from the other four named inventors of the EVLT
Patent. This transaction was completed under a license agreement between the
Company and Endolaser Associates entered into on July 11, 2003. On September 3,
2003, the Company paid Endolaser Associates $1,500,000 for the exclusive license
granted by Endolaser Associates on behalf of the four inventors who had assigned
their interest in the EVLT Patent to Endolaser Associates. The Company agreed to
make additional payments totaling $2,500,000 in 10 quarterly installments of
$250,000 each, commencing upon the second closing of the Equity Financing. The
Company has agreed to pay Endolaser Associates variable royalties based on the
Company's sales of products using the EVLT Patent over the remaining 16-year
life of the EVLT Patent.
The Company recorded an intangible technology asset in the amount of
$4,702,000 to record the acquisition of the EVLT Patent. The intangible asset
will be amortized over the remaining 16-year life of the EVLT Patent.
F-24
Item 2. Management's Discussion and Analysis or Plan of Operation
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/A (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 the commercialization of our current and future
products and applications, and risks relating to our common stock and its market
value.
In view of our relatively limited operating history, we have limited
experience forecasting our revenues and operating costs. Therefore, we believe
that period-to-period comparisons of financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
To date, the Company has incurred substantial costs to create our products. As
of September 30, 2003, we had an accumulated deficit of approximately
$46,761,000, including $5,859,000 in non-cash interest expense. 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 losses 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 and the Annual Report.
Overview
Diomed specializes in developing and commercializing laser and related
disposable product technologies used in minimally and micro-invasive medical
procedures. Minimally 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 can be significantly diminished with minimally and
micro-invasive procedures.
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
minimally 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 market 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 to purchase our disposable
products, such as kits and optical fibers.
Using our proprietary technology, including our exclusive rights to
U.S. Patent No. 6,398,777 and related foreign patents for the endovenous laser
treatment of varicose veins, we currently focus on endovenous laser treatment
(our EVLT(R) 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.
1
In 2001, Diomed developed endovenous laser treatment (EVLT(R)), 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(R) in Europe. On
January 22, 2002, Diomed was the first company to receive FDA clearance for
endovenous laser treatment, with respect to marketing EVLT(R) in the U.S.
EVLT(R) was a primary source of revenue in 2002 and has continued to be
a primary source of revenue in 2003. Diomed believes that EVLT(R) will achieve a
high level of commercial acceptance due to its related short recovery period,
immediate return to one's normal routine barring vigorous physical activities,
reduced pain and minimal scarring, and reduced costs compared to other vein
treatments for varicose veins. We developed our EVLT(R) 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 has also published a health
insurance reimbursement guide to assist physicians in the reimbursement
submission process. We believe that these attributes, in addition to EVLT(R)'s
superior clinical trial results, favorable peer reviews, and comparatively
larger and longer follow-up data reports provide EVLT(R) with a competitive
advantage over competing traditional and minimally invasive varicose vein
treatment products.
Diomed expects that as the number of EVLT(R) procedures increases, so
will its sales of associated disposable items. Diomed believes that the U.S.
represents the single largest market for EVLT(R). Diomed is targeting its sales
and marketing efforts at hospitals, private physician practices and clinics. We
sell our products to hospital and office-based physicians in major population
centers throughout the U.S., including specialists in vascular surgery,
interventional-radiology, general surgery, phlebology, gynecology and
dermatology.
Diomed has developed and maintains a website - www.EVLT.com - to
implement both the "push" and "pull" components of its marketing strategy to
attract the interest of both patients and physicians. EVLT.com provides patients
with education about treatment options and benefits of EVLT(R) and provides
physicians with education about the EVLT(R) procedure. At www.EVLT.com, patients
can also locate the nearest physician performing EVLT(R) by inputting their city
and state.
The sales cycle for selling capital equipment, such as medical lasers,
can be affected by several factors, including:
o the customer's internal approval process,
o hospital determinations as to the specialty of physician
performing the EVLT(R) procedure and the facility where these
procedures will be performed,
o the physician's desire to observe an EVLT(R)procedure prior to
making a purchase decision, and
o budget constraints for capital equipment.
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 provides both hospital-based and office-based physicians with marketing
guidance as to how they can build an EVLT(R) business, facilitating the sales
closing process and reducing the sales cycle.
Prior to 2002, the Company sold its products through independent sales
representatives in the U.S. and through distributors internationally. In March
2002, Diomed made the decision to execute a direct sales strategy to
commercialize EVLT(R) in the U.S. 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
strategies, and adjust the number of direct sales representatives, indirect
sales representatives and distributors to address market needs and opportunities
in the future.
2
Diomed works jointly and early on in the development cycle with
photodynamic therapy drug (PDT) companies in their clinical development process
in order to design a laser that optimizes wavelength with their PDT drugs. We
have long-term relationships with some of the world's leading PDT drug
companies, including Axcan Pharma, and have sold them lasers in support of their
clinical trials for PDT applications.
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. In 2001, our collaborative partner, Axcan Pharma, lead the sales
effort for PDT in conjunction with Axcan Pharma's drug, Photofrin. We are unable
to reliably predict our revenues from PDT because EVLT(R) and not PDT is our
primary source of revenue for 2002 and because Photofrin is the first PDT drug
brought to market by Axcan Pharma, and there is not sufficient relevant
historical data on which to base sales assumptions.
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 PDT 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 original
equipment manufacturing (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
uses our technology for surgical and dental applications. In addition we have a
long-term partnership with Dentek Lasersystems Vertriebs GmbH, which uses our
laser module for dental applications.
In 2002, approximately 55% of our sales were generated in the U.S. and
45% in other markets around the world. Diomed believes that its percentage of
sales generated domestically will increase as it grows the EVLT(R) market in the
U.S. In the first nine months of 2003, the percent of sales generated
domestically increased to 60%.
In 2003, Diomed has focused, and for the remainder of 2003 expects to
continue to focus, on the development and growth of EVLT(R) 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.
Results of Operations
Three Months Ended September 30, 2003 Compared to the Three Months
Ended September 30, 2002
Revenue
Revenue for the three months ended September 30, 2003 was $2,372,000,
increasing approximately $427,000, or 22%, from $1,945,000 for the same period
in 2002. In the three months ended September 30, 2003, approximately $1,504,000,
or 63%, of our total revenue was derived from laser sales, as compared to
approximately $1,404,000, or 72%, in the same period in 2002. In the three
months ended September 30, 2003, approximately $868,000, or 37%, of our total
revenues were derived from sales of disposable fibers and kits, accessories and
service, as compared to approximately $541,000, or 28%, in the same period in
2002.
The increase in revenue is attributable primarily to:
o increased penetration in the EVLT(R) market,
3
o the compounding impact of the recurring revenue stream from
disposable sales to both new and existing customers, and
o the impact of new sales management and development of our
sales team.
Cost of Revenue and Gross Profit
Cost of Revenue for the three months ended September 30, 2003 was
$1,540,000, increasing approximately $253,000, or 20%, from the same period in
2002. This resulted in gross profit for the three months ended September 30,
2003 of $832,000, an increase of approximately $173,000, or 26%, from the same
period in 2002.
The increase in Cost of Revenue was driven by:
o new royalties from the EVLT(R) patent acquisition (see Note 11
to the accompanying financial statements), and
o the corresponding increase in the number of lasers and
disposable products sold, offset, on a percentage of sales
basis, by the leverage of fixed manufacturing costs across a
greater number of units.
Operating Expenses
Research and Development Expenses for the three months ended September
30, 2003 remained largely unchanged at $248,000, a $32,000, or 11%, decrease
from $280,000 for the same period in 2002. This slight downward trend is
expected to be reversed in 2004 after the completion of our Equity Financing
(discussed under "Liquidity, Capital Resources and Capital Transactions,"
below).
Selling and Marketing Expenses for the three months ended September 30,
2003 were $870,000, decreasing approximately $149,000, or 15%, from $1,019,000
for the same period in 2002. In 2003, selling and marketing expenses decreased
due to the decreased commission rate of an in-house sales force (offset somewhat
by their associated fixed costs) and reduced discretionary marketing spending
prior to the completion of the Equity Financing. The Company anticipates
increased spending in sales and marketing programs to support the continued
commercialization of EVLT(R) after the completion of the Equity Financing.
General and Administrative Expenses for the three months ended
September 30, 2003 were $1,048,000, increasing approximately $158,000, or 18%,
from $890,000 for the same period in 2002. In the third quarter of 2003, the
Company recognized additional expense in the amount of $150,000 in legal fees
paid for the settlement of the Augenbaum litigation.
Loss from Operations
Loss from operations for the three months ended September 30, 2003 was
$1,335,000, decreasing approximately $197,000, or 13%, from $1,532,000 for the
same period in 2002.
Interest Expense, net
Interest expense for the three months ended September 30, 2003 was
$2,214,000, compared to approximately $29,000 for the same period in 2002.
Interest expense in the three months ended September 30, 2003 included non-cash
charges totaling $2,000,000 and amortization of deferred financing costs
totaling $66,000 related to the December 2002 and May 2003 debt financings. The
non-cash interest charges resulted from the accelerated amortization of the
balance of discount associated with the notes we issued in the December 2002
debt financing upon the retirement of those notes at the first closing of the
Equity Financing.
Net Loss Applicable to Common Stockholders
4
Net loss applicable to common stockholders for the three months ended
September 30, 2003, including $2,000,000 in non-cash interest expense, was
approximately $3,549,000, or $0.12 per share, a $1,988,000, or 127%, increase
from $1,561,000, or $0.11 per share, for the same period in 2002.
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002.
Revenue
Revenue for the nine months ended September 30, 2003 were $6,644,000,
increasing approximately $2,574,000, or 63%, from $4,070,000 for the same period
in 2002. In the nine months ended September 30, 2003, approximately $4,206,000,
or 63%, of our total revenues were derived from laser sales, as compared to
approximately $2,540,000, or 62%, in the same period in 2002. In the nine months
ended September 30, 2003, approximately $2,438,000, or 37%, of our total
revenues were derived from sales of disposable fibers and kits, accessories and
service, as compared to approximately $1,530,000, or 38%, in the same period in
2002.
The increase in revenue is attributable primarily to:
o increased penetration in the EVLT(R) market,
o the compounding impact of the recurring revenue stream from
disposable sales to both new and existing customers, and
o the impact of new sales management and development of our
sales team.
Cost of Revenue and Gross Profit
Cost of Revenue for the nine months ended September 30, 2003 was
$4,211,000, increasing approximately $731,000, or 21%, from $3,480,000 for the
same period in 2002. Cost of Revenue, as a percentage of sales, decreased from
86% to 63% on a year-to-year basis.
Gross profit for the nine months ended September 30, 2003 was
$2,433,000, increasing approximately $1,843,000, or 312%, from $590,000 for the
same period in 2002. On a percent-of-sales-basis, the gross margin increased 23
percentage points from 14% to 37%.
The increase in Cost of Revenue was driven by:
o new royalties from the EVLT(R) patent acquisition (see Note 11
to the accompanying financial statements), and
o the corresponding increase in the number of lasers and
disposable products sold, offset, on a percentage of sales
basis, by the leverage of fixed manufacturing costs across a
greater number of units.
Operating Expenses
Research and Development Expenses for the nine months ended September
30, 2003 remained largely unchanged at $635,000, a $29,000, or 4%, decrease from
$664,000 for the same period in 2002. This slight downward trend is expected to
be reversed in 2004 after the completion of our Equity Financing.
Selling and Marketing Expenses for the nine months ended September 30,
2003 were $2,892,000, increasing approximately $796,000, or 38%, from $2,096,000
for the same period in 2002. In 2003, the increased selling and marketing
expenses resulted primarily from incremental commissions on a higher sales base
(offset somewhat by a lower commission rate) and from a higher level of
marketing spending during the first two quarters of 2003. The Company
anticipates an increased investment in sales and marketing programs to support
the continued commercialization of EVLT(R) after the completion of the Equity
Financing.
5
General and Administrative Expenses for the nine months ended September
30, 2003 remained largely unchanged at $2,829,000, increasing approximately
$171,000, or 6%, from $2,658,000 for the same period in 2002. In the third
quarter of 2003, the Company recognized additional expense in the amount of
$150,000 in legal fees paid for the settlement of the Augenbaum litigation.
Loss from Operations
As a result of the above, the loss from operations for the nine months
ended September 30, 2003 was $3,924,000, decreasing approximately $904,000, or
19%, from $4,828,000 for the same period in 2002.
Interest Expense, net
Interest expense for the nine months ended September 30, 2003 was
$3,383,000, compared to $317,000 for the same period in 2002. Interest expense
in the nine months ended September 30, 2003 included non-cash charges totaling
approximately $2,933,000 and amortization of deferred financing costs totaling
$154,000 related to the December 2002 and May 2003 debt financings.
Two million dollars of non-cash interest charges resulted from the
accelerated amortization of the balance of the discount associated with the
notes we issued in the December 2002 debt financing upon the retirement of those
notes at the first closing of the Equity Financing. An additional $833,000 in
non-cash interest expense resulted from the amortization of the discount on
Class A Secured Notes and Class B Unsecured Notes we issued in the December 2002
financing prior to their exchange for Class C notes contemporaneously with the
May 2003 debt financing.
In the fourth quarter of 2003, upon stockholder approval of the Equity
Financing and the conversion into equity of the $6,995,000 principal amount of
Secured Bridge Notes due 2004 (the "Secured Bridge Notes") we issued on
September 3, 2003 at the first closing of the Equity Financing, the contingent
discount associated with the $6,995,000 in Secured Bridge Notes will be fully
amortized to non-cash interest expense with an offsetting increase in additional
paid in capital. The net impact on stockholders' equity/(deficit) will be zero
when net loss including the discount is fully reflected in the accumulate
deficit.
In the fourth quarter of 2003, in connection with the first closing of
the Equity Financing, the Company will recognize approximately $580,000 in
general interest expense related to the corresponding legal and placement agent
fees upon stockholder approval of the Equity Financing. Otherwise, these
unamortized costs will continue to be amortized over the life of the notes.
In the fourth quarter of 2003, in connection with the first closing of
the Equity Financing, the Company will recognize an additional placement agent
fee, in the amount of approximately $1,800,000, for 6,187,500 warrants issued to
the placement agent. The warrant fee will be recorded as a deferred financing
cost upon stockholder approval of the Equity Financing. This contingent cost
will be fully amortized to general interest expense in the period in which the
Secured Bridge Notes convert to equity, with a corresponding increase in
additional paid in capital. The net impact on stockholders' equity/(deficit)
will be zero when the net loss, including the deferred financing cost, is fully
reflected in the accumulated deficit.
In the fourth quarter of 2003, in accordance with Emerging Issues Task
Force (EITF) 00-27, "Application of EITF No. 98-05 to Certain Convertible
Instruments," the Company will recognize a beneficial conversion feature related
to the Class D notes, in the amount of $960,000, which will be recorded as a
discount to the notes, upon stockholder approval of the Equity Financing. This
contingent discount will be fully amortized to non-cash interest expense in the
period in which the Class D notes convert to equity, with a corresponding
increase in additional paid in capital. The net impact on stockholders'
equity/(deficit) will be zero when the net loss, including the discount, is
fully reflected in the accumulated deficit.
6
Net Loss Applicable to Common Stockholders
As a result of the above, the net loss applicable to common
stockholders for the nine months ended September 30, 2003, including $2,933,000
in non-cash interest expense, was $7,307,000, or $0.29 per share, increasing
approximately $2,162,000, or 42%, from $5,145,000, or $0.38 per share, in the
same period in 2002.
Liquidity, Capital Resources and Capital Transactions
Since inception we have incurred a cumulative loss of approximately
$46,761,000, including approximately $5,859,000 in non-cash interest expense,
and may continue to incur operating losses, dependent upon the commercial
success of EVLT(R). The Company has financed its operations primarily through
private placements of common stock and preferred stock, and private placements
of convertible notes and short-term notes and credit arrangements.
Between December 2002 and May 2003, the Company obtained $3,200,000 of
bridge financing from Gibralt US, Inc., an affiliate of Samuel Belzberg, a
director and significant stockholder of the Company, James A. Wylie, Jr., a
director and the Company's chief executive officer and Peter Norris, a former
director and a stockholder of the Company. In order to fund its operations in
2003, the Company requires additional debt or equity financing and, as an
additional option, to put in place a credit facility to support the Company's
commercialization of EVLT(R). We will require the proceeds of any such
financing, together with our current cash resources, to continue as a going
concern. As a result of the additional financing needed to support operations in
2003, the auditors' opinion for the year ended December 31, 2002 expressed
substantial doubt about the Company's ability to continue as a going concern.
September 2003 Equity Financing Transaction
On September 2, 2003, the Company entered into agreements that provide
for the equity financing transaction (the "Equity Financing") in which 119
accredited investors (the "Investors") agreed to purchase from the Company
254,437,500 shares of common stock for an aggregate purchase price of
$23,200,000. Twenty-two million dollars of the aggregate purchase price is
payable in cash, and $1,200,000 will be paid by conversion of the Class D
Secured Notes (the "Class D notes") issued in connection with the Company's May
2003 debt financing.
The first closing of the Equity Financing occurred on September 3,
2003. At that time, the Investors funded $6,500,000 of the Equity Financing in
the form of Secured Bridge Notes. The second closing of the Equity Financing
will occur after the Company satisfies the conditions to the second closing,
which is expected to be within 90 days after the first closing. The Secured
Bridge Notes issued at the first closing will convert into common stock at the
second closing at a price of $0.08 per share. Also at the second closing, the
remaining $16,700,000 of the Equity Financing will be provided to the Company by
the Investors for the purchase of common stock at a price of $0.10 per share. Of
the $16,700,000 to be provided by the Investors at the second closing,
$15,500,000 will be paid by the Investors in cash and $1,200,000 will be paid by
conversion of the Company's outstanding Class D notes. The $15,500,000 in cash
payable at the second closing is being held by a third party acting as our
escrow agent.
Three of the Investors in the Equity Financing are related to the
Company. These Investors are Gibralt US, Inc., an affiliate of Samuel Belzberg,
a director and significant stockholder of the Company, James A. Wylie, Jr., a
director and the Company's chief executive officer and Peter Norris, a former
director and a stockholder of the Company. Gibralt US loaned $1,500,000 to the
Company at the first closing and, accordingly, the Company issued $1,500,000 in
Secured Bridge Notes to him. Gibralt US also owns $1,100,000 of Class D notes
that will be converted into common stock at the second closing, and Mr. Wylie
and Mr. Norris each own $50,000 of Class D notes that will be converted into
common stock at the second closing.
7
Before the Company can complete the Equity Financing, the following
must occur:
o the stockholders must approve an amendment to the Company's
Certificate of Incorporation to increase the number of
authorized shares of common stock to 500,000,000,
o the stockholders must approve the issuance of up to
298,500,000 shares of common stock to the Investors in the
Equity Financing, and the American Stock Exchange (the "AMEX")
must approve the listing of the shares of common stock to be
issued to the Investors in connection with the Equity
Financing, and
o the stockholders must approve the issuance of 30,138,792
shares of common stock to be issued in exchange for Class E
Preferred Stock (the "Class E Stock") and Class F Preferred
Stock (the "Class F Stock"), and the AMEX must approve the
listing of the shares of common stock to be issued to the
holders of the Class E Stock and the Class F Stock.
The Company anticipates that, assuming stockholder approval at the
annual meeting, the Equity Financing will be completed within three business
days after the annual meeting.
In connection with the Equity Financing, the Company has issued
warrants to purchase up to 40,879,063 shares of common stock to its placement
agent. The warrants issued to the placement agent are exercisable for five years
beginning upon approval by stockholders of the Equity Financing at the annual
meeting, and at exercise prices of $0.001, $0.08 and $0.10. The placement agent
also participated as an investor in the Equity Financing by reinvesting $495,000
of its fee in exchange for Secured Bridge Notes convertible into 6,187,500
shares of common stock. The original agreement with the placement agent provided
that the Company pay the placement agent a cash fee equal to 10% of the funds it
raised in a financing and issue to the placement agent warrants to purchase
shares of common stock equal to 10% of the aggregate number of shares of common
stock that were purchased by the Investors in the Equity Financing.
On August 28, 2003, the agreement with the placement agent was amended
to raise the maximum amount of the financing approved by the board of directors
and to provide for the deposit of all of the Investors' funds into an escrow
pending the second closing. The Company further agreed that it would pay the
cash portion of the fee due to the placement agent in connection with the Equity
Financing in securities rather than in cash. The placement agent agreed to
reinvest its financing fee, and the parties agreed that they would calculate the
financing fee on the total amount invested in the Company, exclusive of amounts
to be invested by the holders of the Class D notes and the Class E Secured Notes
issued in connection with the December 2002 debt financing (the "Class E
notes"), but inclusive of the amount the placement agent reinvested. On
September 3, 2003, the Company amended its agreement with the placement agent to
reflect the increased maximum amount of the offering from $21,200,000 to
$23,200,000.
As of September 30, 2003, the Company incurred $1,238,234 in placement
agent and legal fees in connection with the Equity Financing. In connection with
the first closing, the Company incurred $632,891 of these costs, including the
placement agent's investment of its $495,000 in the Secured Bridge Notes. As of
September 30, 2003, these costs were capitalized as deferred financing costs and
will be amortized to general interest expense over the life of the notes, such
that the full amount of costs will be 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 September 30, 2003, the Company recognized $52,741 in
general interest expense pertaining to this amortization of the deferred
financing costs, and as of September 30, 2003, the balance of the deferred
financing costs was $580,150.
In connection with the first closing of the Equity Financing, the
Company will recognize additional placement agent fees of approximately
$1,800,000 for the 6,187,500 common stock warrants issued to the placement
agent. The fee related to the warrants will be recorded as a deferred financing
cost upon favorable stockholder approval of the Equity Financing. This
contingent cost will be fully amortized to general interest expense in the
period in which the Secured Bridge Notes convert to equity, with a corresponding
increase in additional paid in capital. The net impact on stockholders'
equity/(deficit) will be zero when the net loss including the deferred financing
cost is fully reflected in the accumulated deficit.
8
In connection with the second closing, the Company had incurred
$605,343 in legal fees through September 30, 2003. These costs were capitalized
as deferred offering costs and will be offset against additional paid in capital
in stockholders equity upon completion of the second closing of the Equity
Financing.
The Company entered into a registration rights agreement providing for
the Company to register with the SEC the shares purchased by the investors and
the shares underlying the warrants issued to the placement agent for resale to
the public. The registration rights agreement requires the Company to file a
registration statement for these shares within 5 days after the completion of
the Equity Financing. The Company is obligated to issue additional shares
ratably to the Investors at the rate of 3% of the Investors' shares per month,
subject to a limit of 12%, if the Company does not file the registration
statement timely or if the SEC does not declare the registration effective
within 70 days after filing the registration statement.
September 2003 Acquisition of Exclusive EVLT(R) Technology
On September 3, 2003, the Company acquired rights to U.S. Patent No.
6,398,777 and related foreign patents for endovenous laser treatment of varicose
veins. The EVLT Patent relates to the technology underlying the Company's
EVLT(R) product line. This acquisition resulted from two transactions.
In the first transaction, the Company purchased the interest in the
EVLT Patent owned by Dr. Robert J. Min, one of the five named inventors of the
EVLT Patent. This transaction was completed under a purchase agreement between
the Company and Dr. Min entered into on July 23, 2003. Pursuant to the
agreement, on September 3, 2003, the Company paid $500,000 in cash and issued
options to purchase 1,000,000 shares of common stock in exchange for Dr. Min's
assignment to the Company of his interest in the EVLT Patent. The stock options
are fully vested, have an exercise price of $0.08 per share (the price per share
paid by the Investors in the first closing of the Equity Financing), and are
exercisable for ten years. The Company also has agreed to pay to Dr. Min
variable payments based on the Company's sales of products using the EVLT Patent
over the remaining 16-year life of the EVLT Patent. Dr. Min previously licensed
the EVLT Patent to the Company and had served as a consultant to the Company.
Dr. Min's consulting agreement with the Company was amended to reflect the
changes in the relationship between him and the Company as a result of the
acquisition of his EVLT Patent rights. Dr. Min will continue to act as a
consultant to the Company under the revised consulting agreement.
In the second transaction, the Company licensed, on an exclusive basis
(except for Spain), the EVLT Patent from Endolaser Associates, LLC, the assignee
of interest in the EVLT Patent from the other four named inventors of the EVLT
Patent. This transaction was completed under a license agreement between the
Company and Endolaser Associates entered into on July 11, 2003. On September 3,
2003, the Company paid Endolaser Associates $1,500,000 for the exclusive license
granted by Endolaser Associates on behalf of the four inventors who had assigned
their interest in the EVLT Patent to Endolaser Associates. The Company agreed to
make additional payments totaling $2,500,000 in 10 quarterly installments of
$250,000 each, commencing upon the second closing of the Equity Financing. The
Company has agreed to pay Endolaser Associates variable royalties based on the
Company's sales of products using the EVLT Patent over the remaining 16-year
life of the EVLT Patent.
The Company recorded an intangible technology asset in the amount of
$4,702,000 to record the acquisition of the EVLT Patent. The intangible asset
will be amortized over the remaining life of the EVLT Patent.
Cash Position and Cash Flow
The Company had cash balances of approximately $1,500,000 and
$1,900,000 at September 30, 2003 and December 31, 2002, respectively.
Cash used in operations for the nine months ended September 30, 2003
was approximately $2,300,000. This principally results from the approximate
$3,900,000 loss from operations, offset by changes in working capital and
(non-cash)
9
depreciation expense, and reflects the external marketing initiatives and the
costs of a direct sales force in support of the commercialization of EVLT(R).
Cash used in investing activities for the nine months ended September
30, 2003 was approximately $2,300,000. On September 3, 2003, the Company
acquired rights to U.S. Patent No. 6,398,777 and related foreign patents for
endovenous laser treatment of varicose veins (the "EVLT Patent"), which patents
relate to the technology underlying the Company's EVLT(R) product line. In
connection with this technology acquisition, the Company paid an aggregate of
$2,000,000 to Dr. Robert Min and Endolaser Associates, LLC, and $144,000 in
other costs. Net cash used by investing activities also includes $200,000 in
property, plant and equipment, principally for demonstration equipment for
customer trial programs and for use by the direct sales force in the field.
Cash provided by financing activities for the nine months ended
September 30, 2003 was approximately $4,500,000. This includes the $1,200,000
proceeds from the May interim financing and the $6,500,000 proceeds from the
first closing of September 2003 Equity Financing, offset by $1,290,000 in
financing costs, and the retirement of the December 2002 notes in the aggregate
principal amount of $2,000,000.
Bank Line of Credit
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes
a line of credit with Barclays Bank, limited to the lesser of (pound)350,000
($582,000 at September 30, 2003) or 80% of eligible accounts receivable. The
credit line bears interest at a rate of 3% above Barclays base rate (4.00% at
September 30, 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 September 30, 2003, there were borrowings of (pound)186,976
($310,754) outstanding under this line and available future borrowing capacity
of approximately $16,000.
Critical Accounting Policies
Our discussion and analysis of the Company's financial condition,
results of operations, and cash flows are based on the Company'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 include:
o revenue recognition;
o allowance for doubtful accounts;
o warranty obligation;
o allowances for excess and obsolete inventory; and
o valuation of long-lived and intangible assets.
10
Revenue Recognition. We derive our revenue from primarily two sources:
(i) revenues from products including lasers, instrumentation, and disposables,
and (ii) revenues from service. The Company recognizes revenue on products and
services when 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.
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, and in certain circumstances, depending upon the
type of customer, letters of credit. 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 September 30,
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, resulting in a charge to
earnings.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial
officer have carried out an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a -15e and 15d-15(e) under the
Securities Exchange Act of 1934) as of September 30, 2003 and have concluded
that, as of such date, the Company's disclosure controls and procedures in place
are adequate to ensure material information and other information requiring
disclosure is identified and communicated on a timely basis.
(b) Changes in internal control over financial reporting.
During the period covered by this report, there have been no
significant changes in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
11
Part II: Other Information
Item 1. Legal Proceedings
On July 28, 2003, the Company was named as a defendant in a class
action lawsuit, Augenbaum v. Diomed Holdings, Inc. On August 6, 2003, the
Company entered into a stipulation of settlement to resolve this suit. On
September 15, 2003, after a hearing, the judge entered an order approving the
stipulation of settlement as submitted. The stipulation of settlement became
final on October 15, 2003, when the applicable appeal period of the order
approving the stipulation of settlement expired with no appeal having been
filed.
Item 2. Changes in Securities and Use of Proceeds
Issuance of Secured Bridge Notes to Investors in Equity Financing.
Pursuant to our Equity Financing, on September 3, 2003, we issued an aggregate
principal amount of $6,995,000 in Secured Bridge Notes due 2004 to 119
accredited investors. The principal and accrued interest on these Secured Bridge
Notes will convert into shares of common stock at the conversion price of $0.08
per share when we complete the Equity Financing. The names of the investors in
the Equity Financing to whom we issued Secured Bridge Notes, the principal
amount of the Secured Bridge Notes issued to each such investor and the number
of shares of common stock into which the Secured Bridge Notes will convert are
set forth below. These investors include Gibralt US, Inc., an affiliate of one
of the Company's directors, Samuel Belzberg.
Shares of common stock to Be
Issued at Final Closing of Equity
Financing upon Conversion of
Secured Bridge Notes Purchased Secured Bridge Notes (Excluding
September 3, 2003 at First Closing of Shares to Be Issued upon
Name of Investor Equity Financing Conversion of Accrued Interest)
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Gibralt US, Inc. $1,500,000 18,750,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Morris Belzberg 300,000 3,750,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Charles Diamond 100,000 1,250,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Steven Schraiberg 100,000 1,250,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Sunrise Securities Corp. $495,000 6,187,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Sanford Antignas $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
BPW Israel Ventures LLC $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Emilio Bassini $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
HUG Funding LLC $90,000 1,125,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
West End Convertible Fund, L.P. $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
F. Berdon Defined Benefit Plan $9,000 112,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Chana Braun $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Smithfield Fiduciary, LLC $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Meredith A. Rauhut $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Sean B. Curran $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Incap Company Limited $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Bel-Cal Holdings, Ltd. $45,000 562,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
SDS Merchant Fund, LP $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
BayStar Capital II, LP $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Craig Drill Capital $101,250 1,265,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Joseph Duchman $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
12
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Bear Stearns Securities Corp., Custodian for J.
Steven Emerson IRA II $135,000 1,687,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Michael D. Farkas $16,875 210,937.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
The Riverview Group, LLC $317,250 3,965,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Robert Schecter $6,750 84,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Shimon S. Fishman $3,375 42,187.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Platinum Partners Global Macro Fund, LP $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Platinum Partners Value Arbitrage Fund, LP $168,750 2,109,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Melton Management Ltd. $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Asher Gottesman $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
James G. Groninger $13,500 168,750
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Yehuda Harats $45,000 562,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
David Hirsch and Ruth Hirsh $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
J.M. Hull Associates, LP $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Benjamin J. Jesselson 8/21/74 Trust $33,750 421,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Michael G. Jesselson 4/8/71 Trust $33,750 421,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Ron Katz $33,750 421,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Joseph Klein III $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Abraham Koot $1,125 14,062.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
ProMed Offshore Fund, Ltd. $16,425 205,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
ProMed Partners, LP $96,075 1,200,937.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Dwight E. Lee $6,750 84,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Jonathan Leifer $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
David Leiner $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Ruth Low $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Avi Lyons $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Jason Lyons $1,125 14,062.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
David D. May $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Balestra Capital Partners, LP $45,000 562,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Monmouth Consulting Inc. $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
MTD Holdings LLC $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Israel Nekritz $1,125 14,062.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Tammy Newman $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Pequot Navigator Offshore Fund, Inc. $135,000 1,687,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Pequot Navigator Onshore Fund, LP $78,750 984,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Pequot Scout Fund, LP $236,250 2,953,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Piers Playfair $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
William J. Ritger $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Orion Biomedical Fund, LP $92,418.75 1,155,234.38
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Orion Biomedical Offshore Fund, LP $20,081.25 251,015.63
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Reuven Y. Rosenberg $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Joan Schapiro $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Rock Associates $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Alexander Scharf $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
David Scharf $6,750 84,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Abraham Schwartz $3,375 42,187.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Rivie Schwebel $5,625 70,312.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Morton Seelenfreund IRA $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Sherleigh Associates Inc. Profit Sharing Plan $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Terrapin Partners $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
13
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Stanley B. Stern $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
David Stone $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Richard B. Stone $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Peter Sugarman $45,000 562,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Langley Partners, L.P. $45,000 562,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Ellis International Ltd. $56,250 703,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Fred Weber & Chaya Weber JT Ten $4,500 56,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
George Weinberger $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Congregation Mishkan Sholom $33,750 421,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
North Sound Legacy Fund LLC $10,125 126,562.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
North Sound Legacy Institutional Fund LLC $102,375 1,279,687.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
North Sound Legacy International Ltd. $112,500 1,406,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
East Hudson Inc. (BVI) $13,275 165,937.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
The Conus Fund (QP), LP $11,025 137,812.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
The Conus Fund Offshore Ltd. $9,675 120,937.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
The Conus Fund, LP $78,525 981,562.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Bull & Co. $14,625 182,812.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Albert L. Zesiger $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Cudd & Co. $16,650 208,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Barrie Ramsay Zesiger $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
City of Milford Pension & Retirement Fund $155,250 1,940,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
City of Stamford Firemen's Pension Fund $74,250 928,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Domenic J. Mizio $22,500 281,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Francois deMenil $15,750 196,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
HBL Charitable Unitrust $14,625 182,812.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Cudd & Co. $18,000 225,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
James F. Cleary $2,250 28,125
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Jeanne L. Morency $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
John J. & Catherine H. Kayola $1,800 22,500
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Hare & Co. $15,750 196,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Meehan Foundation $14,625 182,812.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Morgan Trust Co. of the Bahamas Ltd. As Trustee U/A/D $48,375 604,687.5
11/30/93
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Murray Capital, LLC $18,000 225,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Huland & Co. $42,750 534,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Huland & Co. $7,875 98,437.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Huland & Co. $33,750 421,875
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Peter Looram $6,750 84,375
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Psychology Associates $4,500 56,250
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Mellon Bank NA, Custodian for PERSI-Zesiger Capital $270,000 3,375,000
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Robert K. Winters $675 8,437.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Susan Uris Halpern $30,375 379,687.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Theeuwes Family Trust, Felix Theeuwes, Trustee $14,625 182,812.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
William B. Lazar $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Wolfson Investment Partners, LP $11,250 140,625
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Zinc Partners II, LP $505.80 6,322.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Zinc Partners Offshore, Ltd. $37,521 469,012.5
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
Zinc Partners, LP $40,723.20 509,040
- ----------------------------------------------------------- ---------------------------------------- -------------------------------
14
We received gross proceeds of $6,500,000 from the issuance of the
Secured Bridge Notes. We applied a portion of these proceeds to repay in full
all of our outstanding Class E notes (approximately $2,140,000 of principal and
interest, including approximately $1,575,000 repaid to Gibralt US, Inc., an
affiliate of Samuel Belzberg, a director of the Company) and to acquire
additional intellectual property rights related to our EVLT(R) product line
($2,000,000). We also paid fees incurred by legal counsel to the investors
(approximately $100,000) and reimbursable expenses incurred by our placement
agent (approximately $14,000). We intend to use the balance of these proceeds
for general working capital purposes.
Issuance of Warrants to Placement Agent. As part of the compensation
payable to our placement agent, Sunrise Securities Corp., in connection with our
Equity Financing, on September 3, 2003, we issued warrants to purchase up to a
total of 40,879,063 shares of common stock to our placement agent. The warrants
may be exercised for a five-year period beginning when our stockholders have
approved the issuance of shares of our common stock underlying these warrants
and those shares have been listed for trading on the AMEX. The following table
sets forth the respective exercise prices of these warrants
Number of Shares of Exercise Price
Common Stock Purchasable
17,541,563 $0.001
6,187,500 $0.08
17,150,000 $0.10
August 2003 Exchanges of Preferred Shares. Pursuant to the stipulation
of settlement that we reached in the Augenbaum litigation (described under Item
1, Legal Proceedings, above), we entered into exchange agreements with the
holders of the outstanding shares of our Class C Convertible Preferred Stock
(the "Class C Stock") and Class D Convertible Preferred Stock (the "Class D
Stock"). Upon entering into the exchange agreements, on August 22, 2003, the
holders of the Class C Stock exchanged their Class C Stock for 20 shares of
Class E Stock, on a share-for-share basis. Similarly, upon execution of the
exchange agreements, the holders of the 24 outstanding Class D Stock exchanged
their Class D Stock for shares of Class F Stock, on a share-for-share basis.
Following these exchanges, we eliminated all Class C Stock and all Class D
Stock.
Shares of the Class E and Class F Stock are preferred in liquidation to
the extent that, before any distribution of assets can be made to the holders of
the common stock, there will be distributed pro rata to the holders of the
issued and outstanding shares of Class E Stock and Class F Stock the amount of
$108,469 as to each outstanding share of Class E Stock and $10,072 per share as
to each outstanding share of Class F Stock. The holders of the common stock then
share in the remainder of net liquidation of proceeds. The aggregate liquidation
preference of the Class E Stock is $2,169,380 and the aggregate liquidation
preference of the Class F Stock is $241,728.
The holders of the Class E Stock are entitled to cash dividends and
distributions when and as declared by the board of directors, pari passu with
the holders of our common stock with the dividend amount on each share of Class
E Stock being 1,355,862 times the dividend or distribution to be paid on each
share of common stock. The holders of the Class F Stock are entitled to cash
dividends and distributions when and as declared by the board of directors, pari
passu with the holders of our common stock with the dividend amount on each
share of Class F Stock being 125,898 times the dividend or distribution to be
paid on each share of common stock.
The exchange agreements also gave both the Company and the holders of
the Class E Stock and the Class F Stock rights to exchange those preferred
shares for shares of our common stock, as long as our stockholders approve the
issuance of the shares of our common stock underlying the preferred shares and
the AMEX approves the listing of these shares of common stock. Specifically, if
the stockholders approve the common stock issuance and the AMEX lists these the
shares of common stock, then the holders of the Class E Stock have the right to
sell to us, and we have the right to purchase from them, each outstanding share
of Class E Stock in exchange for 1,355,862 shares of our common stock per share
of Class E Stock. Similarly, the holders of the Class F Stock have the right to
sell to us, and we have the right to purchase from them, each outstanding share
of Class F Stock in exchange for 125,898 shares of our common stock per share of
Class F Stock. The exchange agreements also provided that, should any sale,
lease, exchange or other disposition of all or substantially all of our assets
occur while shares of Class E Stock and Class F Stock are outstanding, each
holder of the Class E Stock has the right to sell to us all shares of Class E
Stock held in exchange for 1,355,862 shares of common stock per share of Class E
Stock. Similarly, each holder of the Class F Stock has the right to sell to us
all shares of Class F Stock held in exchange for 125,898 shares of common stock
per share of Class F Stock.
15
The board of directors determined that the terms of the exchange
agreements were appropriate in order to provide the former holders of the Class
C Stock and the Class D Stock with the economic equivalence of the conversion
rights they held in conjunction with the Class C Stock and Class D Stock. Upon
exchange of all Class E Stock, the former holders of the Class C Stock will
receive 27,117,240 shares of our common stock, or the same number of shares of
our common stock we were obligated to issue to them upon conversion of the Class
C Stock. Upon exchange of all shares of the Class F Stock, the former holders of
the Class D Stock will receive 3,021,552 shares of common stock, or the same
number of shares of our common stock that we were obligated to issue to them
upon conversion of the Class D Stock.
Shares to Be Issued to Former Investment Advisor. Under a December 2001
agreement between the Company and Verus Support Services, Inc., the holder of
greater than 5% of the Company's common stock, we engaged Verus as our financial
advisor for the period ended August 31, 2003. Under that agreement, we were to
pay Verus $15,000 per month for these services. We ceased making the $15,000
monthly payments to Verus beginning August 2002. On September 30, 2003, we
entered into an agreement with Verus pursuant to which we are to issue to Verus
a total of 500,000 shares of common stock in lieu of the monthly payments that
we did not pay to Verus. The issuance of these shares is contingent on the
completion of the Equity Financing, and we are to issue these shares to Verus
within three days after we complete the Equity Financing.
Other. During the third quarter of 2003, the Company issued options to
purchase options to purchase up to 1,000,000 shares of common stock at a
purchase price of $0.08 per share to Robert I. Min, M.D. in connection with our
September 3, 2003 purchase of Dr. Min's rights to the EVLT(R) Patents described
in Part I of this Quarterly Report, and options to purchase up to 900 shares of
its common stock at a purchase price of $0.44 per share to Dr. Min and Dr.
Steven Zimmet for contributing services performed for us.
The Company issued securities to the above-referenced persons in
reliance upon the exemption from registration set forth under Section 4(2) of
the Securities Act of 1933, as amended. Each such person agreed that neither the
options or notes, as the case may be, nor the underlying securities would be
resold without registration under the Securities Act or exemption therefrom.
Each such person 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Securities Purchase Agreement and other documents relating to
Equity Financing Transaction (filed with the Company's Current Report
on SEC Form 8-K filed September 10, 2003)
10.2 Purchase Agreement and License Agreement relating to acquisition
of exclusive rights to EVLT Patent (filed with the Company's Current
Report on SEC Form 8-K filed September 10, 2003)
10.3 Letter Agreement between the Company and Gibralt US, Inc., dated
as of August 21, 2003, regarding certain understandings with respect to
the Class E Stock and the Class F Stock
16
10.4 Exchange Agreement among the Company and the holders of the Class
C Stock, dated as of August 22, 2003, providing for the exchange of the
Class C Stock for shares of Class E Stock and the further exchange of
the Class E Stock for common stock
10.5 Exchange Agreement among the Company and the holders of the Class
C Stock, dated as of August 22, 2003, providing for the exchange of the
Class C Stock for shares of Class E Stock and the further exchange of
the Class E Stock for common stock
10.6 Letter Agreement between the Company and Verus Support Services,
Inc., dated as of September 30, 2003, providing for the issuance of
500,000 shares of common stock in lieu of cash payment for fees payable
by Company
10.7 Amendment to Engagement Letter with Placement Agent, dated as of
September 3, 2003, providing for the issuance of 40,879,063 common
stock purchase warrants to the placement agent.
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) 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 September 10, 2003, the Company filed a Form 8-K in connection with
its September 2, 2003 equity financing transaction in which 119 accredited
investors agreed to purchase 254,437,500 shares of common stock for an aggregate
purchase price of $23,200,000
On September 10, 2003, the Company filed a Form 8-K in connection
with its September 3, 2003 acquisition of the exclusive rights to U.S. Patent
No. 6,398,777 and related foreign patents for endovenous laser treatment of
varicose veins, which patents relate to the technology underlying the Company's
EVLT(R) product.
On August 6, 2003, the Company filed a Form 8-K disclosing that it had
entered into a stipulation of settlement in connection with the Augenbaum class
action litigation filed against the Company on July 28, 2003.
On July 29, 2003, the Company filed a Form 8-K disclosing the Augenbaum
class action litigation filed against the Company on July 28, 2003.
17
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: November 7, 2003
By: /s/ DAVID B. SWANK
----------------------------------------
Name: David B. Swank
Title: Chief Financial Officer
Date: November 7, 2003