AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 2004
REGISTRATION NO. 333-[__________]
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DIOMED HOLDINGS, INC.
(NAME OF SMALL BUSINESS ISSUER)
DELAWARE 3845 84-1480636
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ONE DUNDEE PARK
ANDOVER, MA 01810
(978) 475-7771
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
-----------------
JAMES A. WYLIE, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONE DUNDEE PARK
ANDOVER, MA 01810
(978) 475-7771
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPY TO:
WILLIAM A. NEWMAN, ESQ.
MCGUIREWOODS LLP
1345 AVENUE OF THE AMERICAS, 7TH FLOOR
NEW YORK, NEW YORK 10105
(212) 548-2100
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time as determined
by the selling stockholders after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed basis pursuant to Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest reinvestment
plans, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434 check
the following box. [ ]
CALCULATION OF ADDITIONAL REGISTRATION FEE
====================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF OFFERING PRICE PER PROPOSED MAXIMUM AMOUNT OF REGISTRATION
SECURITIES TO BE REGISTERED AMOUNT TO BE REGISTERED SHARE(1) AGGREGATE OFFERING PRICE FEE
----------------------------- ------------------------ --------------------- -------------------------- ---------------------------
Shares of common stock, par 12,224,717 $3.47 $42,419,768 $5,374.58
value $0.001 per share, issued
to the selling stockholders on
October 25, 2004, common stock
issuable upon conversion of
debentures issued October 25,
2004 and common stock underlying
warrants issued October 25, 2004
to the purchasers of common stock
and debentures.
- ----------------------------- ------------------------ ------------------------------------------------- ---------------------------
(1) Estimated solely for the purpose of determining the amount of the
registration fee, based upon the average of the high and low sales prices of the
common stock as reported by the American Stock Exchange in accordance with Rule
457 under the Securities Act of 1933, which was $3.47 per share on November 22,
2004.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004
PROSPECTUS
12,224,717 SHARES OF COMMON STOCK
DIOMED HOLDINGS, INC.
In this prospectus, unless the context requires otherwise, "we," "our," "us,"
"Diomed" and the "Company" refer to Diomed Holdings, Inc. and its subsidiaries.
We have prepared this prospectus to allow the selling stockholders to sell up to
an aggregate of 12,224,717 shares of our common stock. We will not receive any
of the proceeds from the sale of common stock by the selling stockholders.
The selling stockholders have advised us that they will sell the shares from
time to time in the open market, on the American Stock Exchange (AMEX), in
privately negotiated transactions or a combination of these methods, at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or otherwise as described under "Plan of
Distribution." We will pay all expenses of registration incurred in connection
with this offering, but the selling stockholders will pay all of their selling
commission, brokerage fees and related expenses.
The following may be "underwriters" within the meaning of the Securities Act of
1933 in connection with the sale of their shares: Omicron Master Trust and its
affiliates and Galleon Healthcare Partners L.P. and its affiliates. Additional
selling stockholders and any participating broker-dealers may also be deemed to
be "underwriters" as defined in the Securities Act. We cannot estimate at the
present time the amount of commissions or discounts that will be paid to these
underwriters or any other selling stockholders or broker-dealers who are deemed
to be underwriters on account of their sale of shares of common stock. We have
agreed to indemnify the selling stockholders, including these underwriters,
against certain liabilities, including liabilities under the Securities Act, to
the extent these liabilities are based on any untrue statement, or alleged
untrue statement, of any material fact contained herein, or any omission, or
alleged omission, of any material fact required to be stated herein, of on our
violation of applicable securities law relating to any action or inaction
required of us in connection with the registration of our common stock under
this registration statement.
Our common stock is currently traded on the AMEX under the symbol "DIO." On
November 22, 2004, the closing trading price of our common stock as reported on
the AMEX was $3.47 per share.
SEE "RISK FACTORS," BEGINNING ON PAGE 6, FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT YOU SHOULD CONSIDER BEFORE PURCHASING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___________, __, 2004.
1
TABLE OF CONTENTS
DESCRIPTION PAGE
- ----------- ----
SUMMARY ................................................................................................3
SUMMARY FINANCIAL DATA .................................................................................4
RISK FACTORS............................................................................................6
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS ..........................................18
RECENT DEVELOPMENTS....................................................................................19
CAPITALIZATION.........................................................................................20
DIVIDEND POLICY .......................................................................................20
BUSINESS ..............................................................................................20
LEGAL PROCEEDINGS .....................................................................................36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION ......................37
DESCRIPTION OF PROPERTY................................................................................62
CERTAIN MARKET INFORMATION ............................................................................62
DESCRIPTION OF SECURITIES .............................................................................64
MANAGEMENT.............................................................................................66
EXECUTIVE COMPENSATION.................................................................................69
RELATED TRANSACTIONS...................................................................................75
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................................87
SELLING STOCKHOLDERS...................................................................................88
PLAN OF DISTRIBUTION...................................................................................91
TRANSFER AGENT.........................................................................................92
LEGAL MATTERS .........................................................................................92
EXPERTS ...............................................................................................92
WHERE YOU CAN FIND MORE INFORMATION....................................................................92
FINANCIAL STATEMENTS..................................................................................F-1
PART II..............................................................................................II-1
INDEMNIFICATION OF OFFICERS AND DIRECTORS ...........................................................II-1
RECENT SALES OF UNREGISTERED SECURITIES .............................................................II-1
EXHIBITS ............................................................................................II-13
UNDERTAKINGS ........................................................................................II-15
SIGNATURES...........................................................................................II-17
INDEX TO EXHIBITS....................................................................................II-18
2
SUMMARY
THE COMPANY
We specialize in developing and commercializing laser and related disposable
product technologies used in minimally and micro-invasive medical procedures.
Minimally and micro-invasive medical procedures typically result in reduced pain
and scarring, shorter recovery periods and increased effectiveness compared to
traditional surgical procedures. Most of the pain associated with traditional
surgical procedures results from the slicing of the layers of skin and muscle
tissue, which can be significantly diminished or eliminated with minimally and
micro-invasive procedures.
In developing and marketing our clinical solutions, we use proprietary
technology and we aim to secure strong commercial advantages over our
competitors by gaining governmental approvals in advance of others and through
exclusive commercial arrangements. To participate in the minimally and
micro-invasive medical procedure industry, we seek to develop medical
applications for our laser technology, to incorporate disposable products into
these applications and to market our products to physicians who perform medical
procedures using our products and the techniques that we develop or acquire. To
optimize our revenues, we focus on clinical procedures which generate revenue
from both our laser equipment and our disposable products, such as kits and
optical fibers.
Our 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. Using our proprietary technology,
including our exclusive rights to U.S. Patent No. 6,398,777 and related foreign
patents for the endovenous laser treatment of varicose veins, we currently focus
on endovenous laser treatment (our EVLT(R) product line) for use in varicose
vein treatments, photodynamic therapy (our PDT product line) for use in cancer
treatments, and other clinical applications.
Our principal executive offices are located at One Dundee Park, Andover, MA
01810. Our telephone number is (978) 475-7771.
THE OFFERING
Common stock currently outstanding
and available to trade publicly(1) ......... 15,218,938 shares
Common stock offered by the
selling stockholders(2) .................... 12,224,717 shares
Common stock to be available
to trade publicly
after the offering(3) ...................... 27,443,655 shares
Use of proceeds ............................... We will not receive any proceeds
from the sale of the shares of
common stock offered by this
prospectus.
American Stock Exchange Symbol ................ DIO
- ----------
(1) Includes approximately 3,100,000 shares held by affiliates. Excludes
2,362,420 shares of common stock that we issued on October 25, 2004 to the
investors who purchased common stock in our private placement equity financing,
which will not be available to trade publicly until the registration statement
of which this prospectus is a part is declared effective by the SEC.
Accordingly, the total number of shares of common stock currently outstanding is
17,581,359.
(2) This number (i) assumes (a) the full conversion of all principal and accrued
interest on the variable rate convertible debentures that we issued in our
private placement equity and debt financing on October 25, 2004 into 4,403,683
shares of common stock and (b) the exercise of all common stock purchase
warrants that we issued on October 25, 2004 for 3,013,671 shares, and (ii)
reflects a 25% allowance for possible increase in common stock that may become
issuable pursuant to antidilution provisions in the debentures that we issued on
October 25, 2004. See "Selling Stockholders - Determination of Number of Shares
to be Registered," below for details regarding how we calculated the number of
shares to be registered under the registration statement of which this
prospectus is a part.
(3) Assumes no affiliates sell or acquire shares of common stock prior to the
offering.
3
SUMMARY FINANCIAL DATA
The following table summarizes the financial data for our business and includes
our audited consolidated financial data for the years ended December 31, 2002
and 2003, and unaudited consolidated financial data for the nine months ended
September 30, 2003 and 2004, on an actual basis and as adjusted to reflect the
pro forma effects of securities we issued in the equity financing completed on
October 25, 2004 (as if the transaction occurred on January 1, 2003) which are
being offered for resale under this prospectus. The pro forma amounts include
adjustments to the balance sheet at September 30, 2004 as if the transaction
occurred on that date. You should read the following information in conjunction
with the consolidated financial statements and the related financial statement
notes appearing elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA (IN THOUSANDS, EXCEPT PER SHARE)
NINE MONTHS
YEAR ENDED ENDED
YEAR ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
2002 2003 2003 2004 2003 2004
-------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues $ 5,556 $ 9,198 $ 6,644 $ 9,409 $ 9,198 $ 9,409
Cost of Revenues 5,214 5,873 4,211 5,822 5,873 5,822
-------- -------- -------- -------- -------- --------
Gross Profit 342 3,325 2,433 3,587 3,325 3,587
-------- -------- -------- -------- -------- --------
Operating Expenses:
Research and Development 928 850 635 1,123 850 1,123
Selling and Marketing 3,263 4,055 2,892 4,866 4,055 4,866
General and Administrative 3,825 4,400 2,830 4,521 4,400 4,521
-------- -------- -------- -------- -------- --------
Total Operating Expenses 8,016 9,305 6,357 10,510 9,305 10,510
-------- -------- -------- -------- -------- --------
Loss from Operations (7,674) (5,980) (3,924) (6,924) (5,980) (6,924)
-------- -------- -------- -------- -------- --------
Interest Expense, Non-cash (1) 225 12,893 2,933 -- 13,137 183
Interest Expense, Cash-based (1) 102 1,008 450 37 1,808 637
-------- -------- -------- -------- -------- --------
Total Interest Expense 327 13,901 3,383 37 14,945 820
-------- -------- -------- -------- -------- --------
Net Loss Applicable to Common Stockholders $ (8,001) $(19,881) $ (7,307) $ (6,961) $(20,925) $ (7,743)
======== ======== ======== ======== ======== ========
Basic and Diluted Net Loss per Share
Applicable to Common Stockholders (2) $ (14.70) $ (8.99) $ (7.26) $ (0.50) $ (4.57) $ (0.47)
======== ======== ======== ======== ======== ========
Basic and Diluted Weighted Average
Common Shares Outstanding (2) 544 2,212 1,007 14,042 4,575 16,401
======== ======== ======== ======== ======== ========
4
SEPTEMBER
SEPTEMBER 30, 30,
2004 2004
ACTUAL PRO FORMA
AS ADJUSTED
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA (3)
Cash and cash equivalents 6,825 16,380
Working Capital 6,827 16,508
Total assets 17,801 27,972
Non-current liabilities 485 5,607
Accumulated deficit (66,296) (66,296)
Total stockholders' equity 12,167 17,342
(1) The pro forma amounts include an additional $799,940 and $599,955 in general
interest expense and $243,378 and $182,534 in non-cash interest expense
pertaining to interest expense on notes, debt discount and deferred financing
costs for the periods ended December 31, 2003 and September 30, 2004,
respectively.
(2) Adjusted on a retroactive basis to give effect to the 1 for 25 reverse stock
split, effective June 17, 2004.
(3) Adjusted to reflect the cash proceeds, convertible debt issued net of
discount and the additional common stock issued October 25, 2004.
5
RISK FACTORS
If you purchase our common stock and become a Company stockholder, you will be
subject to the risks inherent in our business. Our stock price will fluctuate
for many reasons, including how our business performs relative to, among other
things, competition, market conditions and general economic and industry
conditions. You should carefully consider the following risk factors as well as
other information in this prospectus before purchasing our common stock. The
risks and uncertainties described below are intended to be the material risks
that are specific to us and to our industry. If any of the following risks
actually occur, the market price of our common stock could decline, and you may
lose all or a significant part of the money you paid to buy our common stock.
There may be other risks which we do not believe are currently material that may
nonetheless impair our business.
The following risks relate primarily to general business issues including, our
business plan, operations, revenues, losses, manufacturing, distribution, sales,
marketing, distribution and personnel:
WE HAVE A HISTORY OF SIGNIFICANT OPERATING LOSSES. WE MAY NOT EVER ACHIEVE OR
MAINTAIN PROFITABILITY.
We have incurred significant operating losses since our inception, and, as of
September 30, 2004, we have accumulated deficit of approximately $66.3 million,
including $15.9 million in non-cash interest expense. We may continue to incur
operating losses over the next few years, depending largely upon the commercial
success of our EVLT(R) product line. We will need to generate revenues in excess
of our losses to become profitable, and we may be unable to do so. If we do not
become profitable, the value of our common stock may decline.
Our operating losses may increase as we continue to incur costs for research and
development, regulatory, sales and marketing, manufacturing and general
corporate activities. Whether we achieve and maintain profitability depends in
part upon our ability, alone or with others, to successfully complete the
development of future clinical applications, obtain required regulatory
clearances and sell our products at profitable prices.
YOU MAY HAVE DIFFICULTY EVALUATING AN INVESTMENT IN OUR STOCK BECAUSE WE HAVE A
LIMITED OPERATING HISTORY IN OUR CURRENT MARKETS.
Although we were founded in 1991, we have only commercially offered the products
used in our EVLT(R) product line since late 1999 in Europe and January 2002 in
the United States. As a result, you can only evaluate our business based on this
very limited operating history. This short history may not provide an adequate
basis for you to fully assess our ability to successfully develop or achieve
market acceptance of our products, or to respond to competition.
OUR REQUIRED EXPENDITURES MAY EXCEED OUR BUDGETED EXPENSES, AND WE MAY NOT BE
ABLE TO PAY FOR UNANTICIPATED EXPENSES OUT OF REVENUE OR OBTAIN ADDITIONAL
INVESTMENT CAPITAL TO FUND THESE EXPENSES.
In November 2003, we completed a private placement equity financing transaction
pursuant to which we raised gross proceeds of $22,000,000 and satisfied
$1,200,000 in debt, which we had incurred in a May 2003 bridge financing.
In October 2004, we completed a private placement equity financing transaction
pursuant to which we raised gross proceeds of $10,600,000. For further details,
see "Recent Developments - "Private Placement in Equity and Debt in September
2004."
We have applied, and will continue to apply these proceeds, together with our
operating revenue, to pay for our general working capital needs. However, the
capital which we received from our 2004 equity financing and 2003 equity
financing may not be sufficient to pay for all of our required expenditures if
we have underestimated our expenditures or have overestimated our revenues when
we prepared our business plan. We may need additional resources to fund the
growth, acquisitions and working capital that our business plan envisions. The
timing and amount of our future capital requirements will depend on many
factors, including:
- the scope and results of preclinical studies and clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the costs involved in preparing, filing, prosecuting, maintaining
and enforcing our patents;
- the costs involved in any potential litigation;
- competing technological and market developments;
- our ability to establish additional collaborations;
6
- changes in existing collaborations;
- our dependence on others for development of our potential products;
- the cost of manufacturing, marketing and distribution;
- the opportunities available for making acquisitions that would
enhance our business; and
- the effectiveness of our activities.
If we require additional funds, we cannot be certain that such funds will be
available to us on reasonable terms, or at all. In particular, given our capital
structure after completing the equity financing and the current market price of
our common stock, we may not be able to attract further new investment capital
in the near future. The inability to obtain additional financing could cause us
to reduce or cease operations, sell all or a portion of our assets, seek a sale
of our business or enter into a business combination with a third party.
WE MAY NEED TO EXPAND OUR EXISTING MARKETING AND SALES RESOURCES.
Our marketing and sales resources may not be adequate for the successful
commercialization of our products. Currently, we rely primarily on direct sales
representatives for the U.S. market and independent distributors for the
international market. Direct sales representatives are our employees. Direct
sales representatives are paid a salary plus commissions on sales they make.
Distributors purchase products from us and then resell our products and services
to third parties. We use distributors primarily for sales in Canada and the
international market. Our officers and employees develop and implement our
marketing strategy, although we do periodically engage non-employee consultants,
acting as independent contractors, to assist us in these efforts.
Market forces, such as increasing competition, increasing cost pressures on our
customers and general economic conditions, may require us to devote more
resources to our sales and marketing efforts, such as changing the composition
of our sales and marketing staff and changing our marketing methods. These
changes may result in additional expenses. For example, we will incur additional
salary expenses if we increase hiring of direct sales representatives to replace
independent sales representatives or distributors that we use. Similarly, if we
increase our reliance on marketing consultants to assist us, we will incur
greater costs. If we decide to increase our advertising, we will also incur
higher sales and marketing costs.
As we expand our sales force and increase our marketing activities, we cannot
make any assurances that those efforts will result in more sales or higher
revenue. Also, we cannot make any assurances that the increased costs we incur
by expanding our sales and marketing resources will result in greater sales or
in higher revenue. Further, even if we increase our spending on sales and
marketing, we may not be able to maintain our current level of sales.
WE MAY NEED TO EXPAND OUR EXISTING MANUFACTURING AND DISTRIBUTION CAPABILITIES.
Our manufacturing and distribution capabilities, and any current or future
arrangements with third parties for these activities, may not be adequate for
the successful commercialization of our products.
To be successful, we must manufacture our products in commercial quantities and
at acceptable costs as required by current good manufacturing practices, the FDA
and the applicable standards of other regulators. We currently have the capacity
to manufacture products at certain commercial levels within existing good
manufacturing practices. Future regulatory clearances by the FDA and other
regulatory agencies could result in the need to expand our manufacturing
operations. If we expand our manufacturing capabilities, we would need to spend
substantial funds, hire and retain significant additional personnel and comply
with extensive regulations. If we are not able to expand our manufacturing
capabilities, or are unable to continue to comply with good manufacturing
practices, our ability to grow and to maintain our competitiveness may be
significantly hindered.
WE RELY ON OUR AGREEMENTS WITH OUR SUPPLIERS. IF WE FAIL TO MAINTAIN OR
ESTABLISH THESE AGREEMENTS, WE MAY NOT BE ABLE TO OBTAIN MATERIALS THAT ARE
NECESSARY TO DEVELOP OUR PRODUCTS AND THEIR APPLICATIONS.
We depend on outside suppliers for certain raw materials and other components
for our products, including the diodes for our lasers. Raw materials or
components that we need may not always be available at our standards or on
acceptable terms, if at all, and we may be unable to get alternative suppliers
or produce needed materials or components on our own. If we cannot obtain these
raw materials or components, we may be unable to make our products in sufficient
quantities to meet our customers' needs. We may also be unable to develop new
products and applications and conduct clinical trials. This will, in turn,
hinder our ability to obtain regulatory approval of these applications, thereby
impairing our ability to expand our markets or create products for new
treatments.
7
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS. IF WE
FAIL TO DO SO, WE MAY NOT BE ABLE TO DEVELOP OUR APPLICATIONS.
Our success depends in large part on our ability to attract and retain highly
qualified management and other personnel. We depend upon the principal members
of our management team, key employees, staff and consultants that we engage from
time to time. Competition for this talent is intense, and we may not be able to
continue to attract and retain this talent. If we are unable to attract and
retain skilled personnel, our business would suffer.
We have limited resources to attract and retain personnel. Our ability to
compensate and provide incentives to management and our employees depends on our
financial resources and the availability of equity compensation. In the second
quarter of 2003, the board of directors approved a new stock option plan
providing for up to 1,600,000 shares of common stock to be issued to our
officers, directors, employees and consultants. We have granted incentive awards
for shares under this plan, and as of September 30, 2004, 675,196 shares were
available for future grants under the 2003 incentive plan. This amount may not
be adequate for our needs, and we may wish to adopt a new incentive plan. Any
new incentive plan will require stockholder approval before we may grant any
stock options or other equity compensation under a new plan.
In addition, our directors and senior officers are likely to require that we
maintain directors' and officers' insurance at levels comparable to that which
we have maintained in the past. The premiums for this coverage represent a
significant expense and are subject to substantial increases if the insurance
market becomes more limited. Our current directors' and officers' liability
insurance policies provide this coverage through February 2005. If we are unable
to provide adequate compensation or are unable to obtain sufficient directors'
and officers' insurance coverage, we may not be able to attract or retain key
personnel.
Personnel changes may disrupt our operations. Hiring and training new personnel
will entail costs and may divert our resources and attention from
revenue-generating efforts. From time to time, we also engage consultants to
assist us in our business and operations. These consultants serve as independent
contractors, and we therefore do not have as much control over their activities
as we do over the activities of our employees. Our consultants may be affiliated
with or employed by other parties, and some may have consulting or other
advisory arrangements with other entities that may conflict or compete with
their obligations to us. Inventions or processes discovered by these persons
will not necessarily become our property. If we are unable to find alternative
talent, we will not be in a position to avoid or negotiate terms that would seek
to protect us from these conditions.
WE MAY SUFFER LOSSES OR ENCOUNTER OTHER PROBLEMS AS A RESULT OF FUTURE BUSINESS
COMBINATIONS AND ALLIANCES.
We may expand our operations and market presence by entering into business
combinations, joint ventures, co-branding or other strategic alliances with
other companies. These transactions create risks, such as:
- difficulty in assimilating the operations, technology and
personnel of the combined companies;
- the disruption of our ongoing business, including loss of
management focus on existing businesses and other market developments;
- problems retaining key technical and managerial personnel;
- expenses associated with the amortization of intangible assets;
- additional operating losses and expenses of acquired businesses;
- impairment of relationships with existing employees, customers
and business partners; and
- additional losses from any equity investments we might make or
the assumption of liabilities from third parties that we combine with.
We may not succeed in addressing these risks, and we may not be able to make
business combinations and strategic investments on terms that are acceptable to
us. In addition, any business we may acquire may incur operating losses.
8
SINCE A SUBSTANTIAL PORTION OF OUR REVENUES TO DATE HAVE COME FROM INTERNATIONAL
SALES, EVENTS AFFECTING INTERNATIONAL COMMERCE MAY ADVERSELY AFFECT OUR FUTURE
INTERNATIONAL SALES, FUTURE REVENUES AND OUR PRODUCTS' FUTURE PROFITABILITY.
International revenue accounted for approximately 45% of our total revenue in
2002, 37% of our total revenue in 2003 and 36% of our total revenue for the nine
months ended September 30, 2004. Our key international markets are the European
Union, Japan, Australia, South Korea, Peoples' Republic of China and Canada.
Outside of the European Union, we must obtain country-by-country approval to
import our products. Fluctuations in currency exchange rates may negatively
affect our ability to compete, in terms of price, against products denominated
in local currencies. Our international sales are made through international
distributors and their wholly-owned subsidiaries with payments to us typically
denominated in the local currencies of the United Kingdom and Europe and in U.S.
dollars in the rest of the world. We believe that the U.S. is the single largest
market for our EVLT(R) product line. We anticipate that the comparative portion
of our total revenues derived from international sales will decrease as our
sales of our EVLT(R) product line in the U.S. will increase, due to our emphasis
on selling EVLT(R) in the U.S. However, we expect that international sales will
continue to provide a significant portion of our total revenues.
BUSINESS INTERRUPTIONS COULD KEEP U.S. FROM DEVELOPING OUR PRODUCTS' CLINICAL
APPLICATIONS AND INCREASING OUR REVENUES.
Natural or man-made disasters, such as fires, earthquakes, power losses,
telecommunications failures, terrorist attacks, military operations and other
events beyond our control may interrupt our operations. We do not have a
detailed disaster recovery plan. In addition, we may not carry sufficient
business interruption insurance to compensate us for losses that may occur and
any losses or damages we incur could have a material adverse effect on our cash
flows and success as an overall business.
IF WE OR OUR SUPPLIERS FAIL TO COMPLY WITH APPLICABLE MANUFACTURING REGULATIONS,
OUR BUSINESS COULD BE HARMED.
We and our key component suppliers are required to demonstrate and maintain
compliance with the FDA's Quality System Regulation, or QSR. The QSR sets forth
the FDA's requirements for good manufacturing practices of medical devices and
includes requirements for, among other things, the manufacturing, packaging,
labeling and distribution of such products. The FDA enforces the QSR through
inspections. The FDA conducted its most recent QSR inspection in 2002, and the
FDA issued a satisfactory letter to us after this inspection. We cannot assure
you that we or our key component suppliers are or will continue to be in
compliance, will not encounter any manufacturing difficulties, or that we or any
of our subcontractors or key component suppliers will be able to maintain
compliance with regulatory requirements. Furthermore, we cannot assure you that
if we need to seek out new suppliers to satisfy our business requirements that
we will be able to locate new suppliers who are in compliance with regulatory
requirements. Our failure to do so will have a material adverse effect on our
ability to produce our products and on our profitability.
MARKET ACCEPTANCE OF OUR FUTURE PRODUCTS OR THEIR USES IS UNCERTAIN. FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL HARM OUR BUSINESS' OVERALL CHANCES FOR
PROFITABILITY.
Our long term business plan envisions our marketing medical products in addition
to our current EVLT(R) and photodynamic therapy product lines. These future
products will likely require regulatory approval prior to commercialization.
Even if regulators approve our future products for marketing, these products may
not achieve market acceptance. Our revenues would suffer as a result. The degree
of market acceptance will depend upon a number of factors, including:
- the establishment and demonstration in the medical community of
the safety and efficacy of our clinical applications and their potential
advantages over existing applications;
- the pricing and reimbursement policies of government and
third-party payors, such as insurance companies, health maintenance
organizations and other plan administrators; and
- the general willingness of physicians, patients, payors or the
medical community to accept, utilize or recommend any of our applications.
For example, since most photodynamic therapy treatments still are in clinical
trials, there is no long-term safety or efficacy data available. The medical
profession may, therefore, prefer to prescribe conventional alternatives to PDT,
such as surgery, chemotherapy and radiation. If our future products and clinical
applications are not accepted due to these or other factors, our business will
not develop as planned and may be harmed.
The following risks relate principally to our commercialization of our current
and future products and their clinical applications:
SOME OF OUR PRODUCTS MAY NEVER BE SUCCESSFULLY COMMERCIALIZED, AND, THEREFORE,
THESE PRODUCT LINES MAY NEVER BECOME PROFITABLE OR ALLOW U.S. TO RECOUP EXPENSES
INCURRED IN THEIR DEVELOPMENT.
We must be able to effectively develop, market and sell our products in order to
make a profit. Commercialization depends upon:
- successfully completing development efforts of our collaborative
partners, including finding new clinical applications for our existing
products;
- obtaining the required regulatory approvals;
9
- manufacturing our products at an acceptable cost and with
appropriate quality;
- favorable acceptance of any products marketed; and
- successful marketing and sales efforts by our partner(s) and
ourselves.
We may not successfully achieve some or all of these goals, and if so, our
business and our financial condition would be adversely affected. The time frame
necessary to achieve these goals for any individual clinical application is
uncertain. Most applications will require clinical studies and clinical trials,
and all applications will require regulatory approval prior to
commercialization. The likelihood of our success must be considered in light of
these and other problems, expenses, difficulties, complications and delays that
may arise.
IF WE FAIL TO GAIN MARKET ACCEPTANCE OF OUR PRODUCTS, OUR BUSINESS WOULD SUFFER.
We are introducing novel products and technology into the vein treatment market.
The vein treatment market is dominated by vein stripping procedures which are
well established among physicians, have extensive long-term data, and are
routinely taught to new surgeons. As a result, we cannot be certain of gaining
widespread acceptance of our products and therefore may not achieve expected
revenues or ever become profitable.
To achieve growth in our sales of our EVLT(R) product line over time, we believe
we must continue to penetrate the market for the treatment of vein disease and
expand physicians' education with respect to the EVLT(R) product line.
HEALTH CARE REIMBURSEMENT FOR OUR FUTURE PRODUCTS AND THEIR APPLICATIONS REMAIN
UNCERTAIN AND WE MAY BE UNABLE TO ACHIEVE MARKET ACCEPTANCE OR GENERATE
PROJECTED REVENUES WITHOUT ROUTINE COVERAGE BY MEDICAL INSURANCE.
Our principal product line is EVLT(R). The American Medical Association and the
Center for Medicare and Medicaid Services has established reimbursement codes
for laser ablation as a mode of treatment for superficial vein disorders,
including our EVLT(R) product line for varicose veins. The new codes form the
basis for Medicare and Medicaid reimbursement across the U.S. and are expected
to become effective January 1, 2005. The creation of these codes, combined with
existing insurance carriers policies in the U.S., represent over 180 million
covered lives in the U.S.
It still remains, however, that various health care providers and third party
payors may refuse to cover our future products and/or their particular medical
applications. If the patients who use our treatments do not obtain coverage,
patient demand for our applications may decrease and as a result, physicians may
not purchase our products. Our ability to commercialize our future products
successfully depends, in part, on the extent to which third parties make
reimbursement available for these products and related treatments. These third
parties include collaborative partners, government health administration
authorities, private health insurers, managed care entities and other
organizations. Increasingly, these payors are challenging the price of medical
products and services and establishing protocols and formularies, which
effectively limit physicians' ability to select products and procedures.
Uncertainty exists as to the reimbursement status of health care products,
especially innovative technologies. Additionally, reimbursement coverage, if
available, may not be adequate for us to achieve market acceptance of our future
products or to maintain price levels sufficient for us to realize an appropriate
return on our products. If payors decide not to continue covering our products,
our sales may not meet our projections.
Further, our strategy depends in part on our collaborative partners. As a
result, our ability to commercialize our products may be hindered if cost
control initiatives, such as reducing reimbursement rates or amounts, adversely
affect our collaborators or the clinical applications they market or are seeking
to develop.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH ONGOING GOVERNMENTAL
REGULATIONS COULD ADVERSELY AFFECT OUR ABILITY TO MARKET AND SELL OUR PRODUCTS
AND SERVICES AND COULD RESULT IN LOSSES.
We have been successful in receiving governmental clearances for the products
listed below along with their indications for use:
PRODUCT INDICATION FOR USE
--------- ---------------------
EVLT(R)kit and D15 plus diode laser Closure of the greater saphenous vein in patients with superficial vein
reflux
Diomed 15 plus and 30 plus Open and endoscopic surgical procedures in fields such as urology,
gastroenterology, gynecology and neurosurgery; applications include
treatment of vascular lesions and pigmented lesions
Diomed 630 PDT Combination pre-market approval application for Photofrin used in palliation
of esophageal cancer and endobronchial non-small cell lung cancer and for
treatment of Barrett's Esophagus
EVLT(R) kit and D15 plus and
D30 plus diode lasers Treatment of varicose veins and varicosities associated with the superficial
vein reflux of the greater saphenous vein
10
The production and marketing of our products and our ongoing research and
development, preclinical studies and clinical trial activities are subject to
extensive regulation and review by numerous governmental authorities in the
United States, including the FDA, and similar regulatory agencies in other
countries. Before we can market them, most medical devices that we develop, and
all of the drugs we use in conjunction with those devices, must undergo rigorous
preclinical studies and clinical trials and clear an extensive regulatory
process administered by the FDA and comparable foreign authorities. These
processes involve substantial costs and can often take many years. As a result
of the required up-front costs for regulatory and relatively long time between
developing a product and being able to sell it and generate revenue, we may
incur losses and negative cash flows. Regulations provide that failure to comply
with the applicable requirements can, among other things, result in
non-approval, suspensions of regulatory approvals, fines, product seizures and
recalls, operating restrictions, injunctions and criminal prosecution. We have
limited experience in performing regulatory activities, we have limited
resources available for handling regulatory matters. We rely on our
collaborative partners and outside consultants to assist us with our regulatory
needs.
We must compile and submit to the FDA or other applicable regulators new
indications of use as we determine new clinical applications for our products.
We may also be required to seek regulatory clearance for modifications to our
existing platform of lasers and disposable products, including changes to
suppliers, which must satisfy the FDA's applicable criteria or the criteria of
other applicable regulators. We believe that we have not reached this threshold
in our program and are not now required to submit an application to the FDA for
any changes we have made to our previously reviewed products. In the future,
however, we may decide to alter certain disposables or lasers in a manner such
that the FDA or other applicable regulators outside the United States will
review and approve the change. If we are required to seek FDA for future
indications or modifications to our existing products or services, we or our
collaborative partners may be unable to satisfy the conditions imposed by the
FDA (or other regulators). As a result, we may be required to abandon
applications for regulatory approval we make, or we may be unable to obtain FDA
clearances or other approvals we seek, and therefore we may be unable to offer
products and services relating to the new indications of use or product
modifications that we identify.
As to our EVLT(R) product line, in January 2002 the FDA granted clearance for
using a diode laser fiber to close the greater saphenous vein to treat
superficial reflux. In December 2002 the FDA granted clearance for expanded
indications for use of EVLT(R) including Diomed's D15plus and D30plus diode
lasers and disposable kits for the treatment of varicose veins and varicosities
associated with the superficial vein reflux of the greater saphenous vein.
We are also subject to the Radiation Control for Health and Safety Act with
laser radiation safety regulations administered by the Center for Devices and
Radiological Health of the FDA. We may be subject to fines or other penalties
for failure to comply with these regulations. For detailed information, see
"Business--Government Approvals."
SINCE TECHNOLOGY IN OUR INDUSTRY IS CONSTANTLY CHANGING, WE FACE TECHNOLOGICAL
UNCERTAINTY AND FACE CERTAIN COMPETITIVE DISADVANTAGES.
We are a relatively new enterprise and are engaged in the development of novel
therapeutic technologies, such as EVLT(R). As a result, our resources are
limited, and we may experience technical challenges inherent in such novel
technologies. Many of our competitors have substantially greater financial,
technical and human resources than we do and may also have substantially greater
experience in developing products, conducting preclinical studies or clinical
trials, obtaining regulatory approvals and manufacturing and marketing. Further,
our competitive position could be materially adversely affected if our
competitors or other third parties establish patent protection, because we may
then have to pursue alternate means of developing our products. Existing
competitors or other companies may succeed in developing technologies and
products that are safer, more effective or more affordable than those that we
develop.
IF PHYSICIANS DO NOT SUPPORT THE USE OF OUR PRODUCTS, WE MAY NOT ACHIEVE FUTURE
SALES GROWTH.
Our product sales have mainly been to physicians who are receptive to minimally
invasive techniques. Other physicians may not purchase our products until they
receive further long-term clinical evidence to convince them to alter their
existing treatment methods and recommendations from prominent physicians that
our products effectively treat vein disease. Physicians to whom we market our
products have been trained in alternative vein treatment procedures. We may be
unable to persuade physicians to incur the time necessary to adopt our EVLT(R)
procedure in place of those more familiar procedures. We believe that physicians
will not use our products unless they determine, based on experience, clinical
data and other factors, that our EVLT(R) product line represents an attractive
alternative to conventional means of treating vein disease. There are few
independently published clinical reports and little long-term clinical follow-up
to support our marketing efforts. If our EVLT(R) product line does not receive
adequate endorsement by influential physicians or our long-term data does not
support our current claims of efficacy, our product sales and profitability
could be materially adversely affected.
11
FAILURE IN OUR PHYSICIAN TRAINING EFFORTS COULD SIGNIFICANTLY REDUCE PRODUCT
SALES.
Achieving successful results with our EVLT(R) product line is highly dependent
on proper physician technique in performing the procedure. As a result, it is
critical to the success of our sales effort to provide a sufficient number of
physicians with adequate instruction in the use of our products. We rely on
physicians to spend their time to learn the new procedure. If physicians are not
properly trained, they may misuse or ineffectively use our products. This may
result in unsatisfactory patient outcomes, patient injury, negative publicity or
lawsuits against us, any of which could have an adverse effect on our product
sales or increase our product liability risk.
THE TERMINATION OF LICENSES THAT WE NOW HAVE FOR SOME OF THE TECHNOLOGY THAT WE
USE COULD ENABLE COMPETITORS TO OFFER PRODUCTS SIMILAR TO OURS OR PREVENT U.S.
FROM OFFERING OUR PRODUCTS.
We currently have two technology licenses that are material to our business. The
first license relates to our EVLT(R) product line and the second relates to our
OPTIGUIDE(R) fiber optic diffuser. For detailed information, see "Business -
Patents, Trademarks and Proprietary Technology."
We have an exclusive license to the technology we use in our EVLT(R) products
and services with four of the five inventors of this technology. We also
acquired directly from the fifth inventor all of his rights to the EVLT(R)
patent. If we were to breach our obligations under the exclusive license, our
license could be terminated by the licensor. If our license is terminated by the
licensor, although we could still make, use or sell our EVLT(R) products and
services under our own title to the EVLT(R) patent, the other inventors could
license the EVLT(R) patent to our competitors, which would reduce our
competitive advantage and could result in lower revenue.
The second license relates to our photodynamic therapy product line. This is a
sublicense for patented technology that we currently use in our OPTIGUIDE(R)
fiber optic diffuser. Our sublicense for this technology is non-exclusive. The
term of this sublicense is for the term of the primary exclusive license from
the patent owner to our licensor. The term of the primary exclusive license is
the same as the term of the patent. If our license for the OPTIGUIDE(R)
technology is terminated, we may not have access to components that we need to
manufacture our OPTIGUIDE(R) products. We may not be able to find an alternative
technology source to continue manufacturing these products on reasonable terms
or at all.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID CHANGES IN THE MEDICAL DEVICES
INDUSTRY. AS A RESULT, SOME OR ALL OF OUR PRODUCTS COULD BECOME OBSOLETE.
COMPETING PRODUCTS AND TECHNOLOGIES MAY ALSO MAKE SOME OR ALL OF OUR PROGRAMS OR
POTENTIAL PRODUCTS NONCOMPETITIVE OR OBSOLETE.
Our industry is subject to rapid, unpredictable and significant technological
change. Competition is intense. Well-known pharmaceutical and medical device
companies are marketing well-established therapies for the treatment of cancer
and other diseases. Doctors may prefer existing methods rather than try our
products. Therefore, we may be unable to meet our sales goals. Many companies
are also seeking to develop new products and technologies for medical conditions
for which we and our collaborative partners are developing treatments. Our
competitors may succeed in developing products that are safer or more effective
than ours and in obtaining regulatory approval for future products before we do.
As a result, we may not be able to recoup our costs in developing these
products. We anticipate that we will face increased competition as new companies
enter our markets and as the scientific development of similar treatments
evolves.
The following risks relate primarily to legal protections and related concerns:
THERE ARE SUBSTANTIAL CONCERNS REGARDING SAFETY AND HEALTH IN THE U.S. MEDICAL
PRODUCTS INDUSTRY. WE MAY NOT HAVE ADEQUATE PROTECTION AGAINST PRODUCT LIABILITY
OR RECALL, AND WE MAY HAVE TO PAY A SIGNIFICANT AMOUNT OF MONEY ON LIABILITY
CLAIMS OR RECALLS.
Testing, manufacturing and selling medical products and applications entails
significant inherent, industry-wide risks of allegations of product liability.
The use of our products in clinical trials and the sale of our products may
expose us to liability claims of patients or others who use our products in
connection with clinical trials or sales of treatments offered by our customers.
We currently carry insurance against these risks in amounts we believe
sufficient and comparable to other similarly situated medical device companies,
but that insurance coverage may not be adequate to cover all our liabilities.
The following are some of the risks related to liability and recall:
- we are subject to the inherent risk that a governmental authority
or third party may require the recall of one or more of our products;
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- if we obtain insurance coverage in the future, this coverage may
not be available at a reasonable cost if at all, or in amounts sufficient to
protect us against claims that may be made; and
- liability claims relating to our products or a product recall
could adversely affect our ability to obtain or maintain regulatory approval for
our products and their applications.
To date, we have been named as a defendant in one product liability action,
arising from a doctor's alleged malpractice while performing a photodynamic
therapy treatment on a patient's esophagus. That action is currently in the
discovery phase of litigation. We do not expect the outcome of this litigation
to be adverse to us, or to incur material expenses or liability in connection
with this action.
A successful product liability claim could materially adversely affect our cash
flows and our ability to meet the costs of developing our products and their
clinical applications. Defense of these claims could also entail significant
expense and divert the attention of our management and personnel from other
activities.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS, OR
IF WE LOSE OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED.
We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
As of September 30, 2004, we held 21 patents in the U.S. and foreign countries.
We currently have patents for the following inventions we use in our laser
devices and systems:
- endovascular laser treatment of varicose veins, used in EVLT(R);
- solid state laser diode light source;
- high power light source;
- peltier-cooled apparatus;
- medical spacing guide; and
- Fiber optic diffuser.
Of the patents, seven are U.S. patents and 14 are counterparts of the principal
U.S. patents filed in different jurisdictions. These patents expire at various
times from 2011 to 2019.
13
In addition to the foregoing patents which we own, we also license certain
patented technology. Although we have an ownership interest in the EVLT(R)
patent that we purchased in September 2003 from one of the inventors of this
technology, we also licensed the rights in the same patent from all of the other
inventors on an exclusive basis. We also sub-license technology used in our
OPTIGUIDE(R) fiber optic diffuser used in photodynamic therapy applications on a
non-exclusive basis from the licensee. For detailed information, see the risk
factor captioned "The Termination of Licenses that We Now Have for Some of the
Technology that We Use Could Enable Competitors to Offer Products Similar to
Ours or Prevent Us from Offering Our Products" and "Business - Patents,
Trademarks and Proprietary Technology."
To date, we have sued four competitors for infringement of our EVLT(R) patent:
Vascular Solutions, Inc., AngioDynamics, Inc., Total Vein Solutions, LLC and New
Star Lasers, Inc. d/b/a CoolTouch, Inc. See "Legal Proceedings," below for
further information regarding these lawsuits. Vascular Solutions, AngioDynamics
and Total Vein Solutions have each countered that our EVLT(R) patent is invalid.
If our EVLT(R) patent is judicially determined to be invalid, then we will not
prevail in our infringement actions. We will write off our patent acquisition
costs (currently an intangible asset on our balance sheet) and we will not be
able to exclude third parties from using our EVLT(R) technology. This would
likely have a material adverse effect on our financial condition.
We cannot guarantee that the steps that we have taken or will take to protect
our proprietary rights will be adequate to deter misappropriation of our
intellectual property. In addition to seeking formal patent protection whenever
possible, we attempt to protect our proprietary rights and trade secrets by
entering into confidentiality and non-compete agreements with employees,
consultants and third parties with which we do business. However, these
agreements can be breached and, if they are, there may not be adequate remedies
available to us, and we may be unable to prevent the unauthorized disclosure or
use of our technical knowledge, practices or procedures. If our trade secrets
become known, we may lose our competitive advantage.
In addition, we may not be able to detect unauthorized use of our intellectual
property or take appropriate steps to enforce our rights. If third parties
infringe or misappropriate our patents or other proprietary rights, our business
could be seriously harmed. We may be required to spend significant resources to
monitor our intellectual property rights. We may not be able to detect
infringement of these rights, and consequently we may lose our competitive
advantages associated with our intellectual property rights before we do so. In
addition, competitors may design around our technology or develop competing
technologies that do not infringe on our proprietary rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS, WHICH COULD BE COSTLY AND
TIME CONSUMING AND COULD DIVERT OUR MANAGEMENT AND KEY PERSONNEL FROM OUR
BUSINESS OPERATIONS.
Although we do not believe that any of our products infringe the intellectual
property of third parties, we may be unaware of intellectual property rights of
others that may be used in our technology and products. Third parties may claim
that we are infringing their intellectual property rights. Third parties may
also claim that our patents have been improperly granted and may seek to
invalidate our existing or future patents. Although we do not believe that any
of our active patents should be subject to invalidation, if any claim for
invalidation prevailed, the result could be greatly expanded opportunities for
third parties to manufacture and sell products which compete with our products.
Litigation or other challenges regarding our patents or other intellectual
property could be costly and time consuming and could divert our management and
key personnel from our business operations. Claims of intellectual property
infringement might also require us to enter into costly royalty or license
agreements. However, we may not be able to obtain these agreements on terms
acceptable to us, or at all. We also may be subject to significant damages or
injunctions against development and sale of our products. Infringement claims,
even if not substantiated and unsuccessful, could result in significant legal
and other costs and may be a distraction to management.
The following risks relate principally to our common stock and its market value:
OUR COMMON STOCK COULD BE SUBJECT TO SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS
DUE TO A NUMBER OF FACTORS, MANY OF WHICH WILL BE BEYOND OUR CONTROL, AND THOSE
FLUCTUATIONS MAY PREVENT OUR STOCKHOLDERS FROM RESELLING OUR COMMON STOCK AT A
PROFIT.
The securities markets have experienced extreme price and volume fluctuations
during the past three years, and the market prices of the securities of emerging
companies and technology-oriented companies have been especially volatile. In
the past, companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. In
fact, we have been sued for allegedly violating Section 10(b) of the Securities
Exchange Act of 1934, in connection with trading activity during the first
quarter of 2002. We believe this lawsuit to be without merit, and have moved for
dismissal. See "Legal Proceeding" below, for details regarding this lawsuit.
Securities class action litigation could result in substantial costs,
liabilities and a diversion of management's attention and resources. The shares
of common stock recently issued in our equity financing transactions will likely
enter the trading market, which may result in lower trading prices if there are
not sufficient purchasers to absorb the common stock as it enters the trading
market.
Since the February 14, 2002 merger by which we became a public company through
September 30, 2004, the price and trading volume of our common stock has ranged
widely. During this period, the highest closing price of our common stock was
$220.00 on March 8, 2002 (adjusted for our 1-for-25 reverse stock split
effective on June 17, 2004), and the lowest closing price of our common stock
was $1.66 on October 21, 2004.
OUR COMMON STOCK HAS ONLY BEEN PUBLICLY TRADED SINCE FEBRUARY 22, 2002. THE
PRICE OF OUR COMMON STOCK HAS FLUCTUATED WIDELY AND WE EXPECT THAT THE PRICE OF
OUR COMMON STOCK COULD CONTINUE TO FLUCTUATE SUBSTANTIALLY.
Until shortly after the February 14, 2002 merger, there was not any significant
public market for our common stock. On February 22, 2002, shares of our common
stock became listed for trading on the AMEX. We cannot be certain that the AMEX
will maintain our listing if we fall below its listing qualifications or do not
comply with other applicable AMEX rules. An issuer's securities may be delisted
by the AMEX if the issuer fails to meet certain financial criteria, or if a
listed security trades at a low market price for a substantial period of time.
We have not received notice from the AMEX threatening to delist our common
stock, but if we were to receive such a notice in the future, we cannot be
certain that we would be able to take corrective action requested by the AMEX to
avoid delisting.
If our shares are not listed on the AMEX, our shares are likely to be quoted on
the Over-the-Counter Bulletin Board of the National Association of Securities
Dealers, where they were quoted prior to February 2002, but where there may be
less trading of our shares.
14
The market price for our common stock will be affected by a number of factors,
including:
- developments within our own company;
- our announcements of new products or new clinical applications for
our products;
- our competitors' announcements of new products or new clinical
applications;
- quarterly variations in our or our competitors' results of
operations;
- changes in earnings estimates, recommendations by securities
analysts or our failure to achieve analysts' earning estimates;
- developments in our industry;
- the number of shares of our common stock that are available for
trading in the markets at any given time; and
- general market conditions and other factors, including factors
unrelated to our or our competitors' operating performance.
In addition, the stock prices of many companies in both the medical device and
medical services industries have experienced wide fluctuations, often unrelated
to the operating performance of those companies. These factors and industry
price fluctuations may materially and adversely affect the market price of our
common stock.
SALES OF OUR STOCK BY STOCKHOLDERS PRIOR TO OR FOLLOWING THE FEBRUARY 14, 2002
MERGER MAY HAVE A POTENTIAL IMPACT ON US.
Prior to the February 14, 2002 merger, there was both public and private trading
in the shares of Natexco Corporation, which became Diomed Holdings, Inc. in the
merger. We have been named as a defendant in a class action consisting of
persons who acquired or common stock from February 10, 2002 through March 21,
2002. We believe this suit to be without merit and have moved to dismiss it. See
"Legal Proceedings," below. We cannot be certain that other buyers or sellers
will not assert claims arising out of their purchases and sales of shares, and
we cannot predict whether those claims will involve us. To the extent that we
are involved, this may entail expense and diversion of management's attention,
and if we are found to be have done something improper, then we may have
financial liability, or we may be required to issue additional shares of stock
or take other corrective action.
CERTAIN OF OUR INVESTORS HAVE SIGNIFICANT VOTING POWER AND HAVE INFLUENCE ON THE
COMPOSITION OF OUR BOARD OF DIRECTORS.
As of October 31, 2004, our investors in the 2003 equity financing continued to
hold approximately 60% of our outstanding shares of common stock. Of these
investors, investors holding approximately 79% of the shares that we issued in
the 2003 equity financing (including Gibralt U.S., which is controlled by Samuel
Belzberg, one of our former directors (through February 2004) and, as of October
31, 2004, the holder of approximately 12% of our outstanding common stock)
became parties to a stockholders' agreement to which we are also a party.
The stockholders' agreement contains provisions regarding our board of
directors. Pursuant to this agreement, we increased the size of our board to
nine directors, and, as a result of the increased size of the board and the
resignation of Samuel Belzberg as a director, our remaining six directors
nominated and appointed to the board three persons selected by those investors
who are parties to the stockholders' agreement. Those directors are Joseph
Harris, chairman of our audit committee, Sidney Braginsky, a member of our audit
committee, and Edwin Snape, Ph.D., a member of our compensation committee.
Under the stockholders' agreement, we also agreed that the size of the board of
directors would remain at nine and we will use our best efforts to nominate for
election to the board of directors at each annual meeting of stockholders three
persons designated by those investors who are parties to the stockholders'
agreement. The agreement with regard to the nomination of directors terminates
when the investors who are parties to the stockholders' agreement cease to
beneficially own more than 50% of the investors' shares that are subject to the
agreement. As of October 31, 2004, approximately 79% of the investors' shares
that are subject to the agreement continued to be owned by these parties.
Gibralt U.S. also agreed to vote its voting securities in favor of the election
of the investors' three designees during the first three years after the
completion of the equity financing.
The investors in the 2004 equity and debt financing control approximately 13% of
our currently outstanding shares of common stock, not including common stock
they may acquire upon the exercise of warrants or conversion of convertible
debentures that these investors also hold. We have no stockholders' agreement
with the investors in the 2004 equity financing.
As a result of the high percentage of ownership of our outstanding shares that
the investors in the 2003 equity finacing continue to own and, as to those
investors who are parties to the stockholders' agreement and therefore have the
right to designate three director nominees, these investors may be able to
control the management and affairs of our company. Additionally, the significant
percentage of shares held by investors in the 2004 equity and debt financing
also results in these investors having influence on us. These investors'
interests may vary from yours. The concentration of share ownership that these
investors have also gives them influence over our affairs, particularly if these
investors act in concert. The effect of our investors' concentration of
ownership may also delay or prevent a change in control and might adversely
affect the market price of our common stock. Therefore, concentration of
ownership in the 2003 and 2004 investor factions may not be in the best interest
of our other stockholders.
15
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO POTENTIAL FUTURE APPRECIATION
ON THE VALUE OF OUR STOCK.
We have never paid cash dividends on our stock and do not anticipate paying cash
dividends on our stock in the foreseeable future. The payment of dividends on
our stock, if ever, will depend on our earnings, financial condition and other
business and economic factors affecting us at such time as the board of
directors may consider relevant. If we do not pay dividends, our stock may be
less valuable because a return on investment will only occur if and to the
extent that our stock price appreciates, and, if the price of our stock does not
appreciate, then there will be no return on investment.
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE AND MAY IMPAIR OUR ABILITY TO RAISE CAPITAL IN
THE FUTURE.
If our stockholders sell substantial amounts of our common stock in the public
market, including shares issued upon the conversion of the convertible
debentures or the exercise of outstanding warrants, the market price of our
common stock could decrease. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at times and prices
that we deem reasonable or appropriate.
Of the approximately 17.6 million shares of common stock currently outstanding,
approximately 2.4 million shares are shares that we sold in our 2004 equity and
debt financing. In addition, approximately 4.4 million shares of common stock
underly convertible debentures that we issued in the 2004 equity financing, and
approximately 3 million shares underly warrants that we issued in the 2004
equity and debt financing. The shares that we issued in the 2004 equity and debt
financing and the shares underlying the convertible debentures and warrants are
being registered under the registration of which this prospectus is a part, at
which time these shares will become freely tradable in the public market by the
2004 equity and debt financing investors. Even if these shares are not
registered, then the investors will be able to sell their shares to the public
under the SEC's Rule 144, which will generally require a one-year holding period
(ending October 25, 2005) prior to sale.
The purchase price paid by the investors in the 2004 equity and debt financing
for shares of common stock was $1.53, the conversion price of the debentures is,
subject to certain adjustments, $2.29 per share, and the exercise price of the
warrants is, subject to certain adjustments, $2.10 per share. If these investors
are able to sell their shares above these prices, then they may be inclined to
sell their shares immediately. Other factors may also cause the investors to
decide to sell their shares. If the investors in the 2004 equity and debt
financing determine to sell large numbers of their shares when they become
registered (or, in the case of the shares underlying the debentures and
warrants, when these underlying shares are issued from time-to-time in payment
of principal and accrued interest under the debentures or exercise of the
warrants), then there might not be sufficient interest in purchasing these
shares in the trading market, which may cause the market price of our common
stock to decrease.
POTENTIAL DILUTION CAUSED BY CURRENTLY OUTSTANDING STOCK OPTIONS, AND WARRANTS
MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
As of September 30, 2004, there were outstanding stock options representing
1,017,006 shares of common stock, with exercise prices ranging from $2.00 to
$205.75 per share. The weighted average exercise price of the stock options
outstanding as of September 30, 2004 was $8.56. In addition, as of September 30,
2004, there were outstanding warrants representing 882,625 shares of common
stock, with exercise prices varying from $0.025 to $87.50 per share. The
weighted average exercise price of all warrants outstanding as of September 30,
2004 was $2.50 per share. We issued 1,635,163 of these warrants on September 3,
2003 to our placement agent in the 2003 equity financing, Sunrise Securities
Corp., in partial payment of fees that we owed to the placement agent. The
warrants issued to our placement agent have exercise prices ranging from $0.025
per share to $2.50 per share.
Additionally, the warrants issued to the placement agent were subject to an
anti-dilution adjustment for future equity investments. This adjustment was
triggered on October 25, 2004, and as such the warrants with exercise prices of
$2.00 were adjusted to $1.93 and 7,588 additional warrants were issued, and the
warrants with exercise prices of $2.50 were adjusted to $2.32 and 48,145
additional warrants were issued.
Pursuant to our agreement with Sunrise, on October 25, 2004 we also issued
warrants to purchase an additional 73,539 shares of common stock, at an exercise
price of $2.10 per share, because we agreed to pay Sunrise commissions for sales
of securities within one year of the termination of our agreement with Sunrise
that we made to investors who participated in our 2003 equity financing. As of
the date of the registration statement of which this prospectus is a part, a
total of 1,583,260 of the warrants we issued on September 3, 2003, as adjusted,
had been exercised and 107,636 warrants were unexercised and remained
outstanding, in addition to the 73,539 warrants we issued on October 25, 2004 as
commissions under our agreement with Sunrise.
The warrant holders who exercised their warrants to date used the cashless
exercise feature of these warrants. As a result of the cashless exercise, the
warrant holders did not pay us in cash for the exercise price of the warrants,
but we did not issue the full amount of shares underlying the warrants
exercised. Accordingly, we issued a total of 1,340,464 shares of common stock
upon exercise of the 1,583,260 warrants.
16
During 2003, we also implemented a new option plan to help incent and compensate
our employees and others who assist our business. This new plan allows us to
issue options to purchase up to 1,600,000 shares (adjusted for our 1-for-25
reverse stock split effective on June 17, 2004) of common stock to employees,
directors and consultants. The holders of the options and warrants have the
opportunity to profit if the market price for the stock exceeds the exercise
price of their respective securities, without assuming the risk of ownership. If
the market price of the common stock does not exceed the exercise price of these
securities, then they will likely not be exercised and may expire on their
respective expiration dates.
After the exercise of options or warrants, an increase in the number of
outstanding shares will occur, thus decreasing each shareholder's percentage of
our total outstanding equity. When the holders exercise a significant number of
these options or warrants, the market price of our stock could fall,
particularly if these holders seek to sell the underlying common stock soon
after exercising their options or warrants.
OUR CORPORATE CHARTER AND BYLAWS CONTAIN PROVISIONS THAT MAY PREVENT
TRANSACTIONS THAT COULD BE BENEFICIAL TO STOCKHOLDERS.
Our charter and bylaws restrict certain actions by our stockholders and require
greater than majority votes for certain actions. For example:
- Only our board of directors or the chairman of the board can call
special meetings of stockholders.
- Stockholders must give advance notice to the secretary of any
nominations for directors or other business to be brought by stockholders at any
stockholders' meeting.
- Our board of directors has the authority to issue up to
approximately 3,000,000 additional shares of preferred stock, which are
authorized under our certificate of incorporation but are currently unissued.
Our board of directors can fix the price, rights, preferences and privileges of
the preferred stock without any further vote or action by our stockholders.
These rights, preferences and privileges attached to future preferred stock may
be senior to those of the holders of our common stock.
- Certain stockholders hold a significant percentage of our
outstanding shares, and some of these investors have the right to designate
three nominees to our nine member board of directors. See the risk factor
entitled "Certain of Our Investors Have Significant Voting Power and Have
Influence on the Composition of Our Board of Directors."
These and other provisions of our charter, the certificates of designations
setting forth the terms of our preferred stock and our bylaws, as well as
certain provisions of Delaware law, could prevent changes in our management and
discourage, delay or prevent a merger, tender offer or proxy contest, even if
the events could be beneficial to our stockholders. These provisions could also
limit the price that investors might be willing to pay for our stock because
these provisions may limit their rights and, thus, make an investment in our
stock less attractive to prospective investors.
Additionally, the listing requirements of the AMEX, on which our common stock is
listed, provide restrictions on our ability to enter into certain types of
transactions, such as the issuance of additional shares of capital stock. These
restrictions may make it more difficult to issue securities having terms
acceptable to investors in capital financing transactions that we may wish to
enter into from time to time. If we are precluded by these requirements from
issuing such securities, then our business may suffer because we will be unable
to obtain additional equity capital investment.
17
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
There are statements under "Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition or Results of Operations," "Business" and
elsewhere in this prospectus which are forward-looking. These statements are
indicated by words such as "will," "may," "plans," "expects" or "continue" and
other similar words. These statements relate to future events or our future
financial performance, and involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. Such factors include those listed under "Risk
Factors" in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We do not intend to update any of the
forward-looking statements after the date of this prospectus or to conform such
statements to actual results.
18
RECENT DEVELOPMENTS
PRIVATE PLACEMENT EQUITY AND DEBT FINANCING IN SEPTEMBER 2004
On September 28, 2004, we entered into a private placement equity and debt
financing transaction with accredited investors who agreed to (i) to lend us
$7,000,000 in the form of four-year variable rate convertible debentures, the
principal and interest of which is, subject to certain conditions, convertible
into common stock at a conversion price of $2.29 per share and (ii) purchase a
total of 2,362,420 shares of common stock at a purchase price of $1.53 per share
for an aggregate purchase price of $3,614,503. We issued warrants to purchase up
to 1,832,461 shares of common stock to the investors who purchased convertible
debentures, and we issued warrants to purchase up to 1,181,210 additional shares
of common stock to the investors who purchased 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 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 (which was $1.91 per share). The terms
of this transaction provided that the equity financing would close after
satisfaction of certain conditions precedent, including obtaining AMEX approval
of the issuance and listing with the AMEX of the shares to be sold and the
shares underlying the debentures and warrants. We completed the equity financing
at a closing held on October 25, 2004, at which time we issued the common stock,
debentures and warrants and the investors paid us gross proceeds of $10,614,503.
The registration statement of which this prospectus forms a part, relates to
those shares issued to the investors on October 25, 2004 as well as the shares
to be issued upon conversion of the debentures and exercise of the warrants. The
selling stockholders referred to in this prospectus are the investors to whom we
issued these securities on October 25, 2004.
Of the approximately $10.6 million in gross proceeds we received from the equity
financing on October 25, 2004, we paid commissions of approximately $743,000
(or, 7%) to Roth Capital Partners, LLC of Los Angeles, California, whom we had
engaged as our placement agent in an effort to raise capital. We also paid
approximately $75,000 to Sunrise Securities Corp., which acted as our placement
agent for our 2003 equity financing, in accordance with our agreement with
Sunrise to pay commissions should we sell securities to investors in the 2003
equity financing within one year of the termination of our agreement with
Sunrise. Under that agreement, we also were obligated to issue to Sunrise
warrants to purchase approximately 73,500 shares of common stock, at an exercise
price of $2.10 per share. We also incurred expenses attributable to the equity
financing of approximately $300,000, most of which were for legal fees and
registration expenses. We will use the balance of the proceeds of the equity
financing for general working capital purposes.
1-FOR-25 REVERSE STOCK SPLIT IN JUNE 2004
On June 15, 2004, we held our 2004 annual meeting of stockholders. In addition
to other matters, our stockholders approved the following:
- an amendment to our Certificate of Incorporation allowing our
board of directors to implement a 1-for-25 reverse split of our common stock
should the board so choose; and
-an amendment to our Certificate of Incorporation to decrease the
number of authorized shares of common stock to 50,000,000, but only if the board
of directors chose to implement the reverse stock split.
On June 16, 2004, the board of directors voted to implement the 1-for-25 reverse
stock split, effective on the opening of business as of June 17, 2004. After
giving effect to the reverse stock split, the number of our issued and
outstanding shares was reduced by a factor of 25, from 365,160,559 to
14,606,423, and we also reduced our authorized shares of common stock from
500,000,000 to 50,000,000 shares. Through our transfer agent, Continental Stock
Transfer & Trust Company, we conducted a mandatory share exchange of stock
certificates in connection with the reverse split.
19
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2004 on an
actual basis and as adjusted to reflect the pro forma effects of the securities
we issued in the equity financing on October 25, 2004. We will use the proceeds
that we received from this debt and equity financing for our general working
capital needs. These shares are being offered for resale under this prospectus.
You should read this table in conjunction with our financial statements and the
accompanying notes to our financial statements, "Summary Financial Data" and
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" included elsewhere in this prospectus.
SEPTEMBER 30, 2004
------------------------------
PRO FORMA
ACTUAL AS ADJUSTED (1)
------------------------------
(UNAUDITED)
(IN THOUSANDS)
Total long-term debt ....................... $ 485 $ 5,607
Stockholders' equity:
Common stock, $0.001 par value ....... 15 17
Preferred stock, $0.001 par value .... -- --
Additional paid-in capital ........... 78,367 83,539
Accumulated other comprehensive income 81 81
Accumulated deficit .................. (66,296) (66,296)
Total stockholders' equity ..... 12,167 17,342
Total Capitalization ........... 12,652 22,949
(1) The pro forma amounts include adjustments to the balance sheet at September
30, 2004 as if the transaction occurred on that date.
DIVIDEND POLICY
We have never paid dividends on our common stock or preferred stock. We
currently intend to retain any future earnings to fund the development of our
business and do not currently anticipate paying any cash dividends in the
foreseeable future.
BUSINESS
OVERVIEW OF OUR BUSINESS
We carry on our business primarily through our wholly-owned subsidiaries,
Diomed, Inc. and Diomed, Ltd.
We specialize in developing and commercializing laser and related disposable
product technologies used in minimally and micro-invasive medical procedures.
Minimally and micro-invasive medical procedures typically result in reduced pain
and scarring, shorter recovery periods and increased effectiveness compared to
traditional surgical procedures. Most of the pain associated with traditional
surgical procedures results from the slicing of the layers of skin and muscle
tissue, which can be significantly diminished or eliminated with minimally and
micro-invasive procedures.
In developing and marketing our clinical solutions, we use proprietary
technology and we aim to secure strong commercial advantages over our
competitors by gaining governmental approvals in advance of others and through
exclusive commercial arrangements. To participate in the minimally and
micro-invasive medical procedure industry, we seek to develop medical
applications for our laser technology, to incorporate disposable products into
these applications and to market our products to physicians who perform medical
procedures using our products and the techniques that we develop or acquire. To
optimize our revenues, we focus on clinical procedures which generate revenue
from both our laser equipment and our disposable products, such as kits and
optical fibers.
Our 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. Using our proprietary technology,
including our exclusive rights to U.S. Patent No. 6,398,777 and related foreign
patents for the endovenous laser treatment of varicose veins, we currently focus
on endovenous laser treatment (our EVLT(R) product line) for use in varicose
vein treatments, photodynamic therapy (our PDT product line) for use in cancer
treatments, and other clinical applications.
20
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 U.S.
EVLT(R) was a primary source of revenue in 2002 and 2003, and will be our
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, quick
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 20
by the third Quarter 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. In addition we have a
long-term partnership with Dentek Medical Systems GmbH, which uses our laser
module for dental applications.
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. Our management team focuses on
developing and marketing solutions that address serious medical problems that
have significant markets. Its determinations are based upon the number of
procedures that may be conducted in a market during a three-to-five year time
period and the revenue we project we may receive for this type of procedure.
Currently, EVLT(R) applications fall within this guideline, and we believe that
photodynamic therapy may have the potential to do so as well at some time in the
future. However, EVLT(R), and not PDT, is the emphasis of our current business
plan.
HISTORICAL BACKGROUND
Diomed, Inc. was incorporated on December 24, 1997 in the State of Delaware. On
June 23, 1998, Diomed, Inc. succeeded to the business of Diomed, Ltd., a company
formed under the laws of the United Kingdom in 1991. It did so by offering to
issue shares of Diomed, Inc. on a one-to-one exchange basis to the holders of
the shares of Diomed, Ltd. As a result of the exchange, Diomed, Inc. became the
owner of 100% of the outstanding shares of Diomed, Ltd., and Diomed, Ltd. became
a wholly-owned subsidiary of Diomed, Inc. Diomed, Ltd. continues to operate in
the United Kingdom. Its chief activities are product development, manufacturing
and international sales and marketing. Also, on June 23, 1998, we acquired the
business of Laserlite LLC, a U.S.-based distributor of aesthetic laser systems,
by issuing Diomed, Inc. shares in exchange for the outstanding membership
interests of Laserlite. We withdrew from the aesthetic laser market in 2001,
when we abandoned our Laserlite business because this business did not prove to
be successful, and we subsequently migrated to our current laser platform.
Since our inception in 1991 in Cambridge, England, we have focused on the
development of medical diode lasers. Our patented technology is capable of
bending light from many diodes simultaneously and concentrating them into a very
small opening, such as a small optic fiber. Our proprietary diode laser
technology has made it possible to simplify and minimize certain medical
procedures. Utilizing our core competency in diode light sources and optical
fibers, we pioneered the development of diode lasers for medical applications,
first with photodynamic therapy and later with EVLT(R).
21
In November 2000, to enter the disposable market segment of our laser business,
we acquired the medical fiber business of QLT, Inc., a company based in
Vancouver, British Columbia. We acquired QLT's rights to manufacture and market
OPTIGUIDE(R) fibers that were developed for use in photodynamic therapy cancer
treatments and the distribution rights to customers of Laserscope and Coherent,
Inc., two manufacturers of medical laser devices. In the fourth quarter of 2000,
we also created FibersDirect.com. FibersDirect.com is a U.S. business unit that
acts as a direct marketing conduit by providing on-line information for certain
available products and an e-mail link to our sales staff. FibersDirect.com
enables distribution of fibers directly from the manufacturer to the end-user.
Our OPTIGUIDE(R) fibers used in photodynamic therapy cancer treatments are
promoted via FibersDirect.com.
Diomed, Inc. is now a subsidiary of Diomed Holdings, Inc., a corporation
originally formed under the laws of the State of Nevada on March 3, 1998 under
the name Natexco Corporation. On February 11, 2002, we changed our name from
Natexco Corporation to Diomed Holdings, Inc. On February 14, 2002, Diomed
Holdings, Inc. acquired Diomed, Inc. in a reverse merger, pursuant to the terms
of an Agreement and Plan of Merger. We refer to the reverse merger that occurred
on February 14, 2002 as the "Merger." As a result of the Merger, Diomed, Inc.
became a wholly-owned subsidiary of Diomed Holdings, Inc., and the business of
Diomed Holdings, Inc. now is principally the business of Diomed, Inc.
Accordingly, except for this section or as otherwise indicated, the discussion
of our business relates to Diomed, Inc.'s business. The principal purpose of the
Merger was to enhance our ability to raise capital for our business by creating
a public trading market for shares of our common stock and help us when we
negotiate future acquisitions
For financial statement purposes, the Merger was treated as a recapitalization
of Diomed, Inc. For tax purposes, we believe the Merger qualifies as a tax-free
exchange of equity securities. We have not, however, requested any ruling from
the Internal Revenue Service in respect of the tax treatment of the Merger. For
detailed information, see Note (8) of the Notes to our December 31, 2003 Audited
Consolidated Financial Statements.
In April 2002, our board of directors determined that it was in our best
interests and the best interests of our stockholders to change our state of
incorporation from Nevada to Delaware by way of the migratory merger. On May 13,
2002, after obtaining stockholder approval, we completed the migratory merger by
merging Diomed Holdings, Inc. (Nevada) with and into a newly organized Delaware
subsidiary, Diomed Holdings, Inc. (Delaware).
Since we have become a Delaware corporation, we and our stockholders are subject
to Section 203 of the General Corporation Law of the State of Delaware, an
anti-takeover law. In general, the law prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
the prescribed manner. A "business combination" includes a merger, asset sale or
other transaction resulting in a financing benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within the prior three years, did own) 15%
or more of the corporation's voting stock.
For detailed information, see "Description of Securities - Recent Sales of
Unregistered Securities," and Note (8) of the Notes to the December 31, 2003
Audited Consolidated Financial Statements.
BUSINESS STRATEGY
We offer an integrated clinical solution with two key components: a laser and a
disposable procedure kit. In addition, we sell lasers and optical fiber for a
variety of medical applications directly to physicians, distributors and on an
original equipment manufacturing basis. This strategy involves the following
major components:
FULL SERVICE DIFFERENTIATION TO MAXIMIZE REVENUE AND MARKET SHARE
We generate revenues from the sale of products and services. In 2002, in the
U.S., we launched our EVLT(R) product line, after receiving FDA clearance in
January 2002. In mid 2002, we established a direct sales force to focus on
EVLT(R) sales. In the U.S., our sales force concentrates on selling our EVLT(R)
products and also our photodynamic therapy product line. We also selectively use
a network of independent sales representatives to supplement our direct sales
force. Our direct sales force is well trained and versed in selling EVLT(R) as a
complete clinical solution for the treatment of varicose veins. Our clinical
solution includes not only the laser and disposable procedure kits or single
fiber used by physicians in patient EVLT(R) treatments, but also includes
physician training and practice management tools which we provide to help
physicians develop and manage the business of promoting EVLT(R) as a minimally
invasive treatment option for patients suffering from varicose veins. In
addition, we have developed a website, www.evlt.com, to provide patients and
physicians with information about treatment options and benefits of our EVLT(R)
treatment and a physician locator function. International sales are managed
through a global network of third party sales agents and distributors. We also
take advantage of existing professional relationships and new opportunities to
sell photodynamic therapy lasers and disposable fiber for photodynamic therapy
and to manufacture laser and disposable items for third parties for other
clinical uses.
22
STRATEGIC ALLIANCES TO ENHANCE CUSTOMER REACH
We have established strategic alliances with some notable photodynamic therapy
drug companies to bring new treatments to market. However, the underlying
products being developed by these companies which are used in conjunction with
our products, have gained only limited regulatory approval required for
commercialization, and expanded regulatory approval is not assured. Accordingly,
we have focused our near-term investment in the commercialization of EVLT(R). In
addition, we maintain original equipment manufacture ("OEM") relationships with
companies such as Olympus in Japan, which uses our technology for surgical and
dental applications, and with Dentek Medical Systems GmbH, which uses our laser
module for dental applications. Our strategy is to create long-term and
exclusive working relationships that increase laser applications and revenue
potential through the sale of our lasers and disposables whenever possible.
RESEARCH AND DEVELOPMENT TO ENHANCE EFFICIENCIES AND PRODUCT EFFECTIVENESS
We have an internal research and development staff and from time to time have
used outside experts to assist us in our development program. Historically, our
research and development efforts concentrated on the development of clinical
applications and solutions for our lasers and related delivery systems. Through
our past efforts, we have created our EVLT(R) and photodynamic therapy product
lines. Although current research and development activities are directed at
enhancing laser and fiber manufacturing efficiency and functional effectiveness
of our EVLT(R) product line, we are continuously evaluating new clinical
applications and solutions for our lasers and delivery systems.
Our research and development expenditures were approximately $928,000, or, 17%
of sales, for the year ended December 31, 2002, approximately $850,000, or, 9%
of sales, for the year ended December 31, 2003 and approximately $1,123,000, or
12%, for the nine months ended September 30, 2004.
KEY ACQUISITIONS TO ENHANCE PROFITABILITY
On September 3, 2003, we acquired exclusive rights to U.S. Patent No. 6,398,777
and foreign counterparts regarding the endovenous laser treatment of varicose
veins from the five inventors of this procedure. With this proprietary position,
we believe we have positioned ourselves to be the leader in minimally invasive
varicose vein treatment. Previously, we acquired the rights to manufacture
OPTIGUIDE(R) fiber from QLT, Inc. in November 2000. We continue to be interested
in entertaining attractive opportunities in related fields, and we expect to
expand our efforts to identify and pursue these opportunities, beginning in
2005.
Semiconductor laser diodes are used in optical disc drives, optical fiber
telecommunications, printers and bar code scanners. No larger than a grain of
salt, the diode chip converts electricity into laser light with such efficiency
that power consumption and heat generation are reduced. They are related to the
LEDs that are used as indicator lights in most electrical devices. While LEDs
produce light measured in milliwatts, high power laser diodes each produce
several watts of laser light. Because they are semiconductor components, the
products they support have no moving parts, are highly reliable and can be run
from a wall socket power supply with only limited requirements to cool the
components. The outcome of this miniaturization of laser technology is a
portable, lightweight, highly reliable and easy to use laser. Like electronic
semiconductors, management believes that semiconductor lasers will increasingly
replace most other laser technologies.
To achieve power levels beyond that of a single laser diode, light may be
coupled from multiple diodes. This may be achieved by attaching an optical fiber
to the end of each diode and "bundle" the fibers together. This entails a number
of optical fiber joints inside the laser system to guide and couple the light.
Each optical joint reduces the amount of light that passes through the system,
and each joint also has a finite lifetime that is usually less than the life of
the diode. As one optical joint fails so the others come under greater stress
and an increased likelihood of cascade failure. The result is an inefficient
optical transfer where the power delivered to the working end of the fiber is a
small percentage of the power put out by the diode and a system of optical
joints with an excessive failure rate.
Our core technology uses an optical arrangement to manipulate and combine the
laser light in "free space," focusing the beams from multiple laser diodes into
the final optical fiber. The ability to combine the power from a large number of
laser diodes results in a much higher efficiency of power delivered to the
working site and in higher reliability than non-combined diodes because there
are no optical joints to burn out. The focusing ability of this system also
enables a more concentrated delivery of power as the light is focused to a
smaller spot size. This increased power density enables a wider variety of
medical, and other applications.
The most widely used medical diode laser emits laser energy at 810nm, producing
light in the near infra-red portion of the spectrum. At powers of up to 60W and
used in conjunction with a flexible optical delivery fiber, this wavelength can
be used in various surgical applications to cut, close or vaporise soft tissue.
Semiconductor diode chips, including wavelengths of 630nm, 635nm, 652nm, 690nm
and 730nm, are available, thereby permitting the development of practical,
portable laser systems for photodynamic therapy in the treatment of certain
types of cancer.
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Practical and versatile, the diode laser can be used in the operating theatre,
outpatient clinic and the doctor's office as well as permitting shared use
between hospital departments. With healthcare providers under increasing
pressure to cut costs while maintaining a high standard of treatment, diode
laser technology can assist in achieving these targets.
PRODUCTS, COMPETENCIES AND MARKET OPPORTUNITIES
Our focus on the development and commercialization of minimally and
micro-invasive medical procedures employing our laser technology and disposable
products has led to an array of applications, which are described below.
Minimally and micro-invasive medical procedures in general are a growing market,
as they reduce the need for general anesthesia, expensive hospital stays, and
long and painful recovery periods. The medical procedures that we address with
our products are those which we believe are capable of producing a recurring
revenue stream through the sale of a disposable, such as a procedure kit or
individual fiber, in addition to one-time revenue from the sale of the laser
itself. In 2002, approximately $3,400,000, or, 62%, of our total revenues were
derived from laser sales and approximately $2,100,000, or, 38%, of our total
revenues were derived from sales of disposable fibers and kits, accessories and
services. In 2003, approximately $5,700,000, or, 62%, of our total revenues were
derived from laser sales and approximately $3,500,000, or, 38%, of our total
revenues were derived from sales of disposable fibers and kits, accessories and
services. During the nine months ended September 30, 2004, approximately
$5,500,000, or 59%, of our total revenues were derived from laser sales and
approximately $3,900,000, or 41%, of our total revenues were derived from sales
of disposable fibers and kits, accessories and services. With the procedures
described below, we have demonstrated our skill and ability to be first to
market in the U.S. with innovative treatment options, thereby providing
meaningful new treatments and the foundation for what we believe will be a
profitable growing business.
ENDOVENOUS LASER TREATMENT.
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. In January 2002, we became the first
company to receive FDA clearance for endovenous laser treatment, with respect to
marketing EVLT(R) in the U.S., for the closure of the greater saphenous vein
with superficial reflux. In December 2002, we received FDA clearance for
expanded indications for use of EVLT(R), including our D15plus and D30plus diode
lasers and disposable kits for the treatment of varicose veins and varicosities
associated with the superficial vein reflux of the greater saphenous vein. On
September 3, 2003, we acquired exclusive rights to the patent for endovenous
laser treatment of varicose veins from the five inventors of this procedure. For
detailed information, see "September 2003 Acquisition of Exclusive EVLT(R)
Technology."
We commercialized EVLT(R) as an innovative minimally invasive laser procedure
for the treatment of varicose veins resulting from reflux of the greater
saphenous vein. The causes of varicose veins are commonly genetic. People with
past vein diseases, new mothers, overweight individuals and people with jobs or
hobbies that require extended standing also are at risk. According to a 1973
report by the University of Michigan under a comprehensive study of the health
characteristics of the community of Tecumseh, Michigan, approximately 25% of
women in the U.S. have varicose veins. In addition, varicose veins are more
prevalent in older people. The Tecumseh study was a comprehensive longitudinal
research study that tracked the health of a sample population of 7,000 to nearly
9,000 people at three intervals over the course of a decade, from the late 1950s
to the late 1960s. According to the Tecumseh study, at least 42% of Americans
over age 60 have varicose veins and this number is increasing as the population
continues to age. The Tecumseh study also indicates that at least 72% of women
over age 60 in the U.S. have varicose veins. According to the American
Association of Retired Persons, approximately 76,000,000 people in the U.S. are
50 or older, and approximately an additional 4,000,000 people turn 50 each year.
Based on this data, we estimate that between 25,000,000 and 40,000,000 Americans
suffer from venous insufficiency.
We believe that there are currently as many as 25 to 40 million Americans who
suffer from some degree of venous insufficiency and that there are approximately
150,000 people in the U.S. and 1,000,000 people worldwide who undergo vein
stripping operations annually. We also believe that many people forego vein
stripping procedures to treat their venous insufficiency due to the pain,
extended recovery time, significant potential of scarring and other serious side
effects associated with vein stripping. We believe that most patients who
undergo vein-stripping procedures are candidates for endovenous laser treatment.
EVLT(R) has several competitive advantages over the current vein-stripping
treatment. EVLT(R) is a 45 minute procedure per leg that can be performed in a
physician's office, usually under local anesthesia and with the procedure guided
by ultrasound technology. EVLT(R) also has a quick recovery period, reduced or
minimal pain and no appreciable scarring. In an endovenous laser treatment, the
area of the leg affected is anesthetized locally and a thin laser fiber is
inserted into the effected vein to deliver the laser energy in short pulses or
as a continuous application. At the end of the procedure, after the fiber is
withdrawn, a compression bandage is applied and worn up to three days. In
addition, a compression stocking is worn for seven days. Patients can resume
their normal routine, barring vigorous physical activities, directly after
undergoing the treatment. Vein stripping is a surgical procedure that requires
an overnight hospital stay, a painful recovery period of several weeks, and
possibly post-operative scarring from incisions and post-operative infections.
During clinical studies, 98% of first-time EVLT(R) treatments in clinical trials
have been successful. A EVLT(R) treatment has successfully resolved the
remaining cases.
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We developed our EVLT(R) product line as a complete clinical solution and
marketing model, including a laser, disposable kit and a training and marketing
plan, to assist physicians, clinics and hospitals in responding to the demand
for treatment of varicose veins in a minimally invasive manner. EVLT(R) is
attractive to physicians because it is a rapid treatment for patients, reduces
costs, is an efficient use of resources, reduces the rate of complications and
because we believe that patients will request EVLT(R). Also, EVLT(R) for
treatment of greater saphenous vein reflex is considered a non-cosmetic
procedure that may be reimbursable by health insurance providers if the treating
physician is knowledgeable about the reimbursement system and obtains
preapproval.
Due to the relative newness of the EVLT(R) procedure, currently available long
term clinical data demonstrating the effectiveness of the EVLT(R) procedure in
maintaining closure of the greater saphenous vein is limited to three years. The
lack of longer term clinical data may affect the ability of patients undergoing
this procedure to obtain reimbursement from their health insurance carriers.
Recently, a new study, co-authored by Dr. Robert Min, Diomed's paid consultant,
entitled "Endovenous Laser Treatment of Saphenous Vein Reflux: Long-Term
Results," was published in the August 2003 issue of the Journal of Vascular and
Interventional Radiology. Dr. Min is the Director of Cornell Vascular in New
York and Vice-Chairman of Radiology at Weill Medical College of Cornell
University. Dr. Min is an inventor of the EVLT(R) treatment, and he sold his
rights to this patent to Diomed on September 3, 2003. Dr. Min assists Diomed in
physician training and in the development of medical treatments using EVLT(R).
He has been a paid consultant to us since August 2001. As of September 30, 2004,
Dr. Min owned options to purchase 41,430 shares of common stock.
This study shows what we believe to be excellent long-term results for the
successful occlusion of varicose veins caused by reflux of the greater saphenous
vein. The data presented in the study shows that minimally invasive laser
treatment of varicose veins has a high long-term success rate, low complication
rate and rapid recovery. The Cornell study included 499 limbs with varicose
veins treated by EVLT(R) over a three-year period. Patients were evaluated
clinically and with duplex ultrasound scans at 1 week, 1 month, 6 months, 12
months, 24 months, and 36 months to assess efficacy and adverse reactions.
Successful occlusion of the greater saphenous vein after initial treatment was
98.2% and at 2 year follow-up 93.4% remain closed (113 of 121 limbs followed for
2 years). Importantly, all recurrences occurred prior to 9 months with the
majority noted less than 3 months following endovenous laser treatment. In this
study, there were no reports of skin burns, no abnormal nerve sensation and no
deep vein clots. In comparison, traditional surgery (ligation and stripping)
often requires general or spinal anesthesia and can take up to 4 weeks for full
recovery. Pain, bruising and scarring are also common. The results in this study
also show EVLT(R)to be comparable or superior to those reported for other
options available for treating greater saphenous vein reflux, including
ultrasound guided sclerotherapy, and radiofrequency ablation.
EVLT(R) was a primary source of revenue in 2003, and continues to be the 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. To date, we have sold in excess of 500 EVLT(R) lasers, and have
established Diomed as the leading brand of endovenous laser treatment products
for varicose veins in the U.S. 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 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. In addition, we have developed a website--www.evlt.com--to
provide patients with education about treatment options and benefits of EVLT(R).
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 volume of EVLT(R) procedures performed increases so may
our disposable sales. We believe that the U.S. represents the single largest
market for EVLT(R).
CANCER TREATMENTS UTILIZING PHOTODYNAMIC THERAPY.
We were the first diode laser manufacturer to receive FDA clearance for use of
our lasers and optical fibers in photodynamic therapy cancer treatments.
Photodynamic therapy is an effective palliative treatment for late-stage lung
and esophageal cancers and is under study for treatment of various other cancers
throughout the body. Photodynamic therapy is based on the discovery that certain
chemicals can kill one-celled organisms in the presence of light. Recent
interest in photosensitizing agents stems from research showing that some of
these substances have a tendency to collect in cancer cells. The
photosensitizing agent injected into the body is absorbed by all cells. The
agent remains in or around tumor cells for a longer time than it does in normal
tissue. When treated cancer cells are exposed to red light from a laser, the
light is absorbed by the photosensitizing agent. This light absorption causes a
chemical reaction that destroys the tumor cells. Light exposure is carefully
timed to coincide with the period when most of the agent has left healthy cells
but still remains in cancer cells. There are several promising features of
photodynamic therapy in treating cancer: (1) cancer cells can be selectively
destroyed while most normal cells are spared, (2) the damaging effect of the
photosensitizing agent occurs only when the substance is exposed to light and
(3) the side effects are relatively mild. The laser light used in photodynamic
therapy is directed through an optical fiber (a very thin glass strand). The
optical fiber is placed close to the cancer to deliver the proper amount of
light. For example, the fiberoptic can be directed through a bronchoscope into
the lungs for the treatment of lung cancer or through an endoscope into the
esophagus for the treatment of esophageal cancer.
Our photodynamic therapy product line of photodynamic therapy solutions uses our
own proprietary technology. When used in combination with a photosensitizing
drug, photodynamic therapy provides the cancer therapy. As indicated,
photodynamic therapy requires three-interacting elements: (1) a photosensitive
drug that is absorbed by cancerous and abnormal cells, (2) a light source
(laser) of a specific wavelength that activates the drug and (3) a delivery
system, including a thin optical-fiber to guide the light source to the target
area. Our photodynamic therapy line is a delivery system of laser technology,
support services and fiber disposables to the global photodynamic therapy
industry.
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Photodynamic therapy technology is only effective when these three components
are working in concert. We have worked early in the clinical development process
with photodynamic therapy drug companies to design a laser that optimizes the
most effective wavelength in combination with their photodynamic therapy drugs.
We have had long-term relationships with some photodynamic therapy drug
companies, and have sold lasers to be used in clinical trials for photodynamic
therapy applications.
In the U.S., regulatory approval by the FDA is given for each specific treatment
in response to a specific pre-market approval application. Each pre-market
approval application is generally addressed to a use for the device that the
pre-market approval application specifies. The FDA considers photodynamic
therapy a modality that requires a combination pre-market approval application,
where the photodynamic therapy drug company, laser manufacturer and fiber
manufacturer work together to obtain regulatory approval for the complete
medical procedure. The lengthy regulatory approval process and FDA modality
factor create significant obstacles to potential competition. In addition, we
have forged collaborative relationships with significant players in photodynamic
therapy drug development, thus limiting our risk should one of the photodynamic
therapy companies fail to receive regulatory approval or perform poorly in the
marketplace.
In August 2000, we and Axcan Pharma together received regulatory approval for
our 630nm laser and OPTIGUIDE(R) fiber, and Axcan Pharma's Photofrin(R) drug
used in the palliative treatment for late stage lung and esophageal cancers. In
November 2000, we entered into a 5-year exclusive supply contract with Axcan
Pharma for lasers. Axcan Pharma is developing other clinical applications using
Photofrin(R), including treatment for Barrett's Esophagus, a pre-cursor to
cancer of the esophagus. Axcan Pharma has pursued an application for FDA
clearance for Photofrin(R) and our lasers and fibers for use in the treatment of
Barrett's Esophagus. In December 2002, the FDA issued an approvable letter in
connection with Axcan Pharma's application. Axcan Pharma announced that it
received FDA clearance for the photodynamic therapy for Barrett's Esophagus in
August 2003. In September 2004, our laser development and supply agreement with
Axcan Pharma, dated August 2, 2000, was terminated and as a result, we are no
longer distributing PDT lasers through Axcan Pharma. Sales to Axcan Pharma
represented approximately 1% or less of our sales in 2003 and the first nine
months of 2004. We will continue to market PDT lasers through our direct sales
force and distributors, both domestically and internationally.
Our understandings regarding the market for photodynamic therapy are derived
from a variety of sources, and represents our best estimate of the overall
market sizes presented in certain disease areas. The actual market size and our
market share, depend upon a number of factors, including:
- competitive treatments, either existing or those that may arise
in the future;
- our products' performance and subsequent labeling claims; and
- actual patient population at and beyond product launch.
Our sales of our photodynamic therapy product line are dependent upon the
clinical development process and the commercialization of photodynamic therapy
drugs by photodynamic therapy drug companies. As a result, our sales may
fluctuate in relation to the timing of photodynamic therapy drug companies
achieving their strategic initiatives. Certain additional factors may slow the
growth of a market for photodynamic therapy procedures. Like any new clinical
solution, photodynamic therapy has to show long term results in order to gain
acceptance. The cancers that photodynamic therapy is being developed to treat
are slow to develop and acceptance of the procedure requires long term follow
up. As a result, there is currently a lack of long term clinical data for
photodynamic therapy. Furthermore, the diversity of different cancers requires
us to obtain data based on each type of cancer studied. Also, photodynamic
therapy may cause a photosensitivity side effect in certain patients such that
they are highly sensitive to sunlight for several days. In some patients this
side effect may cause skin burns if the patient is exposed to sunlight.
We currently believe that the potential market for our EVLT(R) product line is
substantially larger than the potential market for our photodynamic therapy
product line. We also expect sales of EVLT(R) products and services to account
for an increasingly higher proportion of our total sales revenue as compared to
photodynamic therapy products. Therefore, while we continue to pursue sales of
our photodynamic therapy product line and to pursue development of new
photodynamic therapy applications through the efforts of our collaborative
partners, our present emphasis is on our EVLT(R) product line and we are
concentrating our marketing and sales efforts towards the EVLT(R) product line.
FIBERS AND DISPOSABLE ITEMS.
To address medical conditions with minimally invasive techniques, we offer
physicians an integrated clinical solution, including a laser and disposable
procedure kits or individual fibers. Optical fiber is the necessary system that
delivers the laserlight during surgical, endovenous laser treatment and
photodynamic therapy procedures. These sterile fibers, generally used only once
to ensure sterility, can generate a steady stream of revenue. We sell
self-contained EVLT(R) kits of disposable items, which include an optical fiber,
a sheath that acts as an introduction for the fiber, a needle, a tray cloth and
protective packaging. In some cases, we sell only the fiber.
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The potential market for kits, fibers and other disposable items is driven by
the adoption rate of the specific clinical procedure. We have and will continue
to generate a disposable market by developing and promoting specific procedures,
such as endovenous laser treatments. As EVLT(R) gains market share in comparison
to vein-stripping and other varicose vein procedures, so will the volume of kits
and fibers used in these treatments, and the volume of fibers we sell for use in
these procedures will increase. As a result, we believe that our revenue stream
is likely to increase if we are able to incent physicians to purchase the fiber
and disposable procedure kits that we sell.
OTHER CLINICAL APPLICATIONS.
Our technologies are also used in general surgical applications as well as in
dental applications. While our focus is on the development of specific clinical
applications, such as varicose vein treatment with EVLT(R) other medical
applications can be, and are being, performed with our lasers. For instance, the
FDA has also cleared our diode laser technology for open and endoscopic surgical
procedures, which are used to treat vascular and pigmented lesions. Potential
clinical applications that we may address include:
NASAL POLYPECTOMY: Nasal polyps are usually benign growths in the nose, which
are removed with the laser with minimal bleeding and quick recovery period.
TURBINATE REDUCTION: The turbinates are structures in the nose which can become
enlarged due to conditions such as allergies and obstruct the airways. The laser
can be used to reduce their size and clear the blockage. Other nasal procedures
include: ethmoidectomy, meatal antrostomy, maxillary endo-sinus surgery. These
various procedures involve the removal of blockages, opening up of the various
airways and gaining access to various structures within the nose.
DACRYOCYSTORHINOSTOMY (DCR): Tear ducts take tears from the corner of the eye
down into the nose. Blockage of the tear ducts results in watery eyes. The laser
fiber can be used to reopen the channel from the tear duct into the nose and
resolve the problem. This simple procedure can be performed under local
anesthetic, is less traumatic than conventional surgery and leaves no surgical
scarring.
ONTOLOGICAL SURGERY: By carbonizing the end of the fiber, the trapped laser
energy heats up the tip producing in effect a tiny "hot knife", which can be
used, for cutting away tissue in a variety of conditions in the ear. The fine
tip size makes it an exceptionally controllable tool. Applications include
Stapedotomy and Stapedectomy (treatments involving the auditory bones in the ear
to correct hearing problems), Myringotomy (incision in eardrum to relieve
pressure from infection), Cholesteatoma and Acoustic neuron (benign growths in
the ear which are removed).
UVULOPALATOPLASTY (LAUP): Reshaping of the soft palate and uvula at the back of
the mouth is done in severe cases to reduce snoring and can be performed in one
session using a fine sculpted tip fiber. The coagulated area surrounding the
incision ensures virtually no blood loss, faster patient recovery and minimal
post-operative nursing requirements.
VAPORIZATION OF TUMORS: Areas of abnormal tissue due to inflammation or
infection can be destroyed or reduced in size with heat energy. The laser
delivers this in a very controllable way with a known depth of effect, which
avoids damage to surrounding structures.
GASTRO-INTESTINAL CANCER: Cancer in the gullet will grow and block the tube
stopping the patient from swallowing. The cancer can be reduced in size and the
tube reopened using the laser. This relieves the symptoms allowing the patient
to eat fairly normally, often returning home. It does not cure the cancer but
produces a temporary improvement in quality of life.
LUNG TUMORS: Cancers in the lung will grow and obstruct the airways causing
breathing problems for the patient. The cancer can be reduced in size and the
airway reopened using the laser. This relieves the symptoms allowing the patient
to breathe more normally. Again, it does not cure the cancer but produces a
temporary improvement in quality of life.
VASCULAR LESIONS: Although seen as primarily a cosmetic problem, vascular and
pigmented lesions can have a profound effect on lifestyle especially when they
occur in young people. For many years lasers have been used to deal with such
lesions with a high degree of success. Such treatments are simple to perform and
the nature of the laser light allows for a high degree of precision while side
effects are kept to a minimum. The laser can be used by shining it through the
skin (transdermally) to reduce the lesions' appearance. Delivery of the laser
energy is simplified by a range of specially designed hand pieces.
NEUROSURGERY: There are a variety of intercranial tumors which can be treated
with the laser. Those most suitable for laser assisted ablation are the benign
forms especially the various meningiomas. The laser can also be useful in
gaining access to lesions involving the brain stem and for removing acoustic
neuromas. The hemostatic properties of the laser, its controllability and the
limited collateral effects make the laser highly suitable for neurosurgical
applications.
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UROLOGY: The laser can be used in the treatment of Benign Prostate Hypertrophy
(BPH) in three different ways. It can be used transurethrally to debulk the
prostate by contact tissue removal or by non-contact tissue coagulation. It can
also be used to shrink the prostate by interstitial therapy. In addition, the
laser can be used to destroy bladder tumors and for a variety of open surgical
techniques where its ability to cut and coagulate simultaneously are utilized.
INTERSTITIAL THERAPY: The laser can be used to treat tumors within normal tissue
by thermally destroying them in situ. This technique is applicable to liver
metastases, osteoid osteomas and breast tumors. In addition, the laser can be
used in a similar way on the nucleus pulposus to cause shrinkage and reduce
pressure within the discs of the lower back. This latter technique is called
Percutaneous Laser Disc Decompression (PLDD).
There may be one or more common pathways for the development of products for
these potential clinical applications. In general, however, each of them will
require extensive preclinical studies, successful clinical trials and cleared
pre-market approval applications or 510(k)s before we can generate significant
revenues from them. We have no pending regulatory applications or clinical
studies. We may rely on third parties, including our collaborative partners, to
design and conduct any required clinical trials. If, we are not able to find
appropriate third parties to design and conduct clinical trials, and if we do
not have the resources to administer clinical trials in-house, this process may
become even more lengthy and expensive. Since we collaborate with third parties,
those parties generally maintain certain rights to control aspects of the
application development and clinical programs. Our business depends in part on
our ability to obtain regulatory approval for expanding applications and uses of
our products. Therefore, delays or other related problems may adversely affect
our ability to generate future revenues.
We may rely on third parties, including our collaborative partners, to design
and conduct any required clinical trials. In the future, we may not be able to
find appropriate third parties to design and conduct clinical trials or we may
not have the resources to administer clinical trials in-house. Therefore, this
process may become even more lengthy and expensive. Moreover, our collaborative
partners have certain rights to control aspects of the application development
and clinical programs. As a result, these programs might not be conducted in the
manner we currently contemplate. Since our business' success is heavily
dependent upon our ability to achieve regulatory approval for the applications
and uses of our products, our revenues may be adversely affected by delays or
other related problems.
Data already obtained from preclinical studies and clinical trials of our
products under development does not necessarily demonstrate that favorable
results will be obtained from future preclinical studies and clinical trials. A
number of companies in the medical devices industry, as in the pharmaceutical
industry, have suffered setbacks in advanced clinical trials, even after
promising results in earlier trials.
ORIGINAL EQUIPMENT MANUFACTURING.
Our technology and manufacturing capability has attracted original equipment
manufacturing partners. In the typical original equipment manufacturing
relationship, we produce the laser and other products to the original equipment
manufacturing customer's specifications, which will then be marketed under the
original equipment manufacturing's label. Our most significant original
equipment manufacturing relationship is with Olympus in Japan, which is using
our technology for surgical and dental applications.
MANUFACTURING
We manufacture our products with components and subassemblies that our
subcontractors supply. We assemble and test each of our products at our
Cambridge, England facility. Ensuring adequate inventory, continuous cost
reduction and superior product quality are top priorities of our manufacturing
operations. To achieve our goals, we work closely with our research and
development, sales and marketing teams, and effectively manage a limited number
of what we believe to be the most qualified suppliers.
We use a variety of materials, including mechanical, electronic, optical
components and subassemblies for the lasers, plus other materials that our
customers purchase for direct consumption, such as disposable items sold in kit
form and fibers. With the lasers constructed in the UK, local high-quality
sources of supply are utilized for metalwork components and subassemblies. We
procure standard off-the-shelf-electronic components from various UK suppliers.
Because of their complexity, high quality requirements and relatively low
volumes we choose to procure our optical components from a single source.
We also use a number of different laser diodes for our various products. The
diodes are also currently single-sourced, although we are exploring available
opportunities for dual sourcing. Currently, the majority of these suppliers are
located in the U.S., Japan and Europe. In addition, we purchase the fibers
contained in our clinical solution kits, and those fibers required to support
our FibersDirect.com business, from suppliers in the U.S.
During 2001, our principal supplier of the diodes that we used to manufacture
lasers was HPD, and our principal suppliers of materials which we used to
manufacture fibers were Pioneer, Inc. and Laser Peripherals. In 2002, we changed
our principal supplier of diodes to Laser Diode, Inc., although HPD remains an
available alternative supplier of diodes. Pioneer and Laser Peripherals continue
to be our main suppliers of fiber. Because most of our raw materials and
components are available from various sources, we are currently developing
qualified backup suppliers for each of these resources.
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We currently outsource most of our manufacturing of disposable fibers used in
EVLT(R), and other surgical procedures. We own the patent applications for
EVLT(R) disposable fiber technology and subcontract the manufacturing to a third
party. We subcontract the production of EVLT(R) kits of disposable items,
consisting principally of a fiber, a sheath used to introduce the fiber into a
vein and a needle used to insert the sheath. Each of these EVLT(R) components is
currently purchased from third parties. We purchase disposable fibers used in
other surgical procedures directly from third parties.
Lead times for components and materials may vary significantly depending on the
size of the order, specific supplier requirements and current market demand for
the components. Inability of our suppliers to meet our requirements on a timely
basis could interrupt our production until we obtain an alternative source of
supply. To date, we have not experienced significant delays in obtaining any of
our products.
We are required to manufacture our products to comply with the international
standard BS EN ISO 13485:2001 and the FDA's Quality System Regulations, or
"QSR." The ISO 13485 and QSR cover the methods and documentation of the design,
testing, control, labeling, packaging, storage and shipping of our products. Our
manufacturing facility is subject to periodic audits by regulators who conduct
inspections that must be satisfactory for us to maintain ISO approval, and it is
also auditable by the FDA. Our failure to maintain compliance with the ISO 13485
and QSR requirements could result in the closure of our manufacturing operations
and the recall of our products. If one of our suppliers were not to maintain
compliance with our quality requirements, we might have to qualify a new
supplier and could experience manufacturing delays as a result. In November
1999, we became certified to manufacture in the United Kingdom and upgraded to
BS EN ISO 13485: 2001. In 2002, we underwent an FDA Quality Systems Regulation
Inspection and received a satisfactory letter in from the FDA as a result of
this inspection.
SALES AND MARKETING
In the U.S., we sell, market and distribute our products and services directly
through direct sales representatives and through "independent sales
representatives." Independent sales representatives are independent contractors
and not employees. Our independent sales representatives commit to achieving
certain minimum sales targets, and we compensate them on a commission only
basis. If an independent sales representative fails to meet its minimum sales
targets, then we have the right to terminate our relationship. Internationally,
we sell our products primarily through distributors.
Our primary sales focus in the U.S. has been the commercialization of EVLT(R).
We began to use independent sales representatives in the later half of 2001,
before the FDA approved our EVLT(R) product line in January 2002. Subsequent to
the FDA's clearance of EVLT(R) and given the dynamics of selling clinical
applications, including lasers and disposable products, we made the decision at
the end of the first quarter in 2002 to execute a direct sales strategy to
commercialize EVLT(R) in the U.S. In addition, in September 2002, we engaged
Sigmacon Health Products Corporation to be our distributor in the Canadian
market. Since expanding our sales force, we have been engaged in training our
sales representatives and in enhancing our proprietary marketing materials. We
will continue to monitor sales activities and strategies and adjust the number
of direct sales representatives, independent sales representatives and
distributors to address market needs and opportunities in the future.
In November 2000, we formed FibersDirect.com, a U.S. business unit that acts as
a direct marketing conduit by providing on-line information for available
products and access to our sales staff by e-mail. FibersDirect.com enables
distribution of fibers directly from the manufacturer to the end-user. Our
OPTIGUIDE(R) fibers, used in photodynamic therapy cancer treatments, are
promoted via FibersDirect.com.
Internationally, we sell, market and distribute our products and services
through a network of distributors in Europe, the Middle East, South America,
Central America and Asia. We typically commit our distributors to minimum
product purchases, and we may terminate our relationships with distributors who
do not meet their minimum purchase levels. We have not given our distributors
price protection or product return rights. We do not remotely monitor inventory
levels of our products once we sell them to distributors, but may obtain that
information as needed by our contact with the distributor. We also develop and
maintain strategic marketing alliances for international sales and marketing.
These alliances exist under agreements with companies such as Olympus
ProMarketing, Inc. Each of these agreements relates to certain products and
market segments.
We target our marketing efforts to physicians through office visits, trade shows
and trade journals, and to consumers through point of service information
brochures and our websites, www.evlt.com (which provides information to patients
and physicians about EVLT(R)) and www.fibersdirect.com (which provides product
and pricing information to prospective customers about our available optical
fibers). We expect that consumer awareness will increase demand for the
treatment methodologies we address and for our products. Our sales philosophy
includes establishing strong collaborations with well-known professionals in the
industry regarding our technology platforms, compiling substantive clinical data
and supporting the publication of peer review articles. With respect to EVLT(R),
we believe that we have collected more clinical data regarding our products and
their application than any of our competitors in the endovenous laser treatment
market.
In the fiscal years 2002 and 2003, only one of our customers accounted for more
than 10% of our revenues, and sales generated in the U.S. versus internationally
were 55% in 2002 and 63% in 2003. In the nine months ended September 30, 2004,
no customer accounted for more than 10% of our revenues, and approximately 64%
of our sales were generated in the U.S. versus internationally.
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Going forward, we believe that our annual dependence on any individual customer
or group of customers should decrease because we expect more of our revenues to
be generated from sales of EVLT(R) to individual physician practices rather than
to large-scale distributors. In addition, we believe that our percentage of
sales generated domestically should increase as EVLT(R) market penetration in
the U.S. increases.
We envision that by developing and marketing procedures to doctors that involve
selling key components--namely lasers and their related single use
disposables--we will have the potential to create recurring sales. Our plan is
that each future procedure will be accompanied with a disposable component to
provide recurring sales.
For the remainder of 2004 and in 2005, we will continue to focus on the
development and growth of EVLT(R) sales worldwide. We will continue to support
the development and approval of new applications for photodynamic therapy
products, and to continue our research and development efforts aimed at
enhancing our products' effectiveness and manufacturing efficiencies.
COMPETITION
The medical device industry is highly competitive and regulated, and is subject
to rapid and substantial technological change. We compete primarily on the basis
of performance, brand name, reputation and price. Developments by others, both
public and private, may render our products under development or existing
technologies noncompetitive or obsolete, or we may be unable to keep pace with
technological developments and other market factors. Existing and potential
competitors may develop products and clinical solutions that could prove to be
more effective, safer or less costly than our products and clinical solutions.
Many of these competitors have significantly greater financial and human
resources than we do, and have established reputations as well as worldwide
distribution channels that are more effective than ours. Such competition
involves an intensive search for technological innovations and the ability to
market these innovations effectively. The introduction of new products and
clinical applications by competitors may result in price reductions, reduced
margins, loss of market share and product replacements, even for products
protected by patents. There can be no assurance that competitors, many of which
may have made substantial investments in competing technologies, would not
prevent, limit or interfere with our ability to make, use or sell our products
either in the United States or in international markets. To compete effectively
in the marketplace, we require the financial resources to effectively support
our activities in the following key areas: research and development, regulatory
compliance, quality control, sales and marketing, distribution and technical
information and training services.
In the vein treatment market, our competitors include manufacturers and
marketers of surgical and radiofrequency devices, and pharmaceutical companies
that provide drugs used in sclerotherapy and other vascular diseases. Within the
specific endovenous laser treatment market which our EVLT(R) products serve,
Biolitec A.G., AngioDynamics, Inc. (a subsidiary of E-Z-EM, Inc.), Vascular
Solutions, Inc., New Star Lasers, Inc., d/b/a CoolTouch, Inc. and Dornier
MedTech GmbH are our main competitors for surgical diode lasers. AngioDynamics
does not manufacture lasers or optical fiber and we understand it currently has
an original equipment manufacturing agreement with Biolitec for these goods.
AngioDynamics received FDA clearance for its device in November 2002,
approximately 10 months after Diomed, while CoolTouch recently received FDA
clearance for its laser treatment of varicose veins on September 30, 2004.
Biolitec, Lumenis and Dornier, among others, are our competitors in the general
surgical laser market. AngioDynamics, Total Vein Solutions, Inc. and Vascular
Solutions, Inc. currently compete with us for kits used in endovenous laser
treatment.
We believe that our EVLT(R) system and comprehensive physician management tools
are superior to the products offered by our direct competitors. EVLT(R) uses a
laser wavelength that has been proven 98% effective in FDA trials and in peer
reviewed data. As to varicose vein treatments using radiofrequency, offered by
our competitor, VNUS, Diomed's EVLT(R) treatment is a faster procedure, uses
substantially less expensive disposables and has clinically proven safety
results that are superior to the safety results reported for VNUS. EVLT(R)
offers physicians comprehensive practice management tools, including physician
training and practice development. Dornier, Biolitec and AngioDynamics offer
some practice management assistance, but we believe that, to the extent offered,
our competitors' practice management tools are significantly less comprehensive
than ours.
In the cancer treatment market, our competitors include manufacturers and
marketers of surgical and radiation therapy devices, and all the pharmaceutical
companies that provide various drugs used in chemotherapy and immunotherapy.
Within the specific photodynamic therapy market, Lumenis, Laserscope and
Biolitec are our main competitors. We currently have one FDA-cleared diode laser
in the U.S. for photodynamic therapy cancer applications, which is used in
conjunction with Axcan Pharma's Photofrin(R) drug for late stage lung and
esophagus cancers.
We also face competition from current widespread treatment practices, including
surgery, chemotherapy and radiation. Since most photodynamic therapy cancer
treatments are still in clinical trials, no long-term safety or efficacy data is
available. As a result, cancer patients may be more likely to choose proven
traditional forms of treatment.
30
We expect that our principal methods of competition with other photodynamic
therapy support companies will be based upon such factors as:
- the ease of administration of our partners' photodynamic therapy
methodologies;
- the degree of generalized skin sensitivity to light;
- the number of required doses;
- the safety and efficacy profile;
- the selectivity of photodynamic therapy drug for the target
lesion or tissue of interest;
- the type and cost of our light systems; and
- the cost of our partners' drug.
Increased competition could result in:
- price reductions;
- lower levels of third-party reimbursements;
- failure to achieve market acceptance for our photodynamic
therapy product line, and loss of market share.
PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY
We hold U.S. and international patents for inventions in the following areas:
endovenous laser treatment of varicose veins, solid state laser diode light
source, high power light source, peltier-cooled and medical spacing guide. These
patents expire from 2010 to 2019.
In June 2002, the U.S. Patent and Trademark Office issued Patent No. 6,398,777
("Endovascular laser device and the treatment of varicose veins") regarding this
technology. The technology is for the process of using lasers and fibers to
perform endovenous laser treatment procedures. We formerly licensed technology
for the EVLT(R) process from one of its inventors, Dr. Robert Min, on a
non-exclusive basis, although Dr. Min had agreed not to license the process
technology to any third party so long as we were not in breach of our
obligations under our agreement with him. On September 3, 2003, Diomed acquired
exclusive rights to U.S. Patent No. 6,398,777 and related foreign patents for
endovenous laser treatment of varicose veins. These patents relate to the
technology underlying our EVLT(R) product. This acquisition resulted from two
transactions.
In the first transaction, Diomed purchased the interest in the EVLT(R) patent
owned by one of its five named inventors, Dr. Robert J. Min. This transaction
was completed under a purchase agreement between Diomed and Dr. Min entered into
on July 23, 2003. On September 3, 2003, Diomed paid the purchase price set forth
in the Purchase Agreement (consisting of $500,000 in cash and options to
purchase 40,000 (as adjusted by the 1:25 reverse split, effective June 17, 2004)
shares of our common stock) in exchange for Dr. Min's assignment to Diomed of
his interest in the EVLT(R) patent. Diomed has agreed to pay to Dr. Min variable
payments based on Diomed's sales of products using the EVLT(R) patent. Dr. Min
had previously licensed the EVLT(R) patent to Diomed and had served as a
consultant to Diomed. Dr. Min's consulting agreement with Diomed was amended to
reflect the changes in the relationship between him and Diomed as a result of
Diomed's acquisition of the EVLT(R) patent rights. Dr. Min will continue to act
as a consultant to Diomed under the revised consulting agreement.
In the second transaction, Diomed licensed, on an exclusive basis, the EVLT(R)
patent from Endolaser Associates, LLC, the assignee of interest in the EVLT(R)
patent from the other four named inventors. This transaction was completed under
a license agreement between Diomed and Endolaser Associates entered into on July
11, 2003. On September 3, 2003, Diomed paid Endolaser Associates $1,500,000 in
cash in exchange for the exclusive license granted by Endolaser Associates on
behalf of the four inventors who had assigned their interest in the EVLT(R)
patent to Endolaser Associates. Diomed is to make additional payments totaling
$2,500,000 in 10 quarterly installments of $250,000 each, commencing October 1,
2003. Diomed paid all such payments due through October 31, 2004. Diomed has
agreed with Endolaser Associates that Diomed will pay variable royalties based
on Diomed's sales of products using the EVLT(R) patent.
Together with Dr. Min and his associate, Dr. Stephen Zimmet, we also invented
fiber technology that we use with our EVLT(R) products. Drs. Min and Zimmet
assigned to us their rights to a patent application regarding this technology.
As of November 1, 2004, this patent application was still pending before the
U.S. Patent and Trademark Office. We pay a fee for our sale of fibers
incorporating this technology. Doctors Min and Zimmet are also our consultants.
They provide services to us on an ongoing basis to educate physicians on the use
of our EVLT(R) products, and we pay them fees for these services.
We license technology that we currently use in our OPTIGUIDE(R) fiber optic
diffuser. Health Research, Inc. owns this patented technology, and exclusively
licenses it to QLT, Inc. In turn, QLT sublicenses it to us on a non-exclusive
basis. The sublicense continues until the licensed patent rights expire or the
license from Health Research to QLT is terminated, whichever comes first. Health
Research may terminate its license to QLT if QLT breaches its obligations under
the license and does not cure the breach within 90 days, or if QLT becomes
insolvent. QLT may terminate our sublicense if we breach our obligations under
the sublicense, such as failing to pay royalties, and do not cure the breach
within 90 days, or if we become insolvent.
31
We have received trademark registrations from the U.S. Patent and Trademark
Office for the trademarks "Diomed," "OPTIGUIDE" and "EVLT." We have initiated
trademark registrations "Summer Legs" as a trademark and/or service mark, but we
have not yet received registrations for this particular mark. We registered
various domain names, including diomedinc.com, diomed-lasers.com,
fibersdirect.com, fibresdirect.com, summerlegs.com and evlt.com.
Our proprietary technology includes:
- a device for scanning laser beams in a pre-defined pattern across
the patient's skin;
- an enclosure for protecting laser diodes and modules;
- a low cost method for measuring the light from optical fibers of
differing geometry (under development);
- a common platform for laser diodes of different wavelengths; - a
user interface that is appropriate to the clinical setting;
- a monolithic optical geometry for implementing the patented
technology;
- a means for driving the laser diodes that provides a wide dynamic
range; and
- a means for efficiently removing heat from the diodes thereby
allowing the instrument to operate with standard line power as the only service.
The patent position of medical device companies generally is highly uncertain.
Some of the risks and uncertainties include:
- the patent applications owned by or licensed to us may not result
in issued patents;
- our issued patents may not provide us with proprietary protection
or competitive advantages;
- our issued patents may be infringed upon or designed around by
others;
- our issued patents may be challenged by others and held to be
invalid or unenforceable;
- the patents of others may have a material adverse effect on us;
and
- significant time and funds may be necessary to defend our patents.
We are aware that our competitors and others have been issued patents relating
to optical fibers and laser devices. In addition, our competitors and others may
have been issued patents or filed patent applications relating to other
potentially competitive products of which we are not aware. Further, in the
future our competitors and others may file applications for patents, or
otherwise obtain proprietary rights to technology that can be used for such
products. These existing or future patents, applications or rights may conflict
with our patents or applications. These conflicts could result in a rejection of
our or our licensors' patent applications or the invalidation of issued patents,
any of which could have a material adverse effect on our ability to focus on the
development or marketing of these applications. If conflicts occur, or if we
believe that other products may infringe on our proprietary rights, we may
pursue litigation or other legal remedies, or may be required to defend against
litigation. Legal proceedings may materially adversely affect our competitive
position, and we may not be successful in any such proceeding. Litigation and
other proceedings can be expensive and time consuming, regardless of whether we
prevail. This can result in the diversion of substantial financial, managerial
and other resources from other activities. An adverse outcome could subject us
to significant liabilities to third parties or require us to cease any related
research and development activities or product sales.
Some of the risks and uncertainties include:
- we may be required to obtain licenses under dominating or
conflicting patents or other proprietary rights of others;
- these licenses may not be made available on terms acceptable to
us, if at all; and
- if we do not obtain such licenses, we could encounter delays or
could find that the development, manufacture or sale of products requiring such
licenses is foreclosed.
For a detailed discussion of current litigation involving our intellectual
property, see "Legal Proceedings."
We also seek to protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. These third parties may breach their agreements with us, and we may
not have adequate remedies for their breach. Also, competitors may independently
learn or discover our trade secrets.
32
GOVERNMENT APPROVALS
The FDA and comparable international regulatory bodies regulate our medical
device products and their applications.
In the United States, our products are regulated as medical devices by the FDA
under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and require
clearance of a premarket notification under Section 510(k) of the FDC Act or
approval of a PMA application, under Section 515 of the FDC Act prior to
commercialization. Pursuant to the FDC Act, the FDA regulates, among other
things, the following aspects of medical devices:
- product design and development;
- product testing for safety and efficacy;
- product manufacturing;
- product labeling;
- product storage;
- pre-market clearance or approval;
- product sales and distribution;
- record keeping;
- reporting of adverse events; and
- corrective actions, recalls and removals.
In addition, in conjunction with the Federal Trade Commission, the FDA regulates
the advertising and promotion of the medical devices in the United States.
Failure to comply with the applicable requirements can result in sanctions such
as warning letters, fines, injunctions, civil and criminal penalties against us,
our officers, and our employees, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant premarket clearance
or premarket approval for devices, withdrawal of marketing approvals and
recommendation that we may not be permitted to enter into government contracts.
Unless an exemption applies, each medical device we wish to commercially
distribute in the U.S. will require either prior clearance by the FDA on the
basis of what is called a "510(k) application," or a pre-market approval ("PMA")
application. The FDA classifies medical devices that are manufactured or sold in
the U.S. into one of three classes. Devices deemed to pose lower risks are
placed in either class I or II, which requires the manufacturer to submit to the
FDA a pre-market notification requesting permission to commercially distribute
the device. This process is generally known as 510(k) pre-market notification.
Devices deemed by the FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are placed in class III,
requiring pre-market approval upon a PMA application submitted by the applicant.
Our laser devices require either 510(k) or pre-market application approval,
depending on the clinical application sought. Our devices generally qualify for
clearance under 510(k) procedures. To obtain 510(k) clearance, we must submit a
pre-market notification demonstrating that our proposed device is substantially
equivalent to a previously cleared 510(k) device or a device that was in
commercial distribution before May 28, 1976 (the date that the FDA called for
the submission of PMA applications). The FDA's 510(k) clearance review has
recently taken from three to twelve months from the date the application is
submitted, but it can take significantly longer.
After a device receives 510(k) clearance, any material changes, major design
changes, changes to the safety and efficacy of the product, new claims or
indications for use and new technology with no prior history of use in medical
devices are subject to a new 510(k) clearance requiring a rigorous demonstration
of substantial equivalence to a currently marketed device and or clinical
trials. Any modification that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use,
requires a new 510(k) clearance or, alternatively, could require pre-market
approval. The FDA requires each manufacturer to make this determination
initially, but the FDA can review any such decision and can disagree with a
manufacturer's determination. If the FDA disagrees with a manufacturer's
determination, the FDA can require the manufacturer to cease marketing and/or
recall the modified device until 510(k) clearance or obtain pre-market approval.
If the FDA requires us to seek 510(k) clearance or pre-market approval for any
modifications to a previously cleared product, we may be required to cease
marketing or recall the modified device for the unapproved, or so called
"offlabel," use until we obtain this clearance or approval. Also, under these
circumstances, we may be subject to significant regulatory fines or penalties.
We expect that any additional applications that we may seek for our existing
laser products will require pre-market approval. The FDA requires pre-market
approval for each specific clinical procedure.
33
We are the first company to receive FDA clearance for use of lasers and related
applications in endovenous laser treatment and first diode laser manufacturer to
receive FDA clearance for use of lasers in photodynamic therapy cancer
treatments. In January 2002, we received FDA clearance for use of endovenous
laser treatment in the U.S., in respect of our EVLT(R) product line, making us
the first company to receive FDA clearance for this modality and use.
Specifically, the FDA approved our EVLT(R) surgical laser and procedure kit as
intended for use in coagulation of the greater saphenous vein of the thigh in
patients with varicose veins, and the FDA specifically found that the FDA would
not require us to submit a pre-market approval application for this use. In
December 2002, the FDA granted clearance for the use of EVLT(R) for expanded
indications, namely, the use of our D15plus and D30plus diode lasers and
disposable kits for the treatment of varicose veins and varicosities associated
with the superficial vein reflux of the greater saphenous vein. In August 2000,
we and Axcan Pharma received regulatory approval for our 630nm laser and
OPTIGUIDE(R) fiber, and Axcan Pharma's Photofrin(R) drug used in the cancer
treatment for late stage lung and esophageal cancers. In August 2003, Axcan
Pharma announced that it received FDA clearance in connection with an
application it had made for expanded indications of the use of Photofrin(R) in
conjunction with our photodynamic therapy laser products for the treatment of
Barrett's Esophagus. In September 2004, our laser development and supply
agreement with Axcan Pharma, dated August 2, 2000, was terminated and as a
result, we are no longer distributing PDT lasers through Axcan Pharma. Sales to
Axcan Pharma represented approximately 1% or less of our sales in 2003 and the
first nine months of 2004. We will continue to market PDT lasers through our
direct sales force and distributors, both domestically and internationally.
We are also regulated under the Radiation Control for Health and Safety Act,
which requires laser products to comply with performance standards, including
design and operation requirements, and manufacturers to certify in product
labeling and in reports to the FDA that their products comply with all such
standards. The law also requires laser manufacturers to file new product reports
and annual reports, maintain manufacturing, testing and sales records, and
report product defects. We must affix various warning labels and install certain
protective devices, depending on the class of the product.
Our failure to comply would initially result in a warning letter from FDA
informing us of the noncompliance. Action to correct the non-compliance range
from a field correction, such as new labeling being sent to existing customers
by mail, to a formal recall of the labeling and replacement with compliant
material. As compliance with existing regulations is included in our new product
development protocol, it is unlikely a non-compliance will occur. Labeling and
new product compliance are reviewed at discrete intervals during new product
development by regulatory and compliance departments prior to the release of any
new products.
International sales of our products are subject to strict regulatory
requirements, which vary substantially from country to country. Our key
international markets are the European Union, Japan, Australia, South Korea,
Peoples Republic of China and Canada. The time required to obtain clearance or
approval by a foreign country may be longer or shorter than that required for
FDA clearance or approval, and the requirements may be different.
The European Union, which consists of fifteen countries encompassing most of the
major countries in Europe, has adopted numerous directives and standards
regulating the design, manufacture, clinical trials, labeling and adverse event
reporting for medical devices. Devices that comply with the requirements of a
relevant directive will be entitled to bear the CE conformity marking indicating
that the device conforms with the essential requirements of the applicable
directives and, accordingly, can be commercially distributed throughout Europe.
ISO 9001 certification is one of the CE Mark certification requirements. In
November 1999, our facility was awarded ISO 9001 and EN 46001 certification,
thereby allowing us to apply the CE mark to our products and market them
throughout the European Union. In September 2001, we were the first company to
receive the CE mark of approval for marketing endovenous laser therapy products
in Europe.
Outside of the European Union, we must obtain country-by-country approval to
import our products. Certain countries, such as Switzerland, have voluntarily
adopted laws and regulations that mirror those of the European Union with
respect to medical devices.
THIRD-PARTY REIMBURSEMENT
A patient's ability to secure reimbursement for our existing and future products
is critical to our success. In the U.S., health care providers generally rely on
third-party payors, principally private health insurance plans, Medicare and
Medicaid, to reimburse all or part of the cost of procedures in which medical
devices are used. However, we cannot assure that EVLT(R) and photodynamic
therapy, and future products that we develop in connection with photodynamic
therapy, endovenous or other medical and clinical procedures, will be
reimbursed, or that the amounts reimbursed to physicians would be adequate.
The current cost reduction orientation of the third-party payor community makes
it exceedingly difficult for new medical devices and surgical procedures to
obtain reimbursement. Often, it is necessary to convince payors that the new
devices or procedures will establish an overall cost savings compared to
currently reimbursed devices and procedures. We believe that EVLT(R) may offer
an opportunity for payors to reduce the costs of treating varicose vein patients
by possibly reducing significantly the number of vein stripping procedures
performed. We estimate that the cost of varicose vein treatment using EVLT(R) is
approximately 25% of the cost of vein stripping procedures. While we believe
that EVLT(R) possesses economic advantages that will be attractive to payors, we
cannot assure that they will make reimbursement decisions based upon these
advantages.
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Reimbursement by third-party payors is often positively influenced by the
existence of peer-reviewed publications of safety and efficacy data and
recommendations by knowledgeable physicians. With regard to EVLT(R), we
currently exceed the competition in the magnitude of clinical data we have
compiled, and we are currently the only company to have peer-reviewed articles
published in scientific journals addressing endovenous laser treatment. Most
recently, a new study, entitled "Endovenous Laser Treatment of Saphenous Vein
Reflux: Long-Term Results," was published in the August 2003 issue of the
Journal of Vascular and Interventional Radiology. This study shows what we
believe to be excellent long-term results for the removal of varicose veins
caused by reflux of the greater saphenous vein. The study was co-authored by Dr.
Robert Min, Director of Cornell Vascular in New York and Vice-Chairman of
Radiology at Weill Medical College of Cornell University. Dr. Min is a paid
consultant to Diomed, and is an inventor of the EVLT(R), who sold his rights to
this patented technology to Diomed on September 3, 2003. Dr. Min assists Diomed
in physician training and in the development of medical treatments using
EVLT(R). For further details of this study, see "Products, Competencies and
Market Opportunities--Endovenous Laser Treatment."
Additionally, we believe that our significant investment in proactive
reimbursement activities has produced dramatic results in both the number and
breadth of insurance carriers willing to provide positive EVLT coverage. The
list of private, regional and national insurance providers with positive
coverage policies on EVLT(R) has grown significantly, driven in large part by
the addition of UnitedHealth Group Inc. UnitedHealthcare has joined other
organizations such as Aetna Inc. and Humana Inc. along with an extensive list of
independent Blue Cross Blue Shield and Medicare (Part B) carriers now providing
our growing EVLT(R) patient base with access to broad insurance coverage.
On November 4, 2004, the Center for Medicare and Medicaid Services (CMS)
established reimbursement codes for laser ablation as a mode of treatment for
superficial vein disorders, including EVLT(R) for varicose veins. The new codes,
which are established by the American Medical Association and the CMS, form the
basis for Medicare and Medicaid reimbursement across the U.S. and are expected
to become effective January 1, 2005.
Under the new codes, doctors performing the EVLT(R) procedure in an office or
clinic setting will be reimbursed an unadjusted base rate of $2,041 for the
first vein treated under code #36478; second and additional veins will have a
base rate of $437 under code #36479. When performed in a hospital setting, the
new codes allow for professional (Part B) payments of $364 for the first vein
treated and $178 for the second and additional veins, along with applicable
hospital facility fees. These base rates will be adjusted for regional cost
differences.
With the issuance of these CDT codes, existing insurance coverage for EVLT(R)
now represents over 180 million covered lives in the U.S.
Reimbursement systems in international markets vary significantly by country
and, within some countries, by region. Reimbursement approvals must be obtained
on a country-by-country basis or a region-by-region basis. In addition,
reimbursement systems in international markets may include both private and
government-sponsored insurance. We cannot be certain that we will be able to
continue to obtain such approvals in a timely manner, if at all. If we fail to
receive acceptable levels of international reimbursement approvals, market
acceptance of our products in those countries is likely to be adversely
affected.
Nevertheless, the efforts of governments and third-party payors to contain or
reduce the cost of healthcare will continue to affect our business and financial
condition as a medical device company. In foreign markets, pricing or
profitability of medical products and services may be subject to government
control. In the U.S., we expect that there will continue to be federal and state
proposals for government control of pricing and profitability. In addition,
increasing emphasis on managed healthcare has increased pressure on pricing of
medical products and will continue to do so. These cost controls may have a
material adverse effect on our revenues and profitability, and may affect our
ability to raise additional capital.
In addition, cost control initiatives could adversely affect our business in a
number of ways, including:
- decreasing the price we, or any of our partners or licensees,
receive for any of our products;
- preventing the recovery of development costs, which could be
substantial; and
- limiting profit margins.
NUMBER OF EMPLOYEES
As of September 30, 2004, we employed a total of 80 full-time employees, 35 of
whom are based in the U.S. and 45 of whom are based at Diomed Ltd., our
wholly-owned subsidiary in Cambridge, England, where manufacturing and certain
international sales are conducted. We believe that our future success will
depend in part on our continued ability to attract, hire and retain qualified
personnel. None of our employees is represented by a labor union. We believe our
employee relations are good.
35
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 defendant(s) 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 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 U.S. 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 January 6, 2004, we filed a lawsuit in the United States Federal District
Court for the District of Massachusetts against AngioDynamics, Inc. seeking
injunctive relief and damages for infringement of our U.S. 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 invalidity of the EVLT(R)
patent. AngioDynamics has added certain counterclaims against us. However, the
Court has bifurcated the case, so that those counterclaims will not be litigated
until we resolve our patent infringement claims against AngioDynamics. We are
currently in the discovery phase of this litigation.
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 U.S. 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 . On September 3, 2004, plaintiffs filed an
amended complaint in the action that named only us 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. 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. To that end, on October 21, 2004, we filed a motion to dismiss the
amended 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 14, 2004, we filed a lawsuit in the United States Federal 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
U.S. 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.
We are involved in other legal proceedings and claims of various types. While
any litigation contains an element of uncertainty, management believes that the
outcome of each such other proceeding or claim which is pending or known to be
threatened, will not have a material adverse effect on us.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
In this Prospectus, 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. We refer you to the
"Risk Factors" on pages 6 through 17 of this prospectus 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 or acquire 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 financial
statements and the notes thereto included in this prospectus.
OVERVIEW
We develop and commercialize minimally invasive medical procedures that employ
our laser technologies and associated disposable products. Using our proprietary
technology, including our exclusive rights to U.S. Patent No. 6,398,777, we
currently focuses on endovenous laser treatment (EVLT(R)) of varicose veins. We
also develop and market 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 our clinical solutions, we use 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, we focus on clinical procedures that generate revenues from
both capital equipment and disposable products, such as procedure kits and
optical fibers.
Our 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), we provide our customers with state of the art
physician training and practice development support. Our EVLT(R) procedure and
related products were cleared by the United States FDA in January of 2002.
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 U.S.
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 relative 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.
37
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 ten 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. In addition we have a
long-term OEM relationship with Dentek Medical Systems GmbH, which uses our
laser module for dental applications. In September 2004, our laser development
and supply agreement with Axcan Pharma, dated August 2, 2000, was terminated and
as a result, we are no longer distributing PDT lasers through Axcan Pharma.
Sales to Axcan Pharma represented approximately 1% or less of our sales in 2003
and the first nine months of 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.
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
our operations, financial position, and cash flows in conformity with accounting
principles generally accepted in the United States. We filed our 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 our financial condition, results of operations,
and cash flows are based on our 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.
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.
38
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.
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 on 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.
39
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 on 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.
LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
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
1,188,470 shares of the Company's common stock at $2.50 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 EQUITY AND DEBT FINANCING 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 AMEX, we completed this transaction. We received net proceeds of
approximately $9.8 million before related legal and registration expenses of
approximately $300,000. We will use the proceeds for general working capital
purposes.
The following summarizes the principal terms of the transaction:
40
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.
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. We issued warrants to purchase up to 1,832,461 shares of common stock to
the investors who purchased convertible debentures, and we issued warrants to
purchase up to 1,181,210 additional shares of common stock to the investors who
purchased 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.
41
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 bore interest
at 1% above the prime interest rate (4.75% at September 30, 2004). The line of
credit was secured by the assets of Diomed, excluding certain intellectual
property, and was subject to financial covenants including tangible net worth
and liquidity. Diomed's obligations under the line of credit were also
guaranteed by the Company. 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, we terminated the $2,500,000
line of credit with Silicon Valley Bank. At no time during the term of the line
of credit did Diomed draw down on the line, and accordingly, there were no
amounts outstanding at the time of termination.
FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2002.
REVENUE
Revenues for the year ended December 31, 2003 were $9,199,000, increasing
approximately $3,643,000, or 66%, from $5,556,000 for the year ended December
31, 2002. Revenue from EVLT(R) disposable procedure kits increased 220%,
representing a volume increase of more than three times the number of kits sold
in 2002 (when we received FDA clearance), which we view as a demonstration of
the growing acceptance of EVLT(R) in the medical field.
In 2003, approximately $5,726,000, or 62%, of our total revenues, were derived
from laser sales, as compared to approximately $3,443,000, or 62%, in 2002. In
2003, approximately $3,473,000, or 38%, of our total revenues were derived from
sales of disposable fibers and kits, accessories and service, as compared to
approximately $2,113,000, or 38% in 2002. We expect the proportion of revenue
derived from disposables to increase as we establish a larger base of installed
lasers and the number of EVLT(R) procedures performed grows.
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,
- the impact of new sales management and development of our sales
team, and
- the impact of increased acceptance of the EVLT(R) procedure and
expanded reimbursement coverage by health care insurers.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the year ended December 31, 2003 was $5,873,000, increasing
approximately $658,000, or 13%, from $5,215,000 for the year ended December 31,
2002. Cost of revenue, as a percentage of sales, decreased from 94% to 64% on a
year-to-year basis.
The increase in cost of revenue in 2003 was driven by:
- the corresponding increase in the number of lasers and disposable
products sold, offset, on a percentage of sales basis, by the
leverage of fixed manufacturing costs across a greater number of
units, and
- new royalties and amortization of an intangible asset from the
EVLT(R) patent acquisition.
Gross profit for the year ended December 31, 2003 was $3,325,000, increasing
approximately $2,983,000 from $342,000 for the year ended December 31, 2002. On
a percent-of-sales-basis, the gross margin increased 30 percentage points from
6% to 36%. The increase in gross profit in 2003 was driven by an increase in
sales volume. Our prices remained stable.
42
OPERATING EXPENSES
- Research and development expenses for the year ended December 31,
2003 decreased by 8% to $850,000 from $928,000 for the year ended December 31,
2002. This slight downward trend was largely due to cash constraints prior to
the equity financing completed in the fourth quarter of 2003. Research and
development spending returned to higher levels in the first nine months of 2004,
and we expect them to remain at an elevated level through year-end 2004 as the
Company improves the feature functions of our products and continues to reduce
product costs.
- Selling and marketing expenses for the year ended December 31,
2003 were $4,056,000, increasing approximately $792,000, or 24%, from $3,264,000
for the year ended December 31, 2002. The increase was primarily driven by
higher sales commissions resulting from sales growth, restructuring of the sales
field leadership and sales field organization, and an increased investment in
marketing initiatives to support the commercialization of EVLT(R). In the first
nine months of 2004, we experienced increased selling and marketing expenses due
to significantly increasing the size of the direct sales force in the U.S. and
we anticipate increased spending in sales and marketing programs through
year-end 2004 to support the continued commercialization of EVLT(R).
- General and administrative expenses for the year ended December
31, 2003 were $4,400,000 increasing approximately $575,000, or 15%, from
$3,825,000 for the year ended December 31, 2002. The increase was primarily due
to costs incurred in connection with financing initiatives, proxy statements and
corresponding stockholder meetings, legal fees in connection with the lawsuit we
filed against Vascular Solutions and the $150,000 in legal fees paid for the
settlement of the Augenbaum litigation. For detailed information about this
litigation, see Note (13) of the Notes to the December 31, 2003 Audited
Consolidated Financial Statements-- Exchange of Class C and Class D Convertible
Preferred." In the first nine months of 2004, we have experienced an increase in
general and administrative expenses due to the growth in the infrastructure we
required to support our growing business and due to increased legal fees in
connection with patent infringement litigation against Angiodynamics, Vascular
Solutions and Total Vein Solutions, and the cost of litigation against Vascular
Solutions in the trade secrets lawsuit we filed in the fourth quarter of 2003.
LOSS FROM OPERATIONS
As a result of the above, the loss from operations for the year ended December
31, 2003 was $5,980,000, decreasing approximately $1,694,000, or 22%, from
$7,674,000 for the year ended December 31, 2002, as increasing costs were more
than offset by increased operating revenue.
INTEREST EXPENSE, NET
Interest expense for the year ended December 31, 2003 was $13,902,000, compared
to $327,000 for the year ended December 31, 2002, and included $12,894,000 in
non-cash charges for debt discounts, beneficial conversion features and debt
financing costs related to the December 2002, May 2003 and September 2003 debt
financings, as well as interest expense on notes related to the May 2003 and
September 2003 debt financings that we converted into common stock in the second
closing of the equity financing on November 25, 2003. Also, cash-based interest
expense in 2003, in the amount of $1,008,000, included $783,000 in amortization
of debt financing costs and $132,000 in interest expense on notes related to the
December 2002 debt financing. These charges will not continue in 2004, as the
December 2002 notes were fully repaid in cash subsequent to the first closing of
the equity financing on September 3, 2003, and the May 2003 and September 2003
notes (including all accrued interest thereon) were fully converted into common
stock in the second closing of the equity financing in November 2003. In
addition, 2003 included $72,000 in interest expense on the $936,000 promissory
note we owed to Axcan Pharma, which we fully paid when we repaid the note on
January 2, 2004, in accordance with the terms of the note.
Please see the notes to our 2003 financial statements included with this
prospectus for further details regarding the accounting for non-cash interest
expense.
CASH-BASED (GENERAL) INTEREST EXPENSE:
December 2002 notes * $ 212,000
May 2003 notes * 51,000
September 2003 notes * 652,000
Axcan Pharma note * 72,000
Other 21,000
-----------
TOTAL $ 1,008,000
===========
43
NON-CASH INTEREST EXPENSE:
December 2002 notes * $ 2,721,000
May 2003 notes * 1,248,000
September 2003 notes * 8,925,000
-----------
TOTAL $12,894,000
===========
* Interest expense was fully recognized in 2003.
INCOME TAXES
For the years ended December 31, 2002 and 2003, we included no provision for
foreign, federal or state income taxes, as we incurred net operating losses.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the above, the net loss applicable to common stockholders for the
year ended December 31, 2003 was $19,881,000, or $8.99 per share (adjusted for
our 1-for-25 reverse stock split effective June 17, 2004), compared to a net
loss of $8,001,000, or $14.70 per share (adjusted for our 1-for-25 reverse stock
split in June 2004), in the year ended December 31, 2002. The FY2003 net loss
included $12,894,000 in non-cash interest expense arising from debt discounts
and beneficial conversion features related to the bridge financings in December
2002 through September 2003.
DESCRIPTION OF INTERIM FINANCING TRANSACTIONS FROM
DECEMBER 2002 TO SEPTEMBER 2003
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number of shares of
common stock, price per share of common stock, options and warrants)
From December 2002 until September 2003, we entered into three interim (or
"bridge") financing transactions, each of which was with a related party.
Highlights of these three transactions are as follows:
- December 2002 Interim Financing. At the end of December 2002, we
borrowed $2,000,000 from Gibralt U.S. in the form of one-year Class A Secured
Convertible Notes (the "Class A Notes") and Class B Unsecured Convertible Notes
(the "Class B Notes"). In connection with this loan, we also issued warrants to
purchase 333,334 shares of common stock at an exercise price of $6.50 per share.
These funds were used to provide working capital while new management and new
independent directors completed their assessments of our prospects and
operations.
- May 2003 Interim Financing. In April 2003, we secured loan
commitments for up to $1,200,000 as interim financing from Gibralt U.S. and two
directors. Gibralt U.S. committed to lend up to $1,100,000, and Mr. Wylie and
Peter Norris committed to lend the remaining $100,000 in exchange for one-year
Class D Secured Notes (the "Class D Notes"). This transaction closed on May 7,
2003. These funds were used to provide working capital while we pursued our plan
to raise long-term equity financing. We issued preferred shares convertible into
a total of 120,863 shares of common stock to these lenders in connection with
their loan commitments.
- May 2003 Exchange Transaction. Simultaneously with obtaining the
$1,200,000 of loan commitments, we modified several terms and conditions of the
Class A and Class B Notes that we believed might impede the completion of a
permanent equity financing with institutions and accredited investors. First, we
issued Class C Stock, which was convertible into 1,084,690 shares of common
stock, in exchange for the redelivery to us of 333,334 warrants and modification
of the Class A and Class B Notes to make them non-convertible. Second, we issued
Class D Stock, which was convertible into 120,863 shares of common stock, as a
discount for the $1,200,000 in committed secured bridge loans. The 1,205,552
shares of common stock underlying the Class C Stock and Class D Stock
represented in the aggregate approximately 50.36% of our common stock and common
stock equivalents outstanding after the transactions.
- May 2003 Modification Transaction. On May 28, 2003, we and the
holders of the Class A and Class B Convertible Notes made further modifications
to the notes to accommodate the plan for permanent equity financing. We did not
issue any additional shares or pay any amounts to obtain these changes.
- August 2003 Exchange of Preferred Shares. As part of our
settlement of the Augenbaum lawsuit, we exchanged the convertible preferred
stock we issued on May 7, 2003 for an equal number of shares of new classes of
preferred stock. The new classes of preferred stock are not by their terms
convertible into common stock, but under a written agreement with the
stockholders, these shares will be exchanged for an equal number of shares of
common stock into which the number the former classes of common stock were
convertible. This exchange was made to address a claim in the Augenbaum
complaint that the preferred stock we issued in May 2003 could be convertible by
its terms. The plaintiff in Augenbaum agreed that we could issue the same number
of shares of common stock into which the May 2003 preferred stock would have
been convertible, but that the mechanism should be through an exchange of
preferred stock for common stock, not a conversion of the preferred stock into
common stock. Accordingly, the August 2003 exchange agreements with the holders
of the preferred stock provide that after our stockholders approve the issuance
of the underlying shares of common stock, then either we or the holders of the
preferred stock may request the exchange of the preferred stock for that number
of shares of common stock into which the May 2003 preferred stock was
convertible.
44
- Repayment of $2,000,000 Debt Incurred in December 2002 Interim
Financing.
On September 3, 2003, we repaid all of the $2,000,000 in principal and accrued
interest on the notes we issued in connection with the December 2002 interim
financing, using a portion of the $6,500,000 gross proceeds of the sale of
Secured Bridge Notes in the first closing of our 2003 equity financing.
- Conversion of $1,200,000 Million Debt Incurred in May 2003 Interim
Financing. On November 25, 2003, (including accrued interest) the $1,200,000 in
notes we issued in our May 2003 interim financing converted into common stock at
$2.50 per share. Accordingly, we issued 499,294 shares of common stock to these
noteholders.
- Conversion of Secured Bridge Notes. On November 25, 2003, the
$6,995,000 in Secured Bridge Notes we issued at the first closing of the equity
financing on September 3, 2003 (including accrued interest) converted into
common stock at $2.00 per share. Accordingly, we issued 3,562,788 shares of
common stock to these noteholders.
- Exchange of Class E and Class F Stock. On November 25, 2003, in
connection with the final closing of our 2003 equity financing and pursuant to
our agreement with the holders of our Class E and Class F Stock, we exchanged
all outstanding shares of Class E Stock for a total of 1,084,690 shares of
common stock and we exchanged all outstanding shares of Class F Stock for a
total of 120,863 shares of common stock.
We summarize in the tables below the material terms of the Class A and Class B
Convertible Notes and warrants that we issued in the December 2002 Interim
Financing, the Class C Notes that we issued in the May 2003 Exchange
Transaction, the Class D Notes that we issued in the May 2003 Interim Financing
Transaction and the Class E Notes that we issued in exchange for the Class C
Notes and the amendments that we made to the Class D Notes in the May 2003
Modification Transaction. Following these tables, we describe the material terms
of these securities in greater detail.
TABLE SUMMARIZING THE DECEMBER 2002 INTERIM FINANCING AND SUBSEQUENT
MODIFICATIONS
The following table summarizes the original terms of the $2,000,000 interim
financing that we completed in December 2002, the terms of that $2,000,000
interim financing after giving effect to the exchange transaction that we
completed on May 7, 2003 and the subsequent modification on May 28, 2003:
ORIGINAL TERMS OF TERMS OF DECEMBER 2002 TERMS OF DECEMBER 2002
DECEMBER 2002 INTERIM FINANCING AS INTERIM FINANCING AS
INTERIM FINANCING MODIFIED MAY 7, 2003 MODIFIED MAY 28, 2003
Indebtedness: Indebtedness: Indebtedness:
- ------------- ------------- -------------
- - $2,000,000 principal amount - $2,000,000 principal amount - $2,000,000 aggregate
- - interest rate 8% per annum - interest rate 8% per annum principal amount
- - principal and accrued interest - principal and accrued - interest rate 12.5% per annum
payable at maturity interest payable at maturity starting 5/28/03
- - maturity date 1/1/04 - maturity date 1/1/04 - interest accrued through
5/27/03 added to principal
and becomes payable quarterly
commencing 3/31/04 to the
extent of 50% excess quarterly
cash flow
- interest accrued from 5/28/03
payable quarterly commencing
9/30/03
- maturity date 1/1/06
Conversion of Indebtedness: Conversion of Indebtedness: Conversion of Indebtedness:
- --------------------------- --------------------------- ---------------------------
- - convertible into common stock - no conversion rights - no conversion rights
at noteholder's option
- - number of shares of common
stock into which convertible
equals principal and interest
divided by conversion price
- - conversion price determined at
time of conversion
- - conversion price is 80% of the
then-prevailing price of common
stock (determined on basis of
market price, price in financing
transaction or liquidation, as
applicable)
45
Other Rights of Noteholders: Other Rights of Noteholders: Other Rights of Noteholders:
- ---------------------------- ---------------------------- ----------------------------
- - right to approve future - no right to approve future - no right to approve future
financings prior to 1/1/2004 financings financings
- - right to participate in future - no right to participate in - no right to participate in
financings at a 20% discount to the future financings future financings
price paid by investors in the - right to rescind 5/7/03 exchange - right to rescind 5/28/03 exchange
future financing transaction if (1) no stockholder transaction if (1) no stockholder
approval of issuance of common approval of issuance of common
stock upon conversion of preferred stock upon conversion of preferred
shares issued in consideration of shares issued in consideration of
exchange transaction, or (2) exchange transaction, or (2)
financing is not entered into prior financing is not entered into prior
to 6/30/03 to 7/31/03
Security: Security: Security:
- --------- --------- ---------
- - $1,000,000 principal amount of - entire $2,000,000 principal - entire $2,000,000 principal
notes secured, $1,000,000 principal amount plus accrued interest amount plus accrued interest on
amount unsecured secured notes secured
- - security interest granted in - security interest is lien on - security interest is lien on
all of our personal property, subject all of our personal property, all of our personal property,
to priority of prior security subject to priority of prior excluding intellectual property
interest in accounts receivable security interest in accounts acquired after 12/31/02 and
- - pledge of stock of subsidiary receivable inventory and fixed assets in
owning the photodynamic therapy - pledge of stock of subsidiary excess of the stipulated 12/31/02
business owning the photodynamic therapy value
business - security interest in accounts
receivable subject to subrogation
to future creditors if we enter
into receivables financing
transaction
- pledge of stock of subsidiary
owning the photodynamic therapy
business
Warrants: Warrants: Warrants:
- --------- --------- ---------
- - warrants to purchase 333,334 - December 2002 warrants - December 2002 warrants
shares of common stock at exercise surrendered, subject to the surrendered, subject to the
price of $6.50 per share December 2002 warrants being December 2002 warrants being
- - number of warrant shares reissued upon the note-holders' reissued upon the noteholders'
subject to increase if shares of exercise of their rescission rights exercise of their rescission rights
common stock or common stock
equivalents are issued at a price
less than the warrant exercise price
- - warrant exercise price subject to downward adjustment if common stock or
common stock equivalents issued in a financing at less than the warrant
exercise price
TABLE SUMMARIZING THE MAY 2003 INTERIM FINANCING AND SUBSEQUENT MODIFICATIONS
The following table summarizes the original terms of the $1,200,000 interim
financing that we completed on May 7, 2003 and the subsequent modification to
certain of the terms and conditions of that financing on May 28, 2003:
ORIGINAL TERMS OF TERMS OF MAY 7, 2003
MAY 7, 2003 INTERIM FINANCING TRANSACTION
INTERIM FINANCING TRANSACTION AS MODIFIED MAY 28, 2003
Indebtedness: Indebtedness:
- ------------- -------------
- - up to $1,200,000 aggregate - up to $1,200,000 aggregate
principal amount principal amount
- - interest rate 8% per annum - interest rate 8% per annum
- - principal and accrued interest - principal and accrued interest
payable 5/6/2004 payable 5/6/2004
Conversion of Indebtedness: Conversion of Indebtedness:
- --------------------------- ---------------------------
- - no conversion rights - no conversion rights
Other Rights of Noteholders: Other Rights of Noteholders:
- ---------------------------- ----------------------------
- - no right to approve future - no right to approve future
financings financings
- - right to participate at the - mandatory participation in future
noteholder's option in future financings at the same price paid
financings at the same price paid by investors in the future
by investors in the future financing and otherwise on the same
financing and otherwise on the same terms as applicable to those
terms as applicable to those investors
investors - no right to redeem indebtedness for
- - right to redeem indebtedness for cash upon completion of future
cash upon completion of future financing
financing - right to accelerate due date of
- - right to accelerate due date of indebtedness if financing not
indebtedness if financing not completed prior to 7/31/2003
completed prior to 7/1/2003
46
Security: Security:
- --------- ---------
- - $1,200,000 principal amount and - $1,200,000 principal amount and
accrued interest on notes secured accrued interest on notes secured
- - security interest granted in all of - security interest granted in all of
our personal property, subject to our personal property, excluding
priority of existing lien in accounts receivable, intellectual
accounts receivable property acquired after 12/31/02
- - pledge of stock of subsidiary and inventory and fixed assets in
owning the photodynamic therapy excess of value as of 12/31/02
business - pledge of stock of subsidiary
owning the photodynamic therapy
business
Warrants: Warrants:
- --------- ---------
- - no warrants issued - no warrants issued
DESCRIPTION OF DECEMBER 2002 INTERIM FINANCING TRANSACTION
The principal terms of the $2,000,000 bridge financing that we completed on
December 27, 2002 were:
- We borrowed $2,000,000 from Gibralt U.S., whose principal, Samuel
Belzberg, was then a member of our board of directors.
- To evidence the loan, we issued $1,000,000 in Class A Notes that
were secured and $1,000,000 in Class B Notes that were unsecured.
- The maturity date of the notes was January 1, 2004.
- The notes bore interest at 8% per annum, and accrued interest was
payable at maturity.
- The Class A and the Class B Notes, including principal and accrued
interest, were convertible into common stock at 80% of the common stock price
determined as follows: (i) if we were to complete a financing transaction in
which we issued common stock or common stock equivalents, the price per share of
common stock or common stock equivalent (the weighted average if multiple
financing transactions occur in a rolling 30-day period), (ii) if we were to
complete a financing transaction in which we did not issue common stock or
common stock equivalents, the lower of the average of the closing price of the
common stock for the 15 business days preceding the public announcement of the
financing transaction or the average of the closing price of the common stock
for the 15 business days following the public announcement of the financing
transaction, (iii) if a liquidity event were to occur in which any person or
group other than a stockholder on December 27, 2002 becomes the beneficial owner
of at least 51% of voting control of us, the price per share allocated to each
share of common stock or common stock equivalent, or (iv) if any other liquidity
event were to occur, the lower of the average of the closing price of the common
stock for the 15 business days preceding the public announcement of the
liquidity event or the average of the closing price of the common stock for the
15 business days following the public announcement of the liquidity event.
- If a merger or reorganization were to occur, the Class A and Class
B Notes were convertible into the kind and number of shares of common stock,
other securities or property into which the notes would have been converted into
if the notes had been converted into common stock on the business day preceding
the merger or reorganization.
- We agreed not to consummate any financing transaction until
January 1, 2004 while any Class A or Class B Notes were outstanding unless we
had first received the approval of the holders of at least 66-2/3% of the
outstanding principal amount of the notes.
47
- We also issued to the noteholder warrants to purchase up to
333,334 shares of common stock. The warrants were exercisable for a period of
five years, beginning June 27, 2003, at an exercise price of $6.50 per share,
which was 110% of the market price of the common stock on December 26, 2002. If
we, during the life of the warrants, were to issue common stock or common stock
equivalents at a price per share less than $6.50, the number of warrants would
be increased and the exercise price of the warrants would be decreased to the
lower price per share. If a merger or reorganization were to occur, the warrants
would become convertible into the kind and number of shares of common stock,
other securities or property into which the common stock, other securities or
property issuable upon exercise of the warrants would have been converted if the
warrants had been exercised prior to the merger or reorganization.
- We and the noteholder entered into an agreement for the
registration of the shares of common stock issuable upon the conversion of the
notes and upon the exercise of the warrants. Under that agreement, we agreed to
notify the noteholder if we were to propose to file certain future registration
statements. We agreed to use our best efforts to register any shares of common
stock issuable to the noteholder in the registration statement, subject to
certain defined limitations, if so requested by the noteholder within 30 days of
receipt of our notice. The noteholder agreed to become subject to a "holdback
period," by which the noteholder could not effect a public sale of common stock
for a period of up to 180 days following the effective date of the registration
statement, if so requested by a managing underwriter of the offering.
- The notes and the warrants, pro rata to the notes, were
transferable in part or in whole by the noteholder to one or more third parties,
in accordance with all of the same terms agreed to by the noteholder.
On March 18, 2003, Gibralt U.S. sold and transferred to three investors in a
private transaction (i) $500,000 aggregate principal amount of the notes
($250,000 of which were Class A Notes and $250,000 of which were Class B Notes),
and (ii) 83,334 warrants. None of these transferees was an affiliate of Gibralt
U.S., although one of them is Morris Belzberg, a cousin of Samuel Belzberg.
Samuel Belzberg does not beneficially own, or have investment discretion over,
the securities purchased from him by Morris Belzberg. Accordingly, after this
transfer, Mr. Belzberg beneficially owned 250,000 warrants and $1,500,000
aggregate principal amount of notes ($750,000 of which are Class A Notes and
$750,000 of which are Class B Notes).
DESCRIPTION OF MAY 7, 2003 EXCHANGE TRANSACTION
During the first quarter of 2003, our board of directors and management
determined that we should seek permanent financing and continue our efforts to
achieve our business plan. Accordingly, the board of directors approved a plan
to raise long-term equity financing.
To address certain issues presented by our capital structure, the board of
directors created a special committee comprised of independent directors, (the
"Independent Committee"). The Independent Committee was comprised of Messrs.
Jenkins, Swank and Brooks. Based on information provided by Mr. Wylie and an
investment banker engaged by us in April 2003, the Independent Committee found
that under prevailing market conditions in the second quarter of 2003,
prospective investors were likely to be reluctant to invest in us because of
certain features of the December 2002 Interim Financing. Specifically, the
Independent Committee found that the future dilution represented by the 333,334
warrants to purchase our common stock and the potential conversion of the
$2,000,000 principal amount of the Class A and Class B Notes were unlikely to be
acceptable to new investors. In addition, the Independent Committee found that
the December 2002 noteholders' right to participate in any future financing at a
20% discount to the price that new investors would be paying and their right to
approve future financing were likely to be obstacles to a completed financing.
The Independent Committee also determined that issuing additional shares in
exchange for modifications to the notes issued in the December 2002 Interim
Financing was, from the perspective of our stockholders, preferable to the
alternative of ceasing operations due to our inability to raise additional
funding.
The Independent Committee began negotiations in April 2003 to modify the terms
of the December 2002 Interim Financing to eliminate the potential obstacles to
obtaining permanent financing. The Independent Committee and the December 2002
noteholders agreed to the proposed terms of the exchange transaction on April
22, 2003 and the transaction closed on May 7, 2003. The principal terms of the
May 7, 2003 exchange transaction were:
- the noteholders delivered to us the 333,334 warrants held by them;
- the noteholders returned the Class A secured notes and Class B
unsecured notes held by them to us for cancellation;
- to compensate the December 2002 noteholders for surrendering the
conversion rights under the notes and the warrants, we issued a total of 20
shares of Class C Stock (the "Class C Stock") to the December 2002 noteholders,
which were convertible into an aggregate of 1,084,690 shares of common stock;
- we issued Class C secured notes to the noteholders in principal
amounts equal to the Class A and Class B notes that were cancelled (the "Class C
Notes");
- the Class C Notes were redeemable for cash at the holder's option
if we were to complete our anticipated permanent financing;
- the Class C Notes were not convertible into our capital stock;
48
- the noteholders surrendered their rights to approve future
financing transactions;
- the Class C Notes were secured by a security interest in our
property identical to the security interest created in the December 2002 Interim
Financing, and otherwise had terms substantially similar to the Class A Notes;
and
- we expanded our obligation under the registration rights agreement
entered into in December 2002 by granting demand registration rights to the
noteholders regarding the underlying shares of stock.
We also agreed to unwind the May 2003 Exchange Transaction and restore the
original terms of the December 2002 Interim Financing if: (1) our stockholders
did not approve the issuance of the common stock underlying the capital stock
issued to the noteholders in the May 2003 Exchange Transaction, or (2) we did
not complete our contemplated financing transaction by June 30, 2003 (this date
was subsequently extended to July 31, 2003 under the modifications which were
agreed to on May 28, 2003 and again to November 15, 2003 or any later day that
is one business day following the date agreed by us and the investors for the
second closing of the equity financing).
If the May 2003 Exchange Transaction had been rescinded, then the original terms
of the December 2002 Interim Financing would have been reinstated (except that
all of the notes will be secured). The original terms of the December 2002 notes
provided for conversion of the notes at a variable conversion rate. The original
terms of the Class A and Class B Notes provided for conversion at the
noteholder's option of principal and accrued interest into common stock at a
conversion price equal to 80% of the common stock price, with the common stock
price being determined at the time of conversion. In addition, if the May 7,
2003 exchange transaction had been rescinded, we would have been required to
redeliver the warrants to purchase 333,334 shares of common stock to the
December 2002 noteholders.
To allow for the issuance of the preferred shares associated with the exchange
transaction, on May 5, 2003, we created a new class of preferred stock,
consisting of 20 shares of preferred stock designated as "Class C Stock," each
share of which was to automatically convert into 54,235 shares of common stock
at the time when our stockholders approve the issuance of common stock
underlying the Class C Stock. This would have resulted in an additional
1,084,690 shares of common stock being issued and outstanding after the
conversion occurs. Under the terms of the Class C Stock, the holders of the
Class C Stock held the right to vote that number of shares into which the Class
C Stock is convertible, voting as one class with the holders of common stock and
other capital stock convertible into common stock.
In the May 7, 2003 exchange transaction, Gibralt U.S. and the three other
securityholders received (1) Class C Notes in the principal amount equal to the
aggregate principal amount of the Class A and Class B Notes surrendered by them
and (2) shares of Class C Stock, all in exchange for surrendering the conversion
rights of the Class A and Class B Notes (Class C Stock convertible into a total
of 732,714 shares of common stock, or, approximately 36,186 shares of common
stock per $100,000 principal amount of notes exchanged for non-convertible
notes) and the warrants (Class C Stock, convertible into a total of 360,976
shares of common stock, or, approximately 4,332 shares of common stock per 4,000
warrants surrendered). On April 22, 2003, the effective date of the May 7, 2003
exchange transaction, the closing price of the common stock on the AMEX was
$4.00 per share.
The number of shares of Class C Stock issued in the exchange transaction and the
value of the Class C Stock issued to the December 2002 security holders in the
exchange transaction, using the closing price of the common stock of $4.00 on
April 22, 2003, is as follows:
Gibralt U.S.
Principal Amount of Notes Exchanged: $1,500,000
Number of Warrants Surrendered: 250,000
Shares of Class C Stock Issued: 15
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 813,518
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $3,254,069
Morris Belzberg
Principal Amount of Notes Exchanged: $300,000
Number of Warrants Surrendered: 50,000
Shares of Class C Stock Issued: 3
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 162,704
Shares of Common Stock Issuable upon Conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $650,814
49
Steven Shraiberg
Principal Amount of Notes Exchanged: $100,000
Number of Warrants Surrendered: 16,667
Shares of Class C Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 54,235
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $216,938
Charles Diamond
Principal Amount of Notes Exchanged: $100,000
Number of Warrants Surrendered: 16,667
Shares of Class C Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 54,235
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $216,938
After the May 2003 Exchange Transaction and Interim Financing were completed and
in light of discussions with our investment banker, the Independent Committee
determined that further modifications to the terms of the securities issued in
the May 2003 transactions would be necessary to assist us in completing the
permanent financing. The material terms of these modifications are described
under "Description of May 2003 Modifications to May 7, 2003 Exchange Transaction
and Interim Financing."
DESCRIPTION OF MAY 2003 INTERIM FINANCING TRANSACTION
In March 2003, the board of directors also determined that we had an immediate
need for capital to support our operations until we completed the contemplated
permanent financing. In April 2003, the board of directors approved a plan to
raise up to $1,200,000 of interim financing prior to May 15, 2003. The board
further determined that, because of our history of operating losses and cash
position at the time, the contemplated permanent financing was likely to involve
the issuance of substantial amounts of equity.
The Independent Committee negotiated with Samuel Belzberg, a principal investor
and a former director, to obtain the needed $1,200,000 interim financing. Mr.
Belzberg committed to lend (through his affiliate, Gibralt U.S.) up to
$1,100,000 to us, and two other directors, James A. Wylie, Jr. and Peter Norris,
each agreed to lend $50,000 to us, to demonstrate their commitment to and
support of us. The board did not believe there were other prospective investors
available to us to provide the interim financing on terms and within a time
period acceptable to us. The Independent Committee and these directors agreed to
the proposed terms of the interim financing on April 22, 2003, and the
transaction closed on May 7, 2003.
The material terms of the May 7, 2003 interim financing transaction are as
follows:
- Gibralt U.S. committed to lend up to $1,100,000 to us ($1,000,000
of which was to be funded according to a predetermined funding schedule and the
other $100,000 of which was to be funded upon completion of a certain third
party transaction), and Messrs. Wylie and Norris loaned $50,000 to us. Gibralt
U.S. funded all of its commitment.
- We issued Class D secured notes in a principal amount equal to the
amount loaned to us (secured on an equal basis with the indebtedness incurred in
the December 2002 Interim Financing and having substantially similar terms as
the Class C notes issued in the May 7, 2003 exchange transaction, except that
they would mature one year from the date of issuance).
- To compensate the lenders for the risk attendant to their
investment and based on our financial condition, need for additional funding and
lack of definitive terms for a future permanent financing or commitment from any
investor to provide such permanent financing, we issued shares of capital stock
equal to 20% of the amount of the loan commitment of the interim financing
lenders (or, $240,000), in the form of a total of 24 shares of Class D
Convertible Preferred Stock, which were convertible into an aggregate of 120,863
shares of common stock.
- The Class D noteholders held rights (but not the obligation) to
redeem their notes for the securities issued by us in the permanent financing on
the same terms and conditions as the investors in the permanent financing.
- The Class D noteholders held rights to redeem their notes for cash
if we consummated our permanent financing.
- The Class D noteholders held registration rights identical to
those granted to the holders of the Class C Notes issued in the May 7, 2003
exchange transaction.
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During the negotiation process, the lenders required that if the contemplated
financing did not occur prior to June 30, 2003 (subsequently extended to July
31, 2003 in the May 28, 2003 modifications, described below and thereafter
extended to November 15, 2003 and again to a day after November 15, 2003 that we
and the investors agree as the date for the second closing of the equity
financing), then the lenders could accelerate the maturity date of their notes.
We created a new class of preferred stock from our authorized preferred stock,
consisting of 24 shares of preferred stock designated as "Class D Convertible
Preferred Stock," each share of which would have been automatically converted
into 5,036 shares of common stock when our stockholders approved the issuance of
these shares of common stock underlying the Class D Convertible Preferred Stock.
This would have resulted in an additional 120,863 shares of common stock being
issued and outstanding after the conversion occurs. Under the terms of the Class
D Stock, the holders of the Class D Stock hold the right to vote that number of
shares into which the Class D Stock is convertible, voting as one class with the
holders of common stock and other capital stock convertible into common stock.
The loan commitments of the lenders in the May 7, 2003 interim financing and the
principal amount of Class D Notes, the number of shares of Class D Convertible
Preferred Stock (and the number of shares of common stock into which the Class D
Stock was convertible) the lenders received, as well as the value of the Class C
Stock issued to the lenders in the interim financing using the closing price of
the common stock of $4.00 on April 22, 2003, and after giving effect to the
issuance of the shares to be issued upon conversion of the Class C Stock and the
Class D Stock, is as follows:
Gibralt U.S.
Loan Commitment: Up to $1,100,000
Principal Amount of Notes Issued: Up to $1,100,000
Shares of Class D Convertible Preferred Stock Issued: 22
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 110,791
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $ 221,580
James A. Wylie, Jr.
Loan Commitment: $50,000
Principal Amount of Notes Issued: $50,000
Shares of Class D Convertible Preferred Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 5,036
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $10,072
Peter Norris
Loan Commitment: $50,000
Principal Amount of Notes Issued: $50,000
Shares of Class D Convertible Preferred Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 5,036
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $10,072
Gibralt U.S., Mr. Norris and Mr. Wylie loaned a total of $1,200,000 to us,
representing their entire loan commitments.
DESCRIPTION OF MAY 28, 2003 MODIFICATIONS TO MAY 7, 2003 EXCHANGE TRANSACTION
AND INTERIM FINANCING
As we proceeded to seek our permanent financing during May 2003, we assessed the
availability of investment capital for development stage companies. The
Independent Committee determined that it was essential to extend the maturity
date of the Class C Notes beyond January 1, 2004, to eliminate the right of the
holders of the Class C Notes to redeem those notes for cash upon the completion
of the future permanent financing and to limit in certain respects the
collateral securing our obligations under the Class C and Class D Notes. The
Independent Committee determined that these modifications were necessary because
the terms of the Class C and Class D Notes would likely, unless modified, deter
investors from investing in us. The Independent Committee found that prospective
investors would presumably expect that we would use the proceeds of their
investment as working capital rather than apply the proceeds to the satisfaction
of existing debt. Accordingly, the Independent Committee negotiated further
modifications to the May 7, 2003 exchange transaction, as well as modifications
to the May 2003 interim financing transaction, as described below in this
section.
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The Independent Committee determined that the maturity date of the Class C Notes
should be extended to January 1, 2006. In addition, the Independent Committee
determined that the security interest granted to the Class C noteholders should
be limited to certain collateral that was owned at December 31, 2002 and that
the note collateral should not include our after-acquired property, thereby
making that property available as security to our future investors. The
Independent Committee further determined that the Class D Notes should not be
redeemable for cash upon the closing of the future financing transaction.
Instead, the Class D Notes should be converted into the securities issued in the
future financing on the same terms and conditions offered to the other
investors. With these objectives, the Independent Committee commenced
negotiations with the holders of the Class C Notes and the Class D Notes.
The Class C noteholders required that, in exchange for the modifications we
sought, the terms of their notes be revised to increase the interest rate from
8% to 12.5% per annum, and to require that we commence making payments of
interest accrued from December 27, 2002 through May 27, 2003 and principal on a
quarterly basis beginning the first quarter of 2004, but only to the extent of
50% of our excess quarterly cash flow.
The Class C noteholders also agreed to modify the security for the notes, the
change to become effective when we raised at least $6,000,000 in our permanent
financing. The Class C noteholders agreed that their security interest in
accounts receivable would be subordinated to a future security interest granted
by us in a receivables financing transaction and that their security interest in
intellectual property would be limited to that owned as of December 31, 2002.
The Class C noteholders required that we maintain minimum inventory and fixed
asset levels, determined quarterly, of not less than $2,000,000. In addition,
our combined cash, inventory and fixed assets must be at least $3,271,400. A
failure to comply with these covenants is an event of default. The notes have
other events of default for matters such as non-payment of interest or
principal, breach of representations and warranties, failure to satisfy any
agreement or condition under the agreements with the investor which is not cured
within 30 days, a "cross-default" for our other institutional indebtedness and
our voluntary or judicial dissolution or bankruptcy. We and the Class C
noteholders exchanged the Class C Notes for an equal principal amount of Class E
Notes with these modified terms.
The covenant relating to minimum inventory, net book assets and cash levels
would not apply unless and until we raised at least $6,000,000 in gross proceeds
in a future financing. We did not expect an event of default relating to this
requirement to occur if we completed our contemplated permanent financing and no
events of default did occur. If any event of default were to occur and was not
cured within the applicable cure period, then, unless the default is waived by a
majority in interest of the noteholders, at the option and in the discretion of
the holders of at least 66 2/3% of the principal amount of the Class E Notes,
the noteholders would have declared the notes and all accrued interest to be
immediately due and payable, and could have immediately enforced any and all of
the noteholder's rights and remedies provided in the agreements with the
investors and any other rights or remedies afforded by law.
The Class D noteholders agreed to redeem their Class D Notes in exchange for the
securities issued in the contemplated permanent financing on the same terms and
conditions offered to the other investors and to forego the option of redeeming
their notes for cash after the permanent financing occurred.
The noteholders also agreed to extend the date by which we would be required to
raise $6,000,000 in our permanent financing (to avoid triggering the December
2002 securityholders' right to rescind the May 7, 2003 exchange transaction)
from June 30, 2003 to July 31, 2003 (and subsequently, to November 15, 2003 and
again to a day after November 15, 2003 that we and the investors agree as the
date for the second closing of the of the equity financing), and to defer our
obligation to seek stockholder approval of the conversion of the Class C Stock
and Class D Stock into shares of common stock until a future meeting of the
stockholders, at which we would also seek approval of the issuance of common
stock underlying securities that may be issued by it in the permanent financing.
The rescission right was not available unless the meeting was held and the
issuance was not approved. Since we held the meeting and our stockholders
approved the issuance at our November 25, 2003 meeting, this rescission right
never became available.
On September 3, 2003, we redeemed all of our outstanding Class E Notes
(principal of $2,000,000 plus accrued interest of approximately $132,000), and
no Class E Notes remain outstanding. We used a portion of the proceeds of the
first closing of the equity financing to pay for the redemption of the Class E
Notes.
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AUGUST 2003 EXCHANGES OF PREFERRED SHARES
As a result of the stipulation of settlement that we reached in the Augenbaum
litigation, we entered into exchange agreements with the holders of the
outstanding shares of our Class C Stock and Class D Convertible Preferred Stock.
Upon entering into the exchange agreements, on August 22, 2003 the holders of
the Class C Stock exchanged their Class C Stock for 20 Class E Shares, on a
share-for-share basis. Similarly, upon execution of the exchange agreements, the
holders of the 24 outstanding Class D Stock exchanged their Class D Stock for
Class F Shares, on a share-for-share basis. Following these exchanges, we
eliminated all Class C Stock and all Class D Stock.
Shares of the Class E Stock are preferred in liquidation to the extent that,
before any distribution of assets can be made to the holders of our common
stock, there will be distributed pro rata to the holders of the issued and
outstanding Class E Shares and Class F Shares the amount of $108,469 as to each
outstanding Class E Share and $10,072 per share as to each outstanding Class F
Share. The holders of the common stock then share in the remainder of net
liquidation of proceeds. The term liquidation means our liquidation, dissolution
or winding up, as well as any sale, lease, exchange or other disposition of all
or substantially all of our assets. The aggregate liquidation preference of the
Class E Shares is $2,169,380 and the aggregate liquidation preference of the
Class F Shares is $241,728. The aggregate liquidation preference was determined
to be equal to the dollar value that the board of directors allocated to the
conversion rights, warrants and other rights that we agreed to pay to the
holders of the Class C Stock and the discount that we agreed to pay to the
holders of the Class D Stock in the May 7, 2003, transactions.
The holders of the Class E Shares and Class F Shares have the right to one vote
per share, respectively, for each outstanding Class E Share and each outstanding
Class F Share.
The holders of the Class E Shares are entitled to cash dividends and
distributions when and as declared by the board of directors, pari passu with
the holders of our common stock with the dividend amount on each Class E Share
being 1,355,862 times the dividend or distribution to be paid on each share of
common stock. The holders of the Class F Shares are entitled to cash dividends
and distributions when and as declared by the board of directors, pari passu
with the holders of our common stock with the dividend amount on each Class F
Share being 5,036 times the dividend or distribution to be paid on each share of
common stock.
The exchange agreements also gave both us and the holders of the Class E Shares
and the Class F Shares rights to exchange those preferred shares for shares of
our common stock, as long as our stockholders approve the issuance of the shares
of our common stock underlying the preferred shares and the AMEX approves the
listing of these shares of common stock. Specifically, the agreement provided
that if the stockholders approve the common stock issuance and the AMEX lists
these the shares of common stock, then the holders of the Class E Share have the
right to sell to us, and we have the right to purchase from them, each
outstanding Class E Share in exchange for 54,235 shares of our common stock per
Class E Share. Similarly, the holders of the Class F Shares have the right to
sell to us, and we have the right to purchase from them, each outstanding Class
F Share in exchange for 5,036 shares of our common stock per Class F Share. The
exchange agreements also provided that, should any sale, lease, exchange or
other disposition of all or substantially all of our assets occur while the
Class E Shares and the Class F Shares are outstanding, each holder of the Class
E Shares has the right to sell to us all Class E Shares in exchange for 54,235
shares of common stock per Class E Share. Similarly, each holder of Class F
Share has the right to sell to us all Class F Shares in exchange for 5,036
shares of common stock per Class F Share.
The board of directors determined that the terms of the exchange agreements were
appropriate in order to provide the former holders of the Class C Stock and the
Class D Stock with the economic equivalence of the conversion rights they held
in conjunction with the Class C Stock and Class D Stock. Upon exchange of all
Class E Stock, the former holders of the Class C Stock will receive 1,084,690
shares of our common stock, or the same number of shares of our common stock we
were obligated to issue to them upon conversion of the Class C Stock. In
connection with the final closing of our equity financing, we exchanged the
Class E and Class F Stock as provided by our August 2003 exchange agreement with
the holders of the Class E and Class F Stock. Upon exchange of all shares of the
Class F Stock, the former holders of the Class D Stock were to receive 120,863
shares of common stock, or the same number of shares of our common stock that we
were obligated to issue to them upon conversion of the Class D Stock. In the
stipulation of settlement for the Augenbaum litigation, the parties agreed on
the exchange of shares of our common stock in these specific amounts for the
Class E Stock and Class F Stock, as well as the exchange of the Class E Stock
for the Class C Stock and the exchange of the Class F Stock for the Class D
Stock. A hearing before the Delaware Chancery Court for approval of the
stipulation of settlement was held on September 15, 2003. After this hearing,
the court entered an order approving the stipulation of settlement as submitted.
The stipulation of settlement became final on October 15, 2003 when the appeal
period terminated with no appeal having been filed.
At the request of the investors in our equity financing, we and Gibralt U.S., on
behalf of itself and the other holders of the Class E Stock and Class F Stock,
agreed not to exchange the Class E Stock or Class F Stock for common stock until
the second closing of the equity financing. Gibralt U.S. also acknowledged that
the common stock to be issued upon the exchange of the Class E Stock and Class F
Stock will not be eligible to participate in the offering to stockholders we
plan to make to the holders of common stock as of August 29, 2003, and that only
those shares of common stock held by Gibralt U.S. and the other holders of Class
E Stock and Class F Stock as of August 29, 2003 would be eligible to participate
in that offering.
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PARTICIPATION BY RELATED PARTIES IN THE EQUITY FINANCING
INVESTMENT BY THE HOLDERS OF THE CLASS E NOTES AT THE FIRST CLOSING. As part of
the negotiation of the equity financing, the investors indicated that, were they
to purchase notes that would be convertible into shares of our common stock, the
notes would be required to be secured by all of our assets, including the patent
rights acquired by us with the proceeds of the first closing and also by those
assets that, prior to the first closing, were encumbered by security interests
in favor of the then-outstanding Class E Notes. As a result, we offered to
Gibralt U.S. and to the other three holders of the Class E Notes the opportunity
to purchase $2,000,000 of the Secured Bridge Notes, which was the outstanding
principal amount of the Class E Notes, and to use part of the proceeds of the
first closing to retire the Class E Notes in full, making the collateral
securing the Class E Notes available to all holders of the Secured Bridge Notes.
The board of directors unanimously, with the abstention of Samuel Belzberg,
approved the terms on which the holders of the Class E Notes would participate
in the equity financing at the first closing. Under those terms, the full
$2,000,000 new investment made by the holders of the Class E Notes would be
allocated to the purchase of Secured Bridge Notes and the holders of the Class E
Notes would, in exchange, terminate the security interest encumbering our assets
and make those assets available as collateral for all holders of the Class E
Notes. The former holders of the Class E Notes received as security for the
repayment of the Secured Bridge Notes held by them, a pro rata interest in the
same collateral securing all of the other Secured Bridge Notes. As is the case
with all Secured Bridge Notes, on November 25, 2003, the Secured Bridge Notes
held by Gibralt U.S. and the other former holders of the Class E Notes converted
into common stock at a purchase price of $2.00 per share.
CONVERSION OF CLASS D NOTES AT SECOND CLOSING. The terms and conditions under
which we issued our outstanding Class D Notes to Gibralt U.S., Peter Norris and
James A. Wylie, Jr. in May 2003 included a requirement that the Class D Notes be
converted into equity on the same terms and conditions on which all other
investors participate in an equity financing. Therefore, on November 25, 2003,
the $1,200,000 principal amount plus accrued interest on the Class D Notes
converted into our common stock at a price of $2.00 per share.
SEPTEMBER 2003 EQUITY FINANCING TRANSACTION
On September 2, 2003, we entered into an equity financing transaction in which
119 accredited investors agreed to purchase 10,177,500 shares of common stock
for an aggregate purchase price of $23,200,000. Under the terms of the equity
financing, $22,000,000 of the aggregate purchase price was payable in cash, and
$1,200,000 was payable by conversion of certain of our outstanding debt,
previously issued in connection with our May 2003 bridge financing.
The first closing of the equity financing occurred on September 3, 2003. At that
time, the investors funded $6,500,000 of the equity financing in the form of a
secured bridge loan. The second closing of the equity occurred on November 25,
2003. The notes that we issued in connection with the secured bridge loans at
the first closing converted into common stock at the second closing at a price
of $2.00 per share. Also at the second closing, the remaining $16,700,000 of the
equity financing was provided to us by the investors for the purchase of common
stock at a price of $2.50 per share. Of the $16,700,000 provided by the
investors at the second closing, $15,500,000 was paid by the investors in cash
and $1,200,000 was paid by conversion of our outstanding Class D Notes due 2004,
which we issued in connection with loans made in our May 2003 interim financing
transaction.
Three of the investors in the equity financing are related to us. These are:
Gibralt U.S., Inc., an affiliate of Samuel Belzberg, a former director and
significant stockholder of us, James A. Wylie, Jr., a director and our chief
executive officer and Peter Norris, a former director and a stockholder of us.
Gibralt U.S. loaned $1,500,000 to us at the first closing and accordingly, we
issued $1,500,000 in secured bridge notes to him. Gibralt U.S. also owned
$1,100,000 of Class D Notes that were converted into common stock at the second
closing, and Mr. Wylie and Mr. Norris each own $50,000 of Class D Notes that
were converted into common stock at the second closing.
PLACEMENT AGENT COMPENSATION
In connection with the 2003 equity financing, we issued warrants to purchase up
to 1,635,163 shares of common stock to our placement agent, Sunrise Securities
Corp., a New York corporation and a registered broker-dealer (the "Placement
Agent"). The warrants issued to the Placement Agent are exercisable for five
years at per share prices of $0.025, $2.00 and $2.50. The Placement Agent also
participated as an investor in the equity financing by reinvesting $495,000 of
its fee in exchange for Secured Bridge Notes which were converted into 247,500
shares of common stock.
INVESTORS' SELECTION OF DIRECTORS
In connection with the equity financing, we agreed to use our best efforts to
cause the board of directors to be increased to nine directors within 12 days of
the closing of the equity financing, and to cause to be elected to the board
three persons selected by the investors who have opted to become parties to the
stockholders' agreement. We also agreed to use our best efforts to cause the
board of directors to appoint one nominee that the investors have so designated
as one of the members of the committees of the board of directors. On November
25, 2003, our stockholders approved an amendment to the certificate of
incorporation that permitted us to increase increased the size of our board of
directors to nine, which we promptly did. The increase in the size of our board,
coupled with the anticipated resignation of Samuel Belzberg, created three
available director positions. Our board then nominated and appointed to the
board three persons selected by those investors who are parties to the
stockholders' agreement. Those directors are Joseph Harris, chairman of our
audit committee, Sidney Braginsky, a member of our audit committee, and Edwin
Snape, Ph.D., a member of our compensation committee.
54
We and Gibralt U.S. agreed with the investors that the size of the board of
directors will remain at nine and we will use our best efforts to nominate for
election to the board of directors at each annual meeting of stockholders three
persons designated by the investors who have opted to become parties to the
stockholders' agreement. The agreement with regard to the nomination of
directors terminates when the investors who are parties to the stockholders'
agreement cease to beneficially own more than 50% of the investors' shares that
are subject to this agreement. As of October 31, 2004, these investors continued
to hold approximately 79% of the shares that were originally subject to the
stockholders' agreement, and the agreement therefore has not been terminated.
INVESTORS' CONTROL OF THE COMPANY
In addition to our agreement to use the proceeds of the 2003 equity financing in
the manner agreed with the investors and to use our best efforts to appoint
three directors that the investors have selected to become members of the board
of directors after the equity financing was completed, we made other agreements
with the investors. These agreements related to actions that we were obligated
to take in the future. We agreed to use our best efforts to follow the direction
of the majority in interest of the investors in whether to pursue a reverse
stock split that we had considered implementing shortly after the completion of
the equity financing. A majority in interest of the investors recommended that
we not pursue the proposed reverse split, and the board of directors determined
not to pursue the reverse split at that time. (Subsequently, at our 2004 annual
meeting of stockholder on June 15, 2004, we sought and received stockholder
approval to allow our board to implement a 1 for 25 reverse split, which our
board determined to implement and which became effective as of June 17, 2004).
In addition to our agreement regarding the use of proceeds and our agreement
regarding the director designees of the investors, both as discussed above, we
agreed to register the common stock that the investors purchased in the equity
financing (including the shares of common stock underlying the warrants issued
to the Placement Agent) and to list these shares with the AMEX for sale. The
board of directors believed that these agreements were reasonable when it
negotiated the final terms of the equity financing.
The common stock issued to the investors and the placement agent in the 2003
equity financing (assuming the exercise of all of the warrants we issued to the
placement agent) represented approximately 83% of our outstanding capital stock
outstanding immediately after we completed our 2003 equity financing, and these
investors continue to hold approximately 60% of our common stock outstanding as
of October 31, 2004. As a result, the investors are able to control any matters
submitted to our stockholders for approval. Except for the investors' agreements
concerning the selection and election of directors described above, we are not
aware of any agreements among the investors to vote collectively in respect of
matters affecting our operations. However, the investors may have made, or may
in the future may make, formal or informal agreements regarding voting of our
common stock or other actions affecting us.
OFFERING TO STOCKHOLDERS OF RECORD AS OF AUGUST 29, 2003
The terms of the equity financing also contemplated that we would commence an
offering of up to 1,188,470 shares of common stock targeted at the holders of
our common stock as of August 29, 2003. In February 2004, we registered the
shares of common stock that we would be offering to our stockholders as of
August 29, 2003, and we completed this offering in April 2004. We sold all
shares offered to the offeree stockholders in this targeted offering, at a price
of $2.50 per share.
USE OF PROCEEDS
We applied a portion of the proceeds from the first closing of the September
2003 equity financing to repay in full all outstanding Class E Notes
(approximately $2,100,000 of principal and interest, including approximately
$1,575,000 repaid to Gibralt U.S., Inc., an affiliate of Samuel Belzberg, one of
our former directors) and to acquire additional intellectual property rights
related to our EVLT(R) product line ($2,000,000). We also paid fees incurred by
legal counsel to the investors (approximately $100,000) and reimbursable
expenses incurred by our placement agent (approximately $14,000). We intend to
use the balance of these proceeds, together with the proceeds from the November
25, 2003 closing of the equity financing and our operating revenue, for general
working capital purposes, including 10 quarterly payments of $250,000 each to be
paid for our exclusive license to the EVLT(R) patent to support our sales and
marketing initiatives, and to effect our intellectual property strategy.
SEPTEMBER 2003 ACQUISITION OF EXCLUSIVE EVLT(R) TECHNOLOGY
On September 3, 2003, we acquired rights to U.S. Patent No. 6,398,777 and
related foreign patents for endovenous laser treatment of varicose veins. The
EVLT Patent relates to the technology underlying our EVLT(R) product line. This
acquisition resulted from two transactions.
In the first transaction, we purchased the interest in the EVLT Patent owned by
Dr. Robert J. Min, one of the five named inventors of the EVLT Patent. This
transaction was completed under a purchase agreement with Dr. Min entered into
on July 23, 2003. Pursuant to the agreement, on September 3, 2003, we paid
$500,000 in cash and issued options to purchase 40,000 shares of common stock in
exchange for Dr. Min's assignment to us of his interest in the EVLT Patent. The
stock options are fully vested, have an exercise price of $2.00 per share (the
price per share paid by the investors in the first closing of the equity
financing), and are exercisable for ten years. We also agreed to pay to Dr. Min
variable payments based on our sales of products using the EVLT Patent over the
remaining 16-year life of the EVLT Patent. Dr. Min previously licensed the EVLT
Patent to us and had served as a consultant to us. Dr. Min's consulting
agreement with us was amended to reflect the changes in the relationship with
him as a result of the acquisition of his EVLT Patent rights. Dr. Min will
continue to act as a consultant to us under the revised consulting agreement.
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In the second transaction, we licensed, on an exclusive basis (except for
Spain), the EVLT Patent from Endolaser Associates, LLC, the assignee of interest
in the EVLT Patent from the other four named inventors of the EVLT Patent. This
transaction was completed under a license agreement between us and Endolaser
Associates entered into on July 11, 2003. On September 3, 2003, we paid
Endolaser Associates $1,500,000 for the exclusive license granted by Endolaser
Associates on behalf of the four inventors who had assigned their interest in
the EVLT Patent to Endolaser Associates. We agreed to make additional payments
totaling $2,500,000 in 10 quarterly installments of $250,000 each, commencing
upon the second closing of the equity financing. We have agreed to pay Endolaser
Associates variable royalties based on our sales of products using the EVLT
Patent over the remaining 16-year life of the EVLT Patent.
We recorded an intangible technology asset in the amount of $4,702,000 to record
the acquisition of the EVLT Patent. The intangible asset will be amortized over
the remaining 16 year life of the EVLT Patent.
CASH POSITION AND CASH FLOW
We have cash balances of approximately $6,825,000 and $13,398,000 at September
30, 2004 and December 31, 2003, respectively.
We have financed our operations primarily through private placements of common
stock and preferred stock, and private placements of convertible notes and
short-term notes and credit arrangements. In 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, we 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.
Cash used in operations for the nine months ended September 30, 2004 was
approximately $6,882,000. The cash used in operations 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.
Cash used in operations for the year ended December 31, 2003 was $6,431,000.
This principally results from the $5,980,000 loss from operations, offset by
changes in working capital and reflects the $1,141,000 reduction in trade
payables subsequent to completion of the equity financing in November, and the
external marketing initiatives and the costs of a direct sales force in support
of the commercialization of EVLT(R).
Cash used in investing activities for the year ended December 31, 2003 was
$2,579,000. On September 3, 2003, we acquired rights to U.S. Patent No.
6,398,777 for the endovenous laser treatment of varicose veins, which patents
relate to the technology underlying our EVLT(R) product line. In connection with
this technology acquisition, we paid an aggregate of $2,000,000 to Dr. Robert
Min and Endolaser Associates, LLC in initial payments, $250,000 to Endolaser
Associates, LLC in subsequent acquisition payments, and $144,000 in other costs.
Net cash used by investing activities also includes $230,000 in property, plant
and equipment, principally for demonstration equipment for customer trial
programs.
Cash provided by financing activities for the year ended December 31, 2003 was
$20,093,000. This includes $1,200,000 in gross proceeds from the May interim
financing and $22,000,000 in new gross proceeds from the equity financing, and
the investment by the placement agent of its $495,000 fee in connection with the
equity financing closing on September 3, 2003, offset by the retirement of the
December 2002 notes in the aggregate principal amount of $2,000,000, the
retirement of short term notes to professional service providers for legal and
marketing services in the aggregate principal amount of $445,000 and $1,172,000
in legal, placement agent, auditing and other costs incurred in the equity
financing that were offset against additional paid in capital.
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PROMISSORY NOTES ISSUED TO SERVICE PROVIDERS
In December 2002, we converted fees for legal services, in the amount of
$416,102, into a promissory note. Payment terms include a $100,000 payment due
upon completing the $2,000,000 bridge financing on December 27, 2002 and the
balance due upon completion of a longer-term capital financing in fiscal 2003.
The promissory note bore interest, at an annual rate of 6%, which accrued over
the life of the promissory note and became payable upon maturity. The promissory
note did not provide for conversion rights into equity. On November 26, 2003, we
repaid this note, including accrued interest, in full.
In December 2002, we converted fees due a professional service provider for
external marketing initiatives, in the amount of $183,016, into a promissory
note. Payment terms included a $50,000 payment due upon completing the
$2,000,000 bridge financing on December 27, 2002, a 20% surcharge of monthly
services until the promissory note was paid, and the balance became due upon
completion of a longer-term financing in fiscal 2003. The promissory note did
not bear any interest and did not provide for conversion rights into equity.
After the final closing of the equity financing on November 25, 2003, we repaid
this note in full.
PROMISSORY NOTE ISSUED TO CUSTOMER
In October 2000, Axcan Pharma advanced us $936,000 to secure certain key
materials. In September 2001, we issued a promissory note to this customer in
the amount of the advance. The promissory note bore interest, at an annual rate
of 8.5%, which is payable quarterly in arrears. The promissory note matured on
January 1, 2004 and did not provide for conversion rights into equity. On
January 2, 2004, we repaid this note in full.
CAPITAL EQUIPMENT LEASES
The leased assets included in property and equipment primarily include
manufacturing equipment. We did not enter into any new capital equipment leases
in the years ended December 31, 2003 and 2002. Depreciation expense for leased
equipment in the years ended December 31, 2002 and 2003 was $56,226 and $36,823,
respectively. During 2004, the Company entered into capital leases totaling
$88,116 at September 30, 2004. Depreciation expense for leased equipment at
September 30, 2004 was $4,895.
CAPITAL TRANSACTIONS IN 2002
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number of shares of
common stock, price per share of common stock, options and warrants)
On January 1, 2002, in accordance with the terms of a bridge financing provided
to us in October 2001, we issued warrants to purchase an additional 400 (in the
aggregate) shares of common stock to the two stockholders who provided that
bridge financing. The reason for this was that the underlying agreement required
us to issue an additional 400 warrants to the stockholders in that bridge
financing for each month after December 31, 2001 where we did not consummate a
reverse-merger. Because the Merger satisfied that requirement, no additional
warrants are issuable in respect of that financing. As of January 1, 2004, all
of these 400 warrants had expired, without having been exercised.
In January and August 2002, we issued a total of 33,272 shares of Class A Stock
to QLT, Inc. upon the conversion of promissory notes held by QLT (issued in
connection with our purchase in October 2000 of QLT's manufacturing rights
related to OPTIGUIDE(R) fibers) in the aggregate principal and interest amount
of $1,247,691, which QLT converted into common stock at a conversion price of
$37.50 per share.
On February 14, 2002, in connection with the Merger, we conducted a private
placement offering of common stock. In the private placement, investors
subscribed to purchase from Diomed, Inc. an aggregate of 200,000 shares of its
common stock at a price per share of $50.00, which resulted in gross proceeds of
$10,000,000 and net proceeds of $8,100,000. As a result of the Merger, the
shares of Diomed, Inc. common stock issued in the private placement were
exchanged for an equal number of shares of Diomed Holdings, Inc.'s common stock.
Subsequent to completion of the Merger, we paid back the $700,000 in convertible
promissory notes issued to two of our stockholders in October and December 2001,
including cumulative interest.
On December 27, 2002, we issued Class A secured notes and Class B unsecured
notes in the aggregate principal amount of $2,000,000 to Gibralt U.S., Inc. (an
affiliate of a former director, Samuel Belzberg) in exchange for providing
bridge financing to us. In connection with the bridge financing, we issued
Gibralt U.S., Inc. 333,334 warrants to purchase shares of our common stock at an
exercise price of $6.50 per share. The Class A and Class B notes were
convertible into common stock. The warrants were cancelled in May 2003. Certain
terms of the Notes were also modified in May 2003, and the notes were satisfied
in full in September 2003.
AS TO NATEXCO CORPORATION
On January 23, 2002, Natexco purchased 16,000 shares of common stock owned by
Anthony Mulhall, a former director of Natexco.
On February 5, 2002 Natexco redeemed all of the shares of preferred stock owned
by R.H. Consulting Group, Inc. and Desert Bloom Investments, Inc., which
represented all of Natexco's then outstanding preferred stock. All of such
shares of preferred stock were then canceled.
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CAPITAL TRANSACTIONS IN 2003
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number of shares of
common stock, price per share of common stock, options and warrants)
On May 7, 2003, we issued Class C Preferred Stock to the holders of the notes
and warrants we had issued in December 2003 in exchange for certain
modifications we made to those notes and warrants. These shares of Class C Stock
were convertible into 1,084,690 shares of common stock upon satisfaction of
certain conditions. The modifications to the notes included eliminating the
convertibility feature of the notes and eliminating the noteholders' right to
approve a future financing transaction. We issued Class C notes in exchange for
the December 2002 notes to reflect these modified terms. The modification to the
warrants was the redelivery of the warrants to us for cancellation.
On May 7, 2003, we also issued $1,200,000 in Class D notes to Gibralt U.S. (an
affiliate of a former director, Samuel Belzberg, to which we issued $1,100,000
principal amount notes) and to two directors (James A. Wylie, Jr. and Peter
Norris, to each of whom we issued $50,000 principal amount of notes). We issued
these notes in exchange for loan commitments made by these noteholders. We also
issued to these noteholders Class D Preferred Stock as a prepaid discount to
recognize that the loan commitments were expected to be converted into equity in
a future equity financing transaction that we then contemplated, and to reflect
the risk that the equity financing transaction might not occur. These shares of
Class D Stock were convertible into a total of 120,863 shares of common stock
upon satisfaction of certain conditions. The notes were convertible into the
securities to be issued in the contemplated equity financing on the same terms
as applied to the other investors in the equity financing.
On August 22, 2003, we exchanged the Class C Stock for an equal number of shares
of Class E Preferred Stock,, and we exchanged the Class D Stock for an equal
number of shares of Class F Preferred Stock. We exchanged these shares of
preferred stock in accordance with the stipulation of settlement we entered into
to settle the Augenbaum class action lawsuit that was filed in late July 2003.
That lawsuit claimed, among other things, that the Class C Stock and Class D
Stock was not permitted to be, by its terms, convertible into common stock.
Accordingly, although we denied the allegations in the lawsuit, to reach a
settlement amicably, we created the Class E and Class F Stock and performed the
preferred stock exchange. The Class E and F Stock is not by its terms
convertible into common stock. However, by a separate agreement between us and
the holders of the Class E and F Stock, upon the satisfaction of certain
conditions, we were to issue 1,084,690 shares of common stock in exchange for
the Class E Stock and we were to issue 120,863 shares of common stock in
exchange for the Class F Stock.
On September 2, 2003, we entered into definitive agreements for the equity
financing that we had been pursuing since the second quarter of 2003. Pursuant
to these agreements, on September 3, 2003, the investors in the equity financing
funded to us $6,500,000 in the form of secured bridge loans, and we issued
secured bridge notes to these investors. The $1,200,000 principal amount of
Class D notes we issued in May 2003 converted into common stock at the final
closing of the equity financing on November 25, 2003. We applied part of the
proceeds of the secured bridge loans to repay all of the notes that we
originally issued in connection with our $2,000,000 December 2002 bridge
financing. The secured bridge notes converted into common stock at $2.00 per
share at the final closing, the investors purchased $15,500,000 of common stock
for $2.50 per shares and the $1,200,000 in Class D notes and accrued interest on
these notes were purchased for common stock for $2.50 per share.
On September 3, 2003, in connection with the equity financing, we issued
securities to pay the fees of the placement agent that we engaged in April 2003
to assist us in obtaining the financing that we needed. In lieu of paying this
fee in cash, we issued to the placement agent $495,000 in secured bridge notes
plus warrants to purchase up to 1,635,163 shares of common stock. Of these
warrants, 701,663 warrants have an exercise price of $0.025 per share, 247,500
warrants have an exercise price of $2.00 per share and 686,000 warrants have an
exercise price of $2.50 per share. These warrants are exercisable for five
years.
On November 25, 2003, we had the final closing of our equity financing, pursuant
to which we issued a total of 10,262,081 shares of common stock to the investors
in the equity financing.
On November 25, 2003, in connection with the final closing of the equity
financing, we exchanged all outstanding Class E Stock for a total of 1,084,690
shares of common stock and we exchanged all outstanding Class F Stock for a
total of 120,863 shares of common stock, as provided by the August 2003 exchange
agreement.
On November 25, 2003, we issued 20,000 shares of common stock to Verus Support
Services, Inc. in connection with an agreement we made on September 30, 2003 to
issue these shares in lieu of accrued cash payments due under our December 2001
agreement with Verus that we ceased paying in August 2002.
On December 3, 2003 and December 8, 2003, some of the warrants we issued on
September 3, 2003 were exercised. Specifically, a total of 440,404 of the
warrants with an exercise price of $0.025 per share were exercised, and we
issued a total of 439,109 shares of common stock in that connection. Because
these holders used the cashless exercise feature of the warrants, they did not
have to pay us the exercise price in cash and we issued fewer than the total
number of warrants exercised. The following table details these warrant
exercises:
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- ------------------------------- --------------------- ----------------------------------------- ------------ -------------------
NAME OF HOLDER DATE OF EXERCISE NO. WARRANTS EXERCISED NO. SHARES ISSUED
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
Nathan Low 12/3/03 340,350 339,349
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
Sunrise Foundation Trust 12/3/03 86,525 86,270
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
Richard Stone 12/8/03 13,417 13,378
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
Marcia Kucher 12/8/03 112 112
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
TOTAL 440,404 439,109
- ------------------------------- --------------------- ----------------------------------------- --------------------------------
On December 18, 2003, in connection with the equity financing, we issued an
additional 13,903 shares of common stock to those investors who paid cash for
their shares at the final closing of the equity financing. We issued these
shares because under the terms of the escrow agreement under which these
investors deposited all funds for their investment, these investors were
entitled to either receive the interest that was earned on their funds while
held in escrow or to receive shares in lieu of this interest, with the interest
earned being paid to us, as determined by the placement agent. The placement
agent elected to have the interest paid to us and for us to issue additional
shares to the investors. We received approximately $35,000 in interest from the
escrow agent on December 18, 2003, and we then issued the additional shares to
the investors (at a price of $2.50 per share).
CAPITAL TRANSACTIONS IN 2004
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number of shares of
common stock, price per share of common stock, options and warrants)
On April 20, 2004, we completed our 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 1,188,470
shares of common stock at $2.50 per share, allowed stockholders to purchase one
share of 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 (which we refer to as the targeted offering).
The SEC declared that registration statement effective on February 13, 2004. We
are using the proceeds from the targeted offering for general working capital
purposes, including supporting our continued growth and intellectual property
strategies.
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 the AMEX approved our application list
the shares to be issued in this financing, we completed this transaction. We
received net proceeds of approximately $9.8 million from this transaction, which
will be used for general working capital purposes.
The following summarizes the principal terms of the 2004 equity and debt
financing transaction:
VARIABLE RATE CONVERTIBLE DEBENTURES
We 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
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 we 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 we obtain stockholder
approval to reduce the conversion price below $2.20.
Subject to certain conditions, the debentures will also be convertible at our
option at any time after the first anniversary of the issuance date if the
closing price of the common stock equals or exceeds 175% of the conversion price
for at least 20 consecutive trading days. Also subject to certain conditions,
upon maturity, we 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.
After the first year and at our option, subject to certain conditions, interest
may be paid in shares of 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 we obtain 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.
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COMMON STOCK
We 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 we and the investors signed the definitive purchase agreements.
Accordingly, we issued a total of 2,362,420 shares of 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, we issued warrants to purchase shares of common stock. We issued
warrants to purchase up to 1,832,461 shares of common stock to the investors who
purchased convertible debentures, and we issued warrants to purchase up to
1,181,210 additional shares of common stock to the investors who purchased
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 we and the investors signed the definitive purchase agreements.
The exercise price is subject to certain adjustments, including future sales of
securities below an exercise price of $1.91 per share, unless we obtain
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 us upon exercise.
REGISTRATION OF COMMON STOCK
We have agreed to undertake registration with the Commission of the common stock
and common stock underlying the convertible debentures and warrants.
Accordingly, we are 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 we do 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, we are required to pay certain
amounts to the investors. The registration statement of which this prospectus is
a part is the registration statement we agreed to file in connection with the
2004 equity financing.
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 concurrently with the reverse stock split.
BANK LINES OF CREDIT
Diomed, Ltd., our 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.
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 bore interest
at 1% above the prime interest rate (4.75% at September 30, 2004). The line of
credit was secured by the assets of Diomed, Inc., excluding certain intellectual
property, and was 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 2004 equity and debt financing transaction, we terminated our
$2,500,000 line of credit with Silicon Valley Bank. At no time during the term
of the line of credit did we draw down on the line, and accordingly, there were
no amounts outstanding at the time of termination.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition, results of operations,
and cash flows are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires us to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to bad
debts, inventory valuation and obsolescence, intangible assets, income taxes,
warranty obligations, contingencies and litigation. Additionally, we use
assumptions and estimates in calculations to determine stock-based compensation.
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.
60
Our critical accounting policies include:
- revenue recognition;
- allowance for doubtful accounts;
- warranty obligation;
- allowances for excess and obsolete inventory; and
- valuation of long-lived and intangible assets.
REVENUE RECOGNITION. We derive our revenue from primarily two
sources: (i) revenues from products including lasers, instrumentation, and
disposables, and (ii) revenues from service. We recognize revenue on products
and services when persuasive evidence of an arrangement is in place, the price
is fixed or determinable, collectability is reasonably assured and title and
risk of ownership has been transferred. Transfer of title and risk of ownership
generally occurs when the product is shipped to the customer or when the
customer receives the product, depending on the nature of the arrangement. We
currently provide for the estimated cost to repair or replace products under
warranty at the time of sale. Service revenue is recognized as the services are
performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. Accounts receivable are customer
obligations due under normal trade terms. We sell our products to private
physicians, hospitals, health clinics, distributors and OEM customers. We
generally require signed sales agreements, non-refundable advance payments and
purchase orders, and in certain circumstances, depending upon the type of
customer, letters of credit. Some customers seek equipment financing from third
party leasing agents. Accounts receivable are stated at the amount billed to the
customer less a valuation allowance for doubtful accounts.
Senior management reviews accounts receivable on a monthly basis to
determine if any receivables could potentially be uncollectible. We include
specific accounts receivable balances that are determined to be uncollectible,
along with a general reserve, in its overall allowance for doubtful accounts.
After all attempts to collect a receivable have failed, the receivable is
written off against the allowance. Based on available information, we believe
our allowance for doubtful accounts as of September 30, 2004 is adequate.
WARRANTY OBLIGATION. We engage in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of our
component suppliers. In addition to these proactive measures, we also provide
for the estimated cost of product warranties at the time revenue is recognized.
EXCESS AND OBSOLETE INVENTORY. Inventories are valued at the lower
cost (first-in, first-out) or market. We maintain reserves for our estimated
obsolete inventory based on historical cost.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS. We assess the
impairment of identifiable intangibles and long-lived assets on an annual basis
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. When we determine that the carrying value of intangibles
and long-lived assets may not be recoverable, we measure any impairment based on
a projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model. If cash generated in the future by the acquired asset is different from
current estimates, or if the appropriate discount rate were to change, then the
net present value of the asset would be impacted, resulting in a charge to
earnings.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our principal executive officer and our principal financial officer have carried
out an evaluation of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a -15e and 15d-15(e) under the Securities Exchange Act of
1934) as of September 30, 2004 and have concluded that, as of such date, our
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the nine-month period ended September 30, 2004, 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.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
In connection with the filing of the registration statement of which this
prospectus is a part, we have filed our audited financial statements for the
year ended December 31, 2002 and 2003, in the manner provided for under current
SEC guidelines. Our financial statements for 2002 and 2003 were audited by BDO
Seidman, LLP, whom we appointed as our auditors to succeed Spicer, Jeffies &
Co., which had served as auditors for Natexco Corporation, our procedessor prior
to the February 14, 2002 Merger. Diomed's auditors prior to the Merger were
Arthur Andersen LLP.
After the merger, acting through our Audit Committee, our board of directors
determined to change our independent accountants. Accordingly, we dismissed
Arthur Andersen and appointed BDO Seidman to serve as our independent public
accountants for the fiscal year ending December 31, 2002. After BDO Seidman
completed its standard client acceptance procedures with respect to its
engagement by us, BDO Seidman accepted its appointment.
During the fiscal years ended December 31, 2000 and 2001, and through the date
we appointed BDO Seidman, we did not consult BDO Seidman with respect to the
application of accounting principles to a specified transaction, either
contemplated or proposed, or the type of audit opinion that might be rendered on
our financial statements or any other matters of reportable events as set forth
in Item 304(a)(2) of Regulation S-B.
In October 2002, we engaged Spicer, Jeffries & Co. for the limited purpose of
auditing the financial statements for the fiscal year ended December 31, 2001,
prior to the merger pursuant to which we became the successor registrant to
Natexco Corp. Since Spicer, Jeffries & Co. completed its audit, we have not
engaged Spicer, Jeffries & Co. for any other purpose.
DESCRIPTION OF PROPERTY
We own no real property. We occupy 20,500 square feet of office, manufacturing,
and research and development space in Cambridge, UK under a 25 year lease
expiring in April 2024. We, however, have the option to terminate the lease
agreement at the end of 15 years and 20 years. If we choose not to exercise our
termination option, the lease agreement will continue for the remaining 10
years. We have sublet a portion of this space. We also occupy approximately
3,700 square feet of office and distribution space in Andover, Massachusetts
under a lease expiring in June 2005. We believe that these facilities are in
good condition and are suitable and adequate for our current operations.
CERTAIN MARKET INFORMATION
Our common stock is traded on the AMEX under the symbol "DIO." On November 22,
2004, our common stock closed at a price of $3.47 per share.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since February 22, 2002, our common stock has been listed on the AMEX under the
symbol "DIO." Between November 2001 and February 22, 2002, our stock was quoted
on the OTC Electronic Bulletin Board. Prior to being quoted on the OTC Bulletin
Board, there was no market for our common stock. The following table sets forth
for the periods indicated the high and low bid price information for the common
stock as reported on the AMEX and the Over-the-Counter Bulletin Board. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. The prices per share
shown below are adjusted to reflect the 1-for-25 reverse split effective June
17, 2004.
PERIOD HIGH LOW
------ ---- ---
2002
JANUARY 1 TO FEBRUARY 21 ....................... $ 225.00 17.50
FEBRUARY 22 TO MARCH 31 ........................ $ 221.25 96.50
SECOND QUARTER ................................. $ 133.75 26.00
THIRD QUARTER .................................. $ 50.00 8.50
FOURTH QUARTER ................................. $ 16.25 5.50
2003
FIRST QUARTER .................................. $ 9.50 2.50
SECOND QUARTER ................................. $ 13.50 4.00
THIRD QUARTER .................................. $ 13.25 8.00
FOURTH QUARTER (THROUGH DECEMBER 31, 2003) ..... $ 11.00 6.50
2004
FIRST QUARTER .................................. $ 9.50 3.50
SECOND QUARTER ................................. $ 3.50 2.50
THIRD QUARTER .................................. $ 3.39 1.66
62
On October 25, 2004, the date of the final closing of our equity financing, the
closing price of our common stock on the AMEX was $2.26.
As of December 31, 2003, there were approximately 450 holders of record of our
common stock (a substantial number of which are nominees for other persons), and
as of September 30, 2004, there were approximately 405 holders of record of our
common stock (a substantial number of which are nominees for other persons).
It is our present policy not to pay cash dividends and to retain future earnings
to support our growth. We do not anticipate paying any cash dividends in the
foreseeable future.
63
DESCRIPTION OF SECURITIES
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number of shares of
common stock, price per share of common stock, options and warrants)
References in the following description are to securities of Diomed Holdings,
Inc. unless otherwise stated or readily indicated by context.
Our authorized capital stock consists of 50,000,000 shares of common stock, par
value $.001 per share, and 20,000,000 shares of preferred stock.
As of December 31, 2003, approximately 14,324,000 shares of common stock were
issued and outstanding (assuming the exercise of all warrants we issued to our
placement agent in connection with the 2003 equity financing) and zero shares of
preferred stock were issued and outstanding.
The following description of our capital stock does not purport to be complete
and is subject to and qualified by our Articles of Incorporation and By-laws,
which are included as exhibits to this report, and by the provisions of
applicable Delaware law.
COMMON STOCK
Subject to preferences that may be applicable to any rights of holders of
outstanding stock having prior rights as to dividends, the holders of
outstanding shares of our common stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the board
of directors from time to time may determine. Holders of our common stock are
entitled to one vote for each share held on all matters submitted to a vote of
the stockholders. Cumulative voting with respect to the election of directors is
permitted by the Articles of Incorporation. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. Upon our
liquidation, dissolution or winding-up, the assets legally available for
distribution to stockholders are distributable ratably among the holders of the
common stock after payment of liquidation preferences, if any, on any
outstanding stock having prior rights on such distributions and payment of other
claims of creditors. Each share of common stock outstanding as of the date of
this prospectus is validly issued, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized, subject to any limitations prescribed by
Delaware law, to issue preferred stock. The board of directors can fix the
rights, preferences and privileges of the shares and any qualifications,
limitations or restrictions thereon. The board of directors may authorize the
issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of common
stock. Each share of preferred stock outstanding as of the date of this
prospectus is validly issued, fully paid and nonassessable.
The issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes could, among other things,
under certain circumstances, have the effect of delaying, deferring or
preventing a change in control. The issuance of preferred stock may adversely
affect the rights of our common stockholders by, among other things:
- restricting dividends on common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control without further action
by the stockholders.
No preferred stock is currently outstanding.
64
STOCK OPTIONS
As of September 30, 2004, options to purchase a total of 1,017,006 shares of
common stock were issued and outstanding, as follows:
OUTSTANDING EXERCISABLE
----------------------------------------------------- -------------------------------------
Weighted
Average
Remaining Weighted Weighted
Average Contractual Average Average
Exercise Price Number of Shares Life (in Years) Exercise Price Number of 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
--------- ---------- --------- ----------
TOTAL: 1,017,006 $ 8.56 226,965 $ 20.42
========= ========== ========= ==========
In the first quarter of 2004, we 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. We 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.
WARRANTS
As of September 30, 2004, warrants to purchase a total of 882,625 shares of
common stock were issued and outstanding, 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
=================================================================================
DELAWARE ANTI-TAKEOVER LAW
We and our stockholders are subject to Section 203 of the General Corporation
Law of the State of Delaware, an anti-takeover law. In general, the law
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in the prescribed
manner. A "business combination" includes merger, asset sale and other
transaction resulting in a financing benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, 17 Battery Place, New York, NY 10004. We act as our
own transfer agent and registrar as to our preferred stock, warrants and stock
options.
65
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following information regards our directors as of October 31, 2004:
DIRECTOR PRINCIPAL OCCUPATION DURING
NAME AGE SINCE LAST FIVE YEARS AND DIRECTORSHIPS
- ---- --- ----- ---------------------------------
Geoffrey Jenkins 52 2002 Mr. Jenkins has been a director of Diomed since 2001, a
director of the Company since the February 14, 2002
merger, is chairman of the Compensation Committee and has
been the chairman of the board of directors of the Company
since January 2003. Mr. Jenkins has over twenty-five years
of experience in building consumer and professional
healthcare companies. In 2000, he founded and became the
president of UV-Solutions, LLC, a product development
company. From 1998 to 2000, Mr. Jenkins held the positions
of chief operating officer and then president of MDI
Instruments, which was acquired by Becton Dickinson in
1999. MDI Instruments developed and marketed diagnostic
devices for the healthcare market. Mr. Jenkins holds a BS
and BA from Clarkson University, awarded in 1976.
Sidney Braginsky 67 2004 Mr. Braginsky has been a director since January 2004. Mr.
Branginsky has in excess of thirty years of executive
experience in scientific and consumer products. During the
past five years and prior thereto, Mr. Braginsky has held
a variety of executive level positions. Currently, Mr.
Braginsky is the chairman of DoubleD Venture Fund, LLC,
chairman of Atropos Technologies, LLC and chief executive
officer and president of Ineedmd, Ltd. and chairman and
chief executive officer of Digilab, LLC, a manufacturer
and marketer of spectroscopy instruments. From 2001
through 2003, Mr. Braginsky was president of Mediscience
Corp., a designer and developer of diagnostic medical
devices. From 1994 through 2000, he was president and
chief operating officer of Olympus America, Inc., which he
joined in 1970. During his tenure at Olympus America, a
business unit of the global Japanese company, Mr.
Braginsky built Olympus America into a billion dollar
business unit focused on optical products. Mr. Braginsky
currently serves as a director of Noven Pharmaceutical
Corp. (where he is a member of the Audit Committee), a
director of Estech Cardiology and a director of
E.O.S.Electro-Optical Systems. Mr. Braginsky is also
chairman of the board of City University of New York,
Robert Chambers Laboratory, chairman of International
Standards Organization Optics and Electro-Optical Systems
and a board member of several other organizations in the
scientific and educational community. Mr. Braginsky
attended the City University of New York. Gary Brooks 70
2003 Mr. Brooks has been a director of the Company since
March 2003 and is a member of the Audit Committee. Mr.
Brooks is a nationally recognized turnaround consultant
and crisis manager. During the past five years and prior
thereto, Mr. Brooks has principally served as chairman and
chief executive officer of Allomet Partners, Ltd. where
since 1985 he has provided turnaround consulting and
interim management services to more than 400 companies. He
has over thirty-five years of diversified executive
management experience. Mr. Brooks earned a BS in
Biochemical Engineering and Industrial Management from
Massachusetts Institute of Technology in 1955 and an MS in
Chemical Engineering and Operations Research from the
University of Rochester in 1959.
A. Kim Campbell 57 2002 Ms. Campbell has been a director of the Company since
March 2002, and is a member of the Compensation Committee.
Ms. Campbell served as Canada's 19th (and first female)
Prime Minister in 1993. She was also Canada's Minister of
Justice, Attorney General and Minister of National
Defense. Currently, Ms. Campbell is a Visiting Professor
of Practice at the John F. Kennedy School of Government at
Harvard University. In 2000, she completed a four-year
term as Consul General of Canada in Los Angeles,
California, in which she fostered trade in the high-tech
and biotechnology industries. Ms. Campbell holds a range
of prestigious positions, including Senior Fellow of the
Gorbachev Foundation of North America in Boston,
Massachusetts, and member of the International of the Asia
Society of New York. Ms. Campbell is chair of the Council
of Women World Leaders, an organization of current and
former Presidents and Prime Ministers, and deputy
president of the Club Madrid, an organization of former
heads of state and government that democratic transition.
Ms. Campbell holds a BA and an LLB from the University of
British Columbia, awarded in 1969 and 1983, respectively,
performed doctoral work in Soviet government at the London
School of Economics from 1970 to 1973 (ABD), and holds
four honorary doctorates.
Joseph Harris 58 2004 Mr. Harris has been a director of Diomed since February
2004. Mr. Harris is currently a partner in Trillium
Lakefront Partners, III, an early stage and growth equity
venture capital company. He has also served as senior
vice-president and director of corporate strategy &
development for Smithkline Beecham, where his
responsibilities included management of corporate
acquisitions, divestitures, and joint ventures; Eastman
Kodak, as managing director of business development and
director of Licensing Technology Development; and senior
vice president, corporate development at Cantel Medical
Corp, a publicly-traded medical device Company. Mr. Harris
received his bachelors degree in Accounting and his MBA
from Syracuse University School of Business. He earned his
Juris Doctor degree from the Syracuse University School of
Law. He is a certified public accountant and is licensed
to practice law in the state of New York. Mr. Harris also
serves on the board of directors of PacificHealth
Laboratories, Inc., a developer of nutritional products
for sports performance, weight loss and Type 2 diabetes.
66
DIRECTOR PRINCIPAL OCCUPATION DURING
NAME AGE SINCE LAST FIVE YEARS AND DIRECTORSHIPS
- ---- --- ----- ---------------------------------
Peter Klein 51 2002 Mr. Klein has been a director of Diomed since 1999 and a
director of the Company since the February 14, 2002
merger. Mr. Klein has served as the president and chief
executive officer of Diomed from June 1999 and of the
Company since the merger through January 2003, at which
time he resigned from the offices of president and chief
executive officer, but remained a director. For thirteen
years prior to joining Diomed, Mr. Klein has served as an
executive in the medical image processing business, first
as founder, president and co-chairman of Tomtec Imaging
Systems, then as president and chief executive officer of
Medison America, Inc., a subsidiary of the Korean Group
Medison.
Edwin Snape, Ph.D. 64 2004 Dr. Snape has been a director since January 2004. Dr.
Snape has extensive experience in a broad range of
medical-related fields. His experience in the field of
medical devices represents a broad range of technologies
and markets, including wound drainage, blood transfusion,
ultrasound, MRI, implantable devices, drug delivery,
vascular access, organ isolation, atrial fibrillation,
cardiac monitoring, temperature management and
thrombectomy. In the diagnostic field, Dr. Snape's
experience includes alcohol and drug testing, diabetes,
cardiovascular disease, haematology testing and
antibody-based diagnostic testing. His experience in the
pharmaceutical field includes drug delivery, CNS
disorders, viral and bacterial diseases, GI tract
disorders, human tissue and organ regeneration and
oncology. During the past five years and prior thereto,
Dr. Snape has been a partner of New England Partners, a
venture capital company based in Boston, Massachusetts
founded in 1995. He was either the founder or management
partner in nine private equity funds aggregating , and has
been involved in numerous investments, including over 320
investments in the health care sector, fourteen of which
completed initial public offerings and seventeen of which
were either merged or acquired. Dr. Snape earned Bachelor
of Science and Ph.D. degrees from University of Leeds,
England.
David Swank 47 2003 Mr. Swank has been a director of the Company since March
2003 and served as chairman of the Audit Committee from
that time until he became the Company's chief financial
officer, effective September 1, 2003. Mr. Swank is
president and founder of BrookstoneFive, Inc., a private
consulting firm engaged in corporate strategy formulation
and capital acquisition. Since 1997, Mr. Swank has
principally been the president of BrookstoneFive, Inc.,
although from 2001 to the beginning of 2003, he also
served as executive vice president and chief financial
officer of Melard Technologies, Inc., a New York-based,
privately held high-tech developer of wireless computing
devices. From 1994 to 1996, he served as executive vice
president-corporate development and senior vice
president-chief financial officer at Telxon Corporation, a
publicly traded developer of mobile computing devices, and
from 1989 to 1992, he was regional controller for PepsiCo
Foods International (PFI), the international snack food
subsidiary of PepsiCo, Inc. Mr. Swank's other experience
includes chief financial officer at AVM Systems, Inc., a
high-tech developer of Command and Control Systems, and
audit manager at Peat, Marwick, Mitchell & Company
(currently KPMG), an international "Big Four" accounting
firm. Mr. Swank earned a BS in Business Administration in
the honors accounting program at The Ohio State University
in 1980 and an MBA with a concentration in Finance at
Southern Methodist University in 1989.
James A. Wylie, Jr. 66 2003 Mr. Wylie has been a director of the Company since January
2003, at which time he also became the Company's president
and chief executive officer. Prior to joining the Company,
Mr. Wylie acted as a consultant from 1994 through 2002,
providing strategic advisory and interim executive
management services to institutional investors and
operating companies in the medical device, health care,
chemical and telecommunications industries. Mr. Wylie has
more than 30 years of global executive management
experience as a division president, group executive,
president and chief executive officer of both private and
public corporations. Mr. Wylie holds a BS in Chemistry
from Bates College.
The following information regards our current executive officers, in addition to
Mr. Wylie and Mr. Swank, and highly-compensated non-executive officer employees:
Kevin Stearn, General Manager, Mr. Stearn joined us in March 2000 and is Diomed Ltd. the
general manager of our UK subsidiary. From 1987 to 2000 he
served as the operations director of MediSense, a medical
diagnostic manufacturer, joining that company in its early
start-up phase and growing it from revenues of $20 million
to $285 million and a workforce of over 700 people and a 30-
fold increase in production. Mr. Stearn has managed FDA
inspections.
67
Christopher Geberth, Vice
President of Finance Mr. Geberth joined us in May 2004 as vice president, finance
and controller. Mr. Geberth has prior experience in the
fields of finance and accounting in technology and
manufacturing industries. Mr. Geberth has held positions of
vice president and controller with Melard Technologies,
Inc., a New York based, privately held high tech developer
of wireless computing devices, and vice president and controller
of Netmarket Group, Inc., a privately held e-commerce
company. Prior to joining Diomed, Mr. Geberth served as an
audit manager focusing on emerging growth companies with
PricewaterhouseCoopers LLP, an international "Big Four"
accounting firm. Mr. Geberth earned his BA in Accounting
from Pace University in 1993.
John J. Welch, Vice President of
Marketing Mr. Welch joined us in October 2002 as vice president of
marketing. He has over 20 years prior experience in
marketing, sales and management in the medical device
industry. Prior to joining Diomed, Mr. Welch was worldwide
vice president of marketing for the surgical division of
Haemonetics Corp., and before that he served CR Bard and
Datex-Ohmeda in sales and marketing capacities and acted as
director of marketing and sales for the New England Region
of the American Red Cross Blood Program. Mr. Welch holds a
BS in medical technology from Framingham State College.
Section 16(a) of the Securities Exchange Act requires our directors, executive
officers and persons who own more than 10% of any class of our capital stock to
file with the SEC initial reports of ownership and reports of changes in
ownership and to provide copies of such reports to us. Based solely on a review
of the copies of such reports furnished to us and written representations that
no other reports were required to be filed during the fiscal year ended December
31, 2003, we believe that all of the filing requirements applicable to our
officers, directors and beneficial owners of greater than 10% of our common
stock were complied with during the most recent fiscal year as to which we have
issued our annual report, except as follows:
Some of our directors and executive officers did not timely file notices of the
acquisition of stock options that we granted during 2003. The following grants
of options were not reported within two business days on Forms 4 filed with the
SEC but were reported when these officers and directors filed their respective
Forms 5 with the SEC on February 17, 2004:
(Number of shares underlying stock options are adjusted
to give effect to the 1:25 reverse stock split effective on June 17, 2004)
- --------------------------------------- ------------------------------- -----------------------------------
NUMBER OF SHARES
UNDERLYING
NAME DATE OF GRANT STOCK OPTIONS
- --------------------------------------- ------------------------------- -----------------------------------
Lisa Bruneau May 1, 2003 2,500
- --------------------------------------- ------------------------------- -----------------------------------
Kevin Stearn May 1, 2003 2,500
- --------------------------------------- ------------------------------- -----------------------------------
Lisa Bruneau June 2, 2003 3,600
- --------------------------------------- ------------------------------- -----------------------------------
Kevin Stearn June 2, 2003 5,200
- --------------------------------------- ------------------------------- -----------------------------------
David Swank June 4, 2003 8,000
- --------------------------------------- ------------------------------- -----------------------------------
Geoffrey Jenkins June 4, 2003 12,000
- --------------------------------------- ------------------------------- -----------------------------------
Gary Brooks June 4, 2003 4,000
- --------------------------------------- ------------------------------- -----------------------------------
Samuel Belzberg June 4, 2003 8,000
- --------------------------------------- ------------------------------- -----------------------------------
Kim Campbell June 4, 2003 4,000
- --------------------------------------- ------------------------------- -----------------------------------
Peter Klein June 4, 2003 4,000
- --------------------------------------- ------------------------------- -----------------------------------
Peter Norris June 4, 2003 4,000
- --------------------------------------- ------------------------------- -----------------------------------
Lisa Bruneau October 8, 2003 2,500
- --------------------------------------- ------------------------------- -----------------------------------
Kevin Stearn October 8, 2003 2,500
- --------------------------------------- ------------------------------- -----------------------------------
68
Ajmal Khan, formerly a beneficial holder of greater than 10% of our
outstanding shares of common stock, did not timely file notices of sales of
common stock he made at various times during 2003. Mr. Khan sold shares as
follows, which sales were required to have been reported within two business
days on Forms 4 filed with the SEC:
(Number of shares underlying stock options are
adjusted to give effect to the 1:25 reverse stock split effective June 17, 2004)
- --------------------------------- ----------------------------------------
DATE OF SALE NUMBER OF SHARES SOLD
- --------------------------------- ----------------------------------------
February 4, 2003 720
- --------------------------------- ----------------------------------------
March 26, 2003 4,920
- --------------------------------- ----------------------------------------
April 23, 2003 712
- --------------------------------- ----------------------------------------
April 24, 2003 4,000
- --------------------------------- ----------------------------------------
May 19, 2003 5,490
- --------------------------------- ----------------------------------------
May 23, 2003 12,732
- --------------------------------- ----------------------------------------
May 27, 2003 8,200
- --------------------------------- ----------------------------------------
May 28, 2003 16,000
- --------------------------------- ----------------------------------------
May 29, 2003 8,000
- --------------------------------- ----------------------------------------
May 30, 2003 6,000
- --------------------------------- ----------------------------------------
June 3, 2003 4,000
- --------------------------------- ----------------------------------------
June 4, 2003 20,384
- --------------------------------- ----------------------------------------
June 5, 2003 7,000
- --------------------------------- ----------------------------------------
June 6, 2003 4,000
- --------------------------------- ----------------------------------------
June 9, 2003 12,316
- --------------------------------- ----------------------------------------
June 10, 2003 12,084
- --------------------------------- ----------------------------------------
June 11, 2003 5,436
- --------------------------------- ----------------------------------------
June 12, 2003 8,000
- --------------------------------- ----------------------------------------
June 13, 2003 496
- --------------------------------- ----------------------------------------
June 16, 2003 23,504
- --------------------------------- ----------------------------------------
June 17, 2003 16,000
- --------------------------------- ----------------------------------------
June 26, 2003 680
- --------------------------------- ----------------------------------------
June 27, 2003 1,320
- --------------------------------- ----------------------------------------
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the compensation
that we paid for services rendered in all capacities for the fiscal years ended
December 31, 2002 and 2003 and by those individuals serving as our chief
executive officer during 2002 and our other executive officers serving on
December 31, 2003 whose salary and bonuses for 2003 exceeded $100,000. We refer
to these officers as the "Named Executive Officers." This information is
unaudited. Numbers of shares of common stock in the table below are adjusted to
reflect the 1:25 reverse split effective June 17, 2004.
69
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
FISCAL YEAR ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL END COMPENSATION OPTIONS (1) COMPENSATION
POSITION GRAPHIC OMITTED SALARY BONUS (#) (2)
- ------------------ --------------- ------------ -------- ----------- ------------
James A. Wylie, Jr. 12/31/03 $225,000 (3) $177,000 (3) 32,000 (3) $75,000 (4)
President and Chief 12/31/02 $0 $0 0 $50,000 (4)
Executive Officer
(effective January 12, 2003)
Peter Klein 12/31/03 $172,000 (5) $0 4,000 $0
President and Chief 12/31/02 $250,000 $0 0 $0
Executive Officer,
2/14/02 (after the
Merger) to 12/31/02
Gerald A. Mulhall 12/31/02 $0 $0 0 $0
President and Chief
Executive Officer,
1/1/02 to 2/14/02 (prior
to the Merger) (6)
Lisa M. Bruneau (7) 12/31/03 $114,000 $0 4,400 $0
Vice President - 12/31/02 $105,000 $0 1,000 $0
Finance; Treasurer,
Secretary
Kevin Stearn (8) 12/31/03 $134,000 $0 6,000 $0
General Manager, 12/31/02 $109,000 $0 0 $0
Diomed Ltd.
John J. Welch (9) 12/31/03 $146,000 $0 4,400 $0
Vice President, Marketing 12/31/02 $35,000 $0 3,200 $0
Leo T. Griffin, Jr. (10) 12/31/03 $109,000 $0 8,000 $0
David B. Swank (11) 12/31/03 $0 $0 8,000 $96,100
Chief Financial Officer
(1) During fiscal 2003 and 2002, neither Diomed Holdings, Inc. nor Diomed, Inc.
granted any restricted stock awards or stock appreciation rights or made any
long-term incentive plan payouts to any Named Executive Officer.
(2) Includes all other annual compensation and all other long-term compensation.
Perquisites are not included if the aggregate amount is less than the lesser of
$50,000 or 10% of salary and bonus.
(3) Pursuant to terms of Mr. Wylie's employment agreement, which included an
annual salary of $300,000, a bonus award upon completion of an equity financing
and the grant of 32,000 stock options. We paid Mr. Wylie a bonus of $177,000 in
2003 in recognition of his services performed in connection with the equity
financing we completed in 2003. We also paid Mr. Wylie a bonus of $50,000 in
2004 in recognition of his other services performed in 2003.
70
(4) Pursuant to terms of Mr. Wylie's consulting agreement, which provided that
Mr. Wylie would act as a consultant for the period December 2, 2002 through
February 28, 2003 for a consulting fee of $125,000. When we appointed Mr. Wylie
as president and chief executive officer upon the resignation of Peter Klein
effective January 10, 2003, we applied the remaining $75,000 of his consulting
fee to the payment of his salary for 2003.
(5) Pursuant to the terms of Mr. Klein's employment agreement, we paid Mr.
Klein's salary through June 30, 2003 and we also paid him for accrued but unused
vacation. We granted options to purchase 4,000 shares of common stock to Mr.
Klein in 2003.
(6) Mr. Mulhall was president and chief executive officer of the Company's
predecessor, Natexco. Mr. Mulhall's service terminated as of the February 14,
2002 merger.
(7) Ms. Bruneau commenced her employment in November 2001, as controller. Ms.
Bruneau was appointed vice president - finance, secretary and treasurer of the
Company, with an effective annual salary of $110,000. We increased her annual
salary to $122,000 effective September 1, 2003. We granted options to purchase
4,400 shares of common stock to Ms. Bruneau in 2003. We also paid Ms. Bruneau an
aggregate bonus of $40,000 in 2004, including $20,000 in recognition of her
services performed in connection with the equity financing completed in 2003 and
$20,000 in recognition of her other services performed in 2003. Ms. Bruneau
resigned from the Company effective April 30, 2004.
(8) Mr. Stearn began employment in February 2000. All figures expressed as
converted into U.S. dollars from British Pounds Sterling. Mr. Stearn's annual
salary was increased from BPS 78,000 to BPS 91,000 effective September 1, 2003.
We granted options to purchase 6,000 shares of common stock to Mr. Stearn in
2003. We also paid Mr. Stearn a bonus of $33,000 in 2004 in recognition of his
services performed in 2003.
(9) Mr. Welch became our vice president of marketing in October 2002, at an
effective annual salary of $140,000. We increased Mr. Welch's annual salary to
$163,000 effective October 1, 2003. We granted options to purchase 110,000
shares of common stock to Mr. Welch in 2003. We also paid Mr. Welch a bonus of
$25,000 in 2004 in recognition of his services performed in 2003.
(10) Mr. Griffin became our vice president of sales in May 2002, at an effective
annual salary of $175,000. We granted options to purchase 8,000 shares of common
stock to Mr. Griffin in 2003. We also paid Mr. Griffin a bonus of $30,000 in
2004 in recognition of his services performed in 2003. Mr. Griffin resigned
effective November 2, 2004. We agreed to pay Mr. Griffin his salary through May
2, 2005.
(11) Mr. Swank became a director in March 2003 and served on our Audit Committee
from that time until September 1, 2003, when we appointed Mr. Swank as chief
financial officer on a consulting basis. We paid Mr. Swank consulting fees of
$96,100 during 2003. We also paid Mr. Swank an aggregate bonus of $70,000 in
2004, including $50,000 in recognition of his services performed in connection
with the equity financing completed in 2003 and $20,000 in recognition of his
other services performed in 2003. We granted options to purchase 8,000 shares of
common stock to Mr. Swank in 2003.
71
EMPLOYMENT AGREEMENTS
Effective July 1, 2001, Diomed, Inc. entered into an employment agreement with
Mr. Klein, under which his employment continued until terminated in accordance
with certain provisions. Upon the closing of the February 14, 2002 merger, we
assumed Mr. Klein's employment agreement, and as a result during 2002 Mr. Klein
served as our president and chief executive officer at an annual base salary of
$250,000. The agreement provided for bonuses as determined by our board of
directors, and employee benefits, including vacation, sick pay and insurance, in
accordance with our policies. Pursuant the terms of this agreement, after Mr.
Klein's resignation effective January 10, 2003, we paid his salary as then in
effect and continued his medical benefits until June 30, 2003.
Effective January 10, 2003, we entered into an employment agreement with James
A. Wylie, Jr. as president and chief executive officer. Mr. Wylie became a
director as of that date. Mr. Wylie's employment agreement is for a term of two
years and provides for an annual base salary of $300,000 (payable commencing
March 1, 2003), an award of options to purchase up to 32,000 shares (figure
adjusted for 1:25 reverse stock split effective on June 17, 2004) of common
stock and certain bonus compensation, including a discretionary bonus as
determined by the board of directors and a bonus for the consummation of certain
financings (including the equity financing), mergers or similar transactions. If
we terminate Mr. Wylie's employment other than for cause, we will be obligated
to pay his salary and provide benefits to him for the remainder of his two-year
employment term. From December 2, 2002 until the effective date of his
employment agreement, Mr. Wylie acted as a consultant to us and an advisory
board member, pursuant to a management services agreement. Under the management
services agreement, we paid Mr. Wylie a consulting fee of $125,000 for the
period December 2, 2002 through February 28, 2003, and agreed to pay a success
fee for the consummation of certain financing, merger or similar transactions
(excluding the December 27, 2002 bridge financing transaction). The management
services agreement was terminated upon the effective date of Mr. Wylie's
employment agreement and was superceded by his employment agreement.
Effective December 28, 2003, we entered into a second employment agreement with
James A. Wylie, Jr. This agreement supercedes our January 10, 2003 employment
agreement with Mr. Wylie, and extends his employment by one year from December
31, 2004 until December 31, 2005. Mr. Wylie's new agreement provides for an
annual base salary of $330,000 (commencing January 1, 2004), an award of options
to purchase up to 108,000 shares (figure adjusted for 1:25 reverse stock split
effective on June 17, 2004) of common stock and certain bonus compensation. If
we terminate Mr. Wylie's employment other than for cause, we will be obligated
to pay his salary and provide benefits to him for the remainder of his two-year
employment term.
Effective September 1, 2003, we entered into a consulting agreement with David
B. Swank, as chief financial officer. Mr. Swank's agreement provides for us to
pay him a monthly fee of $12,500, and entitles him to receive options to
purchase shares of common stock and bonus compensation. Effective March 1, 2004,
we increased Mr. Swank's monthly fee to $16,700. Mr. Swank's agreement is for
six-month automatically renewable periods, and is cancelable upon six months
notice. Effective September 1, 2004, Mr. Swank's agreement was automatically
extended for a second six-month period until March 1, 2005 with a monthly fee of
$16,700.
Other executive officers have agreements which generally provide that upon
termination of their respective employment without cause, we will pay portions
of their annual base salary and continue their medical benefits for a period of
between three and eight months. These agreements also provide that these
executives are eligible to receive annual bonuses based on performance.
Our employment agreements with our executives also prohibit the executive from
directly or indirectly competing with us for a period of one-year following
termination of his employment.
There have been no adjustments or amendments to the exercise price of stock
options for our executive officers or directors.
STOCK OPTION PLANS
(Figures throughout this section for number of common stock, price per
share of common stock, options and warrants are adjusted to give effect
to the 1:25 reverse stock split effective on June 17, 2004)
2003 OMNIBUS PLAN
In November 2003, our stockholders approved a new incentive plan, the 2003
Omnibus Plan. 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. We obtained stockholder approval of the 2003
Omnibus Plan at our annual meeting on November 25, 2003, after which we reserved
1,600,000 shares of common stock for issuance pursuant to this plan. As of
December 31, 2003, options for 121,517 shares of common stock were outstanding
under the 2003 Omnibus Plan, and options for 1,478,484 shares of common stock
were available for future grants. As September 30, 2004 options for 924,804
shares of common stock were outstanding under the 2003 Omnibus Plan, and options
for 675,196 shares of common stock were available for future grants.
72
The Compensation Committee of the board of directors, or a subcommittee of the
Compensation Committee, administers the 2003 Omnibus Plan. Each member of the
Compensation Committee or its subcommittee, which must have at least two
members, must meet the standards of independence necessary to be classified as
an "outside director" for purposes of Section 162(m) of the Code and a
non-employee director for the purposes of Rule 16b-3 under the Securities
Exchange Act. Subject to the terms of the 2003 Omnibus Plan, the Compensation
Committee will have complete authority and discretion to determine the terms of
incentive awards.
The 2003 Omnibus Plan authorizes the grant of incentive stock options and
nonqualified stock options. Incentive stock options are stock options that
satisfy the requirements of Section 422 of the Code. Nonqualified stock options
are stock options that do not satisfy the requirements of Section 422 of the
Code. Options granted under the 2003 Omnibus Plan entitle the grantee, upon
exercise, to purchase a specified number of shares from us at a specified
exercise price per share. The Compensation Committee determines the period of
time during which an option may be exercised, as well as any vesting schedule,
except that no option may be exercised more than 10 years after the date of
grant. The exercise price for shares of common stock covered by an option cannot
be less than the fair market value of the common stock on the date of grant
unless we agree otherwise at the time of the grant.
The 2003 Omnibus Plan also authorizes the grant of restricted stock awards on
terms and conditions established by the Compensation Committee, which may
include performance conditions. The terms and conditions will include the
designation of a restriction period during which the shares are not transferable
and are subject to forfeiture. In general, the minimum restriction period
applicable to any award of restricted stock that is not subject to the
achievement of one or more performance standards is three years from the date of
grant. The minimum restriction period for any award of restricted stock that is
subject to one or more performance standards is one year from the date of grant,
except that restriction periods of shorter duration may be approved for awards
of restricted stock or restricted stock units combined with respect to up to
180,000 shares reserved for issuance under the 2003 Omnibus Plan.
Restricted stock units may be granted on the terms and conditions established by
the Compensation Committee, including conditioning the lapse of restrictions on
the achievement of one or more performance goals. In the case of restricted
stock units, no shares are issued at the time of grant. Rather, upon lapse of
restrictions, a restricted stock unit entitles a participant to receive shares
of common stock or a cash amount equal to the fair market value of a share of
common stock on the date the restrictions lapse. The requirements with respect
to restriction periods for restricted stock units are the same as those for
restricted stock awards.
The Compensation Committee may make performance grants to any participants that
are intended to comply with Section 162(m) of the Code. Each performance grant
will contain performance goals for the award, including the performance
criteria, the target and maximum amounts payable, and other terms and
conditions. Performance criteria may include price per share of stock, return on
assets, expense ratio, book value, investment return, return on invested capital
(ROIC), free cash flow, value added (ROIC less cost of capital multiplied by
capital), total Stockholder return, economic value added (net operating profit
after tax less cost of capital), operating ratio, cost reduction (or limits on
cost increases), debt to capitalization, debt to equity, earnings, earnings
before interest and taxes, earnings before interest, taxes, depreciation and
amortization, earnings per share (including or excluding nonrecurring items),
earnings per share before extraordinary items, income from operations (including
or excluding nonrecurring items), income from operations compared to capital
spending, net income (including or excluding nonrecurring items, extraordinary
items and/or the accumulative effect of accounting changes), net sales, return
on capital employed, return on equity, return on investment, return on sales,
and sales volume.
The Compensation Committee will make all determinations regarding the
achievement of performance goals. Actual payments to a participant under a
performance grant will be calculated by applying the achievement of performance
criteria to the performance goal. Performance grants will be payable in cash,
shares of common stock or a combination of cash and shares of common stock. The
Compensation Committee may reduce or eliminate, but not increase the payments
except as provided in the performance grant.
The 2003 Omnibus Plan authorizes the making of stock awards. The Compensation
Committee will establish the number of shares of common stock to be awarded and
the terms applicable to each award, including performance restrictions. No more
than 180,000 shares of common stock, reduced by restricted stock and restricted
stock unit awards, may be granted under the 2003 Omnibus Plan without
performance restrictions.
The Compensation Committee may grant Stock Appreciation Rights (SARs) under the
2003 Omnibus Plan. Subject to the terms of the award, SARs entitle the
participant to receive a distribution in an amount not to exceed the number of
shares of common stock subject to the portion of the SAR exercised multiplied by
the difference between the market price of a share of common stock on the date
of exercise of the SAR and the market price of a share of common stock on the
date of grant of the SAR. Such distributions are payable in cash or shares of
common stock, or a combination thereof, as determined by the Compensation
Committee.
The Compensation Committee may make provisions in incentive awards with respect
to a change in control, including acceleration of vesting or removal of
restrictions or performance conditions.
The board may suspend or terminate the 2003 Omnibus Plan without Stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the 2003 Omnibus Plan will terminate on April 10, 2013.
73
The board may also amend the 2003 Omnibus Plan at any time. No change may be
made that increases the total number of shares of common stock reserved for
issuance pursuant to incentive awards (except in certain instances to reflect
adjustments to capital) or reduces the minimum exercise price for options or
exchange of options for other incentive awards, unless such change is authorized
by the stockholders. A termination or amendment of the 2003 Omnibus Plan will
not, without the consent of the participant, adversely affect a participant's
rights under an incentive award previously granted to him or her.
Except as otherwise permitted by the Compensation Committee and provided in the
incentive award, incentive awards may not be transferred or exercised by another
person except by will or by the laws of descent and distribution. The
Compensation Committee may permit participants to elect to defer the issuance of
common stock or the settlement of awards in cash under the 2003 Omnibus Plan.
Incentive awards representing up to 1,600,000 shares of common stock are
authorized for issuance under the 2003 Omnibus Plan.
OPTION GRANTS IN LAST FISCAL YEAR
(Figures throughout this section are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004 for number
of shares of common stock, price per share of
common stock, options and warrants)
The following table sets forth certain information regarding stock options that
we granted in 2003 to all Named Executive Officers:
PERCENT OF
TOTAL
NUMBER OF SHARES OPTIONS GRANTED
NAME AND UNDERLYING TO EMPLOYEES EXERCISE PRICE EXPIRATION
PRINCIPAL POSITION OPTIONS GRANTED IN FISCAL YEAR (1) PER SHARE DATE
- ------------------ --------------- ------------------ -------------- --------------
James A. Wylie, Jr.(2) 32,000 35.0% $ 6.50 January 10, 2013
President and
Chief Executive Officer
David B. Swank (3) 8,000 9.0% 11.50 June 4, 2013
Chief Financial Officer
Lisa M. Bruneau (4) 400 0.5% 4.75 May 1, 2013
VP Finance, Treasurer 3,600 4.0% 7.50 June 2, 2013
and Secretary 400 0.5% 8.75 October 8, 2013
John J. Welch (5) 400 0.5% 4.75 May 1, 2013
VP Marketing 3,600 4.0% 7.50 June 2, 2013
400 0.5% 8.75 October 8, 2013
Leo T. Griffin, Jr. (6) 8,000 9.0% 6.25 May 22, 2013
VP North American Sales
Kevin Stearn (7) 400 0.5% 4.75 May 1, 2013
VP Operations (General 3,600 4.0% 7.50 June 2, 2013
Manager Diomed Limited) 400 0.5% 8.75 October 8, 2013
------------ ------- -------
Totals 61,200 68.0% $ 7.25
(1) Based on a total of 91,660 options granted to employees during 2003.
(2) Mr. Wylie was awarded 108,000 options on February 11, 2004 at an exercise
price of $4.50 per share in connection with the extension of his employment
contract through December 31, 2005, and 268,000 options on February 24, 2004 at
an exercise price of $5.00 per share.
(3) Mr. Swank was awarded 60,000 options on February 24, 2004 at an exercise
price of $5.00 per share.
(4) Ms. Bruneau was awarded 22,000 options on February 24, 2004 at an exercise
price of $5.00 per share. Ms. Bruneau resigned effective April 30, 2004, and in
accordance with the 2003 Omnibus Plan had 90 days to exercise her vested
options. She did not exercise any of these vested options within that 90 day
period, and accordingly, all of her vested options expired. We cancelled all of
her unvested options upon resignation.
(5) Mr. Welch was awarded 28,000 options on February 24, 2004 at an exercise
price of $5.00 per share.
(6) Mr. Griffin was awarded 28,000 options on February 24, 2004 at an exercise
price of $5.00 per share. Mr. Griffin resigned, effective November 2, 2004, and
in accordance with the 2003 Omnibus Plan has 90 days to exercise his vested
options. We cancelled all of his unvested options upon resignation.
(7) Mr. Stearn was awarded 34,000 options on February 24, 2004 at an exercise
price of $5.00 per share.
74
OPTIONS HELD AT END OF PRIOR FISCAL YEAR
(Figures throughout this section are adjusted to give
effect to the 1:25 reverse stock split effective June 17, 2004)
The following table sets forth certain information regarding stock options that
the Named Executive Officers held as of December 31, 2003:
NUMBER OF UNEXERCISED
OPTIONS AT VALUE OF "IN THE MONEY"
DECEMBER 31, 2003 OPTIONS AT
NAME AND EXERCISABLE/ DECEMBER 31, 2003
PRINCIPAL POSITION UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
- -------------------------------------------------------------------------------------------------------------
James A. Wylie Jr., 20,000 / 12,000 $130,000 / $78,000
President and Chief Executive Officer
David B. Swank 2,667 / 5,333 $0 / $0
Chief Financial Officer
Lisa M. Bruneau 1,580 / 4,821 $0 / $5,400
VP Finance, Treasurer, Secretary
John J. Welch 1,534 / 6,067 $0 / $5,400
VP Marketing
Leo T. Griffin, Jr. 0 / 8,000 $0 / $50,000
VP North American Sales
Kevin Stearn 3,896 / 8,505 $0 / $5,400
VP Operations (General Manager Diomed Limited)
(1) Based on the closing price of $7.25 on the AMEX on December 31, 2003 and the
respective exercise prices of the options held.
No adjustments to the exercise price of any outstanding options were made during
the fiscal year ended December 31, 2003, other than in connection with the 1 for
25 reverse split, which effected a 25 fold increase in the exercise price of
each outstanding option.
RELATED TRANSACTIONS
During the past two years, we and our predecessor entities have entered into
transactions with various related parties. Generally, the transactions were
completed to finance our operations and to implement our business plans. We
believe that each of these transactions were on terms as favorable to it as the
terms we could have obtained from independent third parties. Specifically, this
section discusses transactions entered into between January 1, 2002 and
September 30, 2004 between us and the following persons:
- Samuel Belzberg, a former director and his affiliates, Gibralt
Capital Corp. and Gibralt U.S., Inc., a beneficial holder of more than 5% of our
common stock; and
- Verus International Group Limited and its affiliates, a beneficial
holder of more than 5% of the our common stock (prior to the transactions on May
7, 2003, described below).
INTERIM FINANCING TRANSACTIONS FROM DECEMBER 2002 TO DECEMBER 31, 2003
Figures throughout this section for number of common stock, price per share
of common stock, options and warrants are adjusted to give effect to the
1:25 reverse stock split effective June 17, 2004)
At the beginning of 2003, the board elected a new president and chief executive
officer and three new members of the board. In January 2003, Geoffrey Jenkins,
one of our directors since 2001, became the chairman of the board. Also in
January 2003, James A. Wylie, Jr. became our president and chief executive
officer and a director. Mr. Wylie had been engaged on a consulting basis at the
end of 2002 to review our business operations and viability. In March 2003, Gary
Brooks, a nationally recognized turnaround consultant and crisis manager, and
David Swank, an experienced financial executive with significant accounting and
financial control experience, became independent directors.
In connection with the changes in the Board's composition and our leadership, we
entered into three financing transactions, each of which was with a related
party. Highlights of these three transactions are as follows:
75
- DECEMBER 2002 INTERIM FINANCING. At the end of December 2002, we
borrowed $2,000,000 from Gibralt U.S. in the form of one-year Class A Secured
Convertible Notes and Class B Unsecured Convertible Notes. In connection with
this loan, we also issued warrants to purchase 333,334 shares of common stock at
an exercise price of $6.50 per share. These funds were used to provide working
capital while new management and new independent directors completed their
assessments of our prospects and operations.
- MAY 2003 INTERIM FINANCING. In April 2003, we secured loan
commitments for up to $1,200,000 as interim financing from Gibralt U.S. and two
directors. Gibralt U.S. committed to lend up to $1,100,000, and Mr. Wylie and
Peter Norris committed to lend the remaining $100,000 in exchange for one-year
Class D Secured Notes. This transaction closed on May 7, 2003. These funds were
used to provide working capital for us while we pursued our plan to raise
long-term equity financing. We issued preferred shares convertible into a total
of 120,863 shares of common stock to these lenders in connection with their loan
commitments.
- MAY 2003 EXCHANGE TRANSACTION. Simultaneously with obtaining the
$1,200,000 of loan commitments, we modified several terms and conditions of the
Class A and Class B Notes that we believed might impede the completion of a
permanent equity financing with institutions and accredited investors. First, we
issued Class C Stock, which was convertible into 1,084,690 shares of common
stock, in exchange for the redelivery to us of 333,334 warrants and modification
of the Class A and Class B Notes to make them non-convertible. Second, we issued
Class D Stock, which was convertible into 120,863 shares of common stock, as a
discount for the $1,200,000 in committed secured bridge loans. The 1,205,552
shares of common stock underlying the Class C Stock and Class D Stock
represented in the aggregate approximately 50.36% of our common stock and common
stock equivalents outstanding after the transactions.
- MAY 2003 MODIFICATION TRANSACTION. On May 28, 2003, we and the
holders of the Class A and Class B Convertible Notes made further modifications
to the notes to accommodate the plan for permanent equity financing. We did not
issue any additional shares or pay any amounts to obtain these changes.
- AUGUST 2003 EXCHANGE OF PREFERRED SHARES. As part of our
settlement of the Augenbaum lawsuit, we exchanged the convertible preferred
stock we issued on May 7, 2003 for an equal number of shares of new classes of
preferred stock. The new classes of preferred stock were not by their terms
convertible into common stock, but under a written agreement with the
stockholders, these shares were to be exchanged for an equal number of shares of
common stock into which the number the former classes of common stock were
convertible. This exchange was made to address a claim in the Augenbaum
complaint that the preferred stock we issued in May 2003 could not be
convertible by its terms. The plaintiff in Augenbaum agreed that we could issue
the same number of shares of common stock into which the May 2003 preferred
stock would have been convertible, but that the mechanism should be through an
exchange of preferred stock for common stock, not a conversion of the preferred
stock into common stock. Accordingly, the August 2003 exchange agreements with
the holders of the preferred stock provide that after our stockholders approve
the issuance of the underlying shares of common stock, then either we or the
holders of the preferred stock may request the exchange of the preferred stock
for that number of shares of common stock into which the May 2003 preferred
stock was convertible.
- REPAYMENT OF $2,000,000 DEBT INCURRED IN DECEMBER 2002 INTERIM
FINANCING. On September 3, 2003, we repaid all of the $2,000,000 in principal
and accrued interest on the notes we issued in connection with the December 2002
interim financing, using a portion of the $6,500,000 gross proceeds of the sale
of Secured Bridge Notes in the equity financing.
- CONVERSION OF $1,200,000 DEBT INCURRED IN MAY 2003 INTERIM
FINANCING. On November 25, 2003, the $1,200,000 in notes that we issued in our
May 2003 interim financing, including accrued interest, converted into common
stock at $2.50 per share. Accordingly, we issued 499,294 shares of common stock
to these noteholders.
- CONVERSION OF SECURED BRIDGE NOTES. On November 25, 2003, the
$6,995,000 in Secured Bridge Notes we issued at the first closing of the equity
financing in September 3, 2003, including accrued interest, converted into
common stock at $2.00 per share. Accordingly, we issued 3,562,788 shares of
common stock to these noteholders.
- EXCHANGE OF CLASS E AND CLASS F STOCK. On November 25, 2003, in
connection with the final closing of our equity financing and pursuant to our
agreement with the holders of our Class E and Class F Stock, we exchanged all
outstanding shares to Class E Stock for a total of 1,084,690 shares of common
stock and we exchanged all outstanding shares of Class F Stock for a total of
120,863 shares of common stock.
We summarize in the tables below the material terms of the Class A and Class B
Convertible Notes and warrants that we issued in the December 2002 Interim
Financing, the Class C Notes that we issued in the May 2003 Exchange
Transaction, the Class D Notes that we issued in the May 2003 Interim Financing
Transaction and the Class E Notes that we issued in exchange for the Class C
Notes and the amendments that we made to the Class D Notes in the May 2003
Modification Transaction. Following these tables, we describe the material terms
of these securities in greater detail.
76
TABLE SUMMARIZING THE DECEMBER 2002 INTERIM FINANCING AND SUBSEQUENT
MODIFICATIONS
The following table summarizes the original terms of the $2,000,000 interim
financing that we completed in December 2002, the terms of that $2,000,000
interim financing after giving effect to the exchange transaction that we
completed on May 7, 2003 and the subsequent modification on May 28, 2003:
ORIGINAL TERMS OF TERMS OF DECEMBER 2002 TERMS OF DECEMBER 2002
DECEMBER 2002 INTERIM FINANCING AS INTERIM FINANCING AS
INTERIM FINANCING MODIFIED MAY 7, 2003 MODIFIED MAY 28, 2003
Indebtedness: Indebtedness: Indebtedness:
- ------------- ------------- -------------
- - $2,000,000 principal amount - $2,000,000 principal amount - $2,000,000 aggregate
- - interest rate 8% per annum - interest rate 8% per annum principal amount
- - principal and accrued interest - principal and accrued - interest rate 12.5% per annum
payable at maturity interest payable at maturity starting 5/28/03
- - maturity date 1/1/04 - maturity date 1/1/04 - interest accrued through
5/27/03 added to principal
and becomes payable quarterly
commencing 3/31/04 to the
extent of 50% excess quarterly
cash flow
- interest accrued from 5/28/03
payable quarterly commencing
9/30/03
- maturity date 1/1/06
Conversion of Indebtedness: Conversion of Indebtedness: Conversion of Indebtedness:
- --------------------------- --------------------------- ---------------------------
- - convertible into common stock - no conversion rights - no conversion rights
at noteholder's option
- - number of shares of common
stock into which convertible
equals principal and interest
divided by conversion price
- - conversion price determined at
time of conversion
- - conversion price is 80% of the
then-prevailing price of common
stock (determined on basis of
market price, price in financing
transaction or liquidation, as
applicable)
Other Rights of Noteholders: Other Rights of Noteholders: Other Rights of Noteholders:
- ---------------------------- ---------------------------- ----------------------------
- - right to approve future - no right to approve future - no right to approve future
financings prior to 1/1/2004 financings financings
- - right to participate in future - no right to participate in - no right to participate in
financings at a 20% discount to the future financings future financings
price paid by investors in the - right to rescind 5/7/03 exchange - right to rescind 5/28/03 exchange
future financing transaction if (1) no stockholder transaction if (1) no stockholder
approval of issuance of common approval of issuance of common
stock upon conversion of preferred stock upon conversion of preferred
shares issued in consideration of shares issued in consideration of
exchange transaction, or (2) exchange transaction, or (2)
financing is not entered into prior financing is not entered into prior
to 6/30/03 to 7/31/03
Security: Security: Security:
- --------- --------- ---------
- - $1,000,000 principal amount of - entire $2,000,000 principal - entire $2,000,000 principal
notes secured, $1,000,000 principal amount plus accrued interest amount plus accrued interest on
amount unsecured secured notes secured
- - security interest granted in - security interest is lien on - security interest is lien on
all of our personal property, subject all of our personal property, all of our personal property,
to priority of prior security subject to priority of prior excluding intellectual property
interest in accounts receivable security interest in accounts acquired after 12/31/02 and
- - pledge of stock of subsidiary receivable inventory and fixed assets in
owning the photodynamic therapy - pledge of stock of subsidiary excess of the stipulated 12/31/02
business owning the photodynamic therapy value
business - security interest in accounts
receivable subject to subrogation
to future creditors if we enter
into receivables financing
transaction
- pledge of stock of subsidiary
owning the photodynamic therapy
business
Warrants: Warrants: Warrants:
- --------- --------- ---------
- - warrants to purchase 333,334 - December 2002 warrants - December 2002 warrants
shares of common stock at exercise surrendered, subject to the surrendered, subject to the
price of $6.50 per share December 2002 warrants being December 2002 warrants being
- - number of warrant shares reissued upon the note-holders' reissued upon the noteholders'
subject to increase if shares of exercise of their rescission rights exercise of their rescission rights
common stock or common stock
equivalents are issued at a price
less than the warrant exercise price
- - warrant exercise price subject to
downward adjustment if common stock
or common stock equivalents issued
in a financing at less than the
warrant exercise price
77
TABLE SUMMARIZING THE MAY 2003 INTERIM FINANCING AND SUBSEQUENT MODIFICATIONS
The following table summarizes the original terms of the $1,200,000 interim
financing that we completed on May 7, 2003 and the subsequent modification to
certain of the terms and conditions of that financing on May 28, 2003:
ORIGINAL TERMS OF TERMS OF MAY 7, 2003
MAY 7, 2003 INTERIM FINANCING TRANSACTION
INTERIM FINANCING TRANSACTION AS MODIFIED MAY 28, 2003
Indebtedness: Indebtedness:
- ------------- -------------
- - up to $1,200,000 aggregate - up to $1,200,000 aggregate
principal amount principal amount
- - interest rate 8% per annum - interest rate 8% per annum
- - principal and accrued interest - principal and accrued interest
payable 5/6/2004 payable 5/6/2004
Conversion of Indebtedness: Conversion of Indebtedness:
- --------------------------- ---------------------------
- - no conversion rights - no conversion rights
Other Rights of Noteholders: Other Rights of Noteholders:
- ---------------------------- ----------------------------
- - no right to approve future - no right to approve future
financings financings
- - right to participate at the - mandatory participation in future
noteholder's option in future financings at the same price paid
financings at the same price paid by investors in the future
by investors in the future financing and otherwise on the same
financing and otherwise on the same terms as applicable to those
terms as applicable to those investors
investors - no right to redeem indebtedness for
- - right to redeem indebtedness for cash upon completion of future
cash upon completion of future financing
financing - right to accelerate due date of
- - right to accelerate due date of indebtedness if financing not
indebtedness if financing not completed prior to 7/31/2003
completed prior to 7/1/2003
Security: Security:
- --------- ---------
- - $1,200,000 principal amount and - $1,200,000 principal amount and
accrued interest on notes secured accrued interest on notes secured
- - security interest granted in all of - security interest granted in all of
our personal property, subject to our personal property, excluding
priority of existing lien in accounts receivable, intellectual
accounts receivable property acquired after 12/31/02
- - pledge of stock of subsidiary and inventory and fixed assets in
owning the photodynamic therapy excess of value as of 12/31/02
business - pledge of stock of subsidiary
owning the photodynamic therapy
business
Warrants: Warrants:
- --------- ---------
- - no warrants issued - no warrants issued
DESCRIPTION OF DECEMBER 2002 INTERIM FINANCING TRANSACTION
The principal terms of the $2,000,000 bridge financing that we completed on
December 27, 2002 were:
- We borrowed $2,000,000 from Gibralt U.S., whose principal, Samuel
Belzberg, was a member of our board of directors until February 2004.
- To evidence the loan, we issued $1,000,000 in Class A Notes that
were secured and $1,000,000 in Class B Notes that were unsecured.
- The maturity date of the notes was January 1, 2004.
- The notes bore interest at 8% per annum, and accrued interest was
payable at maturity.
78
- The Class A and the Class B Notes, including principal and accrued
interest, were convertible into common stock at 80% of the common stock price
determined as follows: (i) if we were to complete a financing transaction in
which we issued common stock or common stock equivalents, the price per share of
common stock or common stock equivalent (the weighted average if multiple
financing transactions occur in a rolling 30-day period), (ii) if we were to
complete a financing transaction in which we did not issue common stock or
common stock equivalents, the lower of the average of the closing price of the
common stock for the 15 business days preceding the public announcement of the
financing transaction or the average of the closing price of the common stock
for the 15 business days following the public announcement of the financing
transaction, (iii) if a liquidity event were to occur in which any person or
group other than a stockholder on December 27, 2002 becomes the beneficial owner
of at least 51% of voting control over us, the price per share allocated to each
share of common stock or common stock equivalent, or (iv) if any other liquidity
event were to occur, the lower of the average of the closing price of the common
stock for the 15 business days preceding the public announcement of the
liquidity event or the average of the closing price of the common stock for the
15 business days following the public announcement of the liquidity event.
- If a merger or reorganization were to occur, the Class A and Class
B Notes were convertible into the kind and number of shares of common stock,
other securities or property into which the notes would have been converted into
if the notes had been converted into common stock on the business day preceding
the merger or reorganization.
- We agreed not to consummate any financing transaction until
January 1, 2004 while any Class A or Class B Notes were outstanding unless we
had first received the approval of the holders of at least 66-2/3% of the
outstanding principal amount of the notes.
- We also issued to the noteholder warrants to purchase up to
333,334 shares of common stock. The warrants were exercisable for a period of
five years, beginning June 27, 2003, at an exercise price of $6.50 per share,
which was 110% of the market price of the common stock on December 26, 2002. If
we, during the life of the warrants, were to issue common stock or common stock
equivalents at a price per share less than $6.50, the number of warrants would
be increased and the exercise price of the warrants would be decreased to the
lower price per share. If a merger or reorganization were to occur, the warrants
would become convertible into the kind and number of shares of common stock,
other securities or property into which the common stock, other securities or
property issuable upon exercise of the warrants would have been converted if the
warrants had been exercised prior to the merger or reorganization.
- We and the noteholder entered into an agreement for the
registration of the shares of common stock issuable upon the conversion of the
notes and upon the exercise of the warrants. Under that agreement, we agreed to
notify the noteholder if we were to propose to file certain future registration
statements. We agreed to use our best efforts to register any shares of common
stock issuable to the noteholder in the registration statement, subject to
certain defined limitations, if so requested by the noteholder within 30 days of
receipt of our notice. The noteholder agreed to become subject to a "holdback
period," by which the noteholder could not effect a public sale of common stock
for a period of up to 180 days following the effective date of the registration
statement, if so requested by a managing underwriter of the offering.
- The notes and the warrants, pro rata to the notes, were
transferable in part or in whole by the noteholder to one or more third parties,
in accordance with all of the same terms agreed to by the noteholder.
On March 18, 2003, Gibralt U.S. sold and transferred to three investors in a
private transaction (i) $500,000 aggregate principal amount of the notes
($250,000 of which were Class A Notes and $250,000 of which were Class B Notes),
and (ii) 83,334 warrants. None of these transferees was an affiliate of Gibralt
U.S., although one of them is Morris Belzberg, a cousin of Samuel Belzberg.
Samuel Belzberg does not beneficially own, or have investment discretion over,
the securities purchased from him by Morris Belzberg. Accordingly, after this
transfer, Mr. Belzberg beneficially owned 250,000 warrants and $1,500,000
aggregate principal amount of notes ($750,000 of which are Class A Notes and
$750,000 of which are Class B Notes).
DESCRIPTION OF MAY 7, 2003 EXCHANGE TRANSACTION
During the first quarter of 2003, our board of directors and management
determined that we should seek permanent financing and continue our efforts to
achieve our business plan. Accordingly, the board of directors approved a plan
to raise long-term equity financing.
To address certain issues presented by our capital structure, the board of
directors created a special committee comprised of independent directors, (the
"Independent Committee"). The Independent Committee is comprised of Messrs.
Jenkins, Swank and Brooks. Based on information provided by Mr. Wylie and an
investment banker engaged by us in April 2003, the Independent Committee found
that under prevailing market conditions in the second quarter of 2003,
prospective investors were likely to be reluctant to invest in us because of
certain features of the December 2002 Interim Financing. Specifically, the
Independent Committee found that the future dilution represented by the 333,334
warrants to purchase our common stock and the potential conversion of the
$2,000,000 principal amount of the Class A and Class B Notes were unlikely to be
acceptable to new investors. In addition, the Independent Committee found that
the December 2002 noteholders' right to participate in any future financing at a
20% discount to the price that new investors would be paying and their right to
approve future financing were likely to be obstacles to a completed financing.
The Independent Committee also determined that issuing additional shares in
exchange for modifications to the notes issued in the December 2002 Interim
Financing was, from the perspective of our stockholders, preferable to the
alternative of ceasing operations due to our inability to raise additional
funding.
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The Independent Committee began negotiations in April 2003 to modify the terms
of the December 2002 Interim Financing to eliminate the potential obstacles to
obtaining permanent financing. The Independent Committee and the December 2002
noteholders agreed to the proposed terms of the exchange transaction on April
22, 2003 and the transaction closed on May 7, 2003. The principal terms of the
May 7, 2003 exchange transaction were:
- the noteholders delivered the 333,334 warrants held by them;
- the noteholders returned the Class A secured notes and Class B
unsecured notes held by them to us for cancellation;
- to compensate the December 2002 noteholders for surrendering the
conversion rights under the notes and the warrants, we issued a total of 20
shares of Class C Stock (the "Class C Stock") to the December 2002 noteholders,
which were convertible into an aggregate of 1,084,690 shares of common stock;
- we issued Class C secured notes to the noteholders in principal
amounts equal to the Class A and Class B notes that were cancelled (the "Class C
Notes");
- the Class C Notes were redeemable for cash at the holder's option
if we were to complete our anticipated permanent financing;
- the Class C Notes were not convertible into capital stock;
- the noteholders surrendered their rights to approve future
financing transactions;
- the Class C Notes were secured by a security interest in our
property identical to the security interest created in the December 2002 Interim
Financing, and otherwise had terms substantially similar to the Class A Notes;
and
- we expanded our obligation under the registration rights agreement
entered into in December 2002 by granting demand registration rights to the
noteholders regarding the underlying shares of stock.
We also agreed to unwind the May 2003 Exchange Transaction and restore the
original terms of the December 2002 Interim Financing if: (1) our stockholders
did not approve the issuance of the common stock underlying the capital stock
issued to the noteholders in the May 2003 Exchange Transaction, or (2) if we did
not complete our contemplated financing transaction by June 30, 2003 (this date
was subsequently extended to July 31, 2003 under the modifications which were
agreed to on May 28, 2003 and again to November 15, 2003 or any later day that
is one business day following the date agreed by us and the investors for the
second closing of the equity financing).
If the May 2003 Exchange Transaction had been rescinded, then the original terms
of the December 2002 Interim Financing would have been reinstated (except that
all of the notes will be secured). The original terms of the December 2002 notes
provided for conversion of the notes at a variable conversion rate. The original
terms of the Class A and Class B Notes provided for conversion at the
noteholder's option of principal and accrued interest into common stock at a
conversion price equal to 80% of the common stock price, with the common stock
price being determined at the time of conversion. In addition, if the May 7,
2003 exchange transaction had been rescinded, we would have been required to
redeliver the warrants to purchase 333,334 shares of common stock to the
December 2002 noteholders.
To allow for the issuance of the preferred shares associated with the exchange
transaction, on May 5, 2003, we created a new class of preferred stock,
consisting of 20 shares of preferred stock designated as "Class C Stock," each
share of which was to automatically convert into 54,235 shares of common stock
at the time when our stockholders approve the issuance of common stock
underlying the Class C Stock. This would have resulted in an additional
1,084,690 shares of common stock being issued and outstanding after the
conversion occurs. Under the terms of the Class C Stock, the holders of the
Class C Stock held the right to vote that number of shares into which the Class
C Stock is convertible, voting as one class with the holders of common stock and
other capital stock convertible into common stock.
In the May 7, 2003 exchange transaction, Gibralt U.S. and the three other
securityholders received (1) Class C Notes in the principal amount equal to the
aggregate principal amount of the Class A and Class B Notes surrendered by them
and (2) shares of Class C Stock, all in exchange for surrendering the conversion
rights of the Class A and Class B Notes (Class C Stock convertible into a total
of 723,714 shares of common stock, or, approximately 36,186 shares of common
stock per $100,000 principal amount of notes exchanged for non-convertible
notes) and the warrants (Class C Stock, convertible into a total of 360,976
shares of common stock, or, approximately 4,332 shares of common stock per 4,000
warrants surrendered). On April 22, 2003, the effective date of the May 7, 2003
exchange transaction, the closing price of the common stock on the AMEX was
$4.00 per share.
80
The number of shares of Class C Stock issued in the exchange transaction and the
value of the Class C Stock issued to the December 2002 securityholders in the
exchange transaction, using the closing price of the common stock of $4.00 on
April 22, 2003, is as follows:
GIBRALT U.S.
- ------------
Principal Amount of Notes Exchanged: $1,500,000
Number of Warrants Surrendered: 250,000
Shares of Class C Stock Issued: 15
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 813,518
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $3,254,069
MORRIS BELZBERG
- ---------------
Principal Amount of Notes Exchanged: $300,000
Number of Warrants Surrendered: 50,000
Shares of Class C Stock Issued: 3
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 162,704
Shares of Common Stock Issuable upon Conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $650,814
STEVEN SHRAIBERG
- ----------------
Principal Amount of Notes Exchanged: $100,000
Number of Warrants Surrendered: 16,667
Shares of Class C Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 54,235
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $216,938
CHARLES DIAMOND
- ---------------
Principal Amount of Notes Exchanged: $100,000
Number of Warrants Surrendered: 16,667
Shares of Class C Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class C Stock: 54,235
Shares of Common Stock Issuable upon conversion
of Class C Stock multiplied by
April 22, 2003 closing price per share: $216,938
After the May 2003 Exchange Transaction and Interim Financing were completed and
in light of discussions with our investment banker, the Independent Committee
determined that further modifications to the terms of the securities issued in
the May 2003 transactions would be necessary to assist us in completing the
permanent financing. The material terms of these modifications are described
under "Description of May 2003 Modifications to May 7, 2003 Exchange Transaction
and Interim Financing."
DESCRIPTION OF MAY 2003 INTERIM FINANCING TRANSACTION
In March 2003, the board of directors also determined that we had an immediate
need for capital to support our operations until we completed the contemplated
permanent financing. In April 2003, the board of directors approved a plan to
raise up to $1,200,000 of interim financing prior to May 15, 2003. The board
further determined that, because of our history of operating losses and cash
position at the time, the contemplated permanent financing was likely to involve
the issuance of substantial amounts of equity.
81
The Independent Committee negotiated with Samuel Belzberg, a principal investor
and a former director, to obtain the needed $1,200,000 interim financing. Mr.
Belzberg committed to lend (through his affiliate, Gibralt U.S.) up to
$1,100,000 to us, and two other directors, James A. Wylie, Jr. and Peter Norris,
each agreed to lend $50,000 to us, to demonstrate their commitment to and
support of us. The board did not believe there were other prospective investors
available to us to provide the interim financing on terms and within a time
period acceptable to us. The Independent Committee and these directors agreed to
the proposed terms of the interim financing on April 22, 2003, and the
transaction closed on May 7, 2003.
The material terms of the May 7, 2003 interim financing transaction are as
follows:
- Gibralt U.S. committed to lend up to $1,100,000 to us ($1,000,000
of which was to be funded according to a predetermined funding schedule and the
other $100,000 of which was to be funded upon completion of a certain third
party transaction), and Messrs. Wylie and Norris loaned $50,000 to us. Gibralt
U.S. funded all of its commitment.
- We issued Class D secured notes in a principal amount equal to the
amount loaned to us (secured on an equal basis with the indebtedness incurred in
the December 2002 Interim Financing and having substantially similar terms as
the Class C notes issued in the May 7, 2003 exchange transaction, except that
they would mature one year from the date of issuance).
- To compensate the lenders for the risk attendant to their
investment and based on our financial condition, need for additional funding and
lack of definitive terms for a future permanent financing or commitment from any
investor to provide such permanent financing, we issued shares of capital stock
equal to 20% of the amount of the loan commitment of the interim financing
lenders (or, $240,000), in the form of a total of 24 shares of Class D
Convertible Preferred Stock, which were convertible into an aggregate of 120,863
shares of common stock.
- The Class D noteholders held rights (but not the obligation) to
redeem their notes for the securities issued by us in the permanent financing on
the same terms and conditions as the investors in the permanent financing.
- The Class D noteholders held rights to redeem their notes for cash
if we consummated our permanent financing.
- The Class D noteholders held registration rights identical to
those granted to the holders of the Class C Notes issued in the May 7, 2003
exchange transaction.
During the negotiation process, the lenders required that if the contemplated
financing did not occur prior to June 30, 2003 (subsequently extended to July
31, 2003 in the May 28, 2003 modifications, described below and thereafter
extended to November 15, 2003 and again to a day after November 15, 2003 that we
and the investors agreed as the date for the second closing of the equity
financing), then the lenders could accelerate the maturity date of their notes.
We created a new class of preferred stock from our authorized preferred stock,
consisting of 24 shares of preferred stock designated as "Class D Convertible
Preferred Stock," each share of which would have been automatically converted
into 5,036 shares of common stock when our stockholders approved the issuance of
these shares of common stock underlying the Class D Convertible Preferred Stock.
This would have resulted in an additional 120,863 shares of common stock being
issued and outstanding after the conversion occurs. Under the terms of the Class
D Stock, the holders of the Class D Stock had the right to vote that number of
shares into which the Class D Stock was convertible, voting as one class with
the holders of common stock and other capital stock convertible into common
stock.
The loan commitments of the lenders in the May 7, 2003 interim financing and the
principal amount of Class D Notes, the number of shares of Class D Convertible
Preferred Stock (and the number of shares of common stock into which the Class D
Stock is convertible) the lenders received, as well as the value of the Class C
Stock issued to the lenders in the interim financing using the closing price of
the common stock of $4.00 on April 22, 2003, and after giving effect to the
issuance of the shares to be issued upon conversion of the Class C Stock and the
Class D Stock, is as follows:
GIBRALT U.S.
- ------------
Loan Commitment: Up to $1,100,000
Principal Amount of Notes Issued: Up to $1,100,000
Shares of Class D Convertible Preferred Stock Issued: 22
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 110,791
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $221,580
JAMES A. WYLIE, JR.
- -------------------
Loan Commitment: $50,000
Principal Amount of Notes Issued: $50,000
Shares of Class D Convertible Preferred Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 5,036
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $10,072
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PETER NORRIS
- ------------
Loan Commitment: $50,000
Principal Amount of Notes Issued: $50,000
Shares of Class D Convertible Preferred Stock Issued: 1
Number of Shares of Common Stock Issuable upon
Conversion of Class D Convertible Preferred Stock: 5,036
Shares of Common Stock issuable upon conversion
of Class D Convertible Preferred Stock multiplied by
April 22, 2003 closing price per share: $10,072
Gibralt U.S., Mr. Norris and Mr. Wylie loaned a total of $1,200,000 to us,
representing their entire loan commitments.
DESCRIPTION OF MAY 28, 2003 MODIFICATIONS TO MAY 7, 2003 EXCHANGE TRANSACTION
AND INTERIM FINANCING
As we proceeded to seek our permanent financing during May 2003, we assessed the
availability of investment capital for development stage companies. The
Independent Committee determined that it was essential to extend the maturity
date of the Class C Notes beyond January 1, 2004, to eliminate the right of the
holders of the Class C Notes to redeem those notes for cash upon the completion
of the future permanent financing and to limit in certain respects the
collateral securing our obligations under the Class C and Class D Notes. The
Independent Committee determined that these modifications were necessary because
the terms of the Class C and Class D Notes would likely, unless modified, deter
investors from investing in us. The Independent Committee found that prospective
investors would presumably expect that we would use the proceeds of their
investment as working capital rather than apply the proceeds to the satisfaction
of existing debt. Accordingly, the Independent Committee negotiated further
modifications to the May 7, 2003 exchange transaction, as well as modifications
to the May 2003 interim financing transaction, as described below in this
section.
The Independent Committee determined that the maturity date of the Class C Notes
should be extended to January 1, 2006. In addition, the Independent Committee
determined that the security interest granted to the Class C noteholders should
be limited to certain collateral that was owned at December 31, 2002 and that
the note collateral should not include our after-acquired property, thereby
making that property available as security to our future investors. The
Independent Committee further determined that the Class D Notes should not be
redeemable for cash upon the closing of the future financing transaction.
Instead, the Class D Notes should be converted into the securities issued in the
future financing on the same terms and conditions offered to the other
investors. With these objectives, the Independent Committee commenced
negotiations with the holders of the Class C Notes and the Class D Notes.
The Class C noteholders required that, in exchange for the modifications we
sought, the terms of their notes be revised to increase the interest rate from
8% to 12.5% per annum, and to require that we commence making payments of
interest accrued from December 27, 2002 through May 27, 2003 and principal on a
quarterly basis beginning the first quarter of 2004, but only to the extent of
50% of our excess quarterly cash flow.
The Class C noteholders also agreed to modify the security for the notes, the
change to become effective when we raised at least $6,000,000 in our permanent
financing. The Class C noteholders agreed that their security interest in
accounts receivable would be subordinated to a future security interest granted
by us in a receivables financing transaction and that their security interest in
intellectual property would be limited to that owned as of December 31, 2002.
The Class C noteholders required that we maintain minimum inventory and fixed
asset levels, determined quarterly, of not less than $2,000,000. In addition,
our combined cash, inventory and fixed assets must be at least $3,271,400. A
failure to comply with these covenants is an event of default. The notes have
other events of default for matters such as non-payment of interest or
principal, breach of representations and warranties, failure to satisfy any
agreement or condition under the agreements with the investor which is not cured
within 30 days, a "cross-default" for our other institutional indebtedness and
our voluntary or judicial dissolution or bankruptcy. We and the Class C
noteholders exchanged the Class C Notes for an equal principal amount of Class E
Notes with these modified terms.
The covenant relating to minimum inventory, net book assets and cash levels does
not apply unless and until we raise at least $6,000,000 in gross proceeds in a
future financing. We did not expect an event of default relating to this
requirement to occur if we completed our contemplated permanent financing. No
events of default occurred. If any event of default occurred and was not cured
within the applicable cure period, then, unless the default was waived by a
majority in interest of the noteholders, at the option and in the discretion of
the holders of at least 66 2/3% of the principal amount of the Class E Notes,
the noteholders could have declared the notes and all accrued interest to be
immediately due and payable, and could have immediately enforced any and all of
the noteholder's rights and remedies provided in the agreements with and the
investors and any other rights or remedies afforded by law.
83
The Class D noteholders agreed to redeem their Class D Notes in exchange for the
securities issued in the contemplated permanent financing on the same terms and
conditions offered to the other investors and to forego the option of redeeming
their notes for cash after the permanent financing occurred.
The noteholders also agreed to extend the date by which we would be required to
raise $6,000,000 in our permanent financing (to avoid triggering the December
2002 securityholders' right to rescind the May 7, 2003 exchange transaction)
from June 30, 2003 to July 31, 2003 (and subsequently, to November 15, 2003 and
again to a day after November 15, 2003 that we and the investors agree as the
date for the second closing of the of the equity financing), and to defer our
obligation to seek stockholder approval of the conversion of the Class C Stock
and Class D Stock into shares of common stock until a future meeting of the
stockholders, at which we would also seek approval of the issuance of common
stock underlying securities that may be issued by it in the permanent financing.
The rescission right was not available unless the meeting was held and the
issuance was not approved.
On September 3, 2003, we redeemed all of our outstanding Class E Notes
(principal of $2,000,000 plus accrued interest of approximately $132,000), and
no Class E Notes remain outstanding. We used a portion of the proceeds of the
first closing of the equity financing to pay for the redemption of the Class E
Notes.
AUGUST 2003 AND NOVEMBER 2003 EXCHANGES OF PREFERRED SHARES
As a result of the stipulation of settlement that we reached in the Augenbaum
litigation, we entered into exchange agreements with the holders of the
outstanding shares of our Class C Stock and Class D Convertible Preferred Stock.
Upon entering into the exchange agreements, on August 22, 2003 the holders of
the Class C Stock exchanged their Class C Stock for 20 Class E Shares, on a
share-for-share basis. Similarly, upon execution of the exchange agreements, the
holders of the 24 outstanding Class D Stock exchanged their Class D Stock for
Class F Shares, on a share-for-share basis. Following these exchanges, we
eliminated all Class C Stock and all Class D Stock.
Shares of the Class E Stock are preferred in liquidation to the extent that,
before any distribution of assets can be made to the holders of our common
stock, there will be distributed pro rata to the holders of the issued and
outstanding Class E Shares and Class F Shares the amount of $108,469 as to each
outstanding Class E Share and $10,072 per share as to each outstanding Class F
Share. The holders of the common stock then share in the remainder of net
liquidation of proceeds. The term liquidation means our liquidation, dissolution
or winding up, as well as any sale, lease, exchange or other disposition of all
or substantially all of our assets. The aggregate liquidation preference of the
Class E Shares is $2,169,380 and the aggregate liquidation preference of the
Class F Shares is $241,728. The aggregate liquidation preference was determined
to be equal to the dollar value that the board of directors allocated to the
conversion rights, warrants and other rights that we agreed to pay to the
holders of the Class C Stock and the discount that we agreed to pay to the
holders of the Class D Stock in the May 7, 2003, transactions.
The holders of the Class E Shares and Class F Shares have the right to vote one
vote per share, respectively, for each outstanding Class E Share and each
outstanding Class F Share.
The holders of the Class E Shares are entitled to cash dividends and
distributions when and as declared by the board of directors, pari passu with
the holders of our common stock with the dividend amount on each Class E Share
being 1,355,862 times the dividend or distribution to be paid on each share of
common stock. The holders of the Class F Shares are entitled to cash dividends
and distributions when and as declared by the board of directors, pari passu
with the holders of our common stock with the dividend amount on each Class F
Share being 125,898 times the dividend or distribution to be paid on each share
of common stock.
The exchange agreements also gave both us and the holders of the Class E Shares
and the Class F Shares rights to exchange those preferred shares for shares of
our common stock, as long as our stockholders approve the issuance of the shares
of our common stock underlying the preferred shares and the AMEX approves the
listing of these shares of common Stock. Specifically, if the stockholders
approve the common stock issuance and the AMEX lists these the shares of common
stock, then the holders of the Class E Share have the right to sell to us, and
we have the right to purchase from them, each outstanding Class E Share in
exchange for 54,235 shares of our common stock per Class E Share. Similarly, the
holders of the Class F Shares have the right to sell to us, and we have the
right to purchase from them, each outstanding Class F Share in exchange for
5,036 shares of our common stock per Class F Share. The exchange agreements also
provided that, should any sale, lease, exchange or other disposition of all or
substantially all of our assets occur while the Class E Shares and the Class F
Shares are outstanding, each holder of the Class E Shares has the right to sell
to us all Class E Shares in exchange for 54,235 shares of common stock per Class
E Share. Similarly, each holder of Class F Share has the right to sell to us all
Class F Shares in exchange for 5,036 shares of common stock per Class F Share.
84
The board of directors determined that the terms of the exchange agreements were
appropriate in order to provide the former holders of the Class C Stock and the
Class D Stock with the economic equivalence of the conversion rights they held
in conjunction with the Class C Stock and Class D Stock. Upon exchange of all
Class E Shares, the former holders of the Class C Stock will receive 1,084,690
shares of our common stock, or the same number of shares of our common stock we
were obligated to issue to them upon conversion of the Class C Stock. Upon
exchange of all the Class F Shares, the former holders of the Class D Stock will
receive 120,863 shares of common stock, or the same number of shares of our
common stock that we were obligated to issue to them upon conversion of the
Class D Stock. In the stipulation of settlement for the Augenbaum litigation,
the parties agreed on the exchange of shares of our common stock in these
specific amounts for the Class E Shares and Class F Shares, as well as the
exchange of the Class E Shares for the Class C Stock and the exchange of the
Class F Shares for the Class D Stock. A hearing before the Delaware Chancery
Court for approval of the stipulation of settlement was held on September 15,
2003. After this hearing, the court entered an order approving the stipulation
of settlement as submitted. The stipulation of settlement became final on
October 15, 2003 when the appeal period terminated with no appeal having been
filed.
At the request of the investors in our equity financing, we and Gibralt U.S., on
behalf of itself and the other holders of the Class E Shares and Class F Shares,
agreed not to exchange the Class E Shares or Class F Shares for common stock
until the second closing of the equity financing. Gibralt U.S. also acknowledged
that the common stock to be issued upon the exchange of the Class E Shares and
Class F Shares will not be eligible to participate in the offering to
stockholders, and that only those shares of common stock held by Gibralt U.S.
and the other holders of Class E Shares and Class F Shares as of August 29, 2003
will be eligible to participate in the offering.
Pursuant to the August 2003 exchange agreement, in connection with the equity
financing, on November 25, 2003 we exchanged all outstanding shares of Class E
Stock for a total of 1,084,690 shares of common stock and we exchanged all
outstanding shares of Class F Stock for a total of 120,863 shares of common
stock. After these shares were exchanged, we had no shares of preferred stock
outstanding.
PARTICIPATION BY RELATED PARTIES IN THE SEPTEMBER 2003 EQUITY FINANCING
INVESTMENT BY THE HOLDERS OF THE CLASS E NOTES AT THE FIRST CLOSING. As part of
the negotiation of the equity financing, the investors indicated that, were they
to purchase notes that would be convertible into shares of our common stock, the
notes would be required to be secured by all of our assets, including the patent
rights acquired by us with the proceeds of the first closing and also by those
assets that, prior to the first closing, were encumbered by security interests
in favor of the then-outstanding Class E Notes. As a result, we offered to
Gibralt U.S. and to the other three holders of the Class E Notes the opportunity
to purchase $2,000,000 of the Secured Bridge Notes, which was the outstanding
principal amount of the Class E Notes, and to use part of the proceeds of the
first closing to retire the Class E Notes in full, making the collateral
securing the Class E Notes available to all holders of the Secured Bridge Notes.
The board of directors unanimously, with the abstention of Samuel Belzberg,
approved the terms on which the holders of the Class E Notes would participate
in the equity financing at the first closing. Under those terms, the full
$2,000,000 new investment made by the holders of the Class E Notes would be
allocated to the purchase of Secured Bridge Notes and the holders of the Class E
Notes would, in exchange, terminate the security interest encumbering our assets
and make those assets available as collateral for all holders of the Class E
Notes. The former holders of the Class E Notes received as security for the
repayment of the Secured Bridge Notes held by them, a pro rata interest in the
same collateral securing all of the other Secured Bridge Notes. As is the case
with all Secured Bridge Notes, the Secured Bridge Notes held by Gibralt U.S. and
the other former holders of the Class E Notes converted into common stock on
November 25, 2003 at a purchase price of $2.00 per share.
CONVERSION OF CLASS D NOTES AT FINAL CLOSING. The terms and conditions under
which we issued our outstanding Class D Notes to Gibralt U.S., Peter Norris and
James A. Wylie, Jr. in May 2003 included a requirement that the Class D Notes be
converted into equity on the same terms and conditions on which all other
investors participate in an equity financing. Therefore, on November 25, 2003,
the $1,200,000 principal amount plus accrued interest on the Class D Notes
converted into our common stock at a price of $2.50 per share, and we issued
499,294 shares of common stock to the former holders of the Class D Notes.
AGENCY CAPACITY OF GIBRALT U.S. After the first closing of the equity financing,
Gibralt U.S. ceased to act as the "Designated Note Purchaser" on behalf of the
Class E Notes (because these notes were redeemed and are no longer outstanding),
and at the second closing, ceased to act as the "Designated Lender" on behalf of
the holders of the Class D Notes because they are converted at the second
closing. In addition, Gibralt U.S. agreed to act as the "Designated Note
Investor" under the security agreement that provided the security interest to
the Secured Bridge Note holders and as the "Designated Pledgeholder" under the
pledge agreement under which Gibralt U.S. held all outstanding shares of Diomed
PDT, Inc., an indirect wholly-owned subsidiary of us, as security for holders of
the Secured Bridge Notes and the Class E Notes.
On August 21, 2003, Gibralt U.S. also agreed, on behalf of the holders of the
Class E Shares and the Class F Shares, that their right to registration of those
shares of our common stock for which they are exchangeable would be governed by
the registration rights agreement entered into connection with the equity
financing rather than the agreements that had been entered into at the time of
the acquisition of the Class C Stock and the Class D Stock. On August 21, 2003,
Gibralt U.S., acting on behalf of all holders of the Class D Notes, also agreed
that although it had the right to declare the Class D Notes immediately due and
payable , it would extend this deadline to the business day following the second
closing of the equity financing.
85
ACCELERATED CONVERSION OF CLASS A CONVERTIBLE PREFERRED STOCK ON MARCH 31, 2003
In March 2003, the board of directors determined to accelerate the conversion
into common stock of all our outstanding shares of Class A Stock, including
those shares owned by related parties, pursuant to the authority reserved in the
board under the terms of Class A Stock. Pursuant to the terms of the Class A
Stock, on December 31, 2002 the Class A Stock had begun to automatically convert
into common stock at the rate of 5% of the aggregate number of shares originally
issued at that date and at the end of each month thereafter, with those shares
that were not converted at the end of February 2004 automatically converting
into common stock on February 29, 2004. The original terms of the Class A Stock
also provided that after February 28, 2003, the board of directors could in its
discretion accelerate the rate of conversion or increase the amount of shares of
Class A Stock being converted, so long as the change applied equally to all
shares of Class A Stock.
The purpose for the conversion feature of the Class A Stock, when the terms of
the Class A Stock were designated in February 2002, was to permit a staggered
increase in the number of shares of common stock available for trading in order
to minimize the market disruption that otherwise may occur if a large block of
shares were to become tradable at once. In March 2003, the board determined that
the effect of the incremental conversion of Class A Stock into common stock
would impair our ability to procure additional equity investment. The board
further determined that due to the apparent negative impact on our ability to
obtain equity financing, the board's goal is to have only one class of capital
stock outstanding prior to completing our permanent financings. Pursuant to our
discretion under the terms of the Class A Stock, the board determined to cause
all of the outstanding shares of Class A Stock to convert into common stock as
of March 31, 2003. This acceleration affected all holders of Class A Stock
equally, whether related parties or non-affiliated parties.
As a result of the board's determination to accelerate the conversion of the
Class A Stock, on March 31, 2003 we converted all 525,715 outstanding shares of
Class A Stock (including 234,554 shares held by related parties) into an equal
number of shares of common stock, resulting in a total of 1,188,470 shares of
common stock outstanding and no Class A Stock outstanding. Those related parties
who owned Class A Stock as of March 31, 2003 immediately prior to the conversion
into common stock and the numbers of shares they held are as follows:
NAME SHARES OF CLASS A STOCK OWNED
---- -----------------------------
Samuel Belzberg (Director until
February 23,2004)
(shares registered to Gibralt
Capital Corporation) 34,000
Peter Norris (Director until
September 9, 2003)
(shares registered to spouse) 558
Ajmal Khan (holder of greater than 5%
of our capital stock ) (79,466 shares
registered to Verus Investments
Holdings, Inc. and 68,000 shares
registered to Verus International
Group Limited) 147,466
Winton Capital Corp. (holder of
greater than 5% of our
capital stock) 52,530
The benefit derived by those related parties of us who owned Class A Stock
on March 31, 2003 was the conversion of our Class A Stock into common stock.
This was the same as the benefit derived by all other former holders of Class A
Stock as a result of this transaction.
TRANSACTIONS INVOLVING AFFILIATES OF NATEXCO CORPORATION,
OUR PREDECESSOR CORPORATION
Because of their management positions, organizational efforts and/or percentage
share ownership of Natexco Corp., our predecessor corporation, Gerald A. Mulhall
and Anthony Mulhall may be deemed to be our "parents" and "promoters," as the
Securities Act and the rules thereunder define those terms. Mr. John H. and Ms.
Terese M. Tetstill may be "parents" and "promoters" of Security Software, Inc.
because of their present management positions with, and organizational efforts
on behalf of, Security Software. Because of these relationships, transactions
with Security Software, Messrs. Gerald A. Mulhall and Anthony Mulhall, Aboyne
Management Ltd., of which Gerald A. Mulhall is the president and controlling
stockholder, and Mr. and Ms. Tetstill should not be considered to have occurred
at arms-length.
86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth beneficial ownership information as of October
31, 2004 for our capital stock owned by:
- our chief executive officer and other executive officers whose
salary and bonuses for 2003 exceeded $100,000, including Christopher Geberth,
who we hired to replace Ms. Bruneau after her resignation in April 2004 and
whose annualized salary exceeds $100,000 (we refer to these persons as the Named
Executive Officers);
- each director;
- our directors and executive officers as a group; and
- each person who is known by us to beneficially own more than 5% of
the outstanding shares of our common stock and other classes of voting stock.
To our knowledge, each person, along with his or her spouse, has sole voting and
investment power over the shares unless otherwise noted.
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP PERCENT OF CLASS(1)
- ----- -------------------- ------------------
Sidney Braginsky 5,000(2) 0%
Gary Brooks 7,667(3) 0%
A. Kim Campbell 11,667(4) .1%
Joseph Harris 5,000(5) 0%
Geoffrey Jenkins 25,000(6) .1%
Peter Klein 7,667(7) 0%
Edwin Snape 5,000(8) 0%
David Swank 20,333(9) .1%
James A. Wylie, Jr. 191,961(10) 1.09%
Lisa M. Bruneau 0 0%
Christopher Geberth 5,000(11) 0%
Leo Griffin 10,167(12) .1%
Kevin Stearn 15,365(13) .1%
John J. Welch 10,767(14) .1%
All officers and directors as a group (14 persons) 320,593 1.73%
Beneficial Owners of More than 5% of the Company's
common stock
Samuel Belzberg 2,150,560(15) 12.2%
Zesiger Capital Group 924,442(16) 5.3%
Galleon Healthcare Partners, L.P. and affiliates 1,725,000(17) 9.25%
(1) Calculated pursuant to Rule 13d-3 of the Rules and Regulations under the
Securities Exchange Act of 1934, as amended. Percentages shown for all officers
and directors as a group are calculated on an aggregate basis and percentages
shown for individuals are rounded to the nearest one-tenth of one percent. The
mailing address for each of the directors and officers is c/o Diomed, Inc., One
Dundee Park, Andover, MA 01810.
(2) Includes 5,000 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(3) Includes 7,667 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(4) Includes 11,667 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(5) Includes 5,000 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(6) Includes 25,000 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(7) Includes 7,667 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(8) Includes 5,000 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(9) Includes 20,333 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
87
(10) Includes 25,961 shares held plus 166,000 shares of common stock issuable
upon the exercise of stock options vested through 12/31/04.
(11) Includes 5,000 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(12) Includes 10,167 shares of common stock issuable upon the exercise of stock
options vested at the time of Mr. Griffin's resignation on November 2, 2004.
Pursuant to the terms and conditions of these stock options, any such options
not exercised within 90 days of his resignations will terminate.
(13) Includes 15,365 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(14) Includes 10,767 shares of common stock issuable upon the exercise of stock
options vested through 12/31/04.
(15) Includes 2,145,893 shares of common stock held by Gibralt US, Inc. and
4,667 shares issuable upon the exercise of fully vested stock options held by
Mr. Belzberg. Mr. Belzberg is an affiliate of Gibralt Capital Corp. and Gibralt
U.S. Inc., and therefore is deemed to beneficially own the securities it holds.
Mr. Belzberg's address is c/o Gibralt Capital Corp., 1075 W Georgia Street,
Suite 1075, Vancouver, BC V6E 3C9 Canada.
(16) Includes 924,442 shares of common stock as to which we believe Zesiger has
sole dispositive power, as investment adviser for Zesiger clients, none of whom
individually owns more than 5% of the common stock. Zesiger's address is 320
Park Avenue, 30th Floor, New York, NY 10022.
(17) Includes 1,150,000 shares of common stock held plus 575,000 shares of
common stock issuable upon exercise of warrants. Galleon's address is 135 E 57th
Street, 16th Floor, New York, NY 10022.
SELLING STOCKHOLDERS
The shares being offered by the selling stockholders relate to the following
transactions:
UNDERLYING BASIS FOR ISSUANCE NUMBER OF SHARES
- ----------------------------- ----------------
Common stock issued 10/25/04 2,362,420
Conversion of debentures issued 10/25/04 4,403,683
Exercise of warrants issued 10/25/04
to purchasers of common stock and debentures 3,013,671
Total shares represented by securities
we issued 10/25/04: 9,779,774
----------
Additional allowance of 25% 2,444,943
----------
TOTAL REGISTERED 12,224,717
- ---------------- ==========
DETERMINATION OF NUMBER OF SHARES TO BE REGISTERED
The shares we are registering pursuant to the registration statement of which
this prospectus is a part consist of the following:
o 2,362,420 shares of common stock that we sold under a purchase
agreement, dated September 28, 2004, between us and nine investors;
o 4,403,683 shares of common stock that we may issue in the future
upon conversion of variable rate convertible debentures outstanding
in the aggregate principal amount of $7,000,000 that we sold under a
purchase agreement, dated September 28, 2004, between us and three
investors; and
o 3,013,671 shares of common stock that we may issue upon the exercise
of common stock purchase warrants that we issued to the investors
who purchased the common stock and debentures that we sold under the
September 28, 2004 purchase agreements.
88
The shares being registered consist of the common stock issued in the 2004
equity and debt financing and include (i) the shares of common stock and the
common stock underlying the debentures and warrants issued on October 25, 2004
we sold on October 25, 2004, and (ii) securities issued or issuable upon any
stock split, dividend or other distribution, recapitalization or similar event
and any additional shares we may be required to issue pursuant to the
antidilution provisions of the debentures or the warrants. To allow for the
possibility of issuing additional shares pursuant to these provisions, we agreed
with the investors in the 2004 equity financing that we would seek the
registration of 125% of these shares, and accordingly we have added an
additional 25% to the number of shares being registered hereunder.
We calculated the number of shares issuable upon conversion of the debentures
based on the terms of the debentures and certain assumptions that we made. The
principal amount and accrued interest on the debentures is convertible into
common stock by the holders or, in certain circumstances, by us.
We calculated the number of shares issuable upon conversion of the entire
principal amount of debentures as follows:
PRINCIPAL AMOUNT OF DEBENTURES
The conversion price for interest is stated at $2.29 per share in the
debentures. However, the debentures provide for an antidilution reduction to the
conversion price if we sell securities at a price lower than the conversion
price. This adjustment is subject to a minimum conversion price of $2.20 per
share, unless the we obtain stockholder approval of a lower conversion price.
Accordingly, if the antidilution provision is triggered and the conversion price
is reduced to $2.20, the number of shares issuable upon conversion will be as
follows:
PRINCIPAL AMOUNT = $7,000,000 = 3,181,819 shares
- ------------------------- ----------
Adjusted Conversion Price $2.20
We have therefore allocated 3,181,819 shares for conversion of principal of the
debentures for purposes of this registration.
The debentures may require the issuance in the future of common stock in excess
of the amount currently applied for in certain circumstances. First,
antidilution provisions may cause the conversion price of the Debentures to be
reduced below the conversion price used to calculate the number of shares
currently applied for in respect of conversion of principal.
INTEREST ACCRUED ON DEBENTURES
The number of shares issuable upon conversion of accrued interest on the
debentures is subject to change because the rate of interest on the debentures
is variable. Interest on the debentures accrues at a rate of 400 basis points
over six-month LIBOR. At the time of the 2004 equity financing, six-month LIBOR
was 2.17%, and if this rate were constant for the entire four-year term of the
debentures, accrued interest would be approximately $1,728,000. For purposes of
this registration, we have assumed that the applicable rate of interest for the
entire four-year term of the debentures will be 8.17%, to allow for upward
movement of the variable rate. Based on this assumption, accrued interest will
be approximately $2,288,000.
In addition, the interest conversion price is variable, and equals the lesser of
(i) the average of the five closing prices immediately prior to the interest
payment date, (ii) the average of the four closing prices immediately prior to
the interest payment date, (iii) the average of the three closing prices
immediately prior to the interest payment date, (iv) the average of the two
closing prices immediately prior to the interest payment date, and (v) the
closing price immediately prior to the interest payment date, provided, that the
interest conversion price may not be less than $1.91 (the AMEX closing price of
the common stock on September 27, 2004, the trading day prior to our agreement
to sell the debentures) without prior stockholder approval, and PROVIDED,
FURTHER, that if we obtain stockholder approval, the interest conversion price
will be reduced by 10%. For purposes of this registration, we have assumed that
the interest conversion rate will be $1.91, and then we have added an allowance
of 2% to allow for the possibility that the market price of our stock will
decline in the future below this amount and/or that, after we obtain stockholder
approval, we will reduce the otherwise-applicable interest conversion rate by
10%.
We calculated the number of shares of common stock issuable upon conversion of
this assumed amount of accrued interest at the assumed interest conversion price
of $1.91 as follows:
ACCRUED INTEREST = $2,288,000 = 1,197,906 shares x 102% = 1,221,864
- ---------------- ---------- shares
interest conversion price $1.91
We have therefore allocated 1,221,864 shares of common stock for conversion of
interest on the debentures for purposes of this registration.
89
If, in calculating the actual number of shares that we will issue upon
conversion of accrued interest, the factors used to calculate the amount of
accrued interest and/or the interest conversion price differ from the facts as
we have assumed them as set forth above, we may (if we elect to pay interest in
shares instead of cash) be required to issue shares in excess of the amount
included in the registration statement of which this prospectus is a part for
the purposes of conversion of accrued interest.
TOTAL OF SHARES REGISTERED IN RESPECT OF DEBENTURES
The total number of shares we are registering in respect of the debentures is
4,403,683 (as detailed above, 3,181,819 in respect of principal plus, plus
1,221,864 in respect of interest), multiplied by 125%. If this number is
insufficient for the conversion of interest and principal on the debentures, we
will seek to register additional shares for issuance upon conversion, or to
account for antidilution adjustments under the debentures.
INFORMATION REGARDING THE SELLING STOCKHOLDERS
Details regarding the ownership of shares of our common stock held by the
selling stockholders are as follows:
HOLDERS OF DEBENTURES AND WARRANTS
Name of Investor # Shares % Beneficially # Shares
(Individual(s) with Investment Beneficially Owned # Shares Beneficially
and/or Voting Control over Shares Owned Before Before Being Owned After
where Investor is an Entity) Address Offering(1) Offering(2) Offered Offering(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Omicron Master Trust 810 Seventh Ave., 39th Floor 6,124,785 22.3 6,124,785 0
New York, NY 10019
ATTN: Brian Daly
- ------------------------------------------------------------------------------------------------------------------------------------
Iroquois Capital LP 400 Central Avenue, Suite 309 556,798 2.0 556,798 0
Northfield, IL 60093
- ------------------------------------------------------------------------------------------------------------------------------------
Cranshire Capital, L.P. 666 Dundee Road, Suite 1901 1,113,596 4.1 1,113,596 0
Northbrook, IL 60062
- ------------------------------------------------------------------------------------------------------------------------------------
Total of shares held by those
selling stockholders holding
debentures and warrants: 7,795,179 28.4 7,795,179 0
- ------------------------------------------------------------------------------------------------------------------------------------
HOLDERS OF COMMON STOCK AND WARRANTS
Name of Investor # Shares % Beneficially # Shares
(Individual(s) with Investment Beneficially Owned # Shares Beneficially
and/or Voting Control over Shares Owned Before Before Being Owned After
where Investor is an Entity) Address Offering(1) Offering(2) Offered Offering(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Galleon Healthcare Partners, L.P. 135 east 57th Street, 16th Floor 281,250 1.0 281,250 0
New York, NY 10022
ATTN: George Lau
- ------------------------------------------------------------------------------------------------------------------------------------
Galleon Healthcare Offshore LTD c/o The Bank of Bermuda LTD 1,875,000 6.8 1,875,000 0
6 Front Street
Hamilton, HM 11 Bermuda
- ------------------------------------------------------------------------------------------------------------------------------------
ProMed Partners, L.P. 230 Park Avenue, 9th Floor 606,956 2.2 435,340 171,616
New York, NY 10017
- ------------------------------------------------------------------------------------------------------------------------------------
ProMed Partners II, L.P. 230 Park Avenue, 9th Floor 104,899 .4 104,899 0
New York, NY 10017
- ------------------------------------------------------------------------------------------------------------------------------------
ProMed Partners Offshore Fund, Ltd. 230 Park Avenue, 9th Floor 72,508 .3 72,508 0
New York, NY 10017
- ------------------------------------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. Steve Emerson 306,375 1.1 306,375 0
Custodian f/b/o 1522 Ensley Avenue
J. Steven Emerson IRA RO II Los Angeles, CA 90024
- ------------------------------------------------------------------------------------------------------------------------------------
Sedna Partners L.P. 200 Park Avenue, 39th Floor 609,375 2.2 609,375 0
New York, NY 10019
- ------------------------------------------------------------------------------------------------------------------------------------
Woodmont Investments Ltd. c/o Albert Scerbo 328,125 1.2 328,125 0
152 W 57th Street
New York, NY 10019
- ------------------------------------------------------------------------------------------------------------------------------------
Bristol Investment Fund Ltd. 10990 Wilshire Blvd., Suite 1410 416,666 1.5 416,666 0
Los Angeles, CA 90024
- ------------------------------------------------------------------------------------------------------------------------------------
Total of shares held by those
selling stockholders holding
common stock and warrants: 4,601,154 16.8 4,429,538 171,616
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FOR ALL SELLING STOCKHOLDERS: 12,396,333 45.2 12,224,717 171,616
- ------------------------------------------------------------------------------------------------------------------------------------
90
(1) Includes those shares being registered hereunder on behalf of each selling
stockholder, calculated to include a 25% allowance over the number of shares we
calculated for the securities we sold to the selling stockholders on October 25,
2004, as described above.
(2) Based on 27,443,655 shares of common stock outstanding, which includes
15,218,938 shares outstanding and available to trade publicly as of October 25,
2004 plus all 12,224,717 shares being registered on behalf of the selling
stockholders hereunder.
(3) Assumes no other disposition or acquisition of common stock and all shares
of common stock offered hereby are sold.
PLAN OF DISTRIBUTION
Each selling stockholder of the common stock of the company and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on the AMEX or any other stock exchange,
market or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. A selling
stockholder may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers;
o block trades in which a broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o sale of a specified number of shares at a stipulated price per share
based on a agreement between the selling stockholder and the
broker-dealer;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each selling stockholder should not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
91
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We are required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each selling
stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the selling
stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the selling stockholders without registration
and without regard to any volume limitations by reason of Rule 144(e) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, 17 Battery Place, New York, NY 10004.
LEGAL MATTERS
The validity of the common stock being offered hereby is being passed upon for
us by McGuireWoods LLP.
EXPERTS
We appointed BDO Seidman, LLP as our independent registered public accounting
firm for the years ended December 31, 2002 and 2003. The 2002 and 2003 financial
statements included in this prospectus have been audited by BDO Seidman, LLP,
independent registered public accounting firm, to the extent and for the periods
set forth in their report appearing elsewhere herein and are included in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act of 1933, as amended, with
respect to the common stock to be offered hereby. As used herein, the term
"registration statement" means the initial registration statement and any and
all amendments thereto. This prospectus, which is a part of the registration
statement, contains all material information about the contents of any agreement
or other document filed as an exhibit to the registration statement. For further
information with respect to us and our common stock reference is made to the
registration statement, including the exhibits and schedules thereto. Statements
contained in this prospectus concerning the contents of any contract or any
other document contain all material information regarding that contract or other
document but are not necessarily the full text of that contract or document, and
reference is made to such contract or other document filed with the SEC as an
exhibit to the registration statement.
92
A copy of the registration statement, including the exhibits thereto, may be
inspected without charge at the Public Reference section of the commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the following regional offices of the SEC: Northeast Regional Office, 233
Broadway, New York, New York 10279; and Midwest Regional Office, 175 W. Jackson
Boulevard, Suite 900, Chicago, Illinois 606041. Copies of the registration
statement and the exhibits and schedules thereto can be obtained from the Public
Reference Section of the SEC upon payment of prescribed fees, or at its web site
at http://www.sec.gov.
Our common stock is registered under Section 12 of the Securities Exchange Act
of 1934 as amended, and we are therefore subject to the reporting requirements
of Section 13 of the Securities Exchange Act of 1934, as amended. In accordance
therewith, we file periodic reports with the Securities and Exchange Commission.
Our periodic reports are available for inspection and copying at the public
reference facility.
93
FINANCIAL STATEMENTS
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
DESCRIPTION Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2002 and 2003 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2002 and 2003 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002 and 2003 F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2002 and 2003 F-8
Notes to Consolidated Financial Statements F-10
Condensed Consolidated Balance Sheets - September 30, 2004 (unaudited) and December 31, 2003 F-32
Unaudited Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2004 and 2003 F-33
Unaudited Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003 F-34
Notes to Unaudited Condensed Consolidated Financial Statements F-36
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Diomed Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Diomed Holdings,
Inc. as of December 31, 2003 and December 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the two year
period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diomed Holdings,
Inc. and subsidiaries at December 31, 2003 and December 31, 2002, and the
results of their operations and their cash flows for the two year period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BDO SEIDMAN, LLP
Boston, Massachusetts
February 5, 2004
F-2
DIOMED HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 December 31, 2003
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,848,646 $ 13,398,075
Restricted cash 75,000 --
Accounts receivable, net of
allowance for doubtful accounts
of $308,000 and $209,000 in
2002 and 2003, respectively (Notes 2k, 9) 676,444 1,437,238
Inventories (Note 2f) 2,012,141 1,892,241
Prepaid expenses and other current
assets 214,253 449,625
------------ ------------
Total current assets 4,826,484 17,177,179
------------ ------------
Property and Equipment:
Office equipment and furniture and
fixtures 1,229,307 1,429,409
Manufacturing equipment 731,787 893,335
Leasehold improvements 652,141 731,408
------------ ------------
2,613,235 3,054,152
Less--Accumulated depreciation and
amortization 1,548,085 2,306,424
------------ ------------
1,065,150 747,728
------------ ------------
Intangible Manufacturing Asset, net of accumulated
amortization of $417,000 and $613,000 in
2002 and 2003, respectively (Note 2h) 564,270 367,991
Intangible EVLT Technology Asset, net of accumulated -- 4,604,262
amortization of $98,000 2003 (Note 2h, 6f and 15)
------------ ------------
Total intangible assets, net 564,270 4,972,253
------------ ------------
Other Assets:
Deposits 597,426 183,756
Deferred financing costs, net of accumulated 80,000 --
amortization of zero and $80,000 in
2002 and 2003, respectively (Note 6c)
------------ ------------
Total other assets 677,426 183,756
------------ ------------
$ 7,133,330 $ 23,080,916
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank loan (Note 5) $ 216,306 $ 261,676
Promissory notes payable(Notes 6a and 6b) 445,208 936,000
Current maturities of capital lease
obligations (Note 6g) 33,993 13,848
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIOMED HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
December 31, 2002 December 31, 2003
----------------- -----------------
Accounts payable 1,608,622 1,497,541
Accrued expenses (Note 4) 1,444,100 1,838,632
Deferred revenue -- 56,802
Current maturities of EVLT technology payable
($1,000,000 face value, net of $35,609 debt
discount at December 31, 2003) -- 964,391
(Notes 6f and 15)
------------ ------------
Total current liabilities 3,748,229 5,568,890
Promissory Note Payable (Note 6a) 936,000 --
Related Party Convertible Debt, less
current maturities ($2,000,000 face value, net of
$2,000,000 debt discount at 12/31/02) (Note 6c) -- --
Capital Lease Obligations, less current
maturities (Note 6g) 10,018 --
EVLT Technology Payable, less current maturities of
($1,250,000 face value, net of $173,832 debt
discount at December 31, 2003) -- 1,076,168
(Notes 6f and 15)
------------ ------------
Total liabilities 4,694,247 6,645,058
------------ ------------
Commitments and contingencies (Note 11)
Stockholders' Equity (Note 8):
Preferred stock, $0.001 par value
Authorized--20,000,000 shares
Designated Class A convertible preferred stock,
$0.001 par value Authorized--18,000,000 shares
Issued and outstanding-14,688,662 and zero shares 14,689 --
At December 31, 2002 and 2003, respectively
Common stock, $0.001 par value
Authorized--80,000,000 and 500,000,000 shares at
December 31, 2002 and 2003, respectively
Issued and outstanding--600,927 and 13,129,119
shares at December 31, 2002 and 2003, 601 13,129
respectively
Additional paid-in capital 41,719,196 75,582,369
Accumulated other comprehensive income 158,312 175,278
Accumulated deficit (39,453,715) (59,334,918)
------------ ------------
Total stockholders' equity 2,439,083 16,435,858
------------ ------------
$ 7,133,330 $ 23,080,916
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Years Ended December 31,
-----------------------------------
2002 2003
------------- ------------
Revenues $ 5,556,439 $ 9,198,592
Cost of Revenues 5,214,524 5,873,288
------------ ------------
Gross profit 341,915 3,325,304
------------ ------------
Operating Expenses:
Research and
development 928,167 849,772
Selling and
marketing 3,263,517 4,055,625
General and
administrative 3,824,652 4,399,550
------------ ------------
Total operating
expenses 8,016,336 9,304,947
------------ ------------
Loss from operations (7,674,421) (5,979,643)
Interest Expense,
non-cash 225,260 12,893,718
Interest Expense,
cash based 101,657 1,007,842
------------ ------------
Total interest expense 326,917 13,901,560
------------ ------------
Net loss $ (8,001,338) $(19,881,203)
============ ============
Net loss per
share (Note 3):
basic and
diluted net
loss per share
applicable to
common
stockholders $ (14.70) $ (8.99)
============ ============
Basic and diluted
weighted average common
shares outstanding 544,131 2,212,666
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------
2002 2003
------------ ------------
Cash Flows from Operating
Activities:
Net loss $ (8,001,338) $(19,881,203)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and
amortization 627,366 674,592
Noncash interest expense 225,260 12,893,718
Issuance of stock
options to third parties 82,329 22,400
Changes in operating assets and liabilities:
Accounts receivable 192,786 (760,794)
Inventories 390,041 119,900
Prepaid expenses
and other current assets (12,824) (235,372)
Deposits -- 452,094
Accounts payable (658,606) (111,080)
Accrued expenses 560,331 394,532
Customer advance (293,463) --
------------ ------------
Net cash used in operating
activities (6,888,118) (6,431,213)
Cash Flows from Investing
Activities:
Purchases of property
and equipment (406,924) (229,718)
Restricted cash (75,000) --
Acquisition EVLT technology -- (2,349,087)
------------ ------------
Net cash used in investing
activities (481,924) (2,578,805)
Cash Flows from Financing
Activities:
Proceeds from issuance of
common stock, net 8,293,713 14,328,364
Proceeds from issue
of preferred stock, net -- --
Proceeds from related
party convertible debt 2,000,000 --
Proceeds from redeemable debt 1,200,000
Proceeds from convertible debt 6,995,000
Net proceeds (payments) from
bank borrowings (658,142) 45,369
Payments on
convertible debt (700,000) --
Payments on
related party debt -- (2,000,000)
Payments on capital
lease obligations (42,190) (30,163)
Payments on
promissory notes (153,911) (445,208)
Increase in deferred
financing costs (80,000) --
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Years Ended December 31,
----------------------------------
2002 2003
------------ ------------
Net cash provided by
financing activities 8,659,470 20,093,362
------------ ------------
Effect of Exchange Rate Changes 236,651 466,085
------------ ------------
Net Increase in Cash and
Cash Equivalents 1,526,080 11,549,429
Cash and Cash Equivalents,
beginning of year 322,566 1,848,646
------------ ------------
Cash and Cash Equivalents,
end of year $ 1,848,646 $ 13,398,075
============ ============
Supplemental Disclosure of
Cash Flow Information:
Cash paid for interest $ 118,917 $ 228,134
============ ============
Supplemental Disclosure of Noncash Investing and
Financing Activities:
Conversion of convertible debt
into common stock $ 1,247,691 $ --
============ ============
Value ascribed to warrants issued
in connection with issuance of
convertible debt to stockholders equity $ 8,200 $ --
============ ============
Value ascribed to call option and
beneficial conversion feature
related to preferred stock $ -- $ --
============ ============
Value ascribed to debt discount and
warrants feature related to
convertible debt $ 2,000,000 $ --
============ ============
Reclassification offering costs to
additional paid-in capital $ 387,133 $ --
============ ============
Conversion of accounts payable
to notes payable $ 599,118 $ --
============ ============
Value ascribed to debt discount
related to redeemable debt $ -- $ 1,200,000
============ ============
Value ascribed to debt discount
related to related party debt $ -- $ 721,333
============ ============
Value ascribed to debt discount
related to convertible debt $ -- $ 6,995,000
============ ============
Value ascribed to stock options
issued in connection with
EVLT technology acquisition $ -- $ 312,078
============ ============
Debt associated with EVLT
technology acquisition $ -- $ 2,245,647
============ ============
Value ascribed to common stock
issued to a consultant $ -- $ 50,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DIOMED HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
SERIES A CLASS A
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------- ---------------
NUMBER $0.001 PAR NUMBER OF $0.001 PAR
OF SHARES VALUE SHARES VALUE
------------ ------------ ------------ ------------
Balance, December 31, 2001 2,725,000 $ 27,250 -- --
Conversion of debt into
common stock -- -- -- --
Conversion of Series A
convertible preferred stock
into Class A convertible
preferred Stock (2,725,000) (27,250) 1,362,500 1,363
Conversion of common stock
into Class A convertible
preferred stock -- -- 2,328.923 2,329
Common stock assumed in
the Merger -- -- -- --
Issuance of common stock,
net of issuance costs
of $2,093,420 -- -- -- --
Value ascribed to warrants
issued in connection with
issuance of debt to
stockholders -- -- -- --
Recapitalization of conversion
of Series A convertible
preferred stock into Class A
convertible preferred stock -- -- 4,087,500 4,088
Recapitalization of conversion
of common stock into Class A
convertible preferred stock -- -- 6,986,767 6,987
Compensation expense related to
issuance of stock options to
consultants -- -- -- --
Beneficial conversion related
to warrants issued in connection
with issuance of debt to stockholders -- -- -- --
Conversion of debt into Class A stock -- -- 696,060 696
Debt discount ascribed to warrants
and convertible notes -- --
Conversion of Class A stock into
common stock -- -- (773,087) (773)
Issuance of additional shares of
common stock -- --
Change in cumulative translation
adjustment -- -- -- --
Net loss
Comprehensive loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2002 -- -- 14,688,662 14,689
COMMON STOCK
------------
TOTAL
ADDITIONAL STOCKHOLDERS'
NUMBER OF $0.001 PAR PAID-IN TRANSLATION ACCUMULATED EQUITY
SHARES VALUE CAPITAL ADJUSTMENT DEFICIT (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 367,199 $ 367 $ 30,333,369 $ 130 $(31,452,377) $ (1,091,261)
Conversion of debt into
common stock 5,432 5 339,331 -- -- 339,336
Conversion of Series A
convertible preferred stock
into Class A convertible
preferred Stock -- -- 25,887 -- -- --
Conversion of common stock
into Class A convertible
preferred stock (372,628) (373) (1,956) -- -- --
Common stock assumed in
the Merger 368,000 368 (368) -- -- --
Issuance of common stock,
net of issuance costs
of $2,093,420 200,000 200 7,906,380 -- -- 7,906,580
Value ascribed to warrants
issued in connection with
issuance of debt to
stockholders -- -- 8,200 -- -- 8,200
Recapitalization of conversion
of Series A convertible
preferred stock into Class A
convertible preferred stock -- -- (4,088) -- -- --
Recapitalization of conversion
of common stock into Class A
convertible preferred stock -- -- (6,987) -- -- --
Compensation expense related to
issuance of stock options to
consultants -- -- 82,329 -- -- 82,329
Beneficial conversion related
to warrants issued in connection
with issuance of debt to stockhold -- -- 128,700 -- -- 128,700
Conversion of debt into Class A stoc -- -- 907,659 -- -- 908,355
Debt discount ascribed to warrants
and convertible notes -- -- 2,000,000 -- 2,000,000
Conversion of Class A stock into
common stock 30,924 31 742 -- -- --
Issuance of additional shares of
common stock 2,000 2 (2) -- -- --
Change in cumulative translation
adjustment -- -- -- 158,182 -- 158,182
Net loss
Comprehensive loss -- -- -- -- (8,001,338) (8,001,338)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 600,927 601 $ 41,719,196 $ 158,312 $(39,453,715) $ 2,439,083
The accompanying notes are an integral part of these consolidated financial
statements
F-8
CLASS A CONVERTIBLE
PREFERRED STOCK
-------------------
NUMBER $0.001 PAR $0.001 PAR PREFERRED
OF SHARES VALUE NUMBER OF SHARES AMOUNT STOCK
------------ ------------ ---------------- ------------ ------------
Balance, December 31, 2002 14,688,662 $ 14,689 600,927 $ 601 --
Conversion of Class A Preferred Stock into
common stock (14,688,662) (14,689) 587,547 588 --
Elimination of unamortized debt discount
ascribed to warrants and convertible
notes in December 2002 Interim Financing -- -- -- -- --
Debt discount related to issuance of Class
E Preferred Stock in May 2003 Exchange
Transaction -- -- -- -- 2,000,000
Debt discount and beneficial conversion
feature related to issuance of Class F
Preferred Stock and Class D Notes in May
2003 Interim Financing -- -- -- -- 240,000
Beneficial conversion feature related to
secured bridge notes issued at September
2003 closing of Equity Financing -- -- -- -- --
Debt financing cost related to warrants
issued to placement agent at September
2003 closing of Equity Financing -- -- -- -- --
Issuance of common stock, net of issuance
costs -- -- 6,200,000 6,200 --
Conversion of Class E Notes, including
interest, into common stock -- -- 3,562,788 3,563 --
Conversion of Class D Notes, including
interest, into common stock -- -- 499,294 499 --
Exchange of Class E and Class F Preferred
Stock for common stock -- -- 1,205,552 1,205 (2,240,000)
Compensation expense related to issuance of
stock options to consultants and a
service provider -- -- -- -- --
Value ascribed to stock options issued in
connection with EVLT patent acquisition -- -- -- -- --
Issuance of common stock to a consultant 20,000 20 49,980 50,000
Issuance of common stock to Equity
Financing investors as interest on
escrowed funds -- -- 13,903 14 --
Exercise of warrants by placement agent
and its affiliates -- -- 439,108 439 --
Reversal of issuance costs in connection
with February 2002 Private Placement -- -- -- -- --
Change in cumulative translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Balance, December 31, 2003 -- -- 13,129,119 $ 13,129 --
TOTAL
ADDITIONAL STOCKHOLDERS'
PAID-IN TRANSLATION ACCUMULATED EQUITY
CAPITAL ADJUSTMENT DEFICIT (DEFICIT)
------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 41,719,196 $ 158,312 $(39,453,715) $ 2,439,083
Conversion of Class A Preferred Stock into
common stock 14,101 -- --
Elimination of unamortized debt discount
ascribed to warrants and convertible
notes in December 2002 Interim Financing (1,278,667) -- (1,278,667)
Debt discount related to issuance of Class
E Preferred Stock in May 2003 Exchange
Transaction -- -- 2,000,000
Debt discount and beneficial conversion
feature related to issuance of Class F
Preferred Stock and Class D Notes in May
2003 Interim Financing 960,000 -- 1,200,000
Beneficial conversion feature related to
secured bridge notes issued at September
2003 closing of Equity Financing 6,995,000 -- 6,995,000
Debt financing cost related to warrants
issued to placement agent at September
2003 closing of Equity Financing 1,798,579 -- 1,798,579
Issuance of common stock, net of issuance
costs 14,381,705 -- 14,387,905
Conversion of Class E Notes, including
interest, into common stock 7,122,010 -- 7,125,573
Conversion of Class D Notes, including
interest, into common stock 1,247,734 -- 1,248,233
Exchange of Class E and Class F Preferred
Stock for common stock 2,238,794 -- --
Compensation expense related to issuance of
stock options to consultants and a
service provider 22,311 -- 22,311
Value ascribed to stock options issued in
connection with EVLT patent acquisition 312,078 -- 312,078
Issuance of common stock to a consultant
Issuance of common stock to Equity
Financing investors as interest on
escrowed funds (14) -- --
Exercise of warrants by placement agent
and its affiliates (439) -- --
Reversal of issuance costs in connection
with February 2002 Private Placement 59,540 -- 59,540
Change in cumulative translation adjustment -- 16,966 16,966
Net loss -- -- (19,881,203) (19,881,203)
Balance, December 31, 2003 $ 75,582,369 $ 175,278 $(59,334,918) $ 16,435,858
The accompanying notes are an integral part of these consolidated financial
statements
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) OPERATIONS
The Company specializes in developing and commercializing laser and related
disposable product technologies used in minimally and micro-invasive medical
procedures. Minimally and micro-invasive medical procedures typically result in
reduced pain and scarring, shorter recovery periods and increased effectiveness
compared to traditional surgical procedures. Most of the pain associated with
traditional surgical procedures results from the slicing of the layers of skin
and muscle tissue, which can be significantly diminished or eliminated with
minimally and micro-invasive procedures.
In developing and marketing its clinical solutions, the Company uses proprietary
technology and aims to secure strong commercial advantages over its competitors
by gaining governmental approvals in advance of others and through exclusive
commercial arrangements. To participate in the minimally and micro-invasive
medical procedure industry, the Company seeks to develop medical applications
for its laser technology, to incorporate disposable products into these
applications and to market its products to physicians who perform medical
procedures using its products and the techniques that it develops or acquires.
To optimize its revenues, the Company focuses on clinical procedures which
generate revenues from both its laser equipment and its disposable products,
such as kits and optical fibers.
The Company'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. Using its proprietary
technology, including its exclusive rights to U.S. Patent No. 6,398,777 for the
endovenous laser treatment of varicose veins, the Company currently focuses on
endovenous laser treatment (its EVLT(R) product line) for use in varicose vein
treatments, photodynamic therapy (its PDT product line) for use in cancer
treatments, and other clinical applications.
Previously, the operations of the Company were that of Diomed, Inc., which was
incorporated in December 1997 under the laws of the State of Delaware. On
February 14, 2002, Diomed, Inc. became a wholly owned subsidiary of Diomed
Holdings, Inc. through a reverse merger. (See Note 12)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies as described below and elsewhere in these notes to
consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
These financial statements include the accounts of the Company and its wholly
owned subsidiaries. All significant intercompany transactions have been
eliminated.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates and assumptions principally relate to reserves,
including inventory, doubtful accounts and product warranty, and to services
performed by third parties but not yet invoiced. Actual results could differ
from those estimates.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of short-term, highly liquid investments with
original maturity dates of 90 days or less.
(D) FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the foreign subsidiary are translated at the rate of
exchange in effect at year-end. Results of operations are translated using the
weighted average exchange rate in effect during the year. Translation
adjustments, resulting from changes in the rate of exchange between the
subsidiary's functional currency and the U.S. dollar, are included in other
comprehensive income (loss) with the cumulative effect included as a separate
component of stockholders' equity in the accompanying consolidated balance
sheets. Transaction gains and losses, resulting from the revaluations of assets
and liabilities denominated in other than the functional currency of the Company
or its subsidiaries, are included in operating expenses for all periods
presented.
F-10
(E) REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment, when title
passes, to the customer as long as there is persuasive evidence of an
arrangement, the sales price is fixed and determinable and collection of the
related receivable is reasonably assured. The Company provides for estimated
product returns and warranty costs at the time of product shipment. In December
1999, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which
establishes guidance in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company has determined that its
existing revenue recognition practices comply with the requirements of SAB No.
101 for all periods presented. In December 2003, the Securities and Exchange
Commission ("SEC") published SAB No. 104, Revenue Recognition. SAB No. 104 was
effective upon issuance and supersedes SAB No. 101, Revenue Recognition in
Financial Statements, and rescinds the accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements that was superseded by EITF
Issue No. 00-21. Accordingly, SAB No. 104 rescinds portions of the interpretive
guidance included in Topic 13 of the codification of staff accounting bulletins.
While the wording of SAB No. 104 has changed to reflect the guidance of EITF
00-21, the revenue recognition principles of SAB No. 101 have remained largely
unchanged. The adoption of SAB No. 104 did not have a material effect on the
Company's financial position, results of operations, or cash flows.
(F) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
Work-in-progress and finished goods consist of materials, labor and
manufacturing overhead. Inventories consist of the following:
December 31,
2002 2003
---------- ----------
Raw materials $ 982,622 $ 856,886
Work-in-progress 446,820 456,934
Finished goods 582,699 578,421
---------- ----------
$2,012,141 $1,892,241
========== ==========
(G) PROPERTY AND EQUIPMENT
The Company records property and equipment at cost. The Company provides for
depreciation and amortization using both straight-line and accelerated methods
by charges to operations in amounts that allocate the cost of the assets over
their estimated useful lives as follows:
Description Useful Life
- ----------- -----------
Office equipment and furniture and fixtures 2-5 years
Manufacturing equipment 2-5 years
Leasehold improvements Lesser of estimated useful
life or life of lease
Depreciation expense for the years ended December 31, 2002 and 2003 was $431,366
and $380,357, respectively.
(H) INTANGIBLE ASSETS
Intangible assets are recorded at cost and consist of manufacturing rights
acquired in 2001 and the EVLT(R) patent rights acquired in September 2003 (Note
15). The manufacturing rights are being amortized over a five-year estimated
useful life. Included in general and administrative expenses is amortization
expense relating to these manufacturing rights of approximately $196,000 for
each of the years ended December 31, 2002 and 2003, respectively. The EVLT(R)
patent rights are being amortized over the remaining 16-year life of the
patents, and amortization expense relating to the EVLT(R) patent rights of
$98,000 is included in the cost of goods sold for the year ended December 31,
2003.
F-11
(I) LONG LIVED ASSETS
The Company evaluates long-lived assets, such as intangible assets, equipment
and leasehold improvements , for impairment in accordance with Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company records an impairment charge whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists, the related
assets are written down to fair value. The Company did not incur any impairments
in the years ended December 31, 2002 and 2003.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash, cash equivalents, accounts
receivable, accounts payable, capital lease obligations and various debt
instruments approximate fair value due to the short-term nature of these
instruments. The carrying amounts of debt issued pursuant to agreements with
banks approximate fair value as the interest rates on these instruments
fluctuate with market interest rates.
(K) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to credit risk primarily consist
of cash, cash equivalents and trade accounts receivable. The Company places its
cash and cash equivalents in established financial institutions. The Company has
no significant off-balance-sheet concentration of credit risk such as foreign
exchange contracts, options contracts or other foreign hedging arrangements. The
Company's accounts receivable credit risk is not concentrated within any one
geographic area. The Company has not experienced any significant losses related
to receivables from any individual customers or groups of customers in any
specific industry or by geographic area. Due to these factors, no additional
credit risk beyond amounts provided for collection losses is believed by
management to be inherent in the Company's accounts receivable.
Accounts receivable are customer obligations due under normal trade terms. The
Company sells its products to private physicians, hospitals, health clinics,
distributors and OEM customers. The Company generally requires signed sales
agreements, non-refundable advance payments, although collateral is generally
not required, and purchase orders depending upon the type of customer, and
letters of credit may be required in certain circumstances. Some customers seek
equipment financing from third party leasing agents, which the Company is not
party to and bears no credit risk. Accounts receivable is stated at the amount
billed to the customer less a valuation allowance for doubtful accounts. Senior
management reviews accounts receivable on a monthly basis to determine if any
receivables could potentially be uncollectible. The Company includes specific
accounts receivable balances that are determined to be uncollectible, along with
a general reserve, in its overall allowance for doubtful accounts. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance. Based on available information, the Company believes its
allowance for doubtful accounts as of December 31, 2003 is adequate. The
allowance for doubtful accounts as of December 31, 2002 and 2003 was $308,145,
and $209,167, respectively.
One customer accounted for greater than 10% of total revenues in 2002, and no
customers accounted for greater than 10% of total revenues in 2003.
In 2002 and 2003, no customers accounted for 10% or more of gross accounts
receivable.
(L) 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 (see Note 8e).
The pro forma effect of applying FAS123 in 2002 and 2003 is as follows:
December 31,
------------------------------
2002 2003
------------ ------------
Net loss as reported $ (8,001,338) $(19,881,203)
Deduct: total stock-based employee compensation:
expense determined under the fair value based method,
net of tax $ (541,367) $ (381,816)
------------ ------------
Pro forma net loss $ (8,542,705) $(20,263,019)
============ ============
Loss per share:
Basic and diluted - as reported $ (14.70) $ (8.99)
Basic and diluted - pro forma $ (15.70) $ (9.16)
F-12
(M) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as incurred.
(N) COMPREHENSIVE INCOME (LOSS)
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 from
transactions and other events and circumstances from nonowner sources. For all
periods presented, comprehensive loss consists of the Company's net loss and
changes in cumulative translation adjustment account. The Company has disclosed
comprehensive income (loss) for all periods presented in the accompanying
consolidated statements of stockholders' equity.
(O) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes are provided on temporary differences that arise in the
recording of transactions for financial and tax reporting purposes and result in
deferred tax assets and liabilities. Deferred tax assets are reduced by an
appropriate valuation allowance if in management's judgment it is more likely
than not that the deferred tax asset will not be realized. Tax credits are
accounted for as reductions of the current provision for income taxes in the
year in which the related expenditures are incurred.
(P) OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149 which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, SFAS No. 149 clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in SFAS No. 133, clarifies when a derivative contains
a financing component, amends the definition of an underlying (as initially
defined in SFAS No. 133) to conform it to language used in FIN No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. SFAS No. 149 is effective for all contracts entered into or
modified after June 30, 2003, subject to certain exceptions. The adoption of
this statement did not have an impact on the Company's financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances), while many of such
instruments were previously classified as equity or "mezzanine" equity. The
statement also requires that income statement treatment be consistent with the
balance sheet classification. That is, if the instrument is classified as a
liability, payments to the holders are interest expense, not dividends, and
changes in value are recorded in earnings. The statement relates to three
specific categories of instruments: mandatorily redeemable shares, freestanding
written put options and forward contracts that obligate an entity to purchase
its own shares, and freestanding contracts that obligate an entity to pay with
its own shares in amounts that are either unrelated, or inversely related, to
the price of the shares. SFAS No. 150 is effective immediately for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective in the first interim period beginning after June 15, 2003. The
adoption of this statement did not have an impact on the Company's financial
position, results of operations, or cash flows.
F-13
In December 2003, the FASB issued a revision to FIN No. 46, Consolidation of
Variable Interest Entities. The revised FIN No. 46, which replaces the original
FIN No. 46 issued in January 2003, clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to certain entities
in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. While
this interpretation exempts certain entities from its requirements, it also
expands the definition of a variable interest entity ("VIE") to a broader group
of entities than those previously considered special-purpose entities ("SPE's")
and specifies the criteria under which it is appropriate for an investor to
consolidate VIE's. Application of the revised FIN No. 46 is required in
financial statements of public entities that have interest in structures that
are commonly referred to as SPE's for periods ending after December 15, 2003.
For all other types of VIE's, application of the revised FIN No. 46 by public
entities is required for periods ending after March 15, 2004. The application of
this interpretation with respect to structures commonly referred to as SPE's did
not have a material impact on the Company's financial position, results of
operations, or cash flows. The Company currently does not expect the application
of this interpretation with respect to other types of VIE's to have a material
impact on its financial position, results of operations, or cash flows.
(3) NET LOSS PER SHARE
Net loss per share is computed based on the guidance of SFAS No. 128, Earnings
per Share. SFAS No. 128 requires companies to report both basic loss per share,
which is based on the weighted average number of common shares outstanding, and
diluted loss per share, which is based on the weighted average number of common
shares outstanding and the weighted average dilutive potential common shares
outstanding using the treasury stock method. As a result of the losses incurred
by the Company for the years ended December 31, 2002 and 2003, all potential
common shares were antidilutive and were excluded from the diluted net loss per
share calculations.
The following table summarizes securities outstanding, adjusted for the 1 for 25
reverse split effective June 17, 2004, as of each year-end which were not
included in the calculation of diluted net loss per share since their inclusion
would be antidilutive.
December 31,
--------------------------------
2002 2003
--------------------------------
Common stock options 64,131 222,343
Convertible preferred stock 2,747,547 (A) --
Convertible debt 384,616 (B) --
Common stock warrants 338,211 (B) 1,196,838 (C)
(A) On February 14, 2002, the Company completed a reverse merger and issued
Diomed Inc. shareholders Diomed Holdings, Inc. Class A Convertible Preferred
Stock (the "Class A Stock") that was convertible into Diomed Holdings, Inc.
Common Stock by February 14, 2004. On December 31, 2002, monthly installments of
the Class A Stock began converting into Common Stock at the rate of 30,924
shares per month. The remaining 185,542 shares of Class A Stock were to have
converted into Common Stock in February 2004. On March 31, 2003, the Company
accelerated the conversion of those shares of Class A Stock that had not yet
been converted into Common Stock. As of the close of business on March 31, 2003,
no shares of Class A Stock were outstanding:
(B) On December 27, 2002 (the "Closing Date"), the Company completed a
$2,000,000 bridge financing with Gibralt U.S., Inc (the "Lender"), whose
Principal Samuel Belzberg was a member of the Company's Board of Directors
through February 2004. The financing was in the form of Notes, including
$1,000,000 in Class A secured Notes and $1,000,000 in Class B unsecured Notes
(collectively known as the "Notes"), which were due on January 1, 2004. The
Notes accrued interest, at an annual rate of 8%, over the life of the Notes and
was payable upon maturity. The Notes, including principal and accrued interest,
were convertible into Common Stock, at the election of the Lender, at 80% of the
price per share of the Common Stock in defined transactions. Based on the $6.50
closing price per share of the Common Stock on December 31, 2002, the Notes were
convertible into 384,616 shares of Common Stock. On September 3, 2003, the Notes
in the aggregate principal of $2,000,000 and accrued interest were fully
retired.
In connection with the bridge financing, the Company issued the Lender 100%
Warrant coverage or 333,334 Warrants, based upon the $6.00 closing price of the
Company's Common Stock on December 26, 2002. The warrants were exercisable for a
period of five years, beginning six months from the Closing Date, at an exercise
price of $6.50. If the Company, over the life of the Warrants, issued Common
Stock or Common Stock equivalents at a price per share less than the $6.50
exercise price of the Warrants, the number of Warrants and the exercise price of
the Warrants were adjustable to the lower price per share (see Note 6c).
On May 7, 2003, the Company issued to the December 2002 noteholders 20 shares of
its Class C Stock, convertible into 1,084,690 shares of common stock in exchange
for eliminating the convertibility feature of the $2,000,000 principal amount of
notes and the warrants to purchase 333,334 shares of common stock, as well as
certain other rights.
The Class C Stock was exchanged for Class E Stock on August 22, 2003. (See Note
13)
On November 25, 2003, in connection with the final closing of the equity
financing discussed in Note 14, the Company exchanged all outstanding Class E
Stock for a total of 1,084,690 shares of common stock, as provided by the August
2003 exchange agreement.
F-14
(C) On September 3, 2003, in connection with the equity financing discussed in
Note 14, the Company issued securities to pay the fees of the placement agent
that it engaged in April 2003 to assist in obtaining the financing that was
needed. In lieu of paying this fee in cash, the Company issued to the placement
agent $495,000 in secured bridge notes plus warrants to purchase up to 1,635,163
shares of common stock. Of these warrants, 701,663 warrants have an exercise
price of $0.025 per share, 247,500 warrants have an exercise price of $2.00 per
share and 686,000 warrants have an exercise price of $2.50 per share. These
warrants are exercisable for five years.
On December 3, 2003 and December 8, 2003, a total of 440,403 of the September 3,
2003 warrants with an exercise price of $0.025 per share were exercised, for
which the Company issued a total of 439,108 shares of common stock. Because the
warrant holders used the cashless exercise feature of the warrants, the exercise
price was not paid in cash and the Company issued fewer common shares than the
total number of warrants exercised.
(4) ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
-------------------------------
2002 2003
---------- ----------
Payroll and related costs $ 290,260 $ 461,863
Warranty and related costs 538,954 462,154
Deferred rent 97,333 26,974
Professional fees 365,172 776,864
Other 152,381 110,777
---------- ----------
$1,444,100 $1,838,632
========== ==========
(5) LINE-OF-CREDIT ARRANGEMENT
Diomed, Ltd., the Company's subsidiary in the United Kingdom, has a line of
credit with Barclays Bank, which is limited to the lesser of (BPS)350,000
($624,000 at December 31, 2003) or 80% of eligible accounts receivable. This
line bears interest at 3% above Barclays Bank's base rate (3.75% at December 31,
2003) and borrowings are due upon collection of receivables from customers. As a
security interest, Barclays has a lien on all of the assets of Diomed, Ltd.,
excluding inventory and certain intellectual property.
As of December 31, 2003, there were borrowings of (BPS)146,663 ($261,676)
outstanding under this line and zero was available for future borrowing.
(6) DEBT
(A) PROMISSORY NOTE ISSUED TO CUSTOMER
In October 2000, a customer, Axcan Pharma, Inc., advanced the Company $936,000
to secure certain key materials. In September 2001, the Company issued a
Promissory Note to this customer in the amount of the advance. The Promissory
Note bears interest, at an annual rate of 8.5%, which is payable quarterly in
arrears. The Promissory Note matures on January 1, 2004 and does not provide for
conversion rights into equity. As of December 31, 2002 and 2003, the balance
outstanding on this Promissory Note was $936,000. As of December 31, 2003,
accrued interest was $20,053. On January 2, 2004, the Company fully repaid the
note and accrued interest in accordance with the terms of the note.
(B) PROMISSORY NOTES ISSUED TO SERVICE PROVIDERS
In December 2002, the Company converted accounts payable for legal services, in
the amount of $416,102, into a Promissory Note. Payment terms included a
$100,000 payment due upon completing the $2,000,000 bridge financing on December
27, 2002 and the balance due upon completion of a longer-term capital financing
in fiscal 2003, being the earlier of May 15, 2003 and the completion of a
subsequent debt or equity financing other than a bridge financing. The
Promissory Notes bore interest, at an annual rate of 6%, which accrued over the
life of the Promissory Note and was payable upon maturity. The Promissory Note
did not provide for conversion rights into equity. As of December 31, 2002, the
balance outstanding to this Promissory Note was $316,102. On November 26, 2003,
subsequent to completion of the equity financing, the Company repaid the
outstanding balance of the Promissory Note plus accrued interest in the amount
of $7,442.
F-15
In December 2002, the Company converted accounts payable due a professional
service provider for external marketing initiatives, in the amount of $183,016,
into a Promissory Note. Payment terms included a $50,000 payment due upon
completing the $2,000,000 bridge financing on December 27, 2002, a 20% surcharge
on monthly services until the Promissory Note was paid in full, and the balance
due upon completion of a longer-term financing in fiscal 2003. The Promissory
Note did not bear interest and did not provide for conversion rights into
equity. As of December 31, 2002, the balance outstanding to this Promissory Note
was $129,106. On December 1, 2003, subsequent to completion of the equity
financing, the Company repaid the outstanding balance in the amount of $112,639.
(C) BRIDGE FINANCING WITH RELATED PARTY
On December 27, 2002, the Company completed a $2,000,000 bridge note financing
with Gibralt U.S., Inc (the "December 2002 noteholder" and, together with the
three persons to whom Gibralt U.S. subsequently transferred $500,000 of the
notes, the "December 2002 noteholders"). Samuel Belzberg, a principal of Gibralt
U.S., was a member of the Company's Board of Directors during 2003. The
financing included $1,000,000 in Class A secured notes and $1,000,000 in Class B
unsecured notes due January 1, 2004. The notes accrued interest at an annual
rate of 8%, payable upon maturity.
The notes were convertible into common stock at the election of the December
2002 noteholders upon the occurrence of: (i) a financing transaction, (ii) a
liquidity event, (iii) a merger or reorganization, or (iv) at any time during
the life of the notes at the election of the holders of at least 66 2/3% of the
outstanding principal amount of the notes. The notes, including principal and
accrued interest, were convertible into common stock at 80% of the common stock
price at the time of conversion.
As security for the notes, the Company formed a new wholly owned subsidiary
("PDT Co."), transferred its assets for photodynamic therapy to PDT Co.,
including intellectual property, manufacturing rights and trademarks for lasers
and disposable Optiguide(R) fibers, and pledged 100% of the shares of PDT Co. to
the December 2002 noteholders. As additional security, the Company granted a
security interest in the following unencumbered assets of Diomed Inc. to the
December 2002 noteholders: equipment, inventory, accounts receivable,
intellectual property and cash deposit accounts. The December 2002 noteholders'
lien on the inventory was subordinate to Axcan Pharma's lien on inventory. (See
Note 6a).
As additional consideration for the financing, the Company issued to the
December 2002 noteholders warrants to purchase 333,334 shares of common stock.
The warrants were exercisable for a period of five years beginning June 27, 2003
at an exercise price of $6.50, which represented 110% of the market price of the
stock on December 26, 2002. If, prior to the exercise of the warrants, the
Company issued common stock or common stock equivalents at a price per share
less than the exercise price of the warrants, the number of warrants and the
exercise price of the warrants were to be adjusted to the lower price per share.
In the event of a merger or reorganization, the warrants were convertible into
the kind and number of shares of common stock, other securities or property into
which the warrants would have been converted into if the warrants had been
converted into common stock based on the provisions of the merger or
reorganization.
The notes and warrants were transferable in part or in whole by the December
2002 noteholders to one or more third parties in accordance with all of the same
terms granted the noteholder by the Company. The December 2002 noteholders could
designate a member to the Company's Board of Directors while the notes were
outstanding. The Company was required to obtain the advance approval by the
December 2002 noteholders for future financing transactions during the life of
the notes.
On March 18, 2003, the initial December 2002 noteholder sold and transferred to
three investors in a private transaction (i) $500,000 aggregate principal amount
of notes ($250,000 of which were Class A notes and $250,000 of which were Class
B notes) and (ii) warrants to purchase 83,334 shares of common stock.
Accordingly, after the taking effect of this transfer, the initial noteholder
owned $1,500,000 aggregate principal amount of notes ($750,000 of which were
Class A notes and $750,000 of which were Class B notes) and warrants to purchase
250,000 shares of common stock.
The Company recognized the $2,000,000 fair value of the warrants and the
beneficial conversion feature related to the immediate convertibility of the
notes to equity as a discount to the notes, with a corresponding increase in
additional paid in capital. The value ascribed to the warrants was approximately
$1,200,000, as calculated using the Black-Scholes option pricing model, and the
value ascribed to the beneficial conversion feature of the notes was $800,000.
The discount was to be amortized over the term of the notes to non-cash interest
expense, such that the full amount of the discount was to be amortized by the
earlier of the maturity date of the notes or the conversion of the notes to
equity. The net impact on stockholders' equity was to be zero when the net loss,
including the amortization of the discount, was fully reflected in the
accumulated deficit. Accordingly, the notes were originally recorded at net
value of zero (after the $2,000,000 discount). In the year ended December 31,
2003, $721,000 was recognized in non-cash interest expense pertaining to this
amortization of the discount prior to the May 2003 exchange transaction
discussed below.
In connection with the bridge financing, the Company incurred $80,000 in related
legal fees. As of December 31, 2002, these costs were capitalized as deferred
financing costs and were to be amortized to general interest expense over the
life of the notes, such that the full amount of costs were amortized by the
earlier of the maturity date of the notes or by the month the notes were
converted into equity. In May 2003, the Company expensed the balance of the
deferred financing costs upon completion of the May 2003 exchange transaction.
In the year ended December 31, 2003, the Company recognized $80,000 in general
interest expense pertaining to this amortization of the deferred financing
costs, and, accordingly, the balance of the deferred financing costs was zero as
of December 31, 2003.
F-16
During the first quarter of 2003, it became clear that the successful operations
of the Company would require additional working capital. In April 2003, the
Company began discussions with Gibralt U.S. with a view to its providing interim
financing in addition to the interim financing that it had provided in December
2002. The Company also began to consider a subsequent financing expected to
begin later in the quarter that would address its longer term capital needs. In
late April, the Company elected to obtain up to $1,200,000 of interim financing
from Gibralt U.S. and two of its directors. At the same time, the Company
proposed a restructuring of the securities issued in December 2002 to improve
its access to the financial markets and enhance the likelihood of a subsequent
financing. Therefore, the Company offered to repurchase from the December 2002
noteholders certain of their rights that, in light of current market conditions,
might have made it more difficult to successfully complete a subsequent
financing in the current market.
Using the Black Scholes valuation methodology, the Company calculated the
monetary value of the rights of the December 2002 noteholders to convert their
notes into shares of common stock and the monetary value of the common stock
purchase warrants. The Company further engaged Marshall & Stevens, Incorporated,
a professional valuation firm, to provide an opinion as to the valuations that
it had calculated. The price per share that the Company employed to calculate
the number of shares equal to the monetary value of the rights that the December
2002 noteholders would be surrendering was the presumed price per share of its
common stock after giving effect to the issuance of those shares.
At the time the Class A secured notes and Class B unsecured notes were issued,
the Company could not issue more than $1,000,000 in secured debt without
obtaining prior approval by its preferred stockholders under the terms of its
Class A Stock. On March 31, 2003, the Company converted all of its Class A Stock
into common stock to eliminate its convertibility feature and its apparent
negative impact on the Company's ability to obtain additional financing. On May
7, 2003, the December 2002 noteholders exchanged their $1,000,000 principal
amount of secured Class A notes and $1,000,000 principal amount of unsecured
Class B notes for $2,000,000 principal amount of secured Class C notes due
January 1, 2004. On May 7, 2003, the Company issued to the December 2002
noteholders 20 shares of its Class C Preferred Stock, which was convertible into
1,084,690 shares of common stock, in exchange for eliminating the convertibility
feature of the $2,000,000 principal amount of notes and the warrants to purchase
333,334 shares of common stock, as well as certain other rights. The Class C
Preferred Stock was exchanged for Class E Preferred Stock on August 22, 2003.
(See Note 13)
On May 28, 2003, the Company and the December 2002 noteholders amended certain
of the terms of the May 7, 2003 capital restructuring to: (i) extend the due
date of the Class C notes from January 1, 2004 until January 1, 2006, (ii)
increase the rate of interest payable on the Class C notes from 8.0% to 12.5%,
(iii) provide for mandatory prepayments of principal of the Class C notes in
amounts up to 50% of positive quarterly cash flow, (iv) limit the security
interest in inventory that secures the Class C notes at $3,271,000, (v) waive
the noteholders' right of approval of future financing transactions and (vi)
extend the deadline by which the financing was to be completed without
triggering the noteholders' right of rescission, from June 30, 2003 to July 31,
2003 (under the terms of the restructuring if the contemplated financing were
not completed by July 31, 2003 the December 2002 noteholders had the right to
rescind the May 7, 2003 exchange transaction). On July 31, 2003, the deadline by
which the financing was to be completed without triggering the noteholders'
right of rescission was extended until November 15, 2003. On August 22, 2003,
the Class C notes were exchanged for Class E notes reflecting these modified
terms, in principal amounts equal to the principal amounts of the Class C notes
exchanged. The Class E notes were repaid in full with a portion of the proceeds
from the first closing of the equity financing.
The exchange of debt and preferred stock for the elimination of warrants and
modification of the December 2002 notes in May 2003 was treated as an
extinguishment of the $2,000,000 debt. As a result, the fair market value of the
warrants and other consideration, which was limited to the remaining unamortized
discount on the December 2002 notes, was recorded as a reduction in additional
paid in capital in the amount of $1,167,000 and the remaining unamortized
discount was reduced to zero.
The Company recognized the $2,000,000 fair value of the preferred stock issued
with the Class E notes, which was recorded as a discount to the notes, with the
offset as an increase in preferred stock. The discount was to be amortized over
the term of the notes to non-cash interest expense, such that the full amount of
the discount was to be amortized by the earlier of the maturity date of the
notes or early retirement of the notes. The net impact on stockholders' equity
was to be zero when the net loss, including the amortization of the discount,
was fully reflected in the accumulated deficit. Accordingly, the notes were
originally recorded at net value of zero (after the $2,000,000 discount). On
September 3, 2003 the notes were fully retired in advance of their January 1,
2006 maturity date in order to expand the security interest base available to
the holders of the September Secured Bridge Notes while the Company obtained
stockholder approval to complete the Equity Financing. (See Notes 6e and 14) In
the year ended December 31, 2003, $2,000,000 was recognized in non-cash interest
expense pertaining to this amortization of the discount.
F-17
(D) BRIDGE LOANS FROM RELATED PARTIES - MAY 7, 2003
On May 7, 2003, Gibralt U.S. and two of the Company's directors, James A. Wylie,
Jr. and Peter Norris (the "May 2003 noteholders"), committed to provide
financing of up to $1,200,000 in the form of Class D secured notes due May 6,
2004. The Company issued the May 2003 noteholders an aggregate of 24 shares of
Class D Preferred Stock, which was convertible into 120,863 shares of common
stock. The Class D Preferred Stock was exchanged for Class F Preferred Stock on
August 22, 2003. (See Note 13) The Class D notes accrued interest at an annual
rate of 8%, payable upon maturity. As of July 7, 2003, the entire $1,200,000 in
interim financing had been funded. The May 2003 noteholders had the same
security interest and registration rights granted to the December 2002
noteholders, as described in Note 6e. The notes were not transferable without
the prior consent of the Company.
The May 2003 noteholders had the right to participate in the Company's financing
contemplated for the second half of 2003 on the same terms and conditions as the
new investors by redeeming their notes. In determining the price at which the
Company sold its notes, an independent committee of the board of directors
considered the added risk that the May 2003 noteholders would be accepting in
light of the uncertainty of the completion of the contemplated financing. The
December 2002 notes provided that the corresponding noteholders had the right to
participate in the next financing of the Company at a discount of 20% to the
price to be paid by investors. Using this discount factor as a benchmark for
assessing the risk that the May 2003 noteholders would be assuming, among other
factors, the independent committee authorized the issuance of preferred shares
convertible into 120,863 shares of common stock, allocated according to the
noteholder's respective loan commitments.
On May 28, 2003, the Company and the May 2003 noteholders amended certain of the
terms of the May 7, 2003 interim financing to: (i) add a requirement that 100%
of the Class D notes be redeemed into common stock in the contemplated financing
at the same price per share and on the same terms as the new investors if the
Company raises $6,000,000 or more in gross proceeds and (ii) extend the deadline
for completion of the contemplated financing without triggering the right of the
May 2003 noteholders to declare the Class D notes due and payable to July 31,
2003. On July 31, 2003, this date was further extended to November 15, 2003. On
August 21, 2003, this deadline was extended to the business day following any
date after November 15, 2003, which the Company and the Investors in the Equity
Financing agree to as the second closing date. At the second closing of the
Equity Financing on November 25, 2003, the $1,200,000 in Class D notes and
accrued interest in the amount of $48,233 were converted into 499,294 shares of
common stock at $2.50 per share. (See Note 14)
The Company recognized an amount of $240,000 for the fair value of the preferred
stock issued, which was recorded as a discount to the Class D notes, with a
corresponding increase in preferred stock. The discount was to be amortized over
the term of the notes to non-cash interest expense, such that the full amount of
the discount was amortized by the earlier of the maturity date of the Class D
notes or by the month the Class D notes were converted into equity. The net
impact on stockholders' equity/(deficit) was zero when the net loss, including
the amortization of the discount, was fully reflected in the accumulated
deficit. In the year ended December 31, 2003, the Company recognized $240,000 in
non-cash interest expense pertaining to this amortization of the discount.
The Company recognized a beneficial conversion feature in the amount of
$960,000, which was recorded as a discount to the notes, upon favorable
stockholder approval of the equity financing at the annual meeting held on
November 25, 2003, with a corresponding increase in additional paid in capital.
This discount was fully amortized to non-cash interest expense in the period in
which the Class D notes converted to equity. The net impact on stockholders'
equity was zero when the net loss, including the amortization of the discount,
was fully reflected in the accumulated deficit.
In connection with the interim financing, the Company incurred $51,000 in
related legal fees. These costs were capitalized as deferred financing costs and
were amortized to general interest expense over the life of the Class D notes,
such that the full amount of costs were amortized by the earlier of the maturity
date of the Class D notes or by the period the Class D notes were converted into
equity. In the year ended December 31, 2003, the Company recognized $51,000 in
general interest expense pertaining to this amortization of the deferred
financing costs, and, accordingly, the balance of the deferred financing costs
were zero as of December 31, 2003.
(E) SECURED BRIDGE NOTES - SEPTEMBER 3, 2003
On September 2, 2003, the Company entered into agreements that provide for the
Equity Financing with 119 Investors who agreed to purchase from the Company
10,177,500 shares of Common Stock for an aggregate purchase price of
$23,200,000. Twenty two million dollars of the aggregate purchase price was
payable in cash, and $1,200,000 was paid by conversion of the Company's Class D
notes at the second closing. (See Note 14)
At the first closing of the Equity Financing, the Company issued $6,995,000 in
principal amount of Secured Bridge Notes due September 3, 2004 (the "Secured
Bridge Notes"), which accrued interest at an annual rate of 8% and were
convertible into 3,497,500 shares of common stock at $2.00 per share upon
favorable stockholder approval of the Equity Financing at the annual meeting
held on November 25, 2003. The notes were secured by a security interest in
collateral that included the Company's rights to U.S. Patent No. 6,398,777 and
related foreign patents for endovenous laser treatment of varicose veins (the
"EVLT Patent"). These patents relate to the technology that the Company acquired
on September 3, 2003 underlying the Company's EVLT(R) product line (See Note 15)
and the security interest previously granted to the December 2002 noteholders
(See Notes 6c and 6d). The Class E Notes were fully paid at the first closing of
the Equity Financing in advance of the January 1, 2006 maturity date to increase
the collateral available for the September Secured Bridge Notes.
F-18
Under the terms of the Equity Financing, at the second closing on November 25,
2003, the aggregate principal amount of the Secured Bridge Notes converted into
3,497,500 shares of Common Stock at a purchase price of $2.00 per share. Also,
on November 25, 2003, the Company issued an additional 65,287 shares of Common
Stock to pay accrued interest in the amount of $130,573 on the Secured Bridge
Notes. Of the Secured Bridge Notes, $6,500,000 in aggregate principal amount was
issued at the first closing in exchange for a purchase price equal to $6,500,000
paid in cash. Gibralt U.S. and the other three holders of the Company's Class E
notes purchased $2,000,000 of Secured Bridge Notes at $2.00 per share, the same
price as paid by the other Investors who purchased Secured Bridge Notes. Each of
the other Investors who subscribed to purchase securities in the Equity
Financing purchased on a pro rata basis $4,500,000 in aggregate principal amount
of the Secured Bridge Notes. The Company also issued $495,000 in principal
amount of the Secured Bridge Notes to the placement agent in partial payment of
its fee.
The Company recognized a beneficial conversion feature in the amount of
$6,995,000, upon favorable stockholder approval of the Equity Financing at the
annual meeting held on November 25, 2003, with a corresponding increase in
additional paid in capital. This discount was fully amortized to non-cash
interest expense in the period the Secured Bridge Notes converted to equity. The
net impact on stockholders' equity was zero when the net loss, including the
amortization of the discount, was fully reflected in the accumulated deficit.
In connection with the first closing, the Company incurred $651,923 in placement
agent and legal fees, including the fee due to be paid in cash to the placement
agent in the amount of $495,000 that the placement agent invested in the Secured
Bridge Notes. These costs were capitalized as deferred financing costs and were
being amortized to general interest expense over the life of the notes, such
that the full amount of costs was amortized by the earlier of the maturity date
of the notes or by the month the notes were converted into equity. In the year
ended December 31, 2003, the Company recognized $651,923 in general interest
expense pertaining to this amortization of the deferred financing costs, and
accordingly, the balance of the deferred financing costs was zero as of December
31, 2003.
In connection with the first closing, the Company recognized an additional
placement agent fee, in the amount of $1,798,579, for 247,500 warrants issued to
a placement agent. The fee was recorded as a deferred financing cost upon
stockholder approval of the Equity Financing on November 25, 2003, with a
corresponding increase in additional paid in capital, and was fully amortized to
general interest expense in the period in which the Secured Bridge Notes
converted to equity. The net impact on stockholders' equity was zero when the
net loss, including the deferred financing cost, was fully reflected in the
accumulated deficit.
(F) EVLT(R) TECHNOLOGY ACQUISITION - SEPTEMBER 3, 2003
On September 3, 2003, the Company acquired rights to the EVLT Patent, which
relates to the technology underlying the Company's EVLT(R) product line. On
September 3, 2003, the Company paid Endolaser Associates $1,500,000 in cash in
exchange for the exclusive license and agreed to make additional payments
totaling $2,500,000 in 10 quarterly installments of $250,000 each, commencing in
the fourth quarter of 2003. On December 1, 2003, subsequent to completion of the
equity financing, the Company paid Endolaser Associates the first quarterly
installment of $250,000. The Company recorded a liability in the amount of
$2,500,000, net of a $254,000 discount based on an annual interest rate of 8%,
to reflect imputed interest of the liability. The discount is being amortized to
general interest expense over the period of the technology payable. (See Note
15)
(G) CAPITAL EQUIPMENT LEASES
Leased assets included in property and equipment primarily include manufacturing
equipment. The Company did not enter into any new capital equipment leases
during the years ended December 31, 2002 and 2003. Depreciation expense for
leased equipment during the years ended December 31, 2002 and 2003 was $56,226
and $36,823, respectively.
A summary of the current and long-term debt at December 31, 2003 is as follows:
DECEMBER 31, 2003
-----------------
Promissory note issued to a customer $ 936,000
EVLT technology payable(face value) 2,250,000
Capital equipment leases 13,848
Less current portion (1,949,848)
-----------
Long-term debt $ 1,250,000
===========
F-19
Future minimum debt payments for capital equipment leases, promissory notes and
the EVLT technology payable required under these arrangements at December 31,
2003 are as follows:
Capital Leases Debt
-------------- ----------
2004 $ 13,848 $1,936,000
2005 -- 1,250,000
---------- ----------
Total future minimum lease payments $13,848 $3,186,000
==========
Less--Amount representing interest --
----------
Present value of future minimum lease
payments 13,848
Less--Current portion
of capital lease obligations 13,848
----------
Capital lease obligations, net of
current portion $ --
==========
(7) INCOME TAXES
No provision for foreign, federal or state income taxes has been recorded, as
the Company incurred net operating losses for all periods presented. The Company
has U.S. federal and state net operating loss carryforwards of approximately
$17,000,000 at December 31, 2003 to reduce future federal income taxes, if any.
These carryforwards expire through 2023 and are subject to review and possible
adjustment by the Internal Revenue Service (IRS). The Company also has
approximately $19,350,000 of foreign net operating loss carryforwards at
December 31, 2003 to reduce future foreign income taxes, if any. These
carryforwards do not have an expiration date.
The Tax Reform Act of 1986 contains provisions that may limit the amount of U.S.
federal and state net operating loss and credit carryforwards that the Company
may utilize in any one year in the event of certain cumulative changes in
ownership over a three-year period in excess of 50%, as defined. The Company
believes that its equity financing completed on November 25, 2003 may have
triggered a change in ownership, which may limit the utilization of net
operating loss carryforwards in future years.
The approximate tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets primarily relate to
net operating loss carryforwards and amount to approximately $8,600,000 and
$12,600,000 as of December 31, 2002 and 2003, respectively. It is the Company's
objective to become a profitable enterprise and to realize the benefits of its
deferred tax assets. However, in evaluating the realizability of these deferred
tax assets, management has considered the Company's short operating history, the
volatility of the market in which it competes and the operating losses incurred
to date, and believes that, given the significance of this evidence, a full
valuation reserve against its deferred tax assets is required as of December 31,
2002 and 2003. The components of the Company's deferred tax assets are
approximately as follows:
December 31,
----------------------------------
2002 2003
----------- -----------
Net operating loss carryforwards $ 8,620,000 $12,600,000
Other temporary differences 255,000 140,000
Valuation allowance (8,875,000) (12,740,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-20
(8) STOCKHOLDERS' EQUITY
(A) CAPITALIZATION OF DIOMED HOLDINGS, INC.
Effective February 14, 2002, the authorized capital stock of the Company was
80,000,000 shares of common stock, par value $0.001 per share, and 5,000,000
shares of preferred stock, par value $.001 per share, of which 4,300,000 shares
were designated Class A Convertible Preferred Stock (referred to as "Old Class A
Stock").
(B) ISSUANCE OF DIOMED HOLDINGS, INC. CLASS A CONVERTIBLE PREFERRED STOCK ("OLD
CLASS A STOCK") IN DIOMED MERGER
On February 14, 2002, Diomed Acquisition Corp. ("Acquisition"), a Delaware
corporation and a wholly-owned subsidiary of Diomed Holdings, Inc., a Nevada
corporation formerly known as Natexco Corporation, merged with and into Diomed,
Inc. pursuant to an Agreement and Plan of Merger, dated as of January 29, 2002.
Pursuant to the Diomed Merger Agreement, Diomed Holdings Nevada issued:
- 2,328,922.50 shares of its Old Class A Stock to the former holders
of Diomed, Inc. common stock in exchange for 9,315,690 shares of common stock of
Diomed, Inc. issued and outstanding as of the effective time of the Diomed
Merger, which 2,328,922.50 shares were convertible into 9,315,690 shares of
Diomed Holdings Nevada common stock; and
- 1,362,500 of its Old Class A Stock to the former holders of
2,725,000 shares of Diomed, Inc. Series A Preferred Stock issued and outstanding
as of the effective time of the Diomed Merger, which 1,362,500 shares were
convertible into 5,450,000 shares of Diomed Holdings Nevada common stock.
On October 24, 2002, the Company's registration statement was declared effective
by the Securities and Exchange Commission.
On December 31, 2002, according to the Class A Convertible Preferred Stock
Certificate of Designation, monthly conversions of the Company's Class A
Convertible Preferred Stock ("Class A Stock") began converting into Common Stock
at the rate of 5% of the initial shares of the Class A Stock or 773,087 shares,
and were to continue to occur on the last day of each month during the period
from January 2003 through January 2004. The remaining 4,638,531 shares of Class
A Stock were to convert in February 2004.
Because the board of directors determined that the effect of the incremental
conversion of Class A Stock into common stock would impair the Company's ability
to procure additional equity investments, pursuant to its discretion under the
terms of the Class A Stock, the board determined to cause the remaining
outstanding shares of Class A Stock to convert into common stock on March 31,
2003, and accordingly, zero shares of Class A Stock are outstanding at December
31, 2003.
(C) MIGRATORY MERGER OF THE COMPANY; RECAPITALIZATION OF THE COMPANY
The figures below are not adjusted to give effect to the 1:25 reverse split
effective June 17, 2004.
In April 2002, the board of directors of the Company determined that it was in
the best interest of the Company and its stockholders for the Company to change
its state of incorporation from Nevada to Delaware. At a stockholders meeting on
May 13, 2002 to consider the proposed reincorporation, the stockholders granted
their approval, and the reincorporation was effected by the merger of the
Company into a newly-formed Delaware corporation (referred to as the "Migratory
Merger"), which occurred on that same date. As a result of the Migratory Merger,
each share of common stock of Diomed Holdings Nevada outstanding as of the date
of the consummation of the Migratory Merger was converted into one share of
Common Stock, and each share of Old Class A Stock was converted into four shares
of Class A Convertible Preferred Stock of the Company (referred to as the
"Convertible Preferred Stock"). The rights and privileges of the Common Stock
and the Convertible Preferred Stock are virtually identical to the common stock
of Diomed Holdings Nevada and the Old Class A Stock, other than the one for four
exchange of shares of Old Class A Stock for shares of Convertible Preferred
Stock, and a reduction in the number of votes from four votes per share for Old
Class A Stock to one vote per share for Convertible Preferred Stock.
In connection with the Migratory Merger, the Company assumed the obligations of
Diomed Holdings Nevada with respect to Diomed Holdings Nevada's outstanding
stock options and warrants (formerly the Diomed stock options and warrants).
In the reverse merger, the Diomed, Inc. Common Stock shareholders received
2,328,922.50 shares of Diomed Holdings, Inc. Class A Convertible Preferred Stock
in exchange for their 9,315,690 shares of Diomed, Inc. Common Stock. Based on a
conversion factor of "1 to 4", the 2,328,922.50 shares of Diomed Holdings, Inc.
Class A Convertible Preferred Stock were convertible into 9,315,690 shares of
Diomed Holdings, Inc. Common Stock. Pursuant to the migratory merger and
recapitalization on May 13, 2002, the Diomed Holdings, Inc. Class A Convertible
Preferred Stock and Common Stock shares were recapitalized on a
one-to-four-share basis such that the 2,328,922.50 shares of Class A Stock
became 9,315,690 shares of Class A Stock.
F-21
In the reverse merger, the Diomed, Inc. Series A Preferred Stock shareholders
received 1,362,500 shares of Diomed Holdings, Inc. Class A Convertible Preferred
Stock in exchange for their 2,725,000 shares of Diomed, Inc. Series A Preferred
Stock. Based on a conversion factor of "1 to 4", the 1,362,500 shares of Diomed
Holdings, Inc. Class A Convertible Preferred Stock were convertible into
5,450,000 shares of Diomed Holdings, Inc. Common Stock. Pursuant to the
migratory merger and recapitalization on May 13, 2002, the Diomed Holdings, Inc.
Class A Convertible Preferred and Common Stock shares were recapitalized on a
one-to-four-share basis such that the 1,362,500 shares of Class A Stock became
5,450,000 shares of Class A Stock.
As of May 13, 2002, the Company had authorized 20,000,000 shares of Preferred
Stock, including 18,000,000 shares of Class A Convertible Preferred Stock,
$0.001 par value, of which 14,765,690 shares are outstanding, and 2,000,000
shares of undesignated shares of Preferred Stock, $.001 par value, of which zero
shares are outstanding.
On August 5, 2002, the Company and QLT entered into an agreement pursuant to
which the Company issued to QLT, and QLT accepted from the Company, a total of
696,059 shares of Convertible Preferred Stock to both resolve the dispute as to
the First Promissory Note and fully satisfy the Company's obligations under the
Second Promissory Note. (See Note 8a).
On December 31, 2002, according to the Class A Convertible Preferred Stock
Certificate of Designation, monthly conversions of the Company's Class A
Convertible Preferred Stock ("Class A Stock") began converting into Common Stock
at the rate of 5% of the initial shares of the Class A Stock or 773,087 shares,
and were to continue to occur on the last day of each month during the period
from January 2003 through January 2004. The remaining 4,638,531 shares of Class
A Stock were to convert in February 2004.
As of December 31, 2002, the Company had authorized 20,000,000 shares of
Preferred Stock, $0.001 par value, of which 14,688,662 shares were outstanding.
Because the board of directors determined that the effect of the incremental
conversion of Class A Stock into common stock would impair the Company's ability
to procure additional equity investments, pursuant to its discretion under the
terms of the Class A Stock, the board determined to cause the remaining
outstanding shares of Class A Stock to convert into common stock on March 31,
2003, and accordingly, the Company had zero shares of Class A Stock outstanding.
As of December 31, 2003, the Company had authorized 20,000,000 shares of
Preferred Stock, $0.001 par value, of which zero shares are outstanding.
(D) COMMON STOCK
The figures below are adjusted to give effect to the 1:25 reverse split
effective June 17, 2004 for the number of shares of common stock, price per
share, options and warrants.
In February 2002, the Company issued 200,000 shares of its Common Stock, $0.001
par value per share, at a price of $50.00 per share in a private placement
financing in connection with the Diomed Merger, resulting in proceeds net of
offering costs of $7,900,000.
After the Migratory Merger on May 13, 2002, the Company had authorized
80,000,000 shares of Common Stock, $0.001 par value, of which 568,000 shares are
outstanding (excluding securities which may be converted into or exercisable for
Common Stock), having been automatically issued to the holders of the Common
Stock issued by Diomed Holdings Nevada by virtue of the Migratory Merger.
As per the Merger agreement, the Company was obligated to use its best efforts
to file a registration statement with the Securities Exchange Commission to
register for resale its common shares that it issued in the private placement
offering and those of its common shares that it issued to the Company's former
stockholders, and to cause the registration statement to be declared effective.
In the event that the Company failed to file or cause the registration statement
to be declared effective within 240 days of completing the Merger, or remain
effective through the first anniversary of the Merger, the Company was required
to issue additional shares of its common stock, up to a maximum of 4% of the
shares held by each of the February 2002 private placement investors. On October
24, 2002, the Company received approval of its registration statement by the
Securities and Exchange Commission and accordingly issued the February 2002
private placement investors an additional aggregate of 2,000 shares of Common
Stock.
On October 24, 2002, the Company's registration statement was declared effective
by the Securities and Exchange Commission.
On December 31, 2002, according to the Class A Convertible Preferred Stock
Certificate of Designation, monthly conversions of the Company's Class A
Convertible Preferred Stock ("Class A Stock") began converting into Common Stock
at the rate of 5% of the initial shares of the Class A Stock or 773,087 shares,
and were to continue to occur on the last day of each month during the period
from January 2003 through January 2004. The remaining 4,638,531 shares of Class
A Stock were to convert in February 2004.
As of December 31, 2002, the Company had authorized 80,000,000 shares of Common
Stock, $0.001 par value, of which 15,023,087 (600,923 after giving effect to the
1:25 reverse split implemented June 17, 2004) shares were outstanding.
Because the board of directors determined that the effect of the incremental
conversion of Class A Stock into common stock would impair the Company's ability
to procure additional equity investments, pursuant to its discretion under the
terms of the Class A Stock, the board determined to cause the remaining
outstanding shares of Class A Stock to convert into common stock on March 31,
2003.
F-22
As of March 31, 2003, the Company had 1,188,470 shares of common stock
outstanding and zero shares of Class A Stock outstanding.
On May 7, 2003, the Company issued Class C Preferred Stock to the holders of the
notes and warrants it had issued in December 2003 in exchange for certain
modifications we made to those notes and warrants. These shares of Class C
Preferred Stock were convertible into 1,084,690 shares of common stock upon
satisfaction of certain conditions. The modifications to the notes included
eliminating the convertibility feature of the notes and eliminating the
noteholders' right to approve a future financing transaction. The Company issued
Class C notes in exchange for the December 2002 notes to reflect these modified
terms. The modification to the warrants was the redelivery of the warrants to
the Company for cancellation.
On May 7, 2003, the Company also issued $1,200,000 in Class D notes to Gibralt
U.S. (an affiliate of a former director, Samuel Belzberg, to which we issued
$1,100,000 principal amount notes) and to two directors (James A. Wylie, Jr. and
Peter Norris, to each of whom the Company issued $50,000 principal amount of
notes). The Company issued these notes in exchange for loan commitments made by
these noteholders. The Company also issued to these noteholders Class D
Preferred Stock as a prepaid discount to recognize that the loan commitments
were expected to be converted into equity in a future equity financing
transaction that the Company then contemplated, and to reflect the risk that the
equity financing transaction might not occur. These shares of Class D Stock were
convertible into a total of 120,863 shares of common stock upon satisfaction of
certain conditions. The notes were convertible into the securities to be issued
in the contemplated equity financing on the same terms as applied to the other
investors in the equity financing.
On August 22, 2003, the Company exchanged the Class C Preferred Stock for an
equal number of shares of Class E Preferred Stock, and exchanged the Class D
Preferred Stock for an equal number of shares of Class F Preferred Stock. The
Company exchanged these shares of preferred stock in accordance with the
stipulation of settlement it entered into to settle the Augenbaum class action
lawsuit that was filed in late July 2003. That lawsuit claimed, among other
things, that the Class C Preferred Stock and Class D Preferred Stock was not
permitted to be, by its terms, convertible into common stock. Accordingly,
although the Company denied the allegations in the lawsuit, to reach a
settlement amicably, the Company created the Class E and Class F Preferred Stock
and performed the preferred stock exchange. The Class E and F Preferred Stock is
not by its terms convertible into common stock. However, by a separate agreement
between the Company and the holders of the Class E and F Preferred Stock, upon
the satisfaction of certain conditions, the Company would issue 1,084,690 shares
of common stock in exchange for the Class E Preferred Stock and would issue
120,863 shares of common stock in exchange for the Class F Preferred Stock.
On September 2, 2003, the Company entered into definitive agreements for the
equity financing that it had been pursuing since the second quarter of 2003.
Pursuant to these agreements, on September 3, 2003, the investors in the equity
financing funded $6,500,000 in the form of secured bridge loans, and the Company
issued secured bridge notes to these investors. The $1,200,000 principal amount
of Class D notes the Company issued in May 2003 converted into common stock at
the final closing of the equity financing on November 25, 2003. The secured
bridge notes converted into common stock at $2.00 per share at the final
closing, the investors purchased $15,500,000 of common stock for $2.50 per share
and the $1,200,000 in Class D notes and accrued interest on these notes were
purchased for common stock for $2.50 per share.
On September 3, 2003, in connection with the equity financing, the Company
issued securities to pay the fees of the placement agent that it had engaged in
April 2003 to assist in obtaining the financing that was needed. In lieu of
paying this fee in cash, the Company issued to the placement agent $495,000 in
secured bridge notes plus warrants to purchase up to 1,635,163 shares of common
stock. Of these warrants, 701,663 warrants have an exercise price of $0.025 per
share, 247,500 warrants have an exercise price of $2.00 per share and 686,000
warrants have an exercise price of $2.50 per share. These warrants are
exercisable for five years.
On November 25, 2003, the number of authorized shares of Common Stock were
increased from 80,000,000 to 500,000,000 (50,000,000 afer giving effect to the
reduction in authorized shares effective June 17, 2004), $0.001 par value, in
order to enable the issuance of shares in connection with the equity financing.
On November 25, 2003, the Company held the final closing of our equity
financing, pursuant to which the Company issued a total of 10,262,081 shares of
common stock to the investors in the equity financing. (See Note 14)
On November 25, 2003, in connection with the final closing of the equity
financing, the Company exchanged all outstanding Class E Preferred Stock for a
total of 1,084,690 shares of common stock and exchanged all outstanding Class F
Preferred Stock for a total of 120,863 shares of common stock, as provided by
the August 2003 exchange agreement.
On November 25, 2003, the Company issued 20,000 shares of common stock to Verus
Support Services, Inc. in connection with an agreement entered into on September
30, 2003 to issue these shares in lieu of accrued cash payments due under the
December 2001 agreement with Verus that the Company ceased paying in August
2002.
The Company agreed to register the common stock issued in the equity financing
and the common stock underlying the warrants issued to the placement agent for
resale to the public with the Securities Exchange Commission, and accordingly,
filed the resale registration statement on December 3, 2003. On February 10,
2004, the Company's registration statement was declared effective by the
Securities and Exchange Commission.
F-23
On December 3, 2003 and December 8, 2003, a total of 440,403 of the September 3,
2003 warrants with an exercise price of $0.025 per share were exercised, for
which the Company issued a total of 439,108 shares of common stock. Because the
warrant holders used the cashless exercise feature of the warrants, they did not
have to pay the exercise price in cash and the Company issued fewer than the
total number of warrants exercised.
On December 18, 2003, in connection with the equity financing, the Company
issued an additional 13,903 shares of common stock to those investors who paid
cash for their shares at the final closing of the equity financing. The Company
issued these shares because under the terms of the escrow agreement under which
these investors deposited all funds for their investment, these investors were
entitled to either receive the interest that was earned on their funds while
held in escrow or to receive shares in lieu of this interest, with the interest
earned being paid to the Company, as determined by the placement agent. The
placement agent elected to have the interest paid to the Company and for the
Company to issue additional shares to the investors. The Company received
approximately $35,000 in interest from the escrow agent on December 18, 2003,
and then issued the additional shares to the investors at a price of $2.50 per
share.
As of December 31, 2003, the Company had authorized 500,000,000 (50,000,000
after giving effect to the reduction in authorized shares effective June 17,
2004) shares of Common Stock, $0.001 par value, of which 13,129,112 (giving
effect to the 1:25 reverse split effective June 17, 2004) shares are
outstanding.
(E) STOCK OPTIONS
The figures below are adjusted to give effect to the 1:25 reverse split
effective June 17, 2004.
In November 1998 and May 2001, the Company's Board of Directors approved the
1998 Incentive Plan (the 1998 Plan) and the 2001 Stock Option Plan (the 2001
Plan) (collectively, the Plans), respectively, permitting the granting of stock
options to employees, directors, consultants and advisors, which may be either
incentive stock options or nonqualified options and stock awards. The Board had
reserved 30,000 and 70,000 shares of Common Stock for issuance under the 1998
Plan and the 2001 Plan, respectively.
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 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 December 31, 2003, 1,478,484 options and other incentive stock awards were
available for future grants under the 2003 Omnibus Plans. In addition, 24,587
options were available under the 1998 Plan and 9,322 options were available
under the 2001 Plan as of December 31, 2003. In the years ended December 31,
2002 and 2003, the Company did not grant any stock options under the 1998 Plan.
Future stock options will only be granted under the 2003 Omnibus Plan and not
under the 1998 Plan or the 2001 Plan.
A summary of stock option activity is as follows:
Range of Exercise Weighted Average
Price Number of Shares Exercise Price
------------- ---------------- ------------
Outstanding, December 31, 2001 $ 31.25-205.75 70,950 $ 66.25
Granted $ 8.50-133.75 18,008 $ 58.75
Forfeited 31.25-205.75 (24,827) 71.75
------------- --------- ------------
Outstanding, December 31, 2002 $ 8.50-205.75 64,131 $ 72.50
Granted 2.00-11.50 174,225 7.00
Forfeited 8.25-156.00 (16,013) 47.50
------------- --------- ------------
Outstanding, December 31, 2003 $ 2.00-205.75 222,343 $ 24.25
============= ========= ============
Exercisable, December 31, 2002 $ 8.50-205.75 46,005 $ 87.25
============= ========= ============
Exercisable, December 31, 2003 $ 2.00-205.75 123,947 $ 34.50
============= ========= ============
F-24
The following table summarizes information relating to currently outstanding and
exercisable options as of December 31, 2003.
OUTSTANDING EXERCISABLE
- ----------------------------------------------- -------------------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICE SHARES YEARS) PRICE SHARES PRICE
$ 2.00-50.00 195,557 9.2 $ 10.25 98,622 $10.25
56.25-88.50 9,859 3.7 71.75 8,959 72.50
100.00-164.00 16,287 3.0 154.50 15,726 156.25
$201.25-205.75 640 2.2 205.75 640 205.75
------- ------ ------- ------
222,343 $24.25 123,947 $34.50
======= ====== ======= ======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period:
December 31,
---------------------------
2002 2003
---------------------------
Risk-free interest rate 1.84-4.74% 1.74-3.37%
Expected dividend yield -- --
Expected lives 5 years 5 years
Expected volatility 75% 75%
Weighted average grant date fair value
per share $ 1.05 $ 0.18
Weighted average remaining contractual
life of options outstanding 6.9 years 8.5 years
(H) ISSUANCE OF STOCK OPTIONS TO CONSULTANTS
In fiscal 2002, the Company granted fully exercisable options to purchase 108
shares of common stock at exercise prices per share in the range of $13.75 to
$71.75 to the two consultants in exchange for marketing services. The Company
recorded the fair value of such options, based on the Black-Scholes option
pricing model, as stock-based compensation expense totaling $1,743 in the
statement of operations for year ended December 31, 2002.
In April 2002, the Company entered into an agreement with The Investor Relations
Group, Inc. ("IRG"), for investor relations and public relations services. In
connection therewith, the Company granted to IRG Options to purchase up to 6,000
shares of Class A Stock at an exercise price of $5.35 per share. These options
were not granted under the 2001 Plan, but are subject to the terms and
conditions of the 2001 Plan as if granted thereunder. Any unvested options would
be cancelled upon the termination of the IRG agreement. The Company calculated
the fair value of these options, based on the Black-Scholes option pricing
model. In November 2002, the Company terminated its agreement with IRG. In
accordance with the agreement, IRG holds 1,750 options that are exercisable
until November 2004. In the statement of operations for the year ended December
31, 2002, the Company recorded stock-based compensation expense in the amount of
$80,586 related to the vested options.
In fiscal 2003, the Company granted fully exercisable options to purchase 2,565
shares of common stock at exercise prices per share in the range of $4.25 to
$11.00 to two consultants in exchange for marketing services. The Company
recorded the fair value of such options, based on the Black-Scholes option
pricing model, as stock-based compensation expense totaling $9,011 in the
statement of operations for year ended December 31, 2003.
In fiscal 2003, the Company granted options to purchase 4,000 shares of common
stock at an exercise price per share of $11.50 to a service provider for legal
services. The Company recorded the fair value of such options, based on the
Black-Scholes option pricing model, as stock-based compensation expense totaling
$13,300 in the statement of operations for year ended December 31, 2003.
F-25
On September 3, 2003, the Company acquired rights to the EVLT Patent, which
relates to the technology underlying the Company's EVLT(R) product line. As part
of the transaction, the Company entered into an agreement with Dr. Robert Min
pursuant to which the Company granted Dr. Min options, to purchase 40,000 shares
of Common Stock. The Company recorded the fair value of these options, in the
amount of $312,078, based on the Black-Scholes option pricing model, and
capitalized this cost as part of the related intangible asset that will be
amortized over the remaining life of the EVLT Patent. The amortization of the
intangible asset will be recorded as a component of cost of goods sold. (See
Note 15)
(I) WARRANTS
A summary of warrant activity for the years ended December 31, 2002 and 2003 is
as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE REMAINING
RANGE OF NUMBER OF EXERCISE CONTRACTUAL LIFE
EXERCISE PRICE SHARES PRICE (IN YEARS)
Outstanding, December 31, 2001 $ 50.00-87.50 4,477 64.00 1.6
Granted to stockholders 50.00 400 50.00 0.5
Granted to related party 6.50 333,334* 6.50 5.5
Forfeited -- -- -- --
---------- ---------- ------ ----
Outstanding, December 31, 2002 $ 6.50-87.50 338,211 $7.25 5.4
Exchanged $ 6.50 (333,334)* 6.50 5.5
Granted to Placement Agent 0.025-2.50 1,635,163** 1.25 5.0
Exercised by Placement Agent 0.025 (440,404)** -- --
Forfeited 50.00 (2,800) 50.00 --
---------- ---------- ------ ----
Outstanding, December 31, 2003 $0.025-$87.50 1,196,838 $2.00 4.9
============ ========== ===== =====
Exercisable, December 31, 2002 $ 6.50-87.50 4,877 $ 64.00
============ ========== ======
Exercisable, December 31, 2003 $0.025-87.50 1,196,838 $ 2.00
============ ========== ======
* See Note 3B.
** See Note 3C
(9) VALUATION AND QUALIFYING ACCOUNTS
A summary of the allowance for doubtful accounts is as follows:
December 31,
------------------------------
2002 2003
------------------------------
Allowance for doubtful accounts:
Balance, beginning of period $ 217,473 $ 308,145
Provision for doubtful accounts 116,452 44,890
Write-offs (25,780) (143,868)
--------- ---------
Balance, end of period $ 308,145 $ 209,167
========= =========
(10) SEGMENT REPORTING
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services and geographic
areas.
F-26
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision making group, in making decisions on how
to allocate resources and assess performance. The Company's chief decision
making group, as defined under SFAS No. 131, is the Executive Management
Committee.
The Company's reportable segments are determined by product type: laser systems
and fibers and other accessories. The accounting policies of the segments are
the same as those described in Note 2. The Executive Management Committee
evaluates segment performance based on revenue. Accordingly, all expenses are
considered corporate level activities and are not allocated to segments. Also,
the Executive Management Committee does not assign assets to its segments.
This table presents revenues by reportable segment:
Years Ended December 31,
--------------------------------
2002 2003
--------------------------------
Laser systems $3,443,228 $5,726,225
Fibers, accessories and service 2,113,211 3,472,367
---------- ----------
Total $5,556,439 $9,198,592
========== ==========
The following table represents percentage of revenues by geographic destination:
Years Ended December 31,
-------------------------
2002 2003
-------------------------
North America 55% 63%
Asia/Pacific 23% 20%
Europe 19% 15%
Other 3% 2%
--- ---
Total 100% 100%
=== ===
The following table represents long-lived assets by geographic location:
December 31
-------------------------------
2002 2003
-------------------------------
North America $1,175,410 $5,300,029
Europe 1,131,436 603,708
---------- ----------
Total $2,306,846 $5,903,737
========== ==========
(11) OTHER COMMITTMENTS
(A) LEASES
The Company leases certain equipment and office facilities under noncancelable
operating and capital leases that expire at various dates through 2014. The
Company's building lease at its subsidiary in the United Kingdom is a 25-year
lease through 2024. However, the Company has an option, at its election, to
terminate the lease agreement after 15 years in 2014. If the Company chooses not
to exercise this option, the lease agreement continues for the remaining 10
years through 2024. The Company's building lease at its headquarters in the U.S.
expires in June 2004. Total rent expense under these operating lease agreements
for the years ended December 31, 2002 and 2003, was $496,539, and $476,585,
respectively.
F-27
Future minimum payments required under these operating leases at December 31,
2003 are as follows:
Operating
Leases
2004 $ 570,403
2005 539,497
2006 539,497
2007 539,497
2008 539,497
Thereafter 2,877,320
----------
Total operating leases $5,605,711
==========
(B) LITIGATION
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.
(C) EMPLOYMENT AGREEMENT WITH CHIEF EXECUTIVE OFFICER
Effective December 28, 2003, the Company entered into an employment agreement
with James A. Wylie, Jr. This agreement supercedes the Company's January 10,
2003 employment agreement with Mr. Wylie, and extends his employment by one year
from December 31, 2004 until December 31, 2005. Mr. Wylie's new agreement
provides for an annual base salary of $330,000 (commencing January 1, 2004), an
award of options to purchase up to 108,000 shares of common stock and certain
bonus compensation. If we terminate Mr. Wylie's employment other than for cause,
we will be obligated to pay his salary and provide benefits to him for the
remainder of his two-year employment term.
(12) MERGER AND PRIVATE OFFERING OF COMMON STOCK
The Company is a corporation originally formed under the laws of the State of
Nevada on March 3, 1998 under the name Natexco Corporation. On February 11,
2002, the Company changed its name from Natexco Corporation to Diomed Holdings,
Inc. On February 14, 2002, the Company acquired Diomed, Inc. in a merger. As a
result of the merger, Diomed, Inc. became a wholly-owned subsidiary of the
Company. The merger was accounted for as a recapitalization. Accordingly, the
historical records of Diomed, Inc. became the historical records of Natexco and,
after the merger, the Company. After the merger, the business conducted by the
Company was the business conducted by Diomed, Inc. prior to the merger.
Under the terms of the merger, the Company issued Class A Preferred Stock to the
former stockholders of Diomed, Inc. These shares of Class A Preferred Stock have
since converted into Common Stock, and no Class A Stock remains outstanding.
Concurrently with the merger, the Company issued 200,000 shares of Common Stock
in a private placement offering at a price of $50.00 per share, resulting in
gross proceeds to the Company of $10,000,000 from the private offering. The
common stock issued in this private offering were not subject to refund,
redemption or rescission and, accordingly, were included as a component of
stockholders' equity, net of applicable costs. The Company registered the shares
of Common Stock issued in the private offering with the SEC in a registration
statement that the SEC declared effective on October 24, 2002.
After the merger, the board of directors of the Company determined that it was
in the best interests of the Company and its stockholders for the Company to
change its state of incorporation from Nevada to Delaware. On May 13, 2002,
after obtaining stockholder approval, the reincorporation was effected by a
migratory merger, and the Company is now a Delaware corporation.
The Merger was accounted for as a recapitalization. Costs of approximately
$2,100,000 related to the issuance of Parent's shares in the private placement
financing and to its preparation and negotiation of the documentation for the
Merger were paid by the Company at the closing of the Merger and subsequent to
the Merger. These costs were offset against paid-in-capital within stockholders
equity in the year ended December 31, 2002.
F-28
(13) EXCHANGE OF CLASS C AND CLASS D CONVERTIBLE PREFERRED
On July 28, 2003, the Company was named as a defendant in a class action
lawsuit, AUGENBAUM V. DIOMED HOLDINGS, INC. On August 6, 2003, the Company
entered into a stipulation of settlement to resolve this suit. The stipulation
of settlement became final on October 15, 2003.
In connection with the stipulation of settlement, on August 22, 2003, the
Company entered into an agreement with the holders of the Class C Preferred
Stock by which the holders tendered all 20 shares of Class C Preferred Stock in
exchange for an equal number of shares of Class E Preferred Stock, and the
Company entered into an agreement with the holders of the Class D Preferred
Stock by which the holders tendered all 24 shares of Class D Preferred Stock for
an equal number of shares of Class F Preferred Stock. The Class E Preferred
Stock and the Class F Preferred Stock entitle the holders to one vote per share.
Following the exchange of Class C Preferred Stock for Class E Preferred Stock
and Class D Preferred Stock for Class F Preferred Stock, both the Class C
Preferred Stock and Class D Preferred Stock were eliminated.
Following stockholder approval of the issuance of shares of Common Preferred
Stock to be issued in exchange for the Class E Preferred Stock and Class F
Preferred Stock, the Company has the right to purchase from the holders of the
Class E Preferred Stock, and the holders of the Class E Preferred Stock were
obligated to sell, all 20 shares of Class E Preferred Stock in exchange for
1,084,690 shares of Common Stock, and the Company had the right to purchase from
the holders of the Class F Preferred Stock, and the holders of the Class F
Preferred Stock were obligated to sell, all 24 shares of Class F Preferred Stock
in exchange for 120,863 shares of Common Stock. Upon a sale, lease, exchange or
other disposition of all or substantially all of the Company's assets, the
holders of the Class E Preferred Stock and Class F Preferred Stock had the right
to tender all shares of their preferred stock in exchange for the corresponding
numbers of shares of Common Stock noted above.
Shares of Class E Preferred Stock and Class F Preferred Stock were preferred in
liquidation to the extent that before any distribution was made to the holders
of Common Stock, there must be a distribution to the holders of the Class E
Preferred Stock in the amount of $108,469 per share of Class E Preferred Stock
and a distribution to the holders of the Class F Preferred Stock in the amount
of $10,072 per share of Class F Preferred Stock. The holders of Common Stock
share pro rata in the remainder of the net liquidation proceeds.
On November 25, 2003, in connection with the final closing of the equity
financing discussed in Note 14, the Company exchanged all outstanding Class E
Preferred Stock for a total of 1,084,690 shares of common stock and exchanged
all outstanding Class F Preferred Stock for a total of 120,863 shares of common
stock, as provided by the August 2003 exchange agreement.
(14) SEPTEMBER 2003 EQUITY FINANCING
On September 2, 2003, the Company entered into a private placement equity
financing transaction with accredited investors who agreed to purchase common
stock for an aggregate purchase price of $23,200,000. The terms of this
transaction provided that the equity financing would occur at two closings. The
first closing occurred on September 3, 2003. At that time, the investors funded
$6,500,000 in cash to the Company in exchange for $6,500,000 principal amount of
secured convertible bridge notes. At the second closing on November 25, 2003,
the $6,500,000 principal amount of notes was converted into a total of 3,250,000
shares of common stock at a conversion price of $2.00 per share and the
investors invested the remaining $16,700,000 of the equity financing in exchange
for common stock at a purchase price of $2.50 per share.
The investors who participated in the first closing of the equity financing
included the four holders of our $2,000,000 principal amount of Class E Secured
Notes due 2006, which we issued in connection with a bridge financing
transaction in December 2002. At the first closing, these noteholders invested
an aggregate of $2,000,000. These noteholders were (i) Gibralt U.S., Inc., an
affiliate of one of our former directors, Samuel Belzberg, which held $1,500,000
of the Class E Notes and purchased $1,500,000 of the secured bridge notes, (ii)
Morris Belzberg, a cousin of Samuel Belzberg, who held $300,000 of the Class E
Notes and purchased $300,000 of the secured bridge notes, (iii) Charles Diamond,
who held $100,000 of the Class E Notes and purchased $100,000 of the secured
bridge notes and (iv) Steven Schraiberg, who held $100,000 of the Class E Notes
and purchased $100,000 of the secured bridge notes. At the time of the first
closing, we repaid all of the Class E Notes.
Of the $16,700,000 invested at the second closing of the equity financing,
$15,500,000 was paid by the investors in cash. The Company also converted the
Class D Secured Notes due 2004, which were issued in connection with a bridge
financing transaction in May 2003, for the remaining $1,200,000 of common stock.
The holders of the Class D Notes were, at the time of the May 2003 bridge
financing, directors, or affiliates of directors. These three Class D holders
are Gibralt U.S., Inc., which is an affiliate of Samuel Belzberg (the holder of
$1,100,000 in principal amount of Class D Notes); James A. Wylie, Jr. (the
holder of $50,000 in principal amount of Class D Notes); and Peter Norris (the
holder of $50,000 principal amount of Class D Notes). The Company issued a total
of 10,259,921 shares of common stock to the 119 investors (including the
placement agent and the holders of the Class D Notes) on November 25, 2003 at
the final closing of the equity financing, including 499,294 shares that were
issued on conversion of the Class D Notes. Subsequently, on December 18, 2003,
the Company issued an additional 13,903 shares of common stock to those
investors who paid cash for their shares at the final closing of the equity
financing. The Company issued these shares because under the terms of the escrow
agreement under which these investors deposited all funds for their investment,
these investors were entitled to either receive the interest that was earned on
their funds while held in escrow or to receive shares in lieu of this interest,
with the interest earned being paid to the Company, as determined by the
placement agent. The placement agent elected to have the interest paid to the
Company and for the Company to issue additional shares accordingly. The Company
received approximately $35,000 in interest from the escrow agent on December 18,
2003, and then issued the additional shares to the investors.
F-29
In connection with the Equity Financing, the Company issued warrants to purchase
up to 1,635,163 shares of Common Stock to its placement agent, including 701,663
warrants at an exercise price of $0.025, 247,500 warrants at an exercise price
of $2.00 and 686,000 warrants at an exercise price of $2.50. The warrants issued
to the placement agent are exercisable for five years beginning upon approval by
stockholders of the Equity Financing at the annual meeting. The placement agent
also participated as an investor in the Equity Financing by reinvesting $495,000
of its fee in exchange for Secured Bridge Notes convertible into 247,500 shares
of Common Stock. The original agreement with the placement agent provided that
the Company pay the placement agent a cash fee equal to 10% of the funds it
raised in a financing and issue to the placement agent warrants to purchase
shares of Common Stock equal to 10% of the aggregate number of shares of Common
Stock that were purchased by the Investors in the Equity Financing.
On August 28, 2003, the agreement with the placement agent was amended to raise
the maximum amount of the financing approved by the board of directors and to
provide for the deposit of all of the Investors' funds into an escrow pending
the second closing. The Company further agreed that it would pay the cash
portion of the fee due to the placement agent in connection with the Equity
Financing in securities rather than in cash. The placement agent agreed to
reinvest its financing fee, and the parties agreed that they would calculate the
financing fee on the total amount invested in the Company, exclusive of amounts
to be invested by the holders of the Class D notes and the Class E notes, but
inclusive of the amount the placement agent reinvested. On September 3, 2003,
the Company amended its agreement with the placement agent to reflect the
increased maximum amount of the offering from $21,200,000 to $23,200,000.
As of December 31, 2003, the Company incurred approximately $3,500,000 in
placement agent, legal and other fees in connection with the Equity Financing,
including $1,798,579 in non-cash charges and $1,851,000 in cash-based fees. In
connection with the first closing, the Company incurred $651,923 in placement
agent and legal fees, including the fee due to be paid in cash to the placement
agent in the amount of $495,000 that the placement agent invested in the Secured
Bridge Notes. These costs were capitalized as deferred financing costs and were
being amortized to general interest expense over the life of the notes, such
that the full amount of costs was amortized by the earlier of the maturity date
of the notes or by the month the notes were converted into equity. In the year
ended December 31, 2003, the Company recognized $651,923 in general interest
expense pertaining to this amortization of the deferred financing costs, and
accordingly, the balance of the deferred financing costs were zero as of
December 31, 2003.
In connection with the first closing, the Company recognized an additional
placement agent fee, in the amount of $1,798,579, for 247,500 warrants issued to
a placement agent. The warrant fee was recorded as a deferred financing cost
upon favorable stockholder approval of the Equity Financing on November 25,
2003, and was fully amortized to general interest expense in the period in which
the Secured Bridge Notes converted to equity, with a corresponding increase in
additional paid in capital. The net impact on stockholders' equity was zero when
the net loss, including the deferred financing cost, was fully reflected in the
accumulated deficit.
In connection with the second closing, the Company incurred approximately
$1,200,000 in legal and other fees through December 31, 2003. These costs were
capitalized as deferred offering costs and were recorded as an offset against
additional paid in capital in stockholders equity upon completion of the second
closing of the Equity Financing.
The Company entered into a registration rights agreement providing for the
Company to register with the Securities and Exchange Commission the shares
purchased by the investors and the shares underlying the warrants issued to the
placement agent for resale to the public. The registration rights agreement
required the Company to file a registration statement for these shares within 5
days after the completion of the Equity Financing, and accordingly the Company
filed the resale registration statement on December 3, 2003. The Company was
obligated to issue additional shares ratably to the Investors at the rate of 3%
of the Investors' shares per month, subject to a limit of 12%, if the Company
did not file the registration statement timely or if the SEC did not declare the
registration effective within 70 days after filing the registration statement.
On February 10, 2004, the Company's registration statement was declared
effective by the Securities and Exchange Commission within the 70 day period,
and accordingly, the Company was not required to issue any additional shares.
(15) ACQUISITION OF EXCLUSIVE EVLT(R) TECHNOLOGY
On September 3, 2003, we acquired exclusive rights to U.S. Patent No. 6,398,777
and related foreign patents and patent applications for endovenous laser
treatment of varicose veins. These patents relate to the technology underlying
our EVLT(R) procedure. This acquisition resulted from two transactions.
F-30
In the first transaction, we purchased the interest in the EVLT(R) patent owned
by one of its five named inventors, Dr. Robert J. Min. This transaction was
completed under a purchase agreement between us and Dr. Min entered into on July
23, 2003, after the satisfaction of the conditions precedent to the closing of
the purchase agreement. On September 3, 2003, we paid the purchase price of
$500,000 in cash and options to purchase 40,000 (adjusted to give effect to the
1:25 reverse split effective June 17, 2004) shares of our common stock in
exchange for Dr. Min's assignment to us of his interest in the EVLT(R) patent.
We have agreed to pay to Dr. Min variable payments based on our sales of EVLT(R)
products. Dr. Min had previously licensed the EVLT(R) patent to us and had
served as a consultant to Diomed. Dr. Min's consulting agreement with Diomed was
amended to reflect the changes in the relationship between him and Diomed as a
result of Diomed's acquisition of the EVLT(R) patent rights. Dr. Min will
continue to act as a consultant to Diomed under the revised consulting
agreement.
In the second transaction, we licensed, on an exclusive basis, the EVLT(R)
patent from Endolaser Associates, LLC, the assignee of interest in the EVLT(R)
patent from the other four named inventors. This transaction was completed under
a license agreement between us and Endolaser Associates entered into on July 11,
2003, after the satisfaction of the conditions precedent to the taking effect of
the license agreement. On September 3, 2003, we paid Endolaser Associates
$1,500,000 in cash in exchange for the exclusive license granted by Endolaser
Associates. We are to make additional payments totaling $2,500,000 in 10
quarterly installments of $250,000 each, commencing in the fourth quarter of
2003, and accordingly the Company recorded a liability in the amount of
$2,500,000 net of a $254,000 discount to reflect imputed interest based on an
interest rate of 8%. The discount is being amortized to general interest expense
over the period of the technology payable. On December 1, 2003, subsequent to
completion of the equity financing, the Company paid Endolaser Associates the
first quarterly installment of $250,000. We have agreed with Endolaser
Associates that we will pay variable royalties based on our sales of EVLT(R)
products.
The Company recorded an intangible technology asset in the amount of $4,702,000
to record the acquisition of the EVLT Patent. The intangible asset will be
amortized over the remaining 16-year life of the EVLT Patent.
F-31
DIOMED HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
ASSETS SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
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-32
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 Stockholders $ (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-33
DIOMED HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(R) 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 (277,210) (340,828)
Deposits (206,568) 452,094
Accounts payable 1,037,845 1,029,270
Accrued expenses
and deferred revenue (240,781) 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-34
DIOMED HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Financing Activities:
Payment on promissory notes (936,000) (11,664)
Net (payments) proceeds on bank borrowings (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-35
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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-36
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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-37
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
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-38
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
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-39
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
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-40
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(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-41
DIOMED HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
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-42
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") allows for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. The Ninth Article of the Registrant's certificate of
incorporation and Article VII of the Registrant's bylaws authorize
indemnification of the registrant's directors, officers, employees and other
agents to the extent and under the circumstances permitted by the DGCL. The
Registrant maintains liability insurance for the benefit of its directors and
certain of its officers.
The above discussion of the DGCL and of the Registrant's certificate of
incorporation, bylaws and indemnification agreements is not intended to be
exhaustive and is qualified in its entirety by such statutes, amended and
restated certificate of incorporation, bylaws and indemnification agreements.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate (except for registration fees, which are actual)
of the approximate amount of the fees and expenses (other than underwriting
commissions and discounts) payable by the Company in connection with the
issuance and distribution of the shares of common stock.
Estimated
Expense Amount
- ------- ------
Securities and Exchange Commission Registration Fee....... $ 8,500
Printing and Engraving Expenses........................... $ 25,000
Legal Fees and Expenses................................... $200,000
Accounting Fees and Expenses.............................. $ 30,000
Transfer Agent Fees and Expenses.......................... $ 10,000
Miscellaneous............................................. $ 5,000
--------
Total............................................... $278,500
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During 2001, 2002, 2003 and the first nine months of 2004, Diomed, Inc. and
Diomed Holdings sold and issued the unregistered securities described below:
1) On March 15, 2001, pursuant to a plan of reorganization, Diomed sold and
issued, and agreed to sell and issue, securities as follows (figures not
adjusted to give effect to the 1:25 reverse split effective June 17, 2004):
Diomed sold 2,000,000 shares of its Series A Preferred Stock to nine purchasers
for an aggregate purchase price of $2,000,000 (each share of Series A Preferred
Stock could be converted into two shares of its common stock, subject to
adjustment as provided in its certificate of incorporation). The nine
purchasers, the shares of Diomed Series A Preferred Stock that they purchased
and the respective purchase prices paid were as follows:
II-1
Shares Purchase Price
---------------- -----------------------
Verus International Group Limited 500,000 $500,000.00
Verus Investments Holdings Inc. 500,000 $500,000.00
Winton Capital Holdings Ltd. 500,000 $500,000.00
Green Crescent Corporation 318,500 $318,500.00
James Arkoosh 41,500 $ 41,500.00
George M. Lieberman 5,000 $5,000.00
Marousa L. Dumaresq 35,000 $ 35,000.00
Content Groove Inc. 50,000 $ 50,000.00
Jack L. Rivkin 50,000 $ 50,000.00
---------------- -----------------------
2,000,000 $2,000,000.00
Diomed committed to sell an additional 500,000 shares of its Series A Preferred
Stock to Verus International, Group Limited by April 30, 2001, for an aggregate
purchase price of $500,000;
Diomed issued a put/call option under which Verus International Group Limited
and Winton Capital Holdings Ltd. could elect to purchase, and Diomed could elect
to require such purchasers to purchase, up to an additional 1,000,000 shares of
its Series A Preferred Stock at the same purchase price of $1.00 per share. The
put option expired on May 31, 2001 and the call option expired on October 31,
2001;
Diomed issued 2,475,000 shares of its common stock in connection with the
conversion by 19 noteholders of $2,475,000 in principal amount of its 9%
Convertible Subordinated Notes due March 31, 2001 (which notes were amended as
of March 15, 2001 to reduce the conversion price of such notes to $1.00 per
share). Diomed repaid an aggregate of $225,000 principal amount of these notes
that were not so converted. The 19 noteholders who converted their notes, the
principal amounts of the notes they tendered to Diomed and the number of shares
of Diomed common stock issued upon conversion of such notes were as follows
(figures not adjusted to give effect to the 1:25 reverse split effective June
17, 2004):
Principal
Amount
Noteholder of Notes Shares Issued
---------- ------------- --------------
Charles Savill $ 25,000.00 25,000
Chris Ohlsen $ 25,000.00 25,000
CMWL Trust $ 500,000.00 500,000
Edward Baxter $ 25,000.00 25,000
Hugh Moreshead $ 25,000.00 25,000
Jeffrey Evans $ 25,000.00 25,000
Julian Rogers-Coltman $ 25,000.00 25,000
Mark & Amanda Sater $ 25,000.00 25,000
Michael May $ 25,000.00 25,000
Mr Robert N. Bee and/or Mrs Delores M. Bee $ 25,000.00 25,000
Neil Durazzo $ 100,000.00 100,000
Nick Burge $ 25,000.00 25,000
Nick Robinson $ 25,000.00 25,000
Rathbone Jersey Limited re PT635 $1,000,000.00 1,000,000
Richard Gray $ 25,000.00 25,000
Ross Jones $ 25,000.00 25,000
Rupert Scott $ 25,000.00 25,000
Verus Investments Holdings Inc. $ 500,000.00 500,000
Xavier De. La Rochefoncould $ 25,000.00 25,000
-------------- ---------------
$2,475,000.00 2,475,000
Diomed had issued 2,000,001 shares of its common stock to the five purchasers
who purchased units on August 31, 2000 in consideration of the tender to it for
cancellation of all securities purchased by such purchasers from us in August
2000 (namely, 571,429 shares of its common stock and warrants to purchase
1,142,858 shares of its common stock at an exercise price of $3.50 per share)
and the termination of all rights granted by it to such purchasers in connection
with the August 2000 transaction. The purchasers, the numbers of shares of
common stock that were reissued to them and, the numbers of shares of common
stock and warrants previously issued that were respectively cancelled were as
follows (rounded to whole numbers):
II-2
Shares of Common Shares of Common
Stock to be Stock to be Warrants to be
Reissued Cancelled Cancelled
------------------- -------------------- -------------------
Verus Investment Holdings 771,985 220,567 441,134
Gibralt Capital 999,999 285,714 571,428
James Arkoosh 17,500 5,000 10,000
George Lieberman 10,500 3,000 6,000
Marousa Dumaresq 200,018 57,148 114,296
------------------- -------------------- -------------------
2,000,001 571,429 1,142,858
Diomed issued 708,792 shares of its common stock to five purchasers who
purchased units in October 2000 in consideration of the tender to it for
cancellation of all securities purchased by such purchasers from us in October
2000 (namely, 202,152 shares of its common stock and warrants to purchase
202,152 shares of its common stock at an exercise price of $3.50 per share) and
the termination of all rights granted by it to such purchasers in connection
with the October 2000 transaction. The purchasers, the numbers of shares of
common stock that were reissued to them and, the numbers of shares of common
stock and warrants previously issued that were respectively cancelled were as
follows:
Shares of Common Shares of Common
Stock to be Stock to be Warrants to be
Reissued Cancelled Cancelled
---------------- ---------------- --------------
DLG Rowlands 25,000.50 7,143 7,143
Mrs. T. Norris 12,250 3,500 3,500
HSBC Financial Services (Cayman) Limited - Trustee of The 81,350.50 23,243 23,243
Abe-Sci Venture Fund
Fortis Fund Services (Cayman) Ltd. - 576,093 164,598 164,598
Trustee of Sofaer Funds/SCI Global Hedge Fund
Michael Bourne 14,098 4,028 4,028
------------- ------------- -----------
708,792 202,512 202,512
Diomed issued and sold the securities in the six above-referenced transactions
in reliance upon exemptions from registration under the Securities act of 1933,
as amended, set forth in Section 4(2) thereof or Regulation D or Regulation S
thereunder. Each purchaser represented that such purchaser was an accredited
investor or not a U.S. person, and each agreed that the securities would not be
resold without registration under the Securities Act or exemption therefrom.
Each purchaser also represented such purchaser's intention to acquire the
securities for investment only, and not with a view to the distribution thereof.
Diomed affixed appropriate legends to the stock certificates issued in such
transactions. Prior to making any offer or sale, Diomed had reasonable grounds
to believe and believed that each purchaser was capable of evaluating the merits
and risks of the investment and was able to bear the economic risk of the
investment.
2) On April 30, 2001, Diomed sold 500,000 shares of its Series A Preferred Stock
to Verus International Group Limited, pursuant to the commitment entered into on
March 15, 2001, for a purchase price of $500,000.
Diomed issued and sold its shares to Verus International Group Limited in the
above transaction in reliance upon exemptions from registration under the
Securities act of 1933, as amended, set forth in Section 4(2) thereof or
Regulation D or Regulation S thereunder. The purchaser represented that it was
an accredited investor, and each agreed that the securities would not be resold
without registration under the Securities Act or exemption therefrom. The
purchaser also represented its intention to acquire the securities for
investment only, and not with a view to the distribution thereof. Diomed affixed
appropriate legends to the stock certificate issued in such transactions. Prior
to making any offer or sale, Diomed had reasonable grounds to believe and
believed that the purchaser was capable of evaluating the merits and risks of
the investment and was able to bear the economic risk of the investment.
3) On May 31, 2001, Diomed exercised its put rights under the put/call option
issued on March 15, 2001 (described under paragraph 1(iii), above) and sold
225,000 shares of its Series A Preferred Stock to four purchasers, three of
which were assignees of Verus International Group Limited, for an aggregate
purchase price of $225,000 in connection with the exercise of its rights. The
purchasers, the numbers of shares of common stock purchased and the amounts paid
were respectively as follows (figures not adjusted to give effect to the 1:25
reverse split effective June 17, 2004):
Shares Purchased Purchase Price
--------------------- ---------------------
Winton Capital Holdings Ltd 112,500 $112,500.00
Virtual Winds Capital 80,500 $82,500.00
Philip Winder 25,000 $25,000.00
Caryn Baily 5,000 $5,000.00
--------------------- ---------------------
225,000 $225,000.00
II-3
Diomed issued and sold the securities in the above transaction in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D or Regulation S thereunder. Each
purchaser represented that such purchaser was an accredited investor or not a
U.S. person, and each agreed that the securities would not be resold without
registration under the Securities Act or exemption therefrom. Each purchaser
also represented such purchaser's intention to acquire the securities for
investment only, and not with a view to the distribution thereof. Diomed affixed
appropriate legends to the stock certificates issued in such transactions. Prior
to making any offer or sale, Diomed had reasonable grounds to believe and
believed that each purchaser was capable of evaluating the merits and risks of
the investment and was able to bear the economic risk of the investment.
4) On September 24, 2001, Diomed issued a Promissory Note due January 1, 2004 in
the principal amount of $936,000 to Axcan Pharma, a customer, in consideration
of a prior advance of funds by such customer of $936,000. Diomed repaid this
note in full, including all accrued interest, on January 2, 2004.
Diomed issued its note to Axcan in the above transaction in reliance upon
exemptions from registration under the Securities Act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D thereunder. Axcan Pharma
represented that it was an accredited investor, and agreed that the note would
not be resold without registration under the Securities Act or exemption
therefrom. Axcan Pharma also represented its intention to acquire the note for
investment only, and not with a view to the distribution thereof.
5) On October 5, 2001, Diomed issued secured promissory notes due January 1,
2003 (subject to prior maturity in certain circumstances specified in such note)
in the aggregate principal amount of $500,000 to Verus International Group
Limited and Winton Capital Holdings Ltd. for an aggregate purchase price of
$500,000 (which notes are convertible into shares of its common stock at a
conversion price, referred to as the "note conversion price," equal to the lower
of $2.25 per share ($56.25 per share after giving effect to the 1:25 reverse
split effective June 17, 2004) or the price per share (on a common
stock-equivalent basis) paid by other persons who purchase shares of its capital
stock in the transaction in connection with which such conversion occurs) and
warrants to purchase an aggregate of 50,000 (2,000 after giving effect to the
1:25 reverse split effective June 17, 2004) shares of its common stock (subject
to increase in certain circumstances specified in such warrant) at an exercise
price equal to the note conversion price. Diomed received the proceeds of these
promissory notes in September 2001. Each purchaser purchased equal amounts of
the notes and warrants. On December 21, 2001, Diomed and the noteholders agreed
to reduce the note conversion price and the warrant exercise price to the lower
of $2.00 per share ($50.00 per share after giving effect to the 1:25 reverse
split effective June 17, 2004) or the price per share paid by other persons who
purchase shares of its capital stock in the transaction in connection with which
such conversion occurs. The principal and accrued interest payable under these
secured promissory notes was paid in full by the Company after the closing of
the private placement sale of common stock which occurred immediately prior to
the Merger on February 14, 2002 and after the Merger became effective. As a
result, these notes are no longer outstanding, and the warrants issued in
conjunction therewith expired without having been exercised.
Diomed issued and sold its securities to Verus International Group Limited and
Winton Capital Holdings Ltd. in the above transactions in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D thereunder. Each purchaser
represented that it was an accredited investor, and each agreed that the
securities would not be sold without registration under the Securities Act or
exemption therefrom. Each purchaser also represented its intention to acquire
the securities for investment only, and not with a view to the distribution
thereof. Diomed affixed appropriate legends to the securities issued in the
transactions with Verus International Group Limited and Winton Capital Holdings
Ltd. Prior to making any offer or sale, Diomed had reasonable grounds to believe
and believed that each purchaser was capable of evaluating the merits and risks
of the investment and was able to bear the economic risk of the investment.
6) On December 21, 2001, Diomed issued secured promissory notes due January 1,
2003 (subject to prior maturity in certain circumstances specified in such
notes) in the aggregate principal amount of $200,000 to Verus International
Group Ltd. and Winton Capital Holdings, Ltd. for an aggregate purchase price of
$200,000 (which notes are convertible into shares of its common stock at a
conversion price, referred to as the "note conversion price," equal to the lower
of $2.00 per share ($50.00 per share after giving effect to the 1:25 reverse
split effective June 17, 2004) or the price per share (on a common
stock-equivalent basis) paid by other persons who purchase shares of its capital
stock in the transaction in connection with which such conversion occurs) and
warrants to purchase an aggregate of 20,000 (800 after giving effect to the 1:25
reverse split effective June 17, 2004) shares of common stock (subject to
increase in certain circumstances specified in such warrants) at an exercise
price equal to the note conversion price. Each purchaser purchased equal amounts
of the notes and warrants. The principal and accrued interest payable under
these secured promissory notes was paid in full by the Company after the closing
of the private placement sale of common stock which occurred immediately prior
to the Merger on February 14, 2002 and after the Merger became effective. As a
result, these notes are no longer outstanding, and the warrants issued in
conjunction therewith expired without having been exercised.
II-4
Diomed issued and sold its securities to Verus International Group Limited and
Winton Capital Holdings Ltd. in the above transactions in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D thereunder. Each purchaser
represented that it was an accredited investor, and each agreed that the
securities would not be sold without registration under the Securities Act or
exemption therefrom. Each purchaser also represented its intention to acquire
the securities for investment only, and not with a view to the distribution
thereof. Diomed affixed appropriate legends to the securities issued in the
transactions with Verus International Group Limited and Winton Capital Holdings
Ltd. Prior to making any offer or sale, Diomed had reasonable grounds to believe
and believed that each purchaser was capable of evaluating the merits and risks
of the investment and was able to bear the economic risk of the investment.
7) On January 1, 2002, Diomed issued 5,000 warrants to each of Verus
International Group Limited and Winton Capital Holdings Ltd. pursuant to
agreements under which Diomed issued warrants to Verus International Group
Limited and Winton Capital Holdings Ltd. on October 5, 2001. The terms and
conditions of the warrants include an exercise price of $2.00 per share ($50 per
share after giving effect to the 1:25 reverse split effected June 17, 2004).
These warrants expired without having been exercised.
Diomed issued and sold its warrants to Verus International Group Limited and
Winton Capital Holdings Ltd., in the above transaction in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D thereunder. Each purchaser also
represented its intention to acquire the warrants for investment only, and not
with a view to the distribution thereof. Diomed affixed appropriate legends to
the warrants issued in the transactions with Verus International Group Limited
and Winton Capital Holdings Ltd. Prior to making any offer or sale, Diomed had
reasonable grounds to believe and believed that each of Verus International
Group Limited and Winton Capital Holdings Ltd. was capable of evaluating the
merits and risks of the investment and was able to bear the economic risk of the
investment. Diomed affixed appropriate legends to the warrants issued in the
transactions with Verus International Group Limited and Winton Capital Holdings
Ltd.
8) In January 2002, Diomed issued 135,735 (5,430 after giving effect to the 1:25
reverse split effected June 17, 2004) shares of its common stock in satisfaction
of indebtedness it owed to QLT under a promissory note in the principal amount
of $339,336. Diomed determined this number of shares in accordance with the
provisions of the note regarding the conversion price of the note.
Diomed issued and sold these securities to QLT in reliance upon exemptions from
registration under the Securities Act set forth in Section 4(2) thereof or
Regulation S thereunder. QLT represented that it was not a U.S. person and
agreed that the securities would not be resold without registration under the
Securities Act or exemption therefrom. QLT also represented it intended to
acquire the securities for investment purposes only and not with a view to the
distribution thereof. The common stock was not issued in certificated form.
Before making any offering of the securities to QLT, Diomed had reasonable
grounds to believe and believed that QLT was capable of evaluating the merits
and risks of the investment and was able to bear the economic risk of the
investment.
9) On February 14, 2002, immediately prior to the taking effect of the Merger,
we issued 5,000,000 (200,000 after giving effect to the 1:25 reverse split
effected June 17, 2004) shares of common stock at a purchase price of $2.00 per
share ($50 per share after giving effect to the 1:25 reverse split effected June
17, 2004) in a private placement offering made to 46 purchasers, and received
aggregate gross proceeds of $10,000,000 from this offering. The purchasers and
the respective numbers of shares of common stock they purchased are set forth
below. The numbers set forth below do not give effect to the 1:25 reverse split
effected June 17, 2004.
Shareholder Shares Issued
- ----------- -------------
Lorne Neff 10,000
Gerry Nichele 12,500
Joan Woodrow 5,000
Cheryl More 5,000
Jim Fitzgerald 25,000
T&J Reilly Revocable Trust 35,000
Walter Eeds 35,000
3854973 Canada Inc. 100,000
Cirpa Inc. 132,500
Melvin Fogel 62,500
Bruce Fogel 100,000
Joseph Yanow 74,000
Elio Cerundolo 56,000
Alan Dershowitz 50,000
Elon Dershowitz 25,000
Panamerica Capital Group, Inc. 250,000
Private Investment Company Ltd. 250,000
Green Mountain Trading, Ltd. 50,000
Steve Leisher 50,000
Antonio Garcia 75,000
Renee Schatz Revocable Trust 35,000
Ray Grimm 25,000
Jeffrey Evans 12,500
Nicholas Burge 12,500
II-5
Julian Rogers - Coltman 12,500
Aslan Ltd. 25,000
Patricia Kelly-White 12,500
Ernest Holloway 10,000
W.T. Leahy III 25,000
Thomas Brassil 25,000
1212855 Ontario Ltd. 50,000
John Galt Fund, L.P. 50,000
Seneca Ventures 125,000
Woodland Ventures Fund 125,000
Steve Shraiberg 300,000
Semamor Enterprises 500,000
Matthew Bronfman Recipient Pour Off Trust 250,000
Jack L. Rivkin 100,000
Orva Harwood 40,000
Winton Capital Holdings 1,200,000
Bridge Finance Ltd. 50,000
Hyde Park International Holdings Ltd. 125,000
Sarah Investments Ltd. 250,000
Charles Diamond 150,000
Lord Anthony St. John 37,500
Alex Vahabzadeh Money Purchase Plan 50,000
---------
5,000,000
Diomed issued and sold the securities in the above transaction in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 4(2) thereof or Regulation D or Regulation S thereunder. Each
purchaser represented that such purchaser was an accredited investor or not a
U.S. person, and each agreed that the securities would not be resold without
registration under the Securities Act or exemption therefrom. Each purchaser
also represented such purchaser's intention to acquire the securities for
investment only, and not with a view to the distribution thereof. Diomed affixed
appropriate legends to the stock certificates issued in such transactions. Prior
to making any offer or sale, Diomed had reasonable grounds to believe and
believed that each purchaser was capable of evaluating the merits and risks of
the investment and was able to bear the economic risk of the investment. The
shares of common stock issued by Diomed in the private placement on February 14,
2002 became shares of common stock of the Company when the Merger became
effective.
10) In April 2002, we entered into an agreement, referred to as the IRG
Agreement, with The Investor Relations Group, Inc., referred to as IRG, for
investor relations and public relations services. In connection therewith, we
granted to IRG 150,000 (6,000 after giving effect to the 1:25 reverse split
effected June 17, 2004) options, referred to as the Awarded Options, to purchase
shares of Class A Stock, (which, in connection with the Migratory Merger,
discussed below, became options to purchase the Company's Class A Stock), priced
at $5.35 per share ($133.75 per share after giving effect to the 1:25 reverse
split effected June 17, 2004). The Awarded Options were not granted under the
2001 Plan, but are subject to the terms and conditions of the 2001 Plan as if
granted thereunder. Any unvested Awarded Options were to terminate upon the
termination of the IRG Agreement. In November 2002, the Company terminated its
agreement with IRG. In accordance with the agreement, IRG owned 1,750 (after
giving effect to the 1:25 reverse split effected June 17, 2004) Awarded Options,
exercisable until November 2004. The Awarded Options so held expired without
exercise.
The Company issued and sold the options to IRG in the above transaction in
reliance upon exemptions from registration under the Securities act of 1933, as
amended, set forth in Section 4(2) thereof or Regulation D thereunder. IRG
represented that it was an accredited investor, and agreed that the securities
would not be resold without registration under the Securities Act or exemption
therefrom. IRG also represented its intention to acquire the securities for
investment only, and not with a view to the distribution thereof. The Company
affixed appropriate legends to the options issued in this transaction. Prior to
making any offer or sale, the Company had reasonable grounds to believe and
believed that IRG was capable of evaluating the merits and risks of the
investment and was able to bear the economic risk of the investment.
11) As a result of the Migratory Merger that occurred in May, 2002, the
outstanding capital securities of the Company prior to the Migratory Merger were
exchanged for comparable securities of the Company after the Migratory Merger.
There was no change in the number of outstanding common share equivalents of the
Company, which remained at 28,965,690 (1,158,627 after giving effect to the 1:25
reverse split effected June 17, 2004). However, each share of pre-Migratory
Merger Class A Stock, each share of which would have been convertible into four
shares of common stock on the basis of a pre-established schedule, received four
shares of post-Merger Class A Stock, each share of which is convertible into one
share of common stock on the basis of the same pre-established schedule. The
Migratory Merger did not result in any change in the restrictions on transfer
attaching to the 5,000,000 (200,000 after giving effect to the 1:25 reverse
split effected June 17, 2004) shares of the common stock sold in the February
14, 2002 private placement.
II-6
The Company issued the securities in the Migratory Merger in reliance upon
exemptions from registration under the Securities act of 1933, as amended, set
forth in Section 3(a)(9) thereof. In the Migratory Merger, the securities of the
predecessor (Nevada) corporation were exchanged for like securities of the
successor (Delaware) and no commission or other remuneration was paid or given
for soliciting the exchange.
12) In August 2002, we re-valued the conversion price of the promissory note
held by QLT, Inc. (issued in connection with our purchase in October 2000 of
QLT's rights related to OPTIGUIDE(R) fibers) which QLT converted into common
stock in January 2002 to $1.50 per share ($37.50 per share after giving effect
to the 1:25 reverse split effected June 17, 2004) and in so doing, we issued an
additional 90,489 (3,620 after giving effect to the 1:25 reverse split effected
June 17, 2004) shares of Class A Stock to QLT. QLT also converted a second
promissory note held by QLT (also issued in connection with our purchase in
October 2000 of QLT's rights related to OPTIGUIDE(R) fibers) at a conversion
price of $1.50 per share ($37.50 per share after giving effect to the 1:25
reverse split effected June 17, 2004), and we issued 605,570 (2,423 after giving
effect to the 1:25 reverse split effected June 17, 2004) shares of Class A Stock
to QLT in that connection.
The Company issued and sold these securities to QLT in reliance upon exemptions
from registration under the Securities Act set forth in Section 4(2) thereof or
Regulation S thereunder. QLT represented that it was not a U.S. person and
agreed that the securities would not be resold without registration under the
Securities Act or exemption therefrom. QLT also represented it intended to
acquire the securities for investment purposes only and not with a view to the
distribution thereof. The common stock was not issued in certificated form.
Before making any offering of the securities to QLT, Diomed had reasonable
grounds to believe and believed that QLT was capable of evaluating the merits
and risks of the investment and was able to bear the economic risk of the
investment.
13) In November 2002, we issued an aggregate of 50,000 (2,000 after giving
effect to the 1:25 reverse split effected June 17, 2004) shares of common stock
to the purchasers of common stock in our February 14, 2002 private placement. We
issued these shares because the registration statement we filed registering the
private placement common stock did not become effective within 240 days of the
private placement. (The registration statement was declared effective by the SEC
as of October 25, 2002). According to the private placement agreement, we were
required to issue 1% of the shares purchased in the private placement for each
month after the 240 day deadline during which the registration statement was not
effective.
The Company filed a registration statement on Form SB-2MEF simultaneously with
the issuance of these shares of common stock. This registration statement became
effective immediately upon filing with the SEC.
14) In December 2002, in consideration for aggregate gross proceeds to Diomed of
$2,000,000 paid by Gibralt U.S., Inc. and pursuant to the terms and conditions
of a Note Agreement, the Company issued to Gibralt U.S. (i) warrants to purchase
up to 8,333,333 (333,333 after giving effect to the 1:25 reverse split effected
June 17, 2004) shares of common stock at an exercise price of $.26 per share
($6.50 per share after giving effect to the 1:25 reverse split effected June 17,
2004), which warrants become exercisable on May 27, 2003 and expire on May 27,
2008, and (ii) $1,000,000 principal amount Class A Secured Convertible Notes due
January 1, 2004 and $1,000,000 principal amount of Class B Unsecured Convertible
Notes due January 1, 2004, which Notes bear interest at the rate of 8% per
annum, and are convertible into common stock at the option of the holder(s) upon
at least 60 days written notice to the Company or, at the option of the
holder(s) upon the occurrence of certain transactions or events, specified in
the Note Agreement. The rate of conversion is 80% of the Common Stock Price (as
defined in the Note Agreement), which cannot be ascertained until a conversion
is requested because it is based on the market price of the common stock during
the period prior to the date that conversion is requested. The Company granted
certain registration rights in connection with the common stock which may be
issued upon exercise of the warrants and/or conversion of the Notes pursuant to
a registration rights agreement. In addition, the Company granted a lien in
certain assets of Diomed to the holder(s) of the Class A Secured Convertible
Notes, and pledged to the Class A Secured Convertible Note holders 100% of the
shares of Diomed PDT, Inc., a wholly-owned Delaware subsidiary of Diomed which
owns certain assets related to the Company's PDT business. Under the terms of
the Note Agreement, Gibralt U.S. is the "Designated Purchaser" with authority to
perform certain actions relating to the Notes on behalf of the other holders of
Notes, although this authority does not include investment discretion over the
Notes or the Warrants.
Gibralt U.S. is an affiliate of Samuel Belzberg, a former director of Diomed
Holdings and Diomed until February 2004. The Company believes the terms of this
bridge financing were no less favorable to Diomed Holdings and/or Diomed than if
the transaction were with a non-affiliate of the Company. This bridge financing
transaction was approved by the Audit Committee of the board of directors of
Diomed Holdings and by the boards of directors of Diomed Holdings and Diomed.
On March 18, 2003, Gibralt U.S. sold and transferred to three investors in a
private transaction (i) $500,000 aggregate principal amount of Notes ($250,000
of which are Class A Notes and $250,000 of which are Class B Notes), and (ii)
2,083,334 (83,333 after giving effect to the 1:25 reverse split effected June
17, 2004) warrants. Accordingly, after the taking effect of this transfer, Mr.
Belzberg beneficially owned 6,249,999 (250,000 after giving effect to the 1:25
reverse split effected June 17, 2004) warrants and $1,500,000 aggregate
principal amount of Notes.
II-7
The Company issued and sold the securities in the above transaction in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Gibralt U.S.
represented that it was an accredited investor, and agreed that the securities
would not be resold without registration under the Securities Act or exemption
therefrom. Gibralt U.S. also represented its intention to acquire the securities
for investment only, and not with a view to the distribution thereof. The
Company affixed appropriate legends to the Notes and warrant certificate issued
in this transaction. Prior to making any offer or sale, the Company had
reasonable grounds to believe and believed that Gibralt U.S. was capable of
evaluating the merits and risks of the investment and was able to bear the
economic risk of the investment.
15) On May 7, 2003, the Company issued to the December 2002 noteholders a total
of 20 shares of Class C Convertible Preferred Stock, convertible into a total of
27,117,240 (1,084,690 after giving effect to the 1:25 reverse split effected
June 17, 2004) shares of common stock, in exchange for the convertibility
feature of the $2,000,000 principal amount of notes and their warrants to
purchase 8,333,333 (333,333 after giving effect to the 1:25 reverse split
effected June 17, 2004) shares of common stock, as well as certain other rights.
The terms of the Notes issued in the December 2002 financing were amended
accordingly, and the Company issued Class (C Secured Notes in exchange for the
Class A and B Notes issued in December 2002.
On May 28, 2003, the Company and the December 2002 noteholders agreed to certain
further revisions of the terms of the Notes issued in December 2002, including
extending the maturity date to January 1, 2006, limiting the collateral securing
the Notes and increasing to 12.5% the interest rate on the Notes. The December
2002 noteholders exchanged their Class C Notes for an equal principal amount of
Class E Notes, reflecting the revised terms. All of the Class E Notes were
redeemed by the Company on September 3, 2003, using a portion of the proceeds
from the first closing of the Company's equity financing which occurred on that
date, and no Class E Notes remain outstanding.
The Company issued and sold the securities in the above transactions in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Each of the
December 2002 noteholders represented that it was an accredited investor, and
agreed that the securities would not be resold without registration under the
Securities Act or exemption therefrom. Each of the December 2002 noteholders
also represented its intention to acquire the securities for investment only,
and not with a view to the distribution thereof. The Company affixed appropriate
legends to the Notes issued in these transactions. Prior to making any offer or
sale, the Company had reasonable grounds to believe and believed that the
December 2002 noteholders were capable of evaluating the merits and risks of the
investment and was able to bear the economic risk of the investment.
16) On May 7, 2003, the Company issued Class D Secured Notes in the aggregate
principal amount of $1,200,000 in connection with loans committed by three
affiliates of the Company, Gibralt U.S., an affiliate of Samuel Belzberg, a
former director of the Company ($1,100,000), Peter Norris, a director of the
Company ($50,000) and James A. Wylie, Jr., a director and the chief executive
officer of the Company ($50,000). The terms of these Notes provide that they are
redeemable for securities that the Company issues in an equity financing
transaction entered into after the issuance of these Notes, on the same terms
and conditions as the other investors in such an equity financing.
In connection with this financing, the Company also issued to the lenders a
total of 24 shares of Class D Convertible Preferred Stock, convertible into a
total of 3,021,552 (120,862 after giving effect to the 1:25 reverse split
effected June 17, 2004) shares of common stock, allocated among the lenders in
proportion to their respective loan commitments, as compensation in
consideration of the increased that they were taking by funding the operations
of the Company in advance of investors in the future equity financing.
The Company issued and sold the securities in the above transactions in reliance
upon exemptions from registration under the Securities act of 1933, as amended,
set forth in Section 4(2) thereof or Regulation D thereunder. Each of the May
2003 noteholders represented that it was an accredited investor, and agreed that
the securities would not be resold without registration under the Securities Act
or exemption therefrom. Each of the May 2003 noteholders also represented its
intention to acquire the securities for investment only, and not with a view to
the distribution thereof. The Company affixed appropriate legends to the Notes
issued in these transactions. Prior to making any offer or sale, the Company had
reasonable grounds to believe and believed that the May 2003 noteholders were
capable of evaluating the merits and risks of the investment and was able to
bear the economic risk of the investment.
17) On August 22, 2003, pursuant to the stipulation of settlement that we
reached in a class action lawsuit filed against us in July 2003, we entered into
exchange agreements with the holders of the outstanding shares of our Class C
Convertible Preferred Stock (the "Class C Stock") and Class D Convertible
Preferred Stock (the "Class D Stock"). Upon entering into the exchange
agreements, the holders of the Class C Stock exchanged their Class C Stock for
20 shares of Class E Stock, on a share-for-share basis. Similarly, upon
execution of the exchange agreements, the holders of the 24 outstanding Class D
Stock exchanged their Class D Stock for shares of Class F Stock, on a
share-for-share basis. Following these exchanges, we eliminated all Class C
Stock and all Class D Stock.
Shares of the Class E and Class F Stock are preferred in liquidation to the
extent that, before any distribution of assets can be made to the holders of the
common stock, there will be distributed pro rata to the holders of the issued
and outstanding shares of Class E Stock and Class F Stock the amount of $108,469
as to each outstanding share of Class E Stock and $10,072 per share as to each
outstanding share of Class F Stock. The holders of the common stock then share
in the remainder of net liquidation of proceeds. The aggregate liquidation
preference of the Class E Stock is $2,169,380 and the aggregate liquidation
preference of the Class F Stock is $241,728.
II-8
The holders of the Class E Stock are entitled to cash dividends and
distributions when and as declared by the board of directors, pari passu with
the holders of our common stock with the dividend amount on each share of Class
E Stock being 1,355,862 (54,234 after giving effect to the 1:25 reverse split
effected June 17, 2004) times the dividend or distribution to be paid on each
share of common stock. The holders of the Class F Stock are entitled to cash
dividends and distributions when and as declared by the board of directors, pari
passu with the holders of our common stock with the dividend amount on each
share of Class F Stock being 125,898 (5,036 after giving effect to the 1:25
reverse split effected June 17, 2004) times the dividend or distribution to be
paid on each share of common stock.
The exchange agreements also gave both the Company and the holders of the Class
E Stock and the Class F Stock rights to exchange those preferred shares for
shares of our common stock, as long as our stockholders approve the issuance of
the shares of our common stock underlying the preferred shares and the AMEX
approves the listing of these shares of common stock. Specifically, if the
stockholders approve the common stock issuance and the AMEX lists these the
shares of common stock, then the holders of the Class E Stock have the right to
sell to us, and we have the right to purchase from them, each outstanding share
of Class E Stock in exchange for 1,355,862 (54,234 after giving effect to the
1:25 reverse split effected June 17, 2004) shares of our common stock per share
of Class E Stock. Similarly, the holders of the Class F Stock have the right to
sell to us, and we have the right to purchase from them, each outstanding share
of Class F Stock in exchange for 125,898 (5,036 after giving effect to the 1:25
reverse split effected June 17, 2004) shares of our common stock per share of
Class F Stock. The exchange agreements also provided that, should any sale,
lease, exchange or other disposition of all or substantially all of our assets
occur while shares of Class E Stock and Class F Stock are outstanding, each
holder of the Class E Stock has the right to sell to us all shares of Class E
Stock held in exchange for 1,355,862 (54,234 after giving effect to the 1:25
reverse split effected June 17, 2004) shares of common stock per share of Class
E Stock. Similarly, each holder of the Class F Stock has the right to sell to us
all shares of Class F Stock held in exchange for 125,898 (5,036 after giving
effect to the 1:25 reverse split effected June 17, 2004) shares of common stock
per share of Class F Stock.
The board of directors determined that the terms of the exchange agreements were
appropriate in order to provide the former holders of the Class C Stock and the
Class D Stock with the economic equivalence of the conversion rights they held
in conjunction with the Class C Stock and Class D Stock. Upon exchange of all
Class E Stock, the former holders of the Class C Stock will receive 27,117,240
(1,084,690 after giving effect to the 1:25 reverse split effected June 17, 2004)
shares of our common stock, or the same number of shares of our common stock we
were obligated to issue to them upon conversion of the Class C Stock. Upon
exchange of all shares of the Class F Stock, the former holders of the Class D
Stock will receive 3,021,552 (120,862 after giving effect to the 1:25 reverse
split effected June 17, 2004) shares of common stock, or the same number of
shares of our common stock that we were obligated to issue to them upon
conversion of the Class D Stock.
The Company issued its preferred shares to the above-referenced persons in
reliance upon the exemption from registration set forth under Section 4(2) of
the Securities Act of 1933, as amended. Each such person agreed that neither the
options or notes, as the case may be, nor the underlying securities would be
resold without registration under the Securities Act or exemption therefrom.
Each such person also represented his or its intention to acquire the securities
for investment only, and not with a view to the distribution thereof. Prior to
making any offer or sale, we had reasonable grounds to believe and believed that
the security holder was capable of evaluating the merits and risks of the
investment and was able to bear the economic risk of the investment represented
by the options granted.
18) On September 3, 2003, at the first closing of our equity financing
transaction, we issued an aggregate principal amount of $6,995,000 in Secured
Bridge Notes due 2004 to 119 accredited investors. The principal and accrued
interest on these Secured Bridge Notes will convert into shares of common stock
at the conversion price of $0.08 per share ($2.00 per share after giving effect
to the 1:25 reverse split effected June 17, 2004) when we complete the equity
financing. The names of the investors in the equity financing to whom we issued
Secured Bridge Notes, the principal amount of the Secured Bridge Notes issued to
each such investor and the number of shares of common stock into which the
Secured Bridge Notes will convert are set forth below. These investors include
Gibralt U.S., Inc., an affiliate of one of the Company's former directors,
Samuel Belzberg. The numbers of shares set forth below do not give effect to the
1:25 reverse split effective June 17, 2004.
II-9
Shares of common stock to
Be Issued at Final
Closing of Equity
Financing upon Conversion
Secured Bridge Notes of Secured Bridge Notes
Purchased September 3, 2003 (Excluding Shares to Be
at First Closing of Equity Issued upon Conversion of
Name of Investor Financing Accrued Interest)
- ----------------------------------------------------------- ------------------------------- ---------------------------
Gibralt U.S., Inc. $1,500,000 18,750,000
Morris Belzberg $300,000 3,750,000
Charles Diamond $100,000 1,250,000
Steven Schraiberg $100,000 1,250,000
Sunrise Securities Corp. $495,000 6,187,500
Sanford Antignas $2,250 28,125
BPW Israel Ventures LLC $56,250 703,125
Emilio Bassini $22,500 281,250
HUG Funding LLC $90,000 1,125,000
West End Convertible Fund, L.P. $22,500 281,250
F. Berdon Defined Benefit Plan $9,000 112,500
Chana Braun $5,625 70,312.5
Smithfield Fiduciary, LLC $112,500 1,406,250
Meredith A. Rauhut $11,250 140,625
Sean B. Curran $11,250 40,625
Incap Company Limited $56,250 703,125
Bel-Cal Holdings, Ltd. $45,000 562,500
SDS Merchant Fund, LP $112,500 1,406,250
BayStar Capital II, LP $112,500 1,406,250
Craig Drill Capital $101,250 1,265,625
Joseph Duchman $5,625 70,312.5
Bear Stearns Securities Corp., Custodian for J. Steven Emerson $135,000 1,687,500
IRA II
Michael D. Farkas $16,875 210,937.5
The Riverview Group, LLC $317,250 3,965,625
Robert Schecter $6,750 84,375
Shimon S. Fishman $3,375 42,187.5
Platinum Partners Global Macro Fund, LP $56,250 703,125
Platinum Partners Value Arbitrage Fund, LP $168,750 2,109,375
Melton Management Ltd. $22,500 281,250
Asher Gottesman $2,250 28,125
James G. Groninger $13,500 168,750
Yehuda Harats $45,000 562,500
David Hirsch and Ruth Hirsh $5,625 70,312.5
J.M. Hull Associates, LP $22,500 281,250
Benjamin J. Jesselson 8/21/74 Trust $33,750 421,875
Michael G. Jesselson 4/8/71 Trust $33,750 421,875
Ron Katz $33,750 421,875
Joseph Klein III $11,250 140,625
Abraham Koot $1,125 14,062.5
ProMed Offshore Fund, Ltd. $16,425 205,312.5
ProMed Partners, LP $96,075 1,200,937.5
Dwight E. Lee $6,750 84,375
Jonathan Leifer $11,250 140,625
David Leiner $5,625 70,312.5
Ruth Low $22,500 281,250
Avi Lyons $2,250 28,125
Jason Lyons $1,125 14,062.5
David D. May $11,250 140,625
Balestra Capital Partners, LP $45,000 562,500
Monmouth Consulting Inc. $5,625 70,312.5
MTD Holdings LLC $56,250 703,125
Israel Nekritz $1,125 14,062.5
Tammy Newman $2,250 28,125
Pequot Navigator Offshore Fund, Inc. $135,000 1,687,500
Pequot Navigator Onshore Fund, LP $78,750 984,375
Pequot Scout Fund, LP $236,250 2,953,125
Piers Playfair $5,625 70,312.5
William J. Ritger $22,500 281,250
II-10
Shares of common stock to
Be Issued at Final
Closing of Equity
Financing upon Conversion
Secured Bridge Notes of Secured Bridge Notes
Purchased September 3, 2003 (Excluding Shares to Be
at First Closing of Equity Issued upon Conversion of
Name of Investor Financing Accrued Interest)
- ----------------------------------------------------------- ------------------------------- ---------------------------
Orion Biomedical Fund, LP $92,418.75 1,155,234.38
Orion Biomedical Offshore Fund, LP $20,081.25 251,015.63
Reuven Y. Rosenberg $56,250 703,125
Joan Schapiro $5,625 70,312.5
Rock Associates $5,625 70,312.5
Alexander Scharf $5,625 70,312.5
David Scharf $6,750 84,375
Abraham Schwartz $3,375 42,187.5
Rivie Schwebel $5,625 70,312.5
Morton Seelenfreund IRA $22,500 281,250
Sherleigh Associates Inc. Profit Sharing Plan $112,500 1,406,250
Terrapin Partners $112,500 1,406,250
Stanley B. Stern $2,250 28,125
David Stone $56,250 703,125
Richard B. Stone $2,250 28,125
Peter Sugarman $45,000 562,500
Langley Partners, L.P. $45,000 562,500
Ellis International Ltd. $56,250 703,125
Fred Weber & Chaya Weber JT Ten $4,500 56,250
George Weinberger $22,500 281,250
Congregation Mishkan Sholom $33,750 421,875
North Sound Legacy Fund LLC $10,125 126,562.5
North Sound Legacy Institutional Fund LLC $102,375 1,279,687.5
North Sound Legacy International Ltd. $112,500 1,406,250
East Hudson Inc. (BVI) $13,275 165,937.5
The Conus Fund (QP), LP $11,025 137,812.5
The Conus Fund Offshore Ltd. $9,675 120,937.5
The Conus Fund, LP $78,525 981,562.5
Bull & Co. $14,625 182,812.5
Albert L. Zesiger $11,250 140,625
Cudd & Co. $16,650 208,125
Barrie Ramsay Zesiger $11,250 140,625
City of Milford Pension & Retirement Fund $155,250 1,940,625
City of Stamford Firemen's Pension Fund $74,250 928,125
Domenic J. Mizio $22,500 281,250
Francois deMenil $15,750 196,875
HBL Charitable Unitrust $14,625 182,812.5
Cudd & Co. $18,000 225,000
James F. Cleary $2,250 28,125
Jeanne L. Morency $11,250 140,625
John J. & Catherine H. Kayola $1,800 22,500
Hare & Co. $15,750 196,875
Meehan Foundation $14,625 182,812.5
Morgan Trust Co. of the Bahamas Ltd. As Trustee U/A/D 11/30/93 $48,375 604,687.5
Murray Capital, LLC $18,000 225,000
Huland & Co. $42,750 534,375
Huland & Co. $7,875 98,437.5
Huland & Co. $33,750 421,875
Peter Looram $6,750 84,375
Psychology Associates $4,500 56,250
Mellon Bank NA, Custodian for PERSI-Zesiger Capital $270,000 3,375,000
Robert K. Winters $675 8,437.5
Susan Uris Halpern $30,375 379,687.5
Theeuwes Family Trust, Felix Theeuwes, Trustee $14,625 182,812.5
William B. Lazar $11,250 140,625
Wolfson Investment Partners, LP $11,250 140,625
Zinc Partners II, LP $505.80 6,322.5
Zinc Partners Offshore, Ltd. $37,521 469,012.5
Zinc Partners, LP $40,723.20 509,040
We received gross proceeds of $6,500,000 from the issuance of the Secured Bridge
Notes. We applied a portion of these proceeds to repay in full all of our
outstanding Class E notes (approximately $2,140,000 of principal and interest,
including approximately $1,575,000 repaid to Gibralt U.S., Inc., an affiliate of
Samuel Belzberg, a former director of the Company) and to acquire additional
intellectual property rights related to our EVLT(R) product line ($2,000,000).
We also paid fees incurred by legal counsel to the investors (approximately
$100,000) and reimbursable expenses incurred by our placement agent
(approximately $14,000). Our intention was to use the balance of these proceeds
for general working capital purposes.
As part of the compensation payable to our placement agent, Sunrise Securities
Corp., in connection with our equity financing, on September 3, 2003, we issued
warrants to purchase up to a total of 40,879,063 (1,635,163 after giving effect
to the 1:25 reverse split effected June 17, 2004) shares of common stock to our
placement agent. The warrants may be exercised for a five-year period beginning
when our stockholders approved the issuance of shares of our common stock
underlying these warrants and those shares have been listed for trading on the
AMEX. The following table sets forth the respective exercise prices of these
warrants. The numbers of shares set forth below do not give effect to the 1:25
reverse split effected June 17, 2004.
Number of Shares of
Common Stock Purchasable Exercise Price
------------------------ --------------
17,541,563 $0.001
6,187,500 $0.08
17,150,000 $0.10
The Company issued its securities to the above-referenced persons in reliance
upon the exemption from registration set forth under Section 4(2) of the
Securities Act of 1933, as amended. Each such person agreed that neither the
notes, common stock or warrants, as the case may be, nor the underlying
securities, would be resold without registration under the Securities Act or
exemption therefrom. Each such person also represented his, her or its intention
to acquire the securities for investment only, and not with a view to the
distribution thereof. Prior to making any offer or sale, we had reasonable
grounds to believe and believed that the purchaser was capable of evaluating the
merits and risks of the investment and was able to bear the economic risk of the
investment represented by the options granted.
19) On September 3, 2003, in connection with our purchase from Robert J. Min,
M.D. of his interest in the technology we use in our EVLT(R) products and
services, we issued options to purchase 1,000,000 (40,000 after giving effect to
the 1:25 reverse split effected June 17, 2004) shares of common stock to Dr.
Min.
The Company issued these options to Dr. Min in reliance upon the exemption from
registration set forth under Section 4(2) of the Securities Act of 1933, as
amended. Dr. Min agreed that neither the options or notes, as the case may be,
nor the underlying securities would be resold without registration under the
Securities Act or exemption therefrom. Dr. Min also represented intention to
acquire the securities for investment only, and not with a view to the
distribution thereof. Prior to making any offer or sale, we had reasonable
grounds to believe and believed that the purchaser was capable of evaluating the
merits and risks of the investment and was able to bear the economic risk of the
investment represented by the options granted.
II-11
20) On September 30, 2003, we agreed to issue 500,000 (20,000 after giving
effect to the 1:25 reverse split effected June 17, 2004) shares of common stock
to Verus Support Services, Inc. to satisfy our obligations arising under a
December 2001 agreement between the Company and Verus. The Company believes that
Verus is no longer a holder of greater than 5% of the Company's common stock. We
engaged Verus as our financial advisor for the period ended August 31, 2003.
Under that agreement, we were to pay Verus $15,000 per month for these services.
We ceased making the $15,000 monthly payments to Verus beginning August 2002. On
September 30, 2003, we entered into an agreement with Verus pursuant to which we
were to issue to Verus a total of 500,000 (20,000 after giving effect to the
1:25 reverse split effected June 17, 2004) shares of common stock in lieu of the
monthly payments that we did not pay to Verus. The issuance of these shares was
contingent on the completion of the equity financing, and we were to issue these
shares to Verus within three days after we completed the equity financing. We
issued these shares on November 25, 2003, the same day that we completed the
equity financing.
The Company issued securities to the Verus in reliance upon the exemption from
registration set forth under Section 4(2) of the Securities Act of 1933, as
amended. Each such person agreed that neither the common stock would not be
resold without registration under the Securities Act or exemption therefrom.
Verus also represented its intention to acquire the securities for investment
only, and not with a view to the distribution thereof. Prior to making any offer
or sale, we had reasonable grounds to believe and believed that Verus was
capable of evaluating the merits and risks of the investment and was able to
bear the economic risk of the investment represented by the shares to be issued.
21) 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 the AMEX approved our application list
the shares to be issued in this financing, we completed this transaction. We
received net proceeds of approximately $9.8 million from this transaction, which
will be used for general working capital purposes. The following summarizes the
principal terms of the transaction:
VARIABLE RATE CONVERTIBLE DEBENTURES
We 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
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 we 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 we obtain stockholder
approval to reduce the conversion price below $2.20.
Subject to certain conditions, the debentures will also be convertible at our
option at any time after the first anniversary of the issuance date if the
closing price of the common stock equals or exceeds 175% of the conversion price
for at least 20 consecutive trading days. Also subject to certain conditions,
upon maturity, we 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.
After the first year and at our 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 we obtain 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
We 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 we and the investors signed the definitive purchase agreements.
Accordingly, we issued a total of 2,362,420 shares of 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, we issued warrants to purchase shares of common stock. We issued
warrants to purchase up to 1,832,461 shares of common stock to the investors who
purchased convertible debentures and we issued warrants to purchase up to
1,181,210 additional shares of common stock to the investors who purchased
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 we 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 we obtain 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 us upon exercise.
II-12
REGISTRATION OF COMMON STOCK
We have agreed to undertake registration with the Commission of the common stock
and common stock underlying the convertible debentures and warrants.
Accordingly, we are 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 we do 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, we are required to pay certain
amounts to the investors. This registration statement is the registration
statement we agreed to file in connection with the 2004 equity financing.
- ---------
All of the above transactions were made directly without use of an underwriter.
In each case the aggregate sales proceeds (if any), after payment of offering
expenses in immaterial amounts, were applied to our working capital and other
general corporate purposes.
ITEM 27. EXHIBITS
Exhibit No. Identification of Exhibit
----------- -------------------------
2.1 Agreement and Plan of Merger for Diomed Merger (1)
2.2 Certificate of Amendment of Articles of Incorporation of Natexco
Corporation (1)
2.3 Agreement and Plan of Merger for migratory merger (2)
2.4 Articles of Merger for migratory merger (Nevada) (2)
2.5 Certificate of Merger for migratory merger (Delaware) (2)
3.1 Diomed Holdings, Inc. (Nevada) Articles of Incorporation (1)
3.2 Diomed Holdings, Inc. (Nevada) Amendment to the Articles of
Incorporation (1)
3.3 Certificate of Incorporation of Diomed Holdings, Inc. (Delaware)
(2)
3.4 Restated By-laws of Diomed Holdings, Inc. (Nevada) (1)
3.5 By-laws of Diomed Holdings, Inc. (Delaware) (2)
4.2 Diomed Holdings, Inc. (Nevada) Certificate of Designation for
Class A Convertible Preferred Stock (1)
4.3 Diomed Holdings, Inc. (Delaware) Certificate of Designation for
Class A Convertible Preferred Stock (2)
4.4 Diomed Holdings, Inc. Certificate of Designations for Class C
Convertible Preferred Stock (7)
4.5 Diomed Holdings, Inc. Certificate of Designations for Class D
Convertible Preferred Stock (7)
4.6 Diomed, Inc. 1998 Incentive Stock Plan (1)
4.7 Diomed, Inc. 2001 Employee Stock Option Plan (1)
4.8 Diomed Holdings, Inc. 2003 Omnibus Incentive Plan (11)
5.1 Legality Opinion rendered by the Registrant's legal counsel,
McGuireWoods LLP (16)
10.1 Form of Subscription Agreement and Investment Representation
regarding February 14, 2002 Private Placement (1)
10.2 Escrow Agreement regarding February 14, 2002 Private Placement (1)
10.3 Lock-up Agreement Applicable to February 14, 2002 Private
Placement Investors (1)
10.4 Consulting Agreement between the Company and Verus Support
Services, Inc. dated December 21, 2001 (1)
10.5 Letter Agreement between Diomed Holdings, Inc. and Verus Support
Services, Inc. dated as of September 3, 2003, providing for
issuance of shares of common stock in lieu of payment (10)
10.6 Agreement between James Arkoosh and Diomed (1)
10.7 Employment Agreement with Peter Klein, dated July 24, 1999 (1)
10.8 Employment Agreement with James A. Wylie, Jr. dated January 10,
2003 (6)
10.9 Cambridge Facility Lease (3)
10.10 Axcan Pharma, Inc.--Diomed photodynamic therapy Laser Development
and Supply Agreement (3)
10.11 HRI Sub-License Agreement between QLT and Diomed (3)
10.12 EVLT(R) marketing and Promotion Agreement with Dr. Robert Min (3)
10.13 EVLT(R) marketing and Promotion Agreement with Dr. Steven E.
Zimmet (3)
II-13
10.14 EVLT(R) patent Purchase Agreement with Dr. Robert Min (8)
10.15 EVLT(R) patent Exclusive License Agreement with Endolaser
Associates, LLC (8)
10.16 Amendment to Engagement Letter with Placement Agent, dated as of
September 3, 2003, providing for the 10.16 A issuance of
40,879,063 warrants to Placement Agent (including form of warrant)
(9)
10.17 Report of Atlas Capital Services dated February 4, 2002 (1)
10.18 Descriptive Memorandum of Diomed Holdings, Inc. (4)
10.19 Note Purchase Agreement dated December 27, 2002 (5)
10.20 Form of Class A Secured Notes due 1/1/2004 (5)
10.21 Form of Class B Unsecured Notes due 1/1/2004 (5)
10.22 Registration Rights Agreement dated December 27, 2002 (5)
10.23 Security Agreement dated December 27, 2002 (5)
10.24 Pledge Agreement dated December 27, 2002 (5)
10.25 Exchange Agreement dated as of April 22, 2003 (7)
10.26 Form of Class C Secured Notes due 1/1/2004 (7)
10.27 Secured Loan Agreement dated as of April 22, 2003 (7)
10.28 Form of Class D Secured Notes due 5/8/04 (7)
10.29 Amended and Restated Security Agreement dated as of April 22, 2003
(7)
10.30 Amended and Restated Pledge Agreement dated as of April 22, 2003
(7)
10.31 Amended and Restated Registration Rights Agreement dated as of
April 22, 2003 (7)
10.32 Second Exchange Agreement dated as of May 28, 2003 (12)
10.33 Second Amended and Restated Security Agreement dated as of May 28,
2003 (12)
10.34 Amendment to First Exchange Agreement dated as of May 28, 2003
(12)
10.35 Amendment to Secured Loan Agreement dated as of May 28, 2003 (12)
10.36 Second Amendment to First Exchange Agreement dated as of July 31,
2003 (12)
10.37 Amendment to Second Amended and Restated Security Agreement dated
as of July 31, 2003 (12)
10.38 Amendment to Second Exchange Agreement dated as of July 31, 2003
(12)
10.39 Second Amendment to Secured Loan Agreement dated as of July 31,
2003 (12)
10.40 Exchange Agreement regarding Class C Stock (Exchanged for Class E
Preferred Stock) (10)
10.41 Exchange Agreement regarding Class D Stock (Exchanged for Class F
Preferred Stock) (10)
10.42 Letter of Understanding with Gibralt U.S., Inc. dated August 21,
2003 (10)
10.43 Securities Purchase Agreement for Equity Financing (9)
10.44 Form of Secured Bridge Notes (Issued at First Closing of Equity
Financing on September 3, 2003) (9)
10.45 Escrow Agreement regarding Equity Financing (9)
10.46 Investors' Rights Agreement regarding Equity Financing (9)
10.47 Patent Security Agreement regarding Equity Financing (9)
10.48 Security Agreement regarding Equity Financing (9)
10.49 Stockholders' Agreement regarding Equity Financing (9)
10.50 Pledge Agreement regarding Equity Financing (9)
10.51 Amendment to Employment Agreement with Global Strategy Associates
regarding services of James A. Wylie, dated as of December 28,
2003 (13)
10.52 Agreement with BrookstoneFive, Inc. regarding services of David B.
Swank, dated as of August 5, 2003 (13)
10.53 Loan and Security Agreement with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.54 Negative Pledge with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.55 Unconditional Guaranty to Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.56 Security Agreement with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.57 Securities Purchase Agreement for Convertible Debentures, dated as
of September 28, 2004 (15)
10.58 Form of Convertible Debenture issued October 25, 2004 (15)
10.59 Form of Warrant issued October 25, 2004 (15)
10.60 Registration Rights Agreement, dated as of October 25, 2004 (15)
II-14
10.61 Securities Purchase Agreement for Common Stock, dated as of
September 28, 2004 (15)
23.1 Consent of BDO Seidman, LLP (16)
23.2 Consent of McGuireWoods LLP (included in Exhibit 5.1)
- --------------
(1) Filed with the Company's Current Report on Form 8-K dated February 14,
2002.
(2) Filed with the Company's Current Report on Form 8-K dated May 14, 2002.
(3) Filed with the Company's Annual Report on Form 10-KSB/A dated April 29,
2002.
(4) Filed with the Company's Current Report on Form 8-K dated October 22,
2003.
(5) Filed with the Company's Current Report on Form 8-K dated December 30,
2002.
(6) Filed with the Company's Current Report on Form 8-K dated January 13,
2003
(7) Filed with the Company's Current Report on Form 8-K/A dated May 19, 2003
(8) Filed with the Company's Current Report on Form 8-K dated September 10,
2003 regarding EVLT(R) patent
(9) Filed with the Company's Current Report on Form 8-K dated September 10,
2003 regarding Equity Financing
(10) Filed with the Company's Quarterly Report on Form 10-QSB dated November
10, 2003
(11) Filed with the Company's Definitive Proxy Statement on Schedule 14A
dated October 27, 2003
(12) Filed with the Company's Registration Statement on Form SB-2 dated
December 3, 2003.
(13) Filed with the Company's Annual Report on Form 10-KSB/A dated March 30,
2004.
(14) Filed with the Company's Current Report on Form 8-K dated June 15, 2004.
(15) Filed with the Company's Current Report on Form 8-K dated September 29,
2004.
(16) Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent post-effective
amendment hereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b), if in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the o ffering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-15
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) That, in connection with the registrant's anticipated request for
acceleration of the effective date of the registration statement under Rule 461
under the Securities Act:
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim form indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form SB-2 and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on November 24, 2004. Each person whose
signature appears below hereby appoints James A. Wylie, Jr. as such person's
true and lawful attorney, with full power for him to sign, for such person and
in such person's name and capacity indicated below, any and all amendments to
this registration statement, hereby ratifying and confirming such person's
signature as it may be signed by said attorney to any and all amendments.
DIOMED HOLDINGS, INC.
By: /s/ James A. Wylie, Jr.
-------------------------------------
James A. Wylie, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this registration statement
has been signed by the following persons, constituting a majority of the members
of the Board of Directors, in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James A. Wylie, Jr. President, Chief Executive Officer and November 24, 2004
- -------------------------------------- Director
(James A. Wylie, Jr)
/s/ David B. Swank Chief Financial Officer and Director November 24, 2004
- --------------------------------------
(David B. Swank)
/s/ Geoffrey H. Jenkins Chairman of the Board, Director November 24, 2004
- --------------------------------------
(Geoffrey H. Jenkins)
/s/ Sidney Braginsky Director November 24, 2004
- --------------------------------------
(Sidney Braginzky)
/s/ Gary Brooks Director November 24, 2004
- --------------------------------------
(Gary Brooks)
/s/ A. Kim Campbell Director November 24, 2004
- --------------------------------------
(A. Kim Cambpell)
/s/ Joseph Harris Director November 24, 2004
- --------------------------------------
(Joseph Harris)
/s/ Peter Klein Director November 24, 2004
- --------------------------------------
(Peter Klein)
/s/ Edwin Snape Director November 24, 2004
- --------------------------------------
(Edwin Snape)
II-17
INDEX TO EXHIBITS
Exhibit No. Identification of Exhibit
- ----------- -------------------------
2.1 Agreement and Plan of Merger for Diomed Merger (1)
2.2 Certificate of Amendment of Articles of Incorporation of Natexco
Corporation (1)
2.3 Agreement and Plan of Merger for migratory merger (2)
2.4 Articles of Merger for migratory merger (Nevada) (2)
2.5 Certificate of Merger for migratory merger (Delaware) (2)
3.1 Diomed Holdings, Inc. (Nevada) Articles of Incorporation (1)
3.2 Diomed Holdings, Inc. (Nevada) Amendment to the Articles of
Incorporation (1)
3.3 Certificate of Incorporation of Diomed Holdings, Inc. (Delaware)
(2)
3.4 Restated By-laws of Diomed Holdings, Inc. (Nevada) (1)
3.5 By-laws of Diomed Holdings, Inc. (Delaware) (2)
4.2 Diomed Holdings, Inc. (Nevada) Certificate of Designation for
Class A Convertible Preferred Stock (1)
4.3 Diomed Holdings, Inc. (Delaware) Certificate of Designation for
Class A Convertible Preferred Stock (2)
4.4 Diomed Holdings, Inc. Certificate of Designations for Class C
Convertible Preferred Stock (7)
4.5 Diomed Holdings, Inc. Certificate of Designations for Class D
Convertible Preferred Stock (7)
4.6 Diomed, Inc. 1998 Incentive Stock Plan (1)
4.7 Diomed, Inc. 2001 Employee Stock Option Plan (1)
4.8 Diomed Holdings, Inc. 2003 Omnibus Incentive Plan (11)
5.1 Legality Opinion rendered by the Registrant's legal counsel,
McGuireWoods LLP (16)
10.1 Form of Subscription Agreement and Investment Representation
regarding February 14, 2002 Private Placement (1)
10.2 Escrow Agreement regarding February 14, 2002 Private Placement (1)
10.3 Lock-up Agreement Applicable to February 14, 2002 Private
Placement Investors (1)
10.4 Consulting Agreement between the Company and Verus Support
Services, Inc. dated December 21, 2001 (1)
10.5 Letter Agreement between Diomed Holdings, Inc. and Verus Support
Services, Inc. dated as of September 3, 2003, providing for
issuance of shares of common stock in lieu of payment (10)
10.6 Agreement between James Arkoosh and Diomed (1)
10.7 Employment Agreement with Peter Klein, dated July 24, 1999 (1)
10.8 Employment Agreement with James A. Wylie, Jr. dated January 10,
2003 (6)
10.9 Cambridge Facility Lease (3)
10.10 Axcan Pharma, Inc.--Diomed photodynamic therapy Laser Development
and Supply Agreement (3)
10.11 HRI Sub-License Agreement between QLT and Diomed (3)
10.12 EVLT(R) marketing and Promotion Agreement with Dr. Robert Min (3)
10.13 EVLT(R) marketing and Promotion Agreement with Dr. Steven E.
Zimmet (3)
10.14 EVLT(R) patent Purchase Agreement with Dr. Robert Min (8)
10.15 EVLT(R) patent Exclusive License Agreement with Endolaser
Associates, LLC (8)
10.16 Amendment to Engagement Letter with Placement Agent, dated as of
September 3, 2003, providing for the 10.16 A issuance of
40,879,063 warrants to Placement Agent (including form of warrant)
(9)
10.17 Report of Atlas Capital Services dated February 4, 2002 (1)
10.18 Descriptive Memorandum of Diomed Holdings, Inc. (4)
10.19 Note Purchase Agreement dated December 27, 2002 (5)
10.20 Form of Class A Secured Notes due 1/1/2004 (5)
10.21 Form of Class B Unsecured Notes due 1/1/2004 (5)
10.22 Registration Rights Agreement dated December 27, 2002 (5)
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10.23 Security Agreement dated December 27, 2002 (5)
10.24 Pledge Agreement dated December 27, 2002 (5)
10.25 Exchange Agreement dated as of April 22, 2003 (7)
10.26 Form of Class C Secured Notes due 1/1/2004 (7)
10.27 Secured Loan Agreement dated as of April 22, 2003 (7)
10.28 Form of Class D Secured Notes due 5/8/04 (7)
10.29 Amended and Restated Security Agreement dated as of April 22, 2003
(7)
10.30 Amended and Restated Pledge Agreement dated as of April 22, 2003
(7)
10.31 Amended and Restated Registration Rights Agreement dated as of
April 22, 2003 (7)
10.32 Second Exchange Agreement dated as of May 28, 2003 (12)
10.33 Second Amended and Restated Security Agreement dated as of May 28,
2003 (12)
10.34 Amendment to First Exchange Agreement dated as of May 28, 2003
(12)
10.35 Amendment to Secured Loan Agreement dated as of May 28, 2003 (12)
10.36 Second Amendment to First Exchange Agreement dated as of July 31,
2003 (12)
10.37 Amendment to Second Amended and Restated Security Agreement dated
as of July 31, 2003 (12)
10.38 Amendment to Second Exchange Agreement dated as of July 31, 2003
(12)
10.39 Second Amendment to Secured Loan Agreement dated as of July 31,
2003 (12)
10.40 Exchange Agreement regarding Class C Stock (Exchanged for Class E
Preferred Stock) (10)
10.41 Exchange Agreement regarding Class D Stock (Exchanged for Class F
Preferred Stock) (10)
10.42 Letter of Understanding with Gibralt U.S., Inc. dated August 21,
2003 (10)
10.43 Securities Purchase Agreement for Equity Financing (9)
10.44 Form of Secured Bridge Notes (Issued at First Closing of Equity
Financing on September 3, 2003) (9)
10.45 Escrow Agreement regarding Equity Financing (9)
10.46 Investors' Rights Agreement regarding Equity Financing (9)
10.47 Patent Security Agreement regarding Equity Financing (9)
10.48 Security Agreement regarding Equity Financing (9)
10.49 Stockholders' Agreement regarding Equity Financing (9)
10.50 Pledge Agreement regarding Equity Financing (9)
10.51 Amendment to Employment Agreement with Global Strategy Associates
regarding services of James A. Wylie, dated as of December 28,
2003 (13)
10.52 Agreement with BrookstoneFive, Inc. regarding services of David B.
Swank, dated as of August 5, 2003 (13)
10.53 Loan and Security Agreement with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.54 Negative Pledge with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.55 Unconditional Guaranty to Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.56 Security Agreement with Silicon Valley Bank, dated as of
June 8, 2004 (14)
10.57 Securities Purchase Agreement for Convertible Debentures, dated as
of September 28, 2004 (15)
10.58 Form of Convertible Debenture issued October 25, 2004 (15)
II-19
10.59 Form of Warrant issued October 25, 2004 (15)
10.60 Registration Rights Agreement, dated as of October 25, 2004 (15)
10.61 Securities Purchase Agreement for Common Stock, dated as of
September 28, 2004 (15)
23.1 Consent of BDO Seidman, LLP (16)
23.2 Consent of McGuireWoods LLP (included in Exhibit 5.1)
- --------------
(1) Filed with the Company's Current Report on Form 8-K dated February 14,
2002.
(2) Filed with the Company's Current Report on Form 8-K dated May 14, 2002.
(3) Filed with the Company's Annual Report on Form 10-KSB/A dated April 29,
2002.
(4) Filed with the Company's Current Report on Form 8-K dated October 22,
2003.
(5) Filed with the Company's Current Report on Form 8-K dated December 30,
2002.
(6) Filed with the Company's Current Report on Form 8-K dated January 13,
2003
(7) Filed with the Company's Current Report on Form 8-K/A dated May 19, 2003
(8) Filed with the Company's Current Report on Form 8-K dated September 10,
2003 regarding EVLT(R) patent
(9) Filed with the Company's Current Report on Form 8-K dated September 10,
2003 regarding Equity Financing
(10) Filed with the Company's Quarterly Report on Form 10-QSB dated November
10, 2003
(11) Filed with the Company's Definitive Proxy Statement on Schedule 14A
dated October 27, 2003
(12) Filed with the Company's Registration Statement on Form SB-2 dated
December 3, 2003.
(13) Filed with the Company's Annual Report on Form 10-KSB/A dated March 30,
2004.
(14) Filed with the Company's Current Report on Form 8-K dated June 15, 2004.
(15) Filed with the Company's Current Report on Form 8-K dated September 29,
2004.
(16) Filed herewith.
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