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, 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 NOVEMBER 4, 2004, THERE WERE 17,581,358 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, 2004
TABLE OF CONTENTS
Page
Item Number Number
- ----------- ------
Part I - Financial Information
1 Condensed Consolidated Balance Sheets - F-1
September 30, 2004 (unaudited) and December 31, 2003
Unaudited Condensed Consolidated Statements of Operations - F-2
Three Months and Nine Months Ended September 30, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows - F-3
Nine Months Ended September 30, 2004 and 2003
Notes to Consolidated Financial Statements F-5
2 Management's Discussion and Analysis or Plan of Operation 1
3 Controls and Procedures 9
Part II - Other Information 10
1 Legal Proceedings 10
6 Exhibits 11
Signatures 12
DIOMED HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
September 30, December 31,
2004 2003
----------- -----------
Assets
Current Assets:
Cash and Cash Equivalents $ 6,824,561 $13,398,075
Accounts Receivable, net 2,128,103 1,437,238
Inventories 2,296,465 1,892,241
Prepaid Expenses and Other Current Assets 726,836 449,625
----------- -----------
Total Current Assets 11,975,965 17,177,179
Property, Plant and Equipment, net 830,559 747,728
Intangible Assets, net 4,604,631 4,972,253
Other Assets 390,323 183,756
----------- -----------
Total Assets $17,801,478 $23,080,916
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Bank Loan $ -- $ 261,676
Promissory Notes -- 936,000
Accounts Payable 2,535,385 1,497,541
Accrued Expenses and Other 1,474,328 1,852,480
Deferred Revenue 248,911 56,802
EVLT Technology Payable ($1,000,000 Face Value,
net of $109,302 and $35,609 Debt Discount at
September 30, 2004 and December 31, 2003) 890,698 964,391
----------- -----------
Total Current Liabilities 5,149,322 5,568,890
EVLT Technology Payable ($500,000 Face Value, net of
$14,610 Debt Discount at September 30, 2004 and
$1,250,000 Face Value, net of $173,832 Debt Discount
at December 31, 2003) 485,390 1,076,168
----------- -----------
Total Liabilities 5,634,712 6,645,058
Commitments and Contingencies
Stockholders' Equity 12,166,766 16,435,858
----------- -----------
Total Liabilities and Stockholders' Equity $17,801,478 $23,080,916
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
DIOMED HOLDINGS, INC.
(UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues $ 3,276,464 $ 2,371,768 $ 9,408,769 $ 6,644,118
Cost of Revenues 1,959,384 1,540,003 5,822,032 4,211,409
------------ ------------ ------------ ------------
Gross Profit 1,317,080 831,765 3,586,737 2,432,709
------------ ------------ ------------ ------------
Operating Expenses:
Research and Development 453,578 248,467 1,123,181 635,253
Selling and Marketing 1,708,391 870,403 4,865,889 2,892,381
General and Administrative 1,712,727 1,047,705 4,521,375 2,829,422
------------ ------------ ------------ ------------
Total Operating Expenses 3,874,696 2,166,575 10,510,445 6,357,056
------------ ------------ ------------ ------------
Loss from Operations (2,557,616) (1,334,810) (6,923,708) (3,924,347)
------------ ------------ ------------ ------------
Interest Expense, Non-cash -- 1,995,484 -- 2,933,333
Interest Expense, net, Cash-based 15,433 218,778 37,194 449,661
------------ ------------ ------------ ------------
Total Interest Expense 15,433 2,214,262 37,194 3,382,994
------------ ------------ ------------ ------------
Net Loss Applicable to Common Stockholder $ (2,573,049) $ (3,549,072) $ (6,960,902) $ (7,307,341)
============ ============ ============ ============
Basic and Diluted Net Loss per Share
Applicable to Common Stockholders $ (0.18) $ (2.99) $ (0.50) $ (7.26)
============ ============ ============ ============
Basic and Diluted Weighted Average Common
Shares Outstanding * 14,606,422 1,188,470 14,041,892 1,007,120
============ ============ ============ ============
* All amounts reflect, on a retroactive basis, the 1 for 25 reverse stock split
effective June 17, 2004.
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
----------------------------
2004 2003
------------ ------------
Cash Flows from Operating Activities:
Net loss $ (6,960,902) $ (7,307,341)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 712,989 460,234
Non-cash interest expense on
related party debt -- 2,933,333
Non-cash interest expense on
EVLT purchase obligation 85,529 --
Issuance of stock options
to third party 62,231 8,600
Changes in operating assets
and liabilities:
Accounts receivable (690,865) (490,185)
Inventories (404,224) 431,238
Prepaid expenses
and other current assets (277,211) (340,828)
Deposits (206,567) 452,094
Accounts payable 1,037,844 1,029,270
Accrued expenses
and deferred revenue (240,780) 538,964
------------ ------------
Net cash used in operating activities (6,881,956) (2,284,621)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (331,349) (194,627)
Acquisition of intangible EVLT Technology -- (2,144,500)
------------ ------------
Net cash used in investing activities (331,349) (2,339,127)
------------ ------------
F-3
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
----------------------------
2004 2003
------------ ------------
Cash Flows from Financing Activities:
Payment on promissory notes (936,000) (11,664)
Net proceeds (payments) on bank borrowing (261,676) 94,447
Payment on EVLT(R) purchase obligation (750,000) --
Increase in deferred financing costs -- (683,991)
Increase in deferred offering costs -- (605,343)
Proceeds from redeemable debt -- 1,200,000
Proceeds from convertible debt 6,500,000
Net Proceeds from Equity Financing 2,723,620 --
Payments on related party debt (2,000,000)
Payments on capital lease obligations (33,378) (15,610)
------------ ------------
Net cash provided by financing activities 742,566 4,477,839
------------ ------------
Effect of Exchange Rate Changes (102,775) (165,497)
------------ ------------
Net Decrease in Cash and Cash Equivalents (6,573,514) (311,406)
Cash and Cash Equivalents, beginning of period 13,398,075 1,848,646
------------ ------------
Cash and Cash Equivalents, end of period $ 6,824,561 $ 1,537,240
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 20,053 $ 67,077
============ ============
Equipment under capital lease $ 88,116 $ --
============ ============
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 $ -- $ 2,040,559
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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-5
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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:
September 30, December 31,
2004 2003
---------- ----------
Raw Materials $ 887,971 $ 856,886
Work-in-Process 716,276 456,934
Finished Goods 692,218 578,421
---------- ----------
$2,296,465 $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 Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss as reported $(2,573,049) $(3,549,072) $(6,960,902) $(7,307,341)
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 (107,317) (71,060) (596,573) (211,729)
----------- ----------- ---------- -----------
Pro forma net loss $(2,680,366) $(3,620,132) $(7,557,475) $(7,519,070)
=========== =========== =========== ===========
Loss per share:
Basic and diluted - as reported $ (0.18) $ (2.99) $ (0.50) $ (7.26)
=========== =========== =========== ===========
Basic and diluted - pro forma $ (0.18) $ (3.05) $ (0.54) $ (7.47)
=========== =========== =========== ===========
(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
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
during a period 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss $(2,573,049) $(3,549,072) $(6,960,902) $(7,307,341)
Foreign currency translation adjustment (7,173) 255,591 (94,041) 105,221
----------- ----------- ----------- -----------
Comprehensive loss $(2,580,222) $(3,293,481) $(7,054,943) $(7,202,120)
=========== =========== =========== ===========
(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 nine-month periods ended September 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
nine-month periods, which were not included in the calculation of diluted net
loss per share since their inclusion would be antidilutive.
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Common Stock Options 1,017,006 137,274 1,017,006 137,274
======================================= =======================================
Common Stock Warrants 882,625 1,640,039 882,625 1,640,039
======================================= =======================================
Convertible Debt -- 3,977,500 -- 3,977,500
======================================= =======================================
Exchangeable Preferred Stock -- 1,205,552 1,205,552
======================================= =======================================
(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 ($271,350 at
September 30, 2004) or 80% of eligible accounts receivable. The credit line
bears interest at a rate of 3% above Barclays base rate (4.75% at September 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 September 30, 2004, there
were no amounts outstanding under this line of credit. As of September 30, 2003,
there was approximately $292,246 outstanding under this line.
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
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
line bears interest at a rate of 1% above the prime interest rate (4.75% at
September 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 September 30, 2004, there were no
amounts outstanding under this line of credit. The Company terminated this line
of credit in October 2004. See Subsequent Events Footnote (8).
(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 September 30, 2004, 675,196 options and other incentive stock awards were
available for future grants under the 2003 Omnibus Plan. In addition, 27,076
options were available under the 1998 Plan and 14,877 options were available
under the 2001 Plan as of September 30, 2004.
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 $ 25.00
Granted 2.50 - 6.75 855,976 4.69
Forfeited 5.00 - 138.00 (61,313) 12.76
--------------------------------------------------------
Outstanding, September 30, 2004 $2.00 - $205.75 1,017,006 $ 8.56
========================================================
Exercisable, September 30, 2004 $2.00 - $205.75 226,965 $ 20.42
========================================================
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
The following table summarizes currently outstanding and exercisable options as
of September 30, 2004.
OUTSTANDING EXERCISABLE
------------------------------------------- -------------------------------------
Weighted Average Weighted Average
Exercise Price Shares Remaining Life* Exercise Price Shares Exercise Price
-------------- ------ --------------- ---------------- ------ ----------------
$2.00 - $50.00 995,327 9.53 $ 5.75 205,486 $ 8.12
56.25 - 88.50 4,531 3.36 66.40 4,331 66.87
100.00 - 164.00 16,508 3.46 153.05 16,508 153.05
$201.25 - $205.75 640 1.41 205.75 640 205.75
-------------- ---------------------- -------------------------------------
1,017,006 $ 8.56 226,965 $ 20.42
============== ====================== =====================================
* 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 nine-month period ended
September 30, 2004.
(c) A summary of warrant activity is as follows:
Weighted Average
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, September 30, 2004 $0.025 - $87.50 882,625 $ 2.50 4.2
=================================================================================
Exercisable, September 30, 2004 $0.025 - $87.50 882,625 $ 2.50 4.2
=================================================================================
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 Month Period Ended Nine Month Period Ended
September 30, September 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Laser systems $1,878,281 $1,504,234 $5,537,152 $4,205,931
Fibers, accessories, and service 1,398,183 867,534 3,871,617 2,438,187
---------- ---------- ---------- ----------
Total $3,276,464 $2,371,768 $9,408,769 $6,644,118
========== ========== ========== ==========
The following table represents percentage of revenues and long-lived assets by
geographic destination:
% of Revenue Long-lived Assets
--------------------------- --------------------------
Nine Months Ended September 30,
--------------------------- September 30, December 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
North America 64% 60% $5,282,369 $5,300,029
Asia/Pacific 25% 23% -- --
Europe 11% 15% 543,144 603,708
Other -- 2% -- --
---------- ---------- ---------- ----------
Total 100% 100% $5,825,513 $5,903,737
========== ========== ========== ==========
(7) COMMITMENTS AND CONTINGENCIES
From time to time the Company is involved in legal and administrative
proceedings and claims of various types. While any litigation contains an
element of uncertainty, management, in consultation with the Company's general
counsel, presently believes that the outcome of each such other proceedings or
claims which are pending or known to be threatened, or all of them combined,
will not have a material adverse effect on the Company.
(8) SUBSEQUENT EVENTS
Private Placement - On September 28, 2004, the Company entered into definitive
agreement for the sale and issuance of convertible debentures, common stock and
warrants to purchase common stock to certain accredited investors in a private
placement financing transaction ("Private Placement"). On October 25, 2004, the
Company completed the sale of $7,000,000 aggregate principal amount of
convertible debentures, which mature four years from the date of issuance, and
2,362,420 shares of its common stock. The Company issued warrants to purchase up
to 1,832,461 shares of its common stock to investors who purchased convertible
debentures, and warrants to purchase up to 1,181,210 additional shares of its
common stock to investors purchasing common stock. The Company received net
proceeds of approximately $9.8 million, before related legal and registration
expenses of approximately $300,000. The Company will use the proceeds for
general working capital purposes.
F-10
Line of Credit - As a result of the Private Placement, the Company terminated
the $2,500,000 line of credit with Silicon Valley Bank. At no time during the
term of the line of credit did the Company draw down on the line, and
accordingly, there were no amounts outstanding at the time of termination.
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
September 30, 2004, we had an accumulated deficit of approximately $66.3 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 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 34 distributors to market our products abroad. We
increased our number of sales representatives from 10 at December 31, 2003 to 20
by the third Quarter 2004. This represents a significant investment in sales
staff, as we allow two quarters before a sales representative is expected to
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. During the Quarter, the Company and Axcan Pharma, Inc.
("Axcan") formally terminated the laser development and supply agreement dated
August 2, 2000, and as a result is no longer distributing PDT lasers for the
Company. Sales to Axcan represented approximately 1% or less of our sales in
each of 2003 and 2004. We will continue to market PDT lasers through our direct
sales force and distributors both domestically and internationally.
In 2004, we have continued to focus on the development and growth of EVLT(R)
sales both domestically and internationally. We will continue 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 SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
REVENUE
Revenue for the three months ended September 30, 2004 was $3,276,000, increasing
approximately $904,000, or 38%, from $2,372,000 for the same period in 2003. In
the three months ended September 30, 2004, approximately $1,878,000, or 57%, of
our total revenue was derived from laser sales, as compared to approximately
$1,504,000, or 63%, in the same period in 2003. In the three months ended
September 30, 2004, approximately $1,398,000, or 43%, of our total revenues were
derived from sales of disposable fibers and kits, accessories and service, as
compared to approximately $868,000, or 37%, in the same period in 2003. Revenue
from the EVLT(R) product line increased 45% over the same period last year,
including growth of 96% in disposable procedure product revenue.
The increase in revenue is attributable primarily to:
- increased penetration in the EVLT(R) market,
- the compounding impact of the recurring revenue stream from disposable
sales to both new and existing customers, and
- the impact of the expansion and development of our sales team.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the three months ended September 30, 2004 was $1,959,000,
increasing approximately $419,000 from $1,540,000 for the same period in 2003.
Gross profit as a percentage of sales for the three months ended September 30,
2004, at 40%, increased approximately 500 basis points from the same period last
year reflecting the impact of incremental volume and improvements in material
costs. However, at the cost of revenue line, improvement over 2003 from fixed
manufacturing cost leverage on incremental 2004 volume was partially offset by
the foreign exchange impact on raw materials purchases and the impact of patent
royalties not in effect in the prior period. The Company believes that gross
profit as a percentage of sales may reach 60% assuming increases in sales volume
that may occur after completion of the patent litigation.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended September 30, 2004
were $454,000, an increase of $205,000, or 83%, from the same period in 2003.
R&D expenditures are expected to remain at an elevated level through year-end as
the Company improves the feature-function of our products and continues to
reduce product costs.
SELLING AND MARKETING EXPENSES for the three months ended September 30, 2004
were $1,708,000, an increase of $838,000, or 96%, 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 September 30,
2004 were $1,713,000, an increase of $665,000, or 63%, 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 trade secrets lawsuit filed
in the fourth quarter of 2003.
3
LOSS FROM OPERATIONS
Loss from operations for the three months ended September 30, 2004 was
$2,558,000, an increase of approximately $1,223,000 from the same period in
2003.
INTEREST EXPENSE, NET
Interest expense for the three months ended September 30, 2004 was $15,000,
compared to $2,214,000 for the same period in 2003. Interest expense in the
three months ended September 30, 2003 included non-cash charges totaling
$1,995,000 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 September
30, 2004 was $2,573,000, or $0.18 per share, compared to $3,549,000, or $2.99
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 for the three months
ended September 30, 2003 to 14.6 million shares for the three months ended
September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
REVENUE
Revenue for the nine months ended September 30, 2004 was $9,409,000, increasing
approximately $2,765,000, or 42%, from $6,644,000 for the same period in 2003.
In the nine months ended September 30, 2004, approximately $5,537,000, or 59%,
of our total revenue was derived from laser sales, as compared to approximately
$4,206,000, or 63%, in the same period in 2003. In the nine months ended
September 30, 2004, approximately $3,872,000, or 41%, of our total revenues were
derived from sales of disposable fibers and kits, accessories and service, as
compared to approximately $2,438,000, or 37%, in the same period in 2003.
Revenue from the EVLT(R) product line increased 54% over the same period last
year, including growth of 96% in disposable procedure product revenue.
The increase in revenue is attributable primarily to:
- increased penetration in the EVLT(R) market,
- the compounding impact of the recurring revenue stream from disposable
sales to both new and existing customers, and
- the impact of the expansion and development of our sales team.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the nine months ended September 30, 2004 was $5,822,000, an
increase of approximately $1,610,000 from $4,211,000 for the same period in
2003. Gross profit for the nine months ended September 30, 2004 of $3,587,000
was 38% of sales, an increase of approximately $1,154,000 or 150 basis points
over the same period last year. However, at the cost of revenue line,
improvement over 2003 from fixed manufacturing cost leverage on incremental 2004
volume was partially offset by the foreign exchange impact on raw materials
purchases and the impact of patent royalties not in effect in the prior year.
4
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the nine months ended September 30, 2004
were $1,123,000, an increase of $488,000, or 77%, from the same period in 2003.
R&D expenditures are expected to remain at an elevated level through year-end as
the Company improves the feature-function of our products and continues to
reduce product costs.
SELLING AND MARKETING EXPENSES for the nine months ended September 30, 2004 were
$4,866,000, an increase of approximately $1,974,000, or 68%, 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 nine months ended September 30, 2004
were $4,521,000, an increase of approximately $1,692,000, or 60%, 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 first
quarter non-cash charge for stock options granted to a third party. Legal
expenses included the cost of patent infringement litigation against
Angiodynamics, Vascular Solutions, and Total Vein Solutions, and continuing
costs of litigation against Vascular Solutions in the theft of trade secrets
suit litigation commenced in the fourth quarter of 2003.
LOSS FROM OPERATIONS
Loss from operations for the nine months ended September 30, 2004 was
$6,924,000, an increase of approximately $3,000,000 from the same period in
2003.
INTEREST EXPENSE, NET
Interest expense for the nine months ended September 30, 2004 was $37,000,
compared to $3,383,000 for the same period in 2003. Interest expense in the nine
months ended September 30, 2003 included non-cash charges totaling $2,933,000
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 nine months ended September
30, 2004 was $6,961,000, or $0.50 per share, compared to $7,307,000, or $7.26
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 1.0 million shares for the nine months
ended September 30, 2003 to 14.0 million shares for the nine months ended
September 30, 2004.
(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 cash proceeds raised in 2003, 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, $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 $6,825,000 and $13,398,000 at
September 30, 2004 and December 31, 2003, respectively.
5
Cash used in operations for the nine months ended September 30, 2004 was
approximately $6,882,000. This principally results from the approximate
$6,961,000 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), as well as legal fees incurred in asserting our
EVLT(R) patent.
Cash used in investing activities for the nine months ended September 30, 2004
was approximately $331,000, primarily related to demonstration equipment and
customer trial programs.
Cash provided by financing activities for the nine months ended September 30,
2004 was approximately $743,000. This primarily includes the $2,971,000 proceeds
received from the targeted offering completed on April 20, 2004, 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 resale and targeted offering registration statements
($248,000). Financing activities also included payments of $750,000 related to
current maturities of the EVLT(R) technology acquisition obligation.
OFFERING TO STOCKHOLDERS AS OF AUGUST 29, 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 (pre-split) 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..
We filed a registration statement to register the shares to be offered to the
stockholders as of August 29, 2003 (the "targeted offering"). The SEC declared
that registration statement effective on February 13, 2004. Proceeds from the
targeted offering are being used for general working capital purposes, including
supporting the Company's continued growth and intellectual property strategies.
PRIVATE PLACEMENT AS OF SEPTEMBER 28, 2004
On September 28, 2004, we entered into definitive agreements for the sale and
issuance of convertible debentures, common stock and warrants to purchase common
stock to certain accredited investors in a private placement financing
transaction. On October 25, 2004, after receiving approval to list the shares
from the American Stock Exchange ("AMEX"), we completed this transaction. We
received net proceeds of approximately $9.8 million, before related legal and
registration expenses of approximately $300,000. The proceeds will be used for
general working capital purposes.
The following summarizes the principal terms of the transaction:
Variable Rate Convertible Debentures
The Company issued an aggregate of $7,000,000 principal amount of convertible
debentures at par. The convertible debentures bear interest (payable quarterly
in arrears on March 31, June 30, September 30 and December 31) at a variable
rate of 400 basis points over six-month LIBOR and mature four years from the
date of issuance.
The debentures are convertible at any time at the option of the holder into the
Company's common stock at a conversion price of $2.29 per share, which was 120%
of the $1.91 per share closing price of the common stock on the AMEX on the
trading day prior to the date that the Company and the investors signed the
definitive purchase agreements The conversion price is subject to certain
adjustments, with a minimum conversion price of $2.20 per share unless the
Company obtains stockholder approval to reduce the conversion price below $2.20.
Subject to certain conditions, the debentures will also be convertible at the
Company's option at any time after the first anniversary of the issuance date if
the closing price of the Company's common stock equals or exceeds 175% of the
conversion price for at least 20 consecutive trading days. Also subject to
certain conditions, upon maturity, the Company may cause the holders to convert
the entire principal amount of debentures outstanding into shares of common
stock upon maturity, at a price per share equal to the lesser of the stated
conversion price and 90% of the volume weighted average trading price of its
common stock for the 20 days prior to the maturity date.
6
After the first year and at the Company's option, subject to certain conditions,
interest may be paid in shares of its common stock in lieu of cash, at a
conversion price which is based on the closing prices of the common stock on the
fifth through first trading days immediately preceding the interest payment
date. The conversion rate for interest will be discounted by 10% if the Company
obtains stockholder approval of this discount. In any event, though, without
stockholder approval, the conversion rate for interest will not be less than
$1.91, the closing price of the common stock on the AMEX on the trading day
prior to the date that the Company and the investors signed the definitive
purchase agreements.
Common Stock
The Company issued and sold, for an aggregate gross purchase price of
$3,614,503, shares of its common stock at a purchase price of $1.53 per share,
which is 80% of the closing price of the common stock on the AMEX on the trading
day prior to the date that the Company and the investors signed the definitive
purchase agreements. Accordingly, the Company issued a total of 2,362,420 shares
of its common stock to the investors who purchased common stock in this
transaction.
Warrants to Purchase Common Stock
In connection with the issuance of both the convertible debentures and the
common stock, the Company issued warrants to purchase shares of its common
stock. In the case of the investors who purchased convertible debentures, the
Company issued warrants to purchase up to 1,832,461 shares of its common stock,
and in the case of the investors who purchased common stock, the Company issued
warrants to purchase up to 1,181,210 additional shares of its common stock. The
warrants are exercisable for five years from the date of issuance at an exercise
price of $2.10 per share, which is 110% of the $1.91 per share closing price of
the common stock on the AMEX on the trading day prior to the date that the
Company and the investors signed the definitive purchase agreements. The
exercise price is subject to certain adjustments, including for future sales of
securities below the exercise price, with a minimum exercise price of $1.91 per
share unless the Company obtains stockholder approval to reduce the exercise
price below $1.91. In addition, if the shares of common stock underlying the
warrants are not registered with the United States Securities and Exchange
Commission (the "Commission") within one year from the closing date, the warrant
holders may exercise their warrants by means of a "cashless exercise" at a
formula set forth in the form of warrant instead of paying cash to the Company
upon exercise.
Registration of Common Stock
The Company has agreed to undertake registration with the Commission of the
common stock and common stock underlying the convertible debentures and
warrants. Accordingly, the Company is required to file a registration statement
with the Commission within 30 days of the closing date of the financing
transaction, which registration must be declared effective by the Commission
within 90 days of the closing date (or 120 days if the Commission reviews the
registration statement). If the Company does not file the registration statement
within 30 days of the closing date or if the Commission does not declare the
registration statement effective within the prescribed time period, the Company
is required to pay certain amounts to the investors.
7
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 concurrent with the reverse stock split.
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 ($271,350 at
September 30, 2004) or 80% of eligible accounts receivable. The credit line
bears interest at a rate of 3% above Barclays base rate (4.75% at September 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
September 30, 2004 there were no amounts outstanding under this line. At
September 30, 2003, there was approximately $292,246 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 1% above the prime interest rate (4.75% at September 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 September 30, 2004, there were no amounts
outstanding under this line of credit and we were in compliance with the bank
covenants. As a result of the Private Placement, the Company terminated the
$2,500,000 line of credit with Silicon Valley Bank. At no time during the term
of the line of credit did the Company draw down on the line, and accordingly,
there were no amounts outstanding at the time of termination.
(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.
8
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 -15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of September 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.
9
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. Vascular Solutions has sought leave to amend its answer and
counterclaims to further allege for patent unenforceability, but the Court has
not yet acted on that motion. We are now proceeding with the discovery phase of
this litigation as well.
On April 2, 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). On September 3, 2004, plaintiffs failed an amended
complaint in the action that named only the Company and our former chairman.
The amended complaint alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and seeks unspecified damages 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. The Company is
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. On September 3, 2004, the Plaintiff filed an amended class action
complaint. On October 21, 2004, we filed a motion to dismiss the amended class
action complaint on the ground that it fails to state a claim upon which relief
can be granted. The Court has not yet acted on that motion.
On October 13, 2004, we filed a lawsuit in the United States District Court for
the District of Massachusetts against New Star Lasers, Inc. d/b/a CoolTouch
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. CoolTouch has not yet responded to the
complaint.
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ITEM 6. EXHIBITS
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
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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: November 5, 2004
By: /s/ DAVID B. SWANK
----------------------------------------
Name: David B. Swank
Title: Chief Financial Officer, Director
Date: November 5, 2004
12