UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT -TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 000-32045
DIOMED HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1480636
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 DUNDEE PARK
ANDOVER, MA 01810
(Address of principal executive offices) (Zip Code)
(978) 475-7771
(Registrant's telephone number)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_|
AS OF AUGUST 12, 2005, THERE WERE 19,423,728 SHARES OF COMMON STOCK, PAR VALUE
$0.001, OUTSTANDING.
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005
TABLE OF CONTENTS
Page
Item Number Number
- ----------- ------
Part I - Financial Information
1 Condensed Consolidated Balance Sheets - F-1
June 30, 2005 (unaudited) and December 31, 2004
Unaudited Consolidated Statements of Operations - F-2
Three Months and Six Months Ended June 30, 2005 and 2004
Unaudited Consolidated Statements of Cash Flows - F-3
Six Months Ended June 30, 2005 and 2004
Notes to Consolidated Financial Statements F-4
2 Management's Discussion and Analysis of Operations 1
3 Controls and Procedures 7
Part II - Other Information 7
1 Legal Proceedings 7
4 Submission of Matters to a vote of Security Holders 8
6 Reports on Form 8-K 10
Signatures 11
Diomed Holdings, Inc.
Condensed Consolidated Balance Sheets
As of June 30, 2005 (unaudited) and December 31, 2004
Assets June 30, 2005 December 31, 2004
----------------- -----------------
Current assets:
Cash and cash equivalents $ 6,607,607 $ 14,436,053
Short term investments 3,167,655 $ --
Accounts receivable, net 3,035,367 2,074,393
Inventories 2,339,764 2,204,385
Prepaid expenses and other current assets 577,578 348,586
----------------- -----------------
Total current assets 15,727,971 19,063,417
Property, plant and equipment, net 926,914 901,569
Intangible assets, net 4,237,010 4,482,091
Other assets 344,116 896,320
----------------- -----------------
Total assets $ 21,236,011 $ 25,343,397
================= =================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,073,552 $ 2,092,562
Accrued expenses and other 2,061,735 1,894,908
Bank line of credit 313,061 --
Deferred revenue 244,469 148,402
EVLT(R) technology payable ($750,000
face value, net of $29,029 debt discount at
June 30, 2005 and $1,000,000 face value,
net of $66,733 debt discount at
June 30, 2005 and December 31, 2004) 720,971 933,267
----------------- -----------------
Total current liabilities 6,413,788 5,069,139
----------------- -----------------
Deferred revenue and other 180,722 211,347
Convertible debt ($3,712,000 face
value, net of $995,496 debt discount at
June 30, 2005 and $7,000,000 face value,
net of $2,183,151 debt discount at
December 31, 2004) 2,716,504 4,816,849
EVLT(R) technology payable ($250,000
face value, net of $4,902 debt discount at
December 31, 2004) -- 245,098
----------------- -----------------
2,897,226 5,273,294
Total liabilities 9,311,014 10,342,433
----------------- -----------------
Commitments and contingencies
Stockholders' equity 11,924,997 15,000,964
----------------- -----------------
Total liabilities and stockholders' equity $ 21,236,011 $ 25,343,397
================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
F-1
Diomed Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues $ 4,773,030 $ 3,182,706 $ 8,905,280 $ 6,132,303
Cost of revenues 2,520,630 1,918,277 4,813,591 3,862,647
------------ ------------ ------------ ------------
Gross profit 2,252,400 1,264,429 4,091,689 2,269,656
------------ ------------ ------------ ------------
Operating expenses:
Research and development 356,476 373,449 747,214 669,603
Selling and marketing 2,305,629 1,551,536 4,612,937 3,157,498
General and administrative 2,092,769 1,409,382 3,663,614 2,808,647
------------ ------------ ------------ ------------
Total operating expenses 4,754,874 3,334,367 9,023,765 6,635,748
------------ ------------ ------------ ------------
Loss from operations (2,502,474) (2,069,938) (4,932,076) (4,366,092)
------------ ------------ ------------ ------------
Interest expense, non-cash 98,904 -- 1,403,856 --
Interest expense, net, cash-based 51,062 9,756 152,368 21,761
------------ ------------ ------------ ------------
Total interest expense 149,966 9,756 1,556,224 21,761
------------ ------------ ------------ ------------
Net loss $ (2,652,440) $ (2,079,694) $ (6,488,300) $ (4,387,853)
============ ============ ============ ============
Basic and diluted net
loss per share $ (0.14) $ (0.14) $ (0.34) $ (0.31)
============ ============ ============ ============
Basic and diluted weighted
average common shares outstanding 19,423,728 14,366,540 19,000,726 14,237,137
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
DIOMED HOLDINGS, INC.
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $ (6,488,300) $ (4,387,853)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 388,129 464,907
Amortization of EVLT(R) discount 42,606 59,125
Fair value of stock options for services 35,440 62,231
Non-cash interest expense 1,403,857 --
Changes in operating assets and liabilities:
Accounts receivable (960,974) (651,963)
Inventories (135,379) (222,858)
Prepaid expenses and other current assets (228,992) (317,014)
Deposits 174,456 (85,762)
Accounts payable 980,989 624,646
Accrued expenses and deferred revenue 270,171 (444,274)
------------ ------------
Net cash used in operating activities (4,517,997) (4,898,815)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (265,311) (256,867)
Purchase of short term investments (3,160,362) --
------------ ------------
Net cash used in investing activities (3,425,673) (256,867)
------------ ------------
Cash flows from financing activities:
Payments on promissory notes -- (936,000)
Net proceeds/(payments) on bank borrowings 313,061 (261,676)
Payments on EVLT(R) purchase obligation (500,000) (500,000)
Proceeds from the exercise of warrants 404,903 --
Net proceeds from equity financing -- 2,723,620
Payments on capital lease obligations (37,902) (11,739)
------------ ------------
Net cash provided by financing activities 180,062 1,014,205
------------ ------------
Effect of exchange rate changes (64,838) (74,465)
------------ ------------
Net decrease in cash and cash equivalents (7,828,446) (4,215,942)
Cash and cash equivalents, beginning of period 14,436,053 13,398,075
------------ ------------
Cash and cash equivalents, end of period $ 6,607,607 $ 9,182,133
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 156,530 $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
(1) OPERATIONS
Diomed Holdings, Inc. ("Diomed" or "the Company") develops and commercializes
minimally invasive medical procedures that employ its laser technologies and
associated disposable products. Using its proprietary technology, including its
exclusive rights to U.S. Patent No. 6,398,777, the Company currently focuses on
endovenous laser treatment of varicose veins(EVLT(R)). 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 by 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 2004 annual report on Form
10-KSB on March 30, 2005, which included audited consolidated financial
statements for the year ended December 31, 2004 and 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, 2004.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Annual Report on Form 10-KSB for the year ended December 31, 2004 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) RECLASSIFICATIONS
Certain reclassifications have been made in the prior year consolidated
financial statements to conform to the current year's presentation.
F-4
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
(b) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
Work-in-progress and finished goods consist of materials, labor and
manufacturing overhead. Inventories consist of the following:
June 30, December 31,
2005 2004
---------- -----------
Raw Materials $ 1,034,772 $ 838,390
Work-in-Process 876,956 502,905
Finished Goods 428,036 863,090
---------- -----------
$ 2,339,764 $ 2,204,385
========== ===========
(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. Statement of Financial
Accounting Standards ("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 proforma 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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss as reported: $(2,652,440) $(2,079,694) $(6,488,300) $(4,387,853)
Deduct: total stock-based employee compensation;
expense determined under the fair value-based
method for all awards, net of tax (420,295) (242,131) (828,620) (489,256)
----------- ----------- ----------- -----------
Proforma net loss $(3,072,735) $(2,321,825) $(7,316,920) $(4,877,109)
=========== =========== =========== ===========
Loss per share:
Basic and diluted - as reported $ (0.14) $ (0.14) $ (0.34) $ (0.31)
=========== =========== =========== ===========
Basic and diluted - proforma $ (0.16) $ (0.16) $ (0.39) $ (0.34)
=========== =========== =========== ===========
F-5
(d) COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, requires disclosure of all
components of comprehensive income (loss). Comprehensive income is defined as
the change in stockholders' equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources.
Comprehensive net loss for all periods presented is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss $(2,652,440) $(2,079,694) $(6,488,300) $(4,387,853)
Unrealized holding gain (loss)
on marketable securities (2,099) -- (2,099) --
Foreign currency translation adjustment (45,675) (36,112) (183,470) (86,868)
----------- ----------- ----------- -----------
Comprehensive loss $(2,700,214) $(2,115,806) $(6,673,869) $(4,474,721)
=========== =========== =========== ===========
(e) MARKETABLE SECURITIES
Debt securities, U.S. Agency Notes and Corporate Bonds, are classified as
"available-for-sale securities" and reported at fair value, with unrealized
gains and losses excluded from operations and reported as a component of
accumulated other comprehensive income (loss), net of the related tax effects,
in stockholders' equity.
Marketable securities, at June 30, 2005, all of which mature within one year
consist of the following:
Amortized Fair
Cost Value
------------ ------------
Available-for-sale securities
U.S. Agency Notes $ 1,681,335 $ 1,680,535
Corporate Bonds 1,487,809 1,487,120
------------ ------------
$ 3,169,144 $ 3,167,655
============ ============
Gross unrealized losses for the three months and six months ended June 30, 2005
totaled $2,099.
(f) 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 dilutive potential common shares outstanding using
the treasury stock method. As a result of the losses incurred by the Company for
the three and six-month periods ended June 30, 2005 and 2004, 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 periods, which were not included in the
calculation of diluted net loss per share since their inclusion would be
antidilutive.
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Common Stock Options 1,701,287 1,024,917 1,701,287 1,024,917
Common Stock Warrants 2,798,452 882,625 2,798,452 882,625
Convertible Debt 1,620,961 -- 1,620,961 --
(4) LINE OF CREDIT ARRANGEMENTS
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes an
overdraft facility as well as an accounts receivable line of credit with
Barclays Bank, limited to the lesser of (GBP)100,000 ($179,300 at June 30, 2005)
or 80% of eligible accounts receivable. The credit line bears interest at a rate
of 3% above Barclays base rate of 4.75% at June 30, 2005 and borrowings are due
upon collection of receivables from customers. As security for the line of
credit, Barclays Bank has a lien on all of the assets of Diomed Ltd., excluding
certain intellectual property. As of June 30, 2005 and 2004 there was
approximately $313,000 and $0, respectively outstanding under these credit
facilities.
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
(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. In May 2005, the Company's stockholders approved an increase of
1,500,000 reserved shares providing for a total of 3,100,000 shares of common
stock reserved for future issuance. The 2003 Omnibus Plan provides for grants or
awards of stock options, restricted stock awards, restricted stock units,
performance grants, stock awards, and stock appreciation rights. Only present
and future employees and outside directors and consultants are eligible to
receive incentive awards under the 2003 Omnibus Plan.
The exercise price and vesting are determined by the Board of Directors at the
date of grant. Options generally vest over two to four years, and expire 10
years after the date of grant. Incentive stock options under the Plans are
granted at not less than fair market value per share of Common Stock on the date
of grant or 110% of fair market value for any stockholder who holds more than
10% of the total combined voting power of all classes of stock of the Company.
As of June 30, 2005, 1,540,549 options and other incentive stock awards were
available for future grants under the 2003 Omnibus Plan. In addition, 2,542
options were available under the 2001 Plan as of June 30, 2005.
A summary of stock option activity for the 2003 Omnibus Plan, the 2001 Plan and
the 1998 Plan is as follows:
Range of Exercise Weighted Average
Price Number of Shares Exercise Price
--------------------------------------------------------------
Outstanding, December 31, 2004 $2.00 - $205.75 1,076,318 $ 8.12
Granted 3.95 - 4.30 647,621 4.19
Forfeited 2.99 - 205.75 (22,652) 22.19
--------------------------------------------------------------
Outstanding, June 30, 2005 $2.00 - $205.75 1,701,287 $ 6.44
==============================================================
Exercisable, June 30, 2005 $2.00 - $205.75 675,603 $ 9.41
==============================================================
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
The following table summarizes currently outstanding and exercisable options as
of June 30, 2005.
OUTSTANDING EXERCISABLE
------------------------------------ -------------------------------------
Weighted Average Weighted Average
Exercise Price Shares Remaining Life* Exercise Price Shares Exercise Price
- ----------------- --------------- --------------- --------------- --------------- ---------------
$ 2.00 - $11.50 1,666,129 8.85 $ 4.65 642,565 $ 5.02
26.00 - 50.00 18,256 6.32 35.32 16,223 35.84
56.25 - 88.50 814 5.93 61.40 727 62.02
100.00 - 164.00 15,768 1.19 153.89 15,768 153.89
$201.25 - $205.75 320 1.33 205.75 320 205.75
--------------- --------------- --------------- ---------------
1,701,287 $ 6.44 675,603 $ 9.41
=============== =============== =============== ===============
* Weighted average remaining contractual life (in years).
(b) 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, 2004 $0.025 - $87.50 2,991,263 $ 2.18 4.82
Exercised 2.10 (192,811) 2.10 --
---------------------------------------------------------------------------------
Outstanding, June 30, 2005 $0.025 - $87.50 2,798,452 $ 2.18 4.48
=================================================================================
Exercisable, June 30, 2005 $0.025 - $87.50 2,798,452 $ 2.18 4.48
=================================================================================
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
(6) SEGMENT REPORTING
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, accessories and service. 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:
Three Months Ended June 30, Six Month Ended June 30,
--------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Laser systems $2,451,477 $1,855,356 $4,568,878 $3,658,871
Fibers, accessories, and service 2,321,553 1,327,350 4,336,402 2,473,432
---------- ---------- ---------- ----------
Total $4,773,030 $3,182,706 $8,905,280 $6,132,303
========== ========== ========== ==========
The following table represents percentage of revenues and long-lived assets by
geographic destination:
% of Revenue Long-lived Assets
---------------------------- ---------------------------
Six Months Ended June 30,
--------------------------- June 30, December 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
North America 76% 60% $ 5,163,849 $ 5,769,521
Asia/Pacific 14% 27% -- --
Europe 9% 10% 344,191 510,459
Other 1% 3% -- --
----------- ----------- ----------- -----------
Total 100% 100% $ 5,508,040 $ 6,279,980
=========== =========== =========== ===========
F-9
(7) COMMITMENTS AND CONTINGENCIES
From time to time the Company is the defendant 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.
On July 21, 2005, a lawsuit was filed against the Company in the United States
Federal District Court for the Northern District of California by VNUS Medical
Technologies, Inc. ("VNUS"), alleging infringement of U.S. patents Nos.
6,258,084, 6,638,273, 6,752,803, and 6,769,433. Diomed intends to vigorously
defend the lawsuit.
During 2004, the Company filed lawsuits in the United States Federal District
Court for the District of Massachusetts against four competitors seeking
injunctive relief and damages for infringement of the Company's U.S. Patent
Number 6,398,777 covering the endovascular laser treatment of varicose veins
which the Company uses in its EVLT(R) product line. If the Company's EVLT(R)
patent is judicially determined to be invalid, the Company will not prevail in
the infringement actions and will not be able to exclude third parties from
using the Company's EVLT(R) technology. As a result, the EVLT(R) patent may be
determined to be impaired and the Company's EVLT(R) revenue stream may be
adversely affected.
(8) SUBSEQUENT EVENTS
On August 5, 2005, Diomed acquired exclusive distribution rights to the Luminetx
VeinViewer(TM) Imaging System for the sclerotherapy, phlebectomy and varicose
vein treatment markets in the United States and United Kingdom. The
VeinViewer(TM), cleared by the FDA in 2004, is a patented imaging system
developed by Luminetx, Inc. of Memphis, Tennessee which utilizes infrared light
to illuminate on a real-time basis subcutaneous veins and project their location
on the surface of the skin with an accuracy of 0.06 mm. VeinViewer(TM) is
designed to allow physicians to visualize the location and orientation of the
patient's veins, thereby providing more precise sclerotherapy and phlebectomy
procedures through increased accuracy in vein mapping and imaging.
The 3 year agreement includes both a $1 million phased investment in Luminetx
and a grant of warrants to purchase 600,000 shares of Diomed common stock both
based upon the achievement of certain milestones. Details of the transaction can
be found in the Company's Current Report on SEC Form 8K filed with the SEC on
August 11, 2005.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
In this Quarterly Report, the terms "Company" and "Diomed Holdings" both refer
to Diomed Holdings, Inc. The term "Diomed" refers to the Company's principal
subsidiary, Diomed, Inc. and its consolidated subsidiaries. We use the terms
"we,", "our" and "us" when we do not need to distinguish among these entities or
their predecessors, or when any distinction is clear from the context.
This section contains forward-looking statements, which involve known and
unknown risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "may," "will," "should," "potential," "expects,"
"anticipates," "intends," "plans," "believes" and similar expressions. These
statements are based on our current beliefs, expectations and assumptions and
are subject to a number of risks and uncertainties. Our actual results could
differ materially from those discussed in these statements. Our 2004 Annual
Report on Form 10-KSB (the "Annual Report") contains a discussion of certain of
the risks and uncertainties that affect our business. We refer you to the "Risk
Factors" on pages 22 through 37 of the Annual Report for a discussion of certain
risks, including those relating to our business as a medical device company
without a significant operating record and with operating losses, our risks
relating to the commercialization of our current and future products and
applications, and risks relating to our common stock and its market value.
In view of our relatively limited operating history, we have limited experience
forecasting our revenues and operating costs. Therefore, we believe that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. To date,
the Company has incurred substantial costs to create or acquire our products. As
of June 30, 2005, we had an accumulated deficit of approximately $76 million
including $17.4 million in non-cash interest expense. We may continue to incur
operating losses due to spending on research and development programs, clinical
trials, regulatory activities, and sales, marketing and administrative
activities. This spending may not correspond with any meaningful increases in
revenues in the near term, if at all. As such, these costs may result in losses
until such time as the Company generates sufficient revenue to offset such
costs.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes set forth above in this Quarterly Report and in
the Annual Report.
(1) OVERVIEW
We develop and commercialize minimally invasive medical procedures that employ
our laser technologies and associated disposable products. We currently focus on
endovenous laser treatment of varicose veins using our proprietary technology
including our exclusive rights to U.S. Patent No. 6,398,777, (EVLT(R)). 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 aim to secure strong commercial advantages over competitors by
obtaining exclusive commercial arrangements, gaining governmental approvals in
advance of others and developing and offering innovative practice enhancement
programs, including physician training and promotional materials. 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.
In 2001, we pioneered the commercialization of endovenous laser treatment
through our patented EVLT(R) technology, 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. In January 2002, we were the first
company to receive FDA clearance for endovenous laser treatment of the greater
saphenous vein. In December 2004, we were the first to receive FDA clearance to
expand the application of EVLT(R) to other superficial veins in the lower
extremities. In July 2005, we received a Notice of Allowance from the U.S.
Patent and Trademark Office allowing a patent encompassing a proprietary marked
introducer sheath for use with our patented EVLT(R) laser treatment for varicose
veins.
1
EVLT(R) was a primary source of revenue in the three months and six months ended
June 30, 2005, and will continue to be our primary source of revenue for the
remainder of fiscal year 2005. We believe that EVLT(R) will achieve a high level
of commercial acceptance due to its relative short recovery period, immediate
return to the patient'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 products and programs, 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 target our sales and marketing efforts at
hospitals, private physician practices and clinics and focus on specialists in
vascular surgery, interventional-radiology, general surgery, phlebology,
interventional-cardiology, gynecology and dermatology.
We primarily utilize a direct sales force to market our products in the United
States and a network of more than 30 distributors to market our products abroad.
In August 2005, we entered into a three year agreement with Luminetx, Inc.to
acquire exclusive distribution rights to the VeinViewer(TM) Imaging System for
the sclerotherapy, phlebectomy and varicose vein treatment markets in the United
States and United Kingdom. In June 2005, we entered into an exclusive
distribution agreement with Colorado-based Med1 Online, Inc., a leading online
distributor of capital medical equipment in the United States. Under the terms
of the three-year renewable distribution agreement, Med1Online acquired
exclusive distribution rights to market our EVLT(R) product line to the OB/GYN
and plastic surgery physician market segments in the United States. During 2004,
we increased our number of sales representatives to 20. This represents a
significant investment in sales staff. Additionally, our current clinical
support organization employees four clinical specialists, including one training
manager, in support of our field sales efforts. These clinical specialists
assist in physician training and post-sales support, freeing our 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.
Although 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 the
development of enhancements to our products in order to further improve their
quality, effectiveness and manufacturability. Our management team focuses on
developing and marketing solutions that address serious medical problems that
have significant markets. Our determinations are based upon the number of
procedures that may be conducted in a market and projections of the associated
revenue. Currently, EVLT(R) applications fall within this guideline, and we
believe that photodynamic therapy may have the potential to do so at some time
in the future. However, EVLT(R), and not PDT, is the emphasis of our current
business plan.
(2) RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004
REVENUE
Diomed delivered revenue for the three months ended June 30, 2005 of $4,773,000,
increasing approximately $1,590,000, or 50%, from $3,183,000 for the same period
in 2004. Revenue from the EVLT(R) product line increased 69% over the same
period last year, including North America EVLT(R) growth of 94%, demonstrating
the continued and growing acceptance of EVLT(R) by the medical community and
patients alike.
For the three months ended June 30, 2005, approximately $2,451,000, or 51%, of
our total revenue was derived from laser sales, as compared to approximately
$1,855,000, or 58%, in the same period in 2004. In the three months ended June
30, 2005, approximately $2,322,000, or 49%, of our total revenues were derived
from sales of disposable fibers and kits, accessories and service, as compared
to approximately $1,327,000, or 42%, in the same period in 2004. 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.
2
The increase in revenue is attributable primarily to:
- increased penetration of EVLT(R) in the market for treating varicose
veins by minimally invasive means,
- 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 by the
medical community and expanded reimbursement coverage by health care
insurers, including the recent establishment of reimbursement codes
for EVLT(R) by the American Medical Association and the Center for
Medicare and Medicaid Services, effective January 1, 2005.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the three months ended June 30, 2005 was $2,521,000,
increasing approximately $602,000, or 31%, from $1,918,000 for the same period
in 2004. The increase in cost of revenue in 2005 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 improved material costs. Cost of revenue, as a
percentage of sales, decreased from 60% to 53% on a year-to-year basis.
Gross profit for the three months ended June 30, 2005 was $2,252,000, increasing
approximately $988,000 from $1,264,000 from the same period in 2004. On a
percent-of-sales-basis, the gross margin increased from 40% to 47%. The increase
in gross profit in the second quarter of 2005 was driven by fixed cost leverage
of the incremental sales volume as well as improvements in material costs. The
Company believes that in the future, gross profit as a percentage of sales may
reach 60%, assuming increases in sales volume that may occur after completion of
the '777 patent litigation.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended June 30, 2005 were
$356,000, a decrease of $17,000, or 5%, from the same period in 2004. R&D
expenditures are expected to remain at this level as we continue to drive
product functionality, cost improvements, and other enhancements.
SELLING AND MARKETING EXPENSES for the three months ended June 30, 2005 were
$2,306,000, an increase of $754,000, or 49%, over 2004. The increase was driven
by a significant expansion in the size of the sales force of $144,000, higher
sales commissions resulting from the increased sales volume of $92,000, and
increased sales and marketing expenditures in support of the sales efforts to
drive the growing commercialization of EVLT(R). Sales and marketing expenditures
are expected to increase with corresponding increases in revenue to support the
continued commercialization of EVLT(R).
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended June 30, 2005
were $2,093,000, an increase of $683,000, or 48%, from the same period in 2004.
The increase was primarily attributable to incremental legal fees of $367,000
which totaled $725,000 for the quarter, as well as Sarbanes-Oxley compliance of
$76,000and other administrative costs. Legal expenses included the continuing
cost of patent litigation against four competitors commenced during 2004 and the
theft of trade secrets litigation initiated in the fourth quarter of 2003. We
expect general and administrative costs to decrease to a more normalized run
rate in the fourth quarter after the discovery phase of the '777 patent
litigation has been completed.
LOSS FROM OPERATIONS
Loss from operations for the three months ended June 30, 2005 was $2,502,000, an
increase of approximately $433,000 from the same period in 2004, as incremental
gross profit was primarily offset by increased legal costs related to our patent
litigation.
NET LOSS
Net loss for the three months ended June 30, 2005 was $2,652,000, or ($0.14) per
share, compared to $2,080,000, or ($0.14) per share, for the same period in
2004.
3
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004
REVENUE
Diomed delivered revenue for the six months ended June 30, 2005 of $8,905,000,
increasing approximately $2,773,000, or 45%, from $6,132,000 for the same period
in 2004. Revenue from the EVLT(R) product line increased 74% over the same
period last year, including 95% growth in revenue from EVLT(R) disposable
procedure products. North America EVLT(R) sales increased 88% including 109%
growth in procedure products revenue.
For the six months ended June 30, 2005, approximately $4,569,000, or 51%, of our
total revenue was derived from laser sales, as compared to approximately
$3,659,000, or 60%, in the same period in 2004. In the six months ended June 30,
2005, approximately $4,336,000, or 49%, of our total revenues were derived from
sales of disposable fibers and kits, accessories and service, as compared to
approximately $2,473,000, or 40%, in the same period in 2004. 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 of EVLT(R) in the market for treating varicose
veins by minimally invasive means,
- 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 by the
medical community and expanded reimbursement coverage by health care
insurers, including the recent establishment of reimbursement codes
for EVLT(R) by the American Medical Association and the Center for
Medicare and Medicaid Services, effective January 1, 2005.
COST OF REVENUE AND GROSS PROFIT
Cost of revenue for the six months ended June 30, 2005 was $4,814,000,
increasing approximately $951,000, or 25%, from $3,863,000 for the same period
in 2004. The increase in cost of revenue in 2005 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 improved materials costs. Cost of revenue, as a
percentage of sales, decreased from 63% to 54% on a year-to-year basis.
Gross profit for the six months ended June 30, 2005 was $4,092,000, increasing
approximately $1,822,000 from $2,270,000 from the same period in 2004. On a
percent-of-sales-basis, the gross margin increased from 37% to 46%. The increase
in gross profit was driven by fixed cost leverage of the incremental sales
volume as well as improvements in material costs. The Company believes that in
the future gross profit as a percentage of sales may reach 60%, assuming
increases in sales volume that may occur after completion of the '777 patent
litigation.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the six months ended June 30, 2005 were
$747,000, an increase of $78,000, or 12%, from the same period in 2004. R&D
expenditures are expected to remain at this level as we continue to drive
product functionality, cost improvements, and other enhancements.
SELLING AND MARKETING EXPENSES for the six months ended June 30, 2005 were
$4,613,000, an increase of $1,455,000, or 46%, over 2004. The increase was
driven by a significant expansion in the size of the sales force of $385,000,
higher sales commissions resulting from the increased sales volume of $209,000,
and increased sales and marketing expenditures in support of the sales efforts
to drive the growing commercialization of EVLT(R).
4
GENERAL AND ADMINISTRATIVE EXPENSES for the six months ended June 30, 2005 were
$3,664,000, an increase of $855,000, or 30%, from the same period in 2004. The
increase was primarily attributable to incremental legal fees of $411,000, as
well as Sarbanes-Oxley compliance of $76,000 and other administrative costs.
Legal expenses included the continuing cost of patent litigation against four
competitors commenced during 2004.
LOSS FROM OPERATIONS
Loss from operations for the six months ended June 30, 2005 was $4,932,000, an
increase of approximately $566,000 from the same period in 2004, as incremental
gross profit was primarily offset by increased legal costs related to our patent
litigation.
INTEREST EXPENSE, NET
Interest expense for the six months ended June 30, 2005 was $1,556,000, compared
to $22,000 for the same period in 2004. Interest expense in the six months ended
June 30, 2005 included non-cash charges totaling $1,404,000 related to the
recurring amortization and acceleration of the debt discount and deferred costs
related to the 1st quarter 2005 conversion of debt obtained in the September 28,
2004 equity and debt financing.
NET LOSS
Net loss for the six months ended June 30, 2005 was $6,488,000, or ($0.34) per
share, compared to $4,388,000, or ($0.31) per share, for the same period in
2004.
(3) LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
CASH POSITION AND CASH FLOW
The Company has financed its operations primarily through private placements of
common stock and preferred stock, and private placements of convertible notes
and short-term notes and credit arrangements. The Company had cash and short
term investment balances of approximately $9,775,000 and $14,436,000 at June 30,
2005 and December 31, 2004, respectively.
CASH USED IN OPERATIONS
Cash used in operations for the six months ended June 30, 2005 was $4,518,000.
The cash used in operations reflects the net loss of $6,488,000 reduced by the
non-cash interest expense of $1,404,000 and working capital changes including
$300,000 in 2004 incentive compensation payments and $100,000 in payments
related to the September 28, 2004 equity and debt financing which are not
expected to recur during the year.
CASH USED IN INVESTING
Cash used in investing activities for the six months ended June 30, 2005 was
approximately $3,426,000, primarily related purchases of short term investments
and computer and demonstration equipment.
CASH PROVIDED BY FINANCING
Cash provided by financing activities for the six months ended June 30, 2005 was
$180,000. This includes $405,000 which we received from the exercise of warrants
we issued in the 2004 equity and debt financing and $313,000 in bank borrowings,
offset by $500,000 in payments related the current maturities of the EVLT(R)
technology acquisition obligation.
5
BANK LINES OF CREDIT
Diomed, Ltd., the Company's United Kingdom-based subsidiary, utilizes a an
overdraft facility as well as an accounts receivable line of credit with
Barclays Bank, limited to the lesser of (GBP)100,000 ($179,300 at June 30, 2005)
or 80% of eligible accounts receivable. The credit line bears interest at a rate
of 3% above Barclays' base rate of 4.75% at June 30, 2005 and borrowings are due
upon collection of receivables from customers. As security for the line of
credit, Barclays Bank has a lien on all of the assets of Diomed Ltd., excluding
certain intellectual property. As of June 30, 2005 and 2004 there was
approximately $313,000 and $0, respectively outstanding under these credit
facilities.
(4) CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of the Company's financial condition, results of
operations, and cash flows are based on the Company's consolidated financial
statements. 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.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB revised SFAS No. 123, Share Based Payment, or SFAS
No. 123R. SFAS No. 123R supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends Statement No. 95, Statement of Cash Flows. Under
SFAS No. 123R, companies must calculate and record in the income statement the
cost of equity instruments, such as stock options, awarded to employees for
services received. The cost of the equity instruments is to be measured based on
the fair value of the instruments on the date they are granted and is required
to be recognized over the period during which the employees are required to
provide services in exchange for the equity instruments. SFAS No. 123R has been
deferred and is now effective for the Company in the first fiscal year beginning
after December 15, 2005.
The adoption of SFAS No. 123R is expected to have a significant impact on the
Company's financial statements. The impact of adopting SFAS No. 123R cannot be
accurately estimated at this time, as it will depend on the market value and the
amount of share-based awards granted in future periods.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107 ("SAB
107"). SAB 107 provides guidance for the implementation of SFAS No. 123R with
respect to valuation techniques, expected volatility and expected term for
valuing employee stock options among other matters. The provisions of SAB 107
will be effective for the Company at the time the Company adopts SFAS No. 123R.
6
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer
have carried out an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a -15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of June 30, 2005 and have concluded that, as
of such date, the Company's disclosure controls and procedures in place are
adequate to ensure material information and other information requiring
disclosure is identified and communicated on a timely basis.
(b) Changes in internal control over financial reporting.
During the period covered by this report, there have been no significant changes
in our internal control over financial reporting that have materially affected
or are reasonably likely to materially affect our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Misappropriation Litigation vs. Vascular Solutions
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, including by Vascular
Solutions' use of the mark "ELT;"
- 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 answered the
complaint, and filed a counterclaim for invalidity of the EVLT(R) trademark. On
July 13, 2005 the Court heard oral argument on Vascular Solutions' motion for
summary judgment on all claims. Vascular Solutions conceded that it would
stipulate to desist from any further use of the mark ELT, which Diomed alleged
infringes Diomed's federally-registered EVLT(r) trademark. Vascular Solutions
further stipulated that it would desist from any further dissemination of the
defamatory statements alleged in Diomed's complaint.
'777 Patent 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 (the "'777 patent") 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 '777 patent is invalid and not
infringed. Vascular Solutions amended its answer and counterclaims to further
allege patent unenforceability. In addition, Vascular Solutions moved to
bifurcate the damages and willful infringement aspects of this case. We opposed
this motion and on June 28, 2005 the court denied Vascular Solutions' motion.
We are continuing to proceed with the discovery phase of this litigation. For
purposes of efficiency, this case has been consolidated with another case for
pretrial purposes as discussed below.
7
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 the '777 patent. AngioDynamics
has generally denied our allegations and has sought a declaratory judgment of
invalidity of the '777 patent. AngioDynamics has also added certain
counterclaims against us, including antitrust violations, patent misuse and
other allegations, all arising from our obtaining and seeking to enforce the
'777 patent. The court has bifurcated the case, so that those counterclaims will
not be litigated until we resolve our patent infringement claims against
AngioDynamics. At the parties' joint request, however, our patent cases
involving AngioDynamics and Vascular Solutions have been consolidated by the
court for pretrial purposes. We are currently in the discovery phase of this
litigation.
On April 12, 2005, the Court issued a claim construction ruling, which
interprets certain claim language in the '777 patent. We believe that the
evidence we have developed to date in the course of these lawsuits if admitted
and fully credited will show that AngioDynamics and Vascular Solutions are
infringing our patent as it has now been interpreted by the Court.
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 the '777 patent 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. We are in the
discovery phase of this litigation.
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 the
'777 patent covering the endovascular laser treatment of varicose veins which we
use in our EVLT(R) product line. On December 3, 2004, CoolTouch answered the
complaint, generally denying our allegations and counterclaiming for declaratory
judgment of non-infringement and invalidity of the EVLT(R) patent. We are now
proceeding with the discovery phase of this litigation.
VNUS Technologies Litigation
On July 21, 2005, a lawsuit was filed against us in the United States Federal
District Court for the Northern District of California by VNUS Medical
Technologies, Inc., alleging infringement of U.S. patents Nos. 6,258,084,
6,638,273, 6,752,803, and 6,769,433. The complaint was served on us on July 27,
2005, and our answer to the complaint is currently due on August 16, 2005.
Diomed intends to vigorously defend the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) On May 17, 2004, the Company held it's 2005 Annual Meeting of Stockholders,
pursuant to a proxy statement that it had filed with the Securities and Exchange
Commission and had furnished to holders of record of the outstanding shares of
its common stock as of April 11, 2005. Of 19,423,728 shares entitled to vote at
the meeting, 15,054,876 shares voted, and a quorum was present. The meeting
included the election of all nine directors to serve until the next annual
meeting or until their successors are duly elected and qualified. Those
directors are:
Geoffrey Jenkins
Sidney Braginsky
Gary Brooks
A. Kim Campbell
Joseph Harris
Peter Klein
Edwin Snape, Ph.D.
David B. Swank
James A. Wylie, Jr.
b) The Company presented the following proposals to our stockholders at that
meeting:
1. To elect nine directors to serve until the next annual meeting of
stockholders, or until their successors are duly elected and qualified.
8
The results of which were as follows:
Director Nominee Votes For Votes Withheld
- ---------------- --------- --------------
Geoffrey Jenkins 14,983,494 71,381
Sidney Braginsky 14,989,966 64,909
Gary Brooks 14,988,886 65,989
A. Kim Campbell 14,993,082 61,793
Joseph Harris 14,988,956 65,919
Peter Klein 14,989,954 64,921
Edwin Snape, Ph.D. 14,989,184 65,929
James A. Wylie, Jr. 14,982,472 72,403
Accordingly, each of the director nominees was elected to serve as a director.
2. To approve an amendment to the Company's certificate of incorporation in
order to create a classified board of directors, having three classes, each with
a term of three years, staggered such that one class is elected each year.
The results of which were as follows:
- ----------------------------- --------------------------- --------------------------- -----------------------
For Against Abstained Broker Non-Votes
- ----------------------------- --------------------------- --------------------------- -----------------------
4,520,588 2,858,105 3,348 7,672,835
- ----------------------------- --------------------------- --------------------------- -----------------------
In order to be approved, a majority of our shares entitled to vote at the
meeting had to be cast "For" the proposal. As a majority of our shares entitled
to vote at the meeting did not vote "For" the proposal, the proposal was not
approved.
3. To approve an amendment to the 2003 Omnibus Plan to increase the number of
shares available for grant thereunder from 1,600,000 to 3,100,000.
The results of which were as follows:
- ----------------------------- --------------------------- --------------------------- -----------------------
For Against Abstained Broker Non-Votes
- ----------------------------- --------------------------- --------------------------- -----------------------
7,169,989 182,795 29,527 7,672,835
- ----------------------------- --------------------------- --------------------------- -----------------------
Accordingly, the proposal was approved.
4. To approve the issuance of shares underlying the convertible debentures we
issued on October 25, 2004 at a conversion price less than $2.20 per share if
antidilution provisions under the terms of the convertible debentures so
require.
The results of which were as follows:
- ----------------------------- --------------------------- --------------------------- -----------------------
For Against Abstained Broker Non-Votes
- ----------------------------- --------------------------- --------------------------- -----------------------
6,036,574 1,317,350 27,717 7,672,835
- ----------------------------- --------------------------- --------------------------- -----------------------
Accordingly, the proposal was approved.
5. To approve the issuance of shares underlying the warrants we issued October
25, 2004 at an exercise price per share less than $1.91 if antidilution
provisions under the terms of the warrants so require
The results of which were as follows:
- ----------------------------- --------------------------- --------------------------- -----------------------
For Against Abstained Broker Non-Votes
- ----------------------------- --------------------------- --------------------------- -----------------------
6,036,133 1,316,635 29,273 7,672,835
- ----------------------------- --------------------------- --------------------------- -----------------------
Accordingly, the proposal was approved.
6. To ratify the selection of BDO Seidman, LLP as the Company's independent
registered public accountant for 2005; and
The results of which were as follows:
- ------------------------------ -------------------------- ---------------------------
For Against Abstained
- ------------------------------ -------------------------- ---------------------------
15,001,281 36,081 17,514
- ------------------------------ -------------------------- ---------------------------
Accordingly, the proposal was approved.
9
ITEM 6. REPORTS ON FORM 8-K
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
During the fiscal quarter ended June 31, 2005, we filed with the Securities and
Exchange Commission Current Reports on Form 8-K as follows:
On June 29, 2005, we filed a Current Report on Form 8-K regarding the
distribution agreement we entered into with Med1Online, pursuant to which Diomed
appointed Med1Online as its exclusive distributor of Diomed's patented EVLT(R)
endovenous laser treatment products in the OB/GYN and plastic surgery markets in
the United States.
On June 30, 2005, we filed a Current Report on Form 8-K regarding the press
release we filed related to the distribution agreement we entered into with
Med1Online.
10
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
DIOMED HOLDINGS, INC.
(REGISTRANT)
By: /s/ JAMES A. WYLIE, JR.
----------------------------------------
Name: James A. Wylie, Jr.
Title: President and Chief Executive Officer,
Director
Date: August 12, 2005
By: /s/ DAVID B. SWANK
----------------------------------------
Name: David B. Swank
Title: Chief Financial Officer, Director
Date: August 12, 2005
11