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 JUNE 30, 2004
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 84-1480636
(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 AUGUST 11, 2004, THERE WERE 14,606,422 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 SIX MONTHS ENDED JUNE 30, 2004
TABLE OF CONTENTS
Page
Item Number Number
- ----------- ------
Part I - Financial Information
1 Condensed Consolidated Balance Sheets - F-1
June 30, 2004 (unaudited) and December 31, 2003
Unaudited Consolidated Statements of Operations - F-3
Three Months and Six Months Ended June 30, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows - F-4
Six Months Ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements F-6
2 Management's Discussion and Analysis or Plan of Operation 1
3 Controls and Procedures 7
Part II - Other Information 8
1 Legal Proceedings 8
2 Changes in Securities 8
3 Submission of Matters for a Vote of Securities Holders 9
5 Other 11
6 Exhibits and Reports on Form 8-K 11
Signatures 12
DIOMED HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 9,182,133 $13,398,075
Accounts Receivable, net 2,089,201 1,437,238
Inventories 2,115,099 1,892,241
Prepaid Expenses and Other Current Assets 766,640 449,625
----------- -----------
Total current assets 14,153,073 17,177,179
Property, Plant and Equipment, net 772,369 747,728
Intangible Assets, net 4,727,172 4,972,253
Other Assets 269,516 183,756
----------- -----------
Total assets $19,922,130 $23,080,916
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
DIOMED HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
ASSETS
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Loan $ -- $ 261,676
Promissory Notes -- 936,000
Accounts Payable 2,122,186 1,497,541
Accrued Expenses and Other 1,304,152 1,852,480
Deferred Revenue 149,118 56,802
EVLT Technology Payable ($1,000,000 Face Value,
net of $121,287 and $35,609
Debt Discount at June 30, 2004
and December 31, 2003) 878,713 964,391
----------- -----------
Total Current Liabilities 4,454,169 5,568,890
EVLT Technology Payable ($750,000 Face Value, net of
$29,029 Debt Discount at June 30, 2004 and $1,250,000
Face Value, net of $173,832 Debt Discount
at December at December 31, 2003. 720,971 1,076,168
----------- -----------
Total Liabilities 5,175,140 6,645,058
Stockholders' Equity 14,746,990 16,435,858
----------- -----------
Total Liabilities and Stockholders' Equity $19,922,130 $23,080,916
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
-------------------------------- --------------------------------
Revenues $ 3,182,706 $ 2,148,540 $ 6,132,303 $ 4,272,350
Cost of Revenues 1,918,277 1,271,947 3,862,647 2,671,406
-------------------------------- --------------------------------
Gross Profit 1,264,429 876,593 2,269,656 1,600,944
-------------------------------- --------------------------------
Operating Expenses:
Research and Development 373,449 198,693 669,603 386,786
Selling and Marketing 1,551,536 878,764 3,157,498 2,021,978
General and Administrative 1,409,382 980,968 2,808,647 1,781,717
-------------------------------- --------------------------------
Total Operating Expenses 3,334,367 2,058,425 6,635,748 4,190,481
-------------------------------- --------------------------------
Loss from Operations (2,069,938) (1,181,832) (4,366,092) (2,589,537)
-------------------------------- --------------------------------
Interest Expense, Non-cash -- 426,386 -- 946,386
Interest Expense, Cash-based 9,756 152,973 21,761 222,346
-------------------------------- --------------------------------
Total Interest Expense 9,756 579,359 21,761 1,168,732
-------------------------------- --------------------------------
Net Loss Applicable to Common Stockholders $ (2,079,694) $(1,761,191) $ (4,387,853) $(3,758,269)
================================ ================================
Basic and Diluted Net Loss per Share Applicable to
Common Stockholders $ (0.14) $ (1.48) $ (0.31) $ (4.11)
================================ ================================
Basic and Diluted Weighted Average Common Shares
Outstanding * 14,366,540 1,188,470 14,237,137 914,942
================================ ================================
* All amounts reflect the reverse stock split on a retroactive basis.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------
2004 2003
------------ -----------
Cash Flows from Operating Activities:
Net loss $ (4,387,853) $(3,758,269)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 464,907 283,912
Non-cash interest expense on
related party debt -- 937,849
Non-cash interest expense on
EVLT(R)purchase obligation 59,125 --
Issuance of stock options
to third party 62,231 8,600
Changes in operating assets
and liabilities:
Accounts receivable (651,963) 47,978
Inventories (222,858) 269,449
Prepaid expenses
and other current assets (317,014) (435,300)
Deposits (85,762) 242,928
Accounts payable 624,646 49,664
Accrued expenses
and deferred revenue (444,274) 45,865
------------ -----------
Net cash used in operating activities (4,898,815) (2,307,324)
------------ -----------
Cash Flows from Investing Activities:
Purchases of property and equipment (256,867) (185,130)
------------ -----------
Net cash used in investing activities (256,867) (185,130)
------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------
2004 2003
------------ -----------
Cash Flows from Financing Activities:
Payment on promissory notes (936,000) (7,454)
Net payments on bank borrowings (261,676) (161,411)
Payment on EVLT(R)purchase obligation (500,000) --
Increase in deferred financing costs -- (51,100)
Increase in deferred offering costs -- (198,682)
Proceeds from redeemable debt -- 1,100,000
Net Proceeds from Equity Financing 2,723,620 --
Payments on capital lease obligations (11,739) (16,757)
------------ -----------
Net cash provided by financing activities 1,014,205 664,596
------------ -----------
Effect of Exchange Rate Changes (74,465) 228,653
------------ -----------
Net Decrease in Cash and Cash Equivalents (4,215,942) (1,599,205)
Cash and Cash Equivalents, beginning of period 13,398,075 1,848,646
------------ -----------
Cash and Cash Equivalents, end of period $ 9,182,133 $ 249,441
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ -- $ 40,843
============ ===========
Value ascribed to debt discount related
to redeemable debt $ 240,000
===========
Value ascribed to debt discount related
to debt $ 2,000,000
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
(1) OPERATIONS
Diomed Holdings, Inc. ("Diomed" or "the Company") develops and
commercializes minimally invasive medical procedures that employ its laser
technologies and associated disposable products. Using its proprietary
technology, including its exclusive rights to U.S. Patent No. 6,398,777, the
Company currently focuses on endovenous laser treatment (EVLT(R)) of varicose
veins. The Company also develops and markets lasers and disposable products for
photodynamic therapy (PDT) cancer procedures and products for other clinical
applications, including dental and general surgical procedures.
In developing and marketing its clinical solutions, the Company uses
proprietary technology and aims to secure strong commercial advantages over
competitors by gaining governmental approvals in advance of others, by
developing and offering innovative practice enhancement programs including
physician training and promotional materials, and obtaining exclusive commercial
arrangements. To optimize revenues, Diomed focuses on clinical procedures that
generate revenues from both capital equipment and disposable products, such as
procedure kits and optical fibers.
Diomed's high power semiconductor diode lasers combine clinical
efficacy, operational efficiency and cost effectiveness in a versatile, compact,
lightweight, easy-to-use and easy-to-maintain system. Along with lasers and
single-use procedure kits for EVLT(R), the Company provides its customers with
state of the art physician training and practice development support. The
EVLT(R) procedure and the Company's related products were cleared by the United
States FDA in January of 2002.
(2) BASIS OF PRESENTATION
In the opinion of management, these unaudited consolidated financial
statements contain all adjustments considered normal and recurring and necessary
for their fair presentation. Interim results are not necessarily indicative of
results to be expected for the year. These interim financial statements have
been prepared in accordance with the instructions for Form 10-QSB, and
therefore, do not include all information and footnotes necessary for a complete
presentation of operations, financial position, and cash flows of the Company in
conformity with accounting principles generally accepted in the United States.
The Company filed with the Securities and Exchange Commission its 2003 annual
report on Form 10-KSB on March 30, 2004, which included audited consolidated
financial statements for the year ended December 31, 2003, and included
information and footnotes necessary for such presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in our annual
report on Form 10-KSB for the year ended December 31, 2003.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Annual Report on Form 10-KSB for the year ended December 31, 2003
includes a comprehensive summary of the significant accounting policies and
methods used in the preparation of our consolidated financial statements. The
application of these policies has a significant impact on our reported results.
In addition, the application of some of these policies depends on management's
judgment, with financial reporting results relying on estimations and
assumptions about the effect of matters that are inherently uncertain. For all
of these policies, management cautions that future events rarely develop exactly
as forecast and the best estimates routinely require adjustment.
(a) REVERSE STOCK SPLIT
On June 16, 2004, we announced that the Board of Directors approved a
one-for-twenty-five reverse stock split of our common stock to be effective on
June 17, 2004. The Board of Directors had been granted authority to implement a
one-for-twenty-five reverse stock split and reduce the authorized shares to 50
million at the Board's discretion by affirmative vote of the Company's Common
Stockholders at the Company's 2004 Annual Meeting of Stockholders held on June
15, 2004. All amounts within the accompanying consolidated financial statements
and footnotes reflect the reverse stock split on a retroactive basis.
Additionally, the Company reduced the number of authorized shares of common
stock from 500 million to 50 million shares.
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
(b) 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:
June 30, December 31,
2004 2003
---------- ----------
Raw Materials $ 813,724 $ 856,886
Work-in-Process 584,115 456,934
Finished Goods 717,260 578,421
---------- ----------
$2,115,099 $1,892,241
========== ==========
(c) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its employee 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 fixed grant over the
amount an employee must pay to acquire the stock. SFAS No. 123, Accounting for
Stock-Based Compensation as amended by SFAS No. 148, 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, with respect to
its employee stock compensation plan, which requires disclosure of the pro forma
effects on net loss and loss per share as if SFAS No. 123 had been adopted as
well as certain other information.
Three-Months Three-Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------- ---------- ---------- ----------
Net loss as reported: $(2,079,694) $(1,761,191) $(4,387,853) $(3,758,269)
Add : Stock-based employee compensation
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 (242,131) (71,060) (489,256) (140,669)
----------- ----------- ---------- -----------
Pro forma net loss $(2,321,825) $(1,832,251) $(4,877,109) $(3,898,938)
=========== =========== =========== ===========
Loss per share:
Basic and diluted - as reported $ (0.14) $ (1.48) $ (0.31) $ (4.11)
=========== =========== =========== ===========
Basic and diluted - pro forma $ (0.16) $ (1.54) $ (0.34) $ (4.26)
=========== =========== =========== ===========
(d) COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of
all components of comprehensive income (loss). Comprehensive income is defined
as the change in stockholders' equity of a business enterprise during a period
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
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 the cumulative translation adjustment account. Comprehensive net loss
for all periods presented is as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss $(2,079,694) $(1,761,191) $(4,387,853) $(3,758,269)
Foreign currency translation adjustment (36,112) 21,423 (86,868) (150,370)
----------- ----------- ----------- -----------
Comprehensive loss $(2,115,806) $(1,739,768) $(4,474,721) $(3,908,639)
=========== =========== =========== ===========
(e) 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-month and six-month periods ended
June 30, 2004 and 2003, respectively, 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 of the
three-month and six month periods, which were not included in the calculation of
diluted net loss per share since their inclusion would be antidilutive.
Three Months Ended June 30, Six Months Ended June 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- ---------- --------- -----------
Common Stock Options 1,024,917 $ 100,758 1,024,917 $ 100,758
========= ========== ========= ===========
Common Stock Warrants 882,625 4,877 882,625 4,877
========= ========== ========= ===========
Convertible Debt -- 2,619,048 -- 2,619,048
========= ========== ========= ===========
(4) LINE OF CREDIT ARRANGEMENTS
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes
a line of credit with Barclays Bank, limited to the lesser of (GBP)150,000
($272,000 at June 30, 2004) or 80% of eligible accounts receivable. The credit
line bears interest at a rate of 3% above Barclays base rate (4.5% at June 30,
2004) 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 certain intellectual property. As of June 30, 2004, there were
no amounts outstanding under this line of credit.
On June 8, 2004, the Company entered into a line of credit facility
with Silicon Valley Bank for $2,500,000, limited to 80% of domestic accounts
receivable and 50% of eligible inventory balances, as defined. The credit line
bears interest at a
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
rate of prime plus one percent (5.25% at June 30, 2004). The credit line is
secured by the assets of Diomed Inc., excluding certain intellectual property,
and is subject to financial covenants including tangible net worth and
liquidity. At June 30, 2004, there were no amounts outstanding under this line
of credit and the Company was in compliance with the bank covenants.
(5) STOCK OPTIONS
(a) In November 2003, the Company's stockholders approved the 2003
Omnibus Plan, under which the Company reserved 1,600,000 shares of common stock
for future issuance. The 2003 Omnibus Plan provides for grants or awards of
stock options, restricted stock awards, restricted stock units, performance
grants, stock awards, and stock appreciation rights. Only present and future
employees and outside directors and consultants are eligible to receive
incentive awards under the 2003 Omnibus Plan.
The exercise price and vesting are determined by the Board of
Directors at the date of grant. Options generally vest over two to four years,
and expire 10 years after the date of grant. Incentive stock options under the
Plans are granted at not less than fair market value per share of Common Stock
on the date of grant or 110% of fair market value for any stockholder who holds
more than 10% of the total combined voting power of all classes of stock of the
Company.
As of June 30, 2004, 671,996 options and other incentive stock awards
were available for future grants under the 2003 Omnibus Plan. In addition,
25,065 options were available under the 1998 Plan and 12,178 options were
available under the 2001 Plan as of June 30, 2004. We anticipate that future
stock options will only be granted under the 2003 Omnibus Plan.
A summary of stock option activity is as follows:
Range of Exercise Weighted Average
Price Number of Shares Exercise Price
--------------------------------------------------------
Outstanding, December 31, 2003 $2.00 - $205.75 222,343 $ 24.13
Granted 2.50 - 6.75 846,971 4.74
Forfeited 5.00 - 138.00 (44,397) 10.95
--------------------------------------------------------
Outstanding, June 30, 2004 $2.00 - $205.75 1,024,917 $ 8.80
========================================================
Exercisable June 30, 2004 $2.00 - $205.75 180,561 $ 25.10
========================================================
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
The following table summarizes currently outstanding and exercisable options as
of June 30, 2004.
OUTSTANDING EXERCISABLE
------------------------------------------- -------------------------------------
Weighted Average Weighted Average
Exercise Price Shares Remaining Life* Exerise Price Shares Exercise Price
- -------------- ------ --------------- ---------------- ------ ----------------
$2.00 - $50.00 1,000,123 9.80 $ 5.79 157,124 $ 8.88
56.25 - 88.50 7,146 2.55 65.23 6,305 66.43
100.00 - 164.00 17,008 3.24 153.83 16,492 155.37
$201.25 - $205.75 640 1.66 205.75 640 205.75
-------------- ---------------------- -------------------------------------
1,024,917 $ 8.80 180,561 $ 25.10
============== ====================== =====================================
* Weighted average remaining contractual life (in years).
(b) In the first quarter of 2004, the Company granted 20,059 options
to purchase shares of Common Stock at exercise prices in the range of $5.00 per
share to $6.75 per share to two consultants and a third party service provider
for services performed. The Company recorded the fair value of such options,
based on the Black-Scholes option pricing model, as stock-based compensation
expense totaling $62,231 in the statement of operations for the six-month period
ended June 30, 2004.
(c) A summary of warrant activity is as follows:
Weighted Averge
Range of Exercise Weighted Average Remaining Contractual
Price Number of Shares Exercise Price Life (In Years)
----------------------------------------------------------------------------------
Outstanding, December 31, 2003 $0.025 - $87.50 1,196,838 $ 2.00 4.9
Exercised by former Placement Agent 0.025 - 2.50 (313,813) 0.03 --
Forfeited due to expiration 50.00 (400) 50.00 --
---------------------------------------------------------------------------------
Outstanding, June 30, 2004 $0.025 - $87.50 882,625 $ 2.50 4.6
=================================================================================
Exercisable June 30, 2004 $0.025 - $87.50 882,625 $ 2.50 4.6
=================================================================================
F-10
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
(6) SEGMENT REPORTING
The Company's reportable segments are determined by product type:
laser systems and fibers, accessories and service. 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 Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Laser systems $1,855,356 $1,295,953 $3,658,871 $2,701,697
Fibers, accessories, and service 1,327,350 852,587 2,473,432 1,570,653
---------- ---------- ---------- ----------
Total $3,182,706 $2,148,540 $6,132,303 $4,272,350
========== ========== ========== ==========
The following table represents percentage of revenues and long-lived assets by
geographic destination:
% of Revenue Long-lived Assets
--------------------------- --------------------------
Six Months Ended June 30,
--------------------------- June 30, December 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
North America 60% 57% $5,199,588 $5,300,029
Asia/Pacific 27% 25% -- --
Europe 10% 18% 569,469 603,708
Other 3% 0% -- --
---------- ---------- ---------- ----------
Total 100% 100% $5,769,057 $5,903,737
========== ========== ========== ==========
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
In this Quarterly Report, the terms "Company" and "Diomed Holdings"
both refer to Diomed Holdings, Inc. The term "Diomed" refers to the Company's
principal subsidiary, Diomed, Inc. and its consolidated subsidiaries. We use the
terms "we," "our" and "us" when we do not need to distinguish among these
entities or their predecessors, or when any distinction is clear from the
context.
This section contains forward-looking statements, which involve known
and unknown risks and uncertainties. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "may," "will," "should," "potential,"
"expects," "anticipates," "intends," "plans," "believes" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Our actual
results could differ materially from those discussed in these statements. Our
2003 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 19 through 32 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 June 30, 2004, we had an accumulated deficit of approximately $63.7 million
including $15.9 million in non-cash interest expense. We may continue to incur
operating losses due to spending on research and development programs, clinical
trials, regulatory activities, and sales, 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 in the Annual Report.
(1) OVERVIEW
Diomed Holdings, Inc. ("Diomed" or "the Company") develops and
commercializes minimally invasive medical procedures that employ its laser
technologies and associated disposable products. Using its proprietary
technology, including its exclusive rights to U.S. Patent No. 6,398,777, the
Company currently focuses on endovenous laser treatment (EVLT(R)) of varicose
veins. The Company also develops and markets lasers and disposable products for
photodynamic therapy (PDT) cancer procedures and products for other clinical
applications, including dental and general surgical procedures.
In developing and marketing its clinical solutions, the Company uses
proprietary technology and aims to secure strong commercial advantages over
competitors by gaining governmental approvals in advance of others, by
developing and offering innovative practice enhancement programs including
physician training and promotional materials, and obtaining exclusive commercial
arrangements. To optimize revenues, Diomed focuses on clinical procedures that
generate revenues from both capital equipment and disposable products, such as
procedure kits and optical fibers.
Diomed's high power semiconductor diode lasers combine clinical
efficacy, operational efficiency and cost effectiveness in a versatile, compact,
lightweight, easy-to-use and easy-to-maintain system. Along with lasers and
single-use procedure kits for EVLT(R), the Company provides its customers with
state of the art physician training and practice development support. The
EVLT(R) procedure and the Company's related products were cleared by the United
States FDA in January of 2002.
1
In 2001, we pioneered the commercialization of 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, we
were 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, we were the first company to receive FDA clearance
for endovenous laser treatment, with respect to marketing EVLT(R) in the US.
EVLT(R) was a primary source of revenue in 2003, and will continue to be a
primary source of revenue in 2004. We believe 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
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 customized marketing programs, to assist office-based
and hospital-based physicians in responding to the growing demand for treatment
of varicose veins in a minimally invasive manner. We have 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.
We expect that as the number of EVLT(R) procedures increases, so will our sales
of associated disposable items. We believe that the U.S. represents the single
largest market for EVLT(R). We are targeting our 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., focusing on specialists in vascular surgery, interventional-radiology,
general surgery, phlebology, gynecology and dermatology.
We utilize a direct sales force to market our products in the United States and
a network of more than 35 distributors to market our products abroad. We
increased our number of sales representatives from 10 at December 31, 2003 to 18
by June 30, 2004, and 20 in July 2004. This represents a significant investment
in sales staff, as we estimate that it takes approximately two quarters before a
sales representative can deliver consistent targeted sales performance. We also
added two clinical specialists to support field sales efforts. These clinical
specialists assist in physician training and post-sales support, freeing the
sales representatives to focus on new sales opportunities.
We have developed and maintain a website - www.EVLT.com - to assist 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.
Our technology and manufacturing capability has also 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 and is currently in the
process of registering EVLT(R) in Japan. In addition we have a long-term
partnership with Dentek Medical Systems GmbH, which uses our laser module for
dental applications.
In 2004, we expect to continue to focus on the development and growth of EVLT(R)
sales both domestically and internationally, 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.
2
(2) RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2003
REVENUE
Revenue for the three months ended June 30, 2004 was $3,183,000,
increasing approximately $1,034,000, or 48%, from $2,149,000 for the same period
in 2003. In the three months ended June 30, 2004, approximately $1,855,000, or
58%, of our total revenue was derived from laser sales, as compared to
approximately $1,296,000, or 60%, in the same period in 2003. In the three
months ended June 30, 2004, approximately $1,327,000, or 42%, of our total
revenues were derived from sales of disposable fibers and kits, accessories and
service, as compared to approximately $853,000, or 40%, in the same period in
2003. Revenue from the EVLT(R) product line increased 65% over the same period
last year, including growth of 90% in disposable procedure product revenue.
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 the expansion and
development of our sales team.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the three months ended June 30, 2004 was $1,918,000,
increasing approximately $646,000, or 51%, from $1,272,000 for the same period
in 2003. Gross profit for the three months ended June 30, 2004, at 40% was
$1,264,000, increasing approximately $388,000 from $877,000 for the same period
last year. Our gross profit at 40%, remained comparable to the same period in
the prior year, as costs from new royalties and the foreign exchange impact on
materials, were offset by decreasing costs of materials and the leverage of
fixed manufacturing costs across a greater number of units.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended June 30,
2004 were $373,000, increasing $174,000, or 88%, from the same period in 2003.
R&D expenditures are expected to remain at an elevated level through year-end as
we strive to improve the feature-function of our products and continue to reduce
product costs.
SELLING AND MARKETING EXPENSES for the three months ended June 30, 2004
were $1,552,000, increasing approximately $673,000, or 77%, over 2003. The
increase was driven by a significant expansion in the size of the sales force,
higher sales commissions resulting from the increased sales volume, and
increased marketing expenditures in support of the sales efforts. The Company
anticipates increased spending in sales and marketing programs through year-end
to support our continued commercialization of EVLT(R).
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30,
2004 were $1,409,000, increasing approximately $428,000, or 44%, from the same
period in 2003. Incremental legal fees and infrastructure enhancements primarily
drove this increase. Legal expenses included the continued cost of patent
litigation against Angiodynamics, Vascular Solutions, and Total Vein Solutions,
and the cost of litigation against Vascular Solutions in the theft of trade
secrets suit filed in the fourth quarter of 2003.
3
LOSS FROM OPERATIONS
Loss from operations for the three months ended June 30, 2004 was
$2,070,000, increasing approximately $888,000, from the same period in 2003.
INTEREST EXPENSE, NET
Interest expense for the three months ended June 30, 2004 was $10,000,
compared to $579,000 for the same period in 2003. Interest expense in the three
months ended June 30, 2003 included non-cash charges totaling $426,000 related
to the December 2002 debt financing for the amortization of the corresponding
discount and beneficial conversion feature.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
Net loss applicable to common stockholders for the three months ended
June 30, 2004 was $2,080,000, or $0.14 per share, compared to $1,761,000, or
$1.48 per share, for the same period in 2003. As a result of the 2003 equity
financing and the April 2004 targeted offering, adjusted for the
one-for-twenty-five share reverse split effective June 17, 2004, basic weighted
average common shares outstanding increased from approximately 1.2 million
shares to 14.4 million shares for the corresponding 2003 and 2004 quarters.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
REVENUE
Revenue for the six months ended June 30, 2004 was $6,132,000,
increasing approximately $1,860,000, or 44%, from $4,272,000 for the same period
in 2003. In the six months ended June 30, 2004, approximately $3,659,000, or
60%, of our total revenue was derived from laser sales, as compared to
approximately $2,702,000, or 63%, in the same period in 2003. In the six months
ended June 30, 2004, approximately $2,473,000, or 40%, of our total revenues
were derived from sales of disposable fibers and kits, accessories and service,
as compared to approximately $1,570,000, or 37%, in the same period in 2003.
Revenue from the EVLT(R) product line increased 59% over the same period last
year, including growth of 96% in disposable procedure product revenue.
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 the expansion and
development of our sales team.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the six months ended June 30, 2004 was $3,863,000,
increasing approximately $1,191,000, or 45%, from $2,671,000 for the same period
in 2003. Gross profit for the six months ended June 30, 2004 was $2,270,000,
increasing approximately $669,000 from $1,601,000 for the same period last year.
Our gross profit, at 37%, remained comparable to the same period last year as
cost increases from new royalties and the foreign exchange impact on materials,
were offset by decreasing costs of materials and the leverage of fixed
manufacturing costs across a greater number of lasers and disposable products
sold.
4
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the six months ended June 30,
2004 were $670,000, increasing $283,000, or 73%, from the same period in 2003.
R&D expenditures are expected to remain at an elevated level through year-end as
we strive to improve the feature-function of our products and continue to reduce
product costs.
SELLING AND MARKETING EXPENSES for the six months ended June 30, 2004
were $3,157,000, increasing approximately $1,136,000, or 56%, over 2003. The
increase was driven by a significant expansion in the size of the sales force,
higher sales commissions resulting from the increased sales volume, and
increased marketing expenditures in support of the sales efforts. The Company
anticipates increased spending in sales and marketing programs through year-end
to support the continued commercialization of EVLT(R).
GENERAL AND ADMINISTRATIVE EXPENSES for the six months ended June 30,
2004 were $2,809,000, increasing approximately $1,027,000, or 58%, from the same
period in 2003. The increase was driven by incremental legal fees, sales volume
based product liability insurance costs, infrastructure enhancements and a
non-cash charge for stock options granted to a third party. Legal expenses
included the continued costs of patent litigation against Angiodynamics,
Vascular Solutions, and Total Vein Solutions, and the cost of litigation against
Vascular Solutions in the theft of trade secrets suit filed in the fourth
quarter of 2003.
LOSS FROM OPERATIONS
Loss from operations for the six months ended June 30, 2004 was
$4,366,000, increasing approximately $1,777,000 from the same period in 2003.
INTEREST EXPENSE, NET
Interest expense for the six months ended June 30, 2004 was $22,000,
compared to $1,169,000 for the same period in 2003. Interest expense in the six
months ended June 30, 2003 included non-cash charges totaling $946,000 related
to the December 2002 debt financing for the amortization of the corresponding
discount and beneficial conversion feature.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
Net loss applicable to common stockholders for the six months ended
June 30, 2004 was $4,388,000, or $0.31 per share, compared to $3,758,000, or
$4.11 per share, for the same period in 2003. As a result of the 2003 equity
financing and the April 2004 targeted offering, adjusted for the
one-for-twenty-five share reverse split effective June 17, 2004, basic weighted
average common shares outstanding increased from approximately 915,000 shares to
14.2 million shares for the corresponding 2003 and 2004 quarters.
(3) LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
CASH POSITION AND CASH FLOW
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. In September
2003, we entered into an equity financing transaction pursuant to which we
raised gross proceeds of $22,000,000 and satisfied $1,200,000 in debt, which we
had issued in a May 2003 bridge financing. Of the new cash proceeds, the Company
utilized approximately $8.6 million as follows: $2,250,000 in initial payments
to acquire the exclusive rights to the EVLT(R) patent, $2,132,000 to retire the
notes we issued in December 2002, $438,000 to retire short-term notes,
$1,160,000 in equity financing costs, $1,141,000 in the reduction of trade
payables,
5
$150,000 in the Augenbaum litigation settlement, and $1,329,000 in working
capital from September through December.
The Company had cash balances of approximately $9,182,000 and
$13,398,000 at June 30, 2004 and December 31, 2003, respectively. At June 30,
2004, the ending cash balance reflected a $4,216,000 reduction in cash during
the six months and included $2,300,000 in payments not expected to recur in the
remaining quarters of 2004; specifically $1,200,000 in debt repayments
(including the $936,000 promissory note we owed to our customer, Axcan Pharma),
$261,000 in costs related to the 2003 equity financing, and $875,000 in annual
insurance premiums and other annual costs which benefit future quarters. We also
raised an additional $2,971,000 in April 20, 2004 through the targeted offering
to shareholders of record as of August 29, 2003.
Cash used in operations for the six months ended June 30, 2004 was
approximately $4,899,000. This principally results from the approximate
$4,388,000 loss from operations, and $875,000 in annual insurance premiums and
other annual costs (primarily sales volume-based product liability insurance
costs). The cash used in operations also reflects the significant expansion in
the size of the sales force and external marketing initiatives in support of the
commercialization of EVLT(R).
Cash used in investing activities for the six months ended June 30,
2004 was approximately $257,000, primarily related to demonstration equipment
and customer trial programs.
Cash provided by financing activities for the six months ended June 30,
2004 was approximately $1,014,000. This primarily includes the $2,971,000
proceeds received from the targeted offering, and was offset by the first
quarter retirement of a promissory note to Axcan Pharma in the aggregate
principal amount of $936,000, a reduction in the borrowing outstanding under the
UK tradeline facility with Barclay's Bank ($262,000), and in legal and other
fees related to the recent resale and targeted offering registration statements
($248,000). Financing activities also included payments of $500,000 related to
current maturities of the EVLT(R) technology acquisition obligation.
OFFERING TO STOCKHOLDERS AS OF AUGUST 29, 2003
The terms of the equity financing contemplated that we would commence
an offering of up to 29,711,749 (pre-split) shares of common stock to the
holders of our common stock as of August 29, 2003 (the "targeted offering"). We
filed a registration statement to register the shares to be offered to the
stockholders as of August 29, 2003. The SEC declared that registration statement
effective on February 13, 2003.
On April 20, 2004, the Company completed its offering to those persons
who held shares of its common stock as of August 29, 2003, raising the
approximate $3.0 million maximum in additional equity financing. The targeted
offering, for 29,711,749 shares of the Company's common stock at $0.10 per
share, allowed stockholders to purchase one share of the Company's common stock
for each share of common stock held on August 29, 2003. The targeted offering
also included an "over-subscription right" which allowed stockholders to
purchase additional shares to the extent the "basic rights" were not fully
subscribed. Proceeds from the targeted offering are being used for general
working capital purposes, including supporting the Company's continued growth
and intellectual property strategies.
CHANGES IN CAPITAL STOCK STRUCTURE
On June 15, 2004, we held our 2004 Annual Meeting of Stockholders, where our
stockholders voted to permit the Board of Directors, in their discretion, to
effect a one-for-twenty-five reverse stock split of our common stock. On June
16, 2004, the Board of Directors approved the reverse stock split effective June
17, 2004. Additionally, our stockholders approved the reduction in our
authorized shares of common stock from 500 million to 50 million, which we
implemented after the reverse stock split took effect.
BANK LINES OF CREDIT
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes a
line of credit with Barclays Bank, limited to the lesser of (GBP)150,000
($272,000 at June 30, 2004) or 80% of eligible accounts receivable. The credit
line bears interest at a rate of 3% above Barclays base rate (4.5% at June 30,
2004) 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 our U.K
subsidiary, Diomed Ltd., excluding certain intellectual property. As of June 30,
6
2004 there were no amounts outstanding under this line. At June 30, 2003, there
was approximately $51,000 outstanding under this line.
On June 8, 2004, we entered into a line of credit facility with Silicon
Valley Bank for $2,500,000, limited to 80% of our domestic accounts receivable
and 50% of our eligible inventory balances, as defined. The line of credit bears
interest at a rate of prime plus one percent (5.25% at June 30, 2004). The line
of credit is secured by the assets of Diomed, Inc., excluding certain
intellectual property, and is subject to financial covenants including tangible
net worth and liquidity. At June 30, 2004, there were no amounts outstanding
under this line of credit and we were in compliance with the bank covenants.
(4) CRITICAL ACCOUNTING POLICIES
In the opinion of management, these unaudited consolidated financial
statements contain all adjustments considered normal and recurring and necessary
for their fair presentation. Interim results are not necessarily indicative of
results to be expected for the year. These interim financial statements have
been prepared in accordance with the instructions for Form 10-QSB, and
therefore, do not include all information and footnotes necessary for a complete
presentation of operations, financial position, and cash flows of the Company in
conformity with accounting principles generally accepted in the United States.
The Company filed its 2003 Annual Report on Form 10-KSB with the Securities and
Exchange Commission on March 30, 2004, which included audited consolidated
financial statements for the year ended December 31, 2003, and included
information and footnotes necessary for such presentation. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in our annual
report on Form 10-KSB for the year ended December 31, 2003.
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. 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.
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 June 30, 2004 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.
7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 12, 2003, we filed a lawsuit in the United States Federal District
Court for the District of Massachusetts seeking injunctive and other relief
against Vascular Solutions, Inc. and one of its executives. We allege, among
other things, that Vascular Solutions and the executive misappropriated our
trade secrets and then improperly used that information to develop and market
laser accessory products. We also seek to redress what we allege to be the
willful and deceptive manner in which Vascular Solutions has been marketing its
laser accessory products by, among other things:
- infringing our registered EVLT(R)mark;
- marketing Vascular Solutions' products in a way designed to confuse
consumers as to the source and origin of its products;
- making false and defamatory statements about us and our products;
- tortiously interfering with our existing and prospective customer
relationships; and
- tortiously interfering with agreements previously entered into by
the executive and us that prohibit the executive from disclosing our
confidential information to Vascular Solutions or any other third
party.
On June 16, 2004, Vascular Solutions and the other the defendants answered the
complaint, and filed a counterclaim for invalidity of the EVLT(R) trademark. We
are now proceeding with the discovery phase of the litigation.
On January 6, 2004, we filed a lawsuit in the United States Federal District
Court for the District of Massachusetts against AngioDynamics, Inc., a
subsidiary of E-Z-EM, Inc., seeking injunctive relief and damages for
infringement of our US Patent Number 6,398,777 covering the endovascular laser
treatment of varicose veins which we use in our EVLT(R) product line.
AngioDynamics has generally denied our allegations and has sought a declaratory
judgment of non-infringement and invalidity of the EVLT(R) patent. AngioDynamics
has sought leave to add additional counterclaims against Diomed, but the Court
has not yet acted on that motion. We are proceeding with the discovery phase of
this litigation.
On March 4, 2004, we filed a second lawsuit against Vascular Solutions in the
United States Federal District Court for the District of Massachusetts seeking
injunctive relief and damages for infringement of our US Patent Number 6,398,777
covering the endovascular laser treatment of varicose veins which we use in our
EVLT(R) product line, the exclusive rights to which we acquired on September 3,
2003.
On April 28, 2004, Vascular Solutions answered the complaint, and filed a
counterclaim for declaratory judgment that the EVLT(R) patent is invalid and not
infringed. We are now proceeding with the discovery phase of this litigation as
well.
On April 5, 2004, we filed a lawsuit in the United States Federal District Court
for the District of Massachusetts against Total Vein Solutions, LLC, seeking
injunctive relief and damages for infringement of our US Patent Number 6,398,777
covering the endovascular laser treatment of varicose veins which we use in our
EVLT(R) product line.
On May 21, 2004, Total Vein Solutions answered the complaint, generally denying
our allegations and counterclaiming for declaratory judgment of non-infringement
and invalidity of the EVLT(R) patent.
On May 26, 2004, we learned that we, our former chairman, our former chief
executive officer and a former director of ours had been named as defendants in
a class action lawsuit commenced on March 3, 2004 in the United States District
Court, District of Massachusetts (Kent Garvey vs. James Arkoosh, et. al., Civil
Action No.: 04-10438-RGS).
The complaint alleges breach of fiduciary duty and violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934, and seeks an award of
$4,500,000 on behalf of a purported class of plaintiffs consisting of persons
who acquired our common stock from February 1, 2002 through and including March
21, 2002. We are named only in the count alleging violation of Section 10(b). We
believe that the allegations in the complaint are baseless, and we intend to
defend the lawsuit vigorously.
ITEM 2. CHANGES IN SECURITIES
a) Pursuant to the approval of our stockholders given at the 2004 Annual
Meeting of Stockholders held June 15, 2004, we amended our certificate
of incorporation to change the vote required for approval by the
holders of our common stock from a majority of total shares outstanding
to a majority of shares present when a vote is taken. Our proxy
statement for the 2004 Annual Meeting details this change and contains
as an exhibit the amendment to the certificate of incorporation that
was used to effect this change.
8
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On June 15, 2004, the Company held it's 2004 Annual Meeting of
Stockholders, pursuant to a proxy statement that it had filed with the
Securities and Exchange Commission and had furnished to holders of
record of the outstanding shares of its common stock as of April 28,
2004. Of the 365,160,559 shares entitled to vote at the meeting,
332,178,375 shares voted. The meeting included the election of all nine
directors to serve until the next annual meeting or until their
successors are duly elected and qualified. Those directors are:
o Geoffrey Jenkins
o Sidney Braginsky
o Gary Brooks
o A. Kim Campbell
o Joseph Harris
o Peter Klein
o Edwin Snape, Ph.D.
o David Swank
o James A. Wylie, Jr.
b) Diomed Holdings presented the following proposals to our stockholders
at that meeting:
1. To elect nine directors to serve until the next annual meeting of
stockholders, or until their successors are duly elected and qualified;
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
Geoffrey Jenkins 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
Sidney Braginsky 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
Gary Brooks 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
A. Kim Campbell 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
Joseph Harris 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
Peter Klein 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
Edwin Snape, Ph.D. 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
David Swank 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
James A. Wylie, Jr. 323,068,923 1,100 1,245,415 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
2. To approve an amendment to the Company's certificate of
incorporation permitting the board to effect a reverse stock split
pursuant to which the Company's outstanding shares of common stock
would be exchanged for new shares of common stock in an exchange ratio
of one newly issued share of common stock for each 25 outstanding
shares of common stock;
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
319,002,131 5,169,925 143,381 7,862,938
----------------------------- --------------------------- -------------------------- -------------------
9
3. To approve an amendment to the Company's certificate of
incorporation reducing the authorized number of shares of common stock
from 500,000,000 to 50,000,000, if the reverse split were to be
implemented.
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
319,782,956 4,138,692 393,789 7,862,938
----------------------------- --------------------------- -------------------------- -------------------
4. To approve an amendment to the Company's certificate of
incorporation to eliminate cumulative voting for directors;
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
147,976,790 64,099,100 882,800 119,219,685
----------------------------- --------------------------- -------------------------- -------------------
As a result, we have not eliminated cummulative voting for Directors.
5. To approve an amendment to the Company's certificate of
incorporation to change the vote required for stockholder approval from
a majority of total shares outstanding to a majority of shares present;
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
202,573,561 9,759,798 625,330 119,219,686
----------------------------- --------------------------- -------------------------- -------------------
6. To ratify the selection of BDO Seidman, LLP as the Company's
independent auditors for 2004; and
The results of which were as follows:
----------------------------- --------------------------- -------------------------- -------------------
For Against Abstained Broker Non-Votes
----------------------------- --------------------------- -------------------------- -------------------
322,738,826 543,106 1,033,506 7,862,937
----------------------------- --------------------------- -------------------------- -------------------
10
ITEM 5. OTHER
CODE OF ETHICS AND CODE OF BUSINESS CONDUCT
In April 2004, our Board of Directors adopted a formal policy regarding ethical
requirements imposed upon the Company's chief executive officer and those
officers engaged in financial management. Also, in April 2004, our Board of
Directors adopted a formal policy regarding the business standards to which all
of the Company's directors, employees and consultants will be held. We have
filed with the Securities and Exchange Commission copies of the Code of Ethics
and Code of Business Conduct, and we have posted them on our website,
www.diomedinc.com. Copies of the Code of Ethics and Code of Business Conduct are
included as appendices to the proxy statement we filed with the SEC on May 12,
2004 in connection with our 2004 Annual Meeting of Stockholders held on June 15,
2004. We will provide copies of the Code of Ethics and/or Code of Business
Conduct free of charge upon written request directed to: Diomed Holdings, Inc.,
One Dundee Park, Andover, MA 01810, Attention: Corporate Secretary, or by oral
request to the Corporate Secretary at telephone number 978-475-7771.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 Form of Loan and Security Agreement between Diomed, Inc. and
Silicon Valley Bank (filed as Exhibit 10.1 to Current Report on
Form 8-K filed June 16, 2004)
10.2 Form of Negative Pledge by Diomed, Inc. (filed as Exhibit 10.2 to
Current Report on Form 8-K filed June 16, 2004)
10.3 Form of Unconditional Guaranty by Diomed Holdings, Inc. in favor
of Silicon Valley Bank (filed as Exhibit 10.3 to Current Report on
Form 8-K filed June 16, 2004)
10.4 Form of Security Agreement between Diomed Holdings, Inc. and
Silicon Valley Bank (filed as Exhibit 10.4 to Current Report on
Form 8-K filed June 16, 2004)
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.
On May 26, 2004, the Company filed a Form 8-K in connection with its
learning that it, its former chairman, former chief executive officer and a
former director have been named as defendants in a class action lawsuit
commenced on May 18, 2004 in the United States District Court, District of
Massachusetts (Kent Garvey vs. James Arkoosh, et. al., Civil Action No.:
04-10438-RGS).
On June 16, 2004, the Company filed a Form 8-K in connection with the
results of the 2004 Annual Meeting of Stockholders, announcing that the
stockholders voted to approve, among other things, a one-for-twenty-five reverse
stock split of the Registrant's common stock, par value $0.001 per share, and a
concurrent reduction in the authorized shares of common stock from 500 million
to 50 million, with no reduction in par value as a result of the reverse split,
and that the Board of Directors would meet on June 16, 2004 to determine the
timing of the implementation of the reverse stock split.
On June 16, 2004, the Company filed a Form 8-K in connection with the
announcement of the obtaining by Diomed, Inc. of a two-year, $2.5 million line
of credit with Silicon Valley Bank, secured by certain assets of Diomed, Inc.,
excluding intellectual property.
On June 17, 2004, the Company filed a Form 8-K in connection with the
Board of Directors' determination as to the implementation of the
one-for-twenty-five reverse stock split (approved by the stockholders at the
Registrant's 2004 Annual Meeting of Stockholders held June 15, 2004).
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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: August 12, 2004
By: /s/ DAVID B. SWANK
----------------------------------------
Name: David B. Swank
Title: Chief Financial Officer, Director
Date: August 12, 2004
12