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 MARCH 31, 2006
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 MAY 12, 2006, THERE WERE 19,448,728 SHARES OF COMMON STOCK, PAR VALUE
$0.001, OUTSTANDING.
DIOMED HOLDINGS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-QSB
FOR THE THREE MONTHS ENDED MARCH 31, 2006
TABLE OF CONTENTS
Page
Item Number Number
- ----------- ------
Part I - Financial Information
1 Condensed Consolidated Balance Sheets - F-1
March 31, 2006 (unaudited) and December 31, 2005
Unaudited Condensed Consolidated Statements of Operations - F-2
Three Months Ended March 31, 2006 and 2005
Unaudited Consolidated Statements of Cash Flows - F-3
Three Months Ended March 31, 2006 and 2005
Notes to Consolidated Financial Statements (unaudited) F-4
2 Management's Discussion and Analysis of Operations 1
3 Controls and Procedures 6
Part II - Other Information 7
1 Legal Proceedings 7
6 Exhibits and Current Reports on Form 8-K 8
Signatures 10
Diomed Holdings, Inc.
Condensed Consolidated Balance Sheets
As of March 31, 2006 (unaudited) and December 31, 2005
Assets MARCH 31, DECEMBER 31,
2006 2005
------------ ------------
Current assets:
Cash and cash equivalents $ 6,894,644 $ 9,562,087
Short term investments 2,089,969 3,566,454
Accounts receivable, net 2,705,897 2,824,717
Inventories 3,371,519 3,059,886
Prepaid expenses and other current assets 631,171 444,453
------------ ------------
Total current assets 15,693,200 19,457,597
Property, plant and equipment, net 1,286,769 1,171,703
Intangible assets, net 4,201,724 4,302,915
Investment 500,000 500,000
Other assets 270,567 294,810
------------ ------------
Total assets $ 21,952,260 $ 25,727,025
============ ============
Liabilities, preferred stock and
stockholders' equity
Current liabilities:
Accounts payable $ 3,005,843 $ 3,561,786
Accrued expenses 2,433,717 2,298,823
Current portion of deferred revenue 265,341 257,889
Bank loan 44,638 53,924
Current maturities of capital lease obligations 1,828 2,047
EVLT technology payable (zero face value,
at March 31, 2006 and $250,000 face
value, net of $4,902 debt discount
at December 31, 2005) -- 245,098
Warrant liability 2,668,634 1,898,213
------------ ------------
Total current liabilities 8,420,001 8,317,780
Deferred revenue, net of current portion 130,156 144,428
Capital lease obligation, net of current maturities 3,656 4,094
Convertible notes payable ($3,712,000 face value,
net of $985,650 debt discount at March 31, 2006
and $3,712,000 face value, net of $1,081,727 debt
discount at December 31, 2005) 2,726,350 2,630,273
------------ ------------
Total liabilities 11,280,163 11,096,575
Commitments and contingencies
Preferred stock
(liquidation value $12,074,000 at March 31, 2006) 7,920,399 7,819,658
Stockholders' equity 2,751,698 6,810,792
------------ ------------
Total liabilities, preferred stock and
stockholders' equity $ 21,952,260 $ 25,727,025
============ ============
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 March 31,
2006 2005
------------ ------------
Revenues $ 4,576,152 $ 4,132,250
Cost of revenues 2,522,631 2,292,961
------------ ------------
Gross profit 2,053,521 1,839,289
------------ ------------
Operating expenses:
Research and development 354,547 390,738
Selling and marketing 2,793,067 2,307,308
General and administrative 2,058,222 1,570,845
------------ ------------
Total operating expenses 5,205,836 4,268,891
------------ ------------
Loss from operations (3,152,315) (2,429,602)
------------ ------------
Other (income) expense, net
Loss from fair value adjustment on
warrant liability 770,421 --
Interest expense, non-cash 96,076 1,304,952
Interest expense, net, cash-based 16,915 101,306
------------ ------------
Total other expense 883,412 1,406,258
------------ ------------
Net loss (4,035,727) (3,835,860)
------------ ------------
Less preferred stock cash dividends (149,188) --
Less preferred stock non-cash dividends (154,991) --
------------ ------------
Net loss applicable to common stockholders $ (4,339,906) $ (3,835,860)
============ ============
Basic and diluted net loss per share $ (0.22) $ (0.21)
============ ============
Basic and diluted weighted average
common shares outstanding 19,445,950 18,573,024
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
DIOMED HOLDINGS, INC.
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
Cash Flows from Operating Activities:
Net loss $ (4,035,727) $ (3,835,860)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 197,263 213,606
Amortization of EVLT(R) discount 4,902 23,567
Non-cash interest expense 96,076 1,304,952
Accretion of discount on marketable securities (68,307) --
Amortization of deferred financing costs 24,243 --
Fair value of stock options 188,140 20,263
Loss from fair value adjustment on warrant liability 770,421 --
Changes in operating assets
and liabilities:
Accounts receivable 118,820 (306,451)
Inventories (311,633) (155,940)
Prepaid expenses and other current assets (186,718) (208,306)
Deposits -- 8,980
Accounts payable (555,943) 175,155
Accrued expenses and deferred revenue 128,074 (100,528)
------------ ------------
Net cash used in operating activities (3,630,389) (2,860,562)
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (282,171) (70,232)
Purchase of available for sale securities (195,280) --
Proceeds from maturities of available for
sale securities 1,700,000 --
------------ ------------
Net cash provided by (used in) investing activities 1,222,549 (70,232)
------------ ------------
Cash Flows from Financing Activities:
Payments on bank borrowings (9,286) --
Payments on EVLT(R) purchase obligation (250,000) (250,000)
Proceeds from exercise of warrants -- 404,903
Payments on capital lease obligations (658) (22,318)
------------ ------------
Net cash provided by (used in) financing activities (259,944) 132,585
------------ ------------
Effect of Exchange Rate Changes 341 (75,688)
------------ ------------
Net Decrease in Cash and Cash Equivalents (2,667,443) (2,873,897)
Cash and Cash Equivalents, beginning of period 9,562,087 14,436,053
------------ ------------
Cash and Cash Equivalents, end of period $ 6,894,644 $ 11,562,156
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 83,965 $ 56,177
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
(1) OPERATIONS
Diomed Holdings, Inc. ("Diomed" or "the Company") develops and commercializes
minimally invasive medical procedures that employ its laser technologies and
associated disposable products. Using its proprietary technology, including its
exclusive rights to U.S. Patent No. 6,398,777, the Company currently focuses on
endovenous laser treatment (EVLT(R)) of varicose veins. The Company also
develops and markets lasers and disposable products for photodynamic therapy
(PDT) cancer procedures and products for other clinical applications, including
dental and general surgical procedures.
In developing and marketing its clinical solutions, the Company uses proprietary
technology and aims to secure strong commercial advantages over competitors by
gaining governmental approvals in advance of others, by developing and offering
innovative practice enhancement programs including physician training and
promotional materials, and 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 2005 annual report on Form
10-KSB/A on April 13, 2006, which included audited consolidated financial
statements for the year ended December 31, 2005, 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/A for the year ended December 31, 2005.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Annual Report on Form 10-KSB/A for the year ended December 31, 2005 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.
F-4
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
(a) 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:
March 31, December 31,
2006 2005
---------- ------------
Raw Materials $1,130,372 $ 1,415,546
Work-in-Process 1,036,757 674,010
Finished Goods 1,204,390 970,330
---------- ------------
$3,371,519 $ 3,059,886
========== ============
(b) DEFERRED REVENUE
Deferred revenue at March 31, 2006 was as follows:
March 31,
2006
----------
Beginning balance $ 402,317
Additions 77,078
Revenue/release (83,898)
----------
Ending balance $ 395,497
==========
(c) ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted Statement No. 123R, Share-Based
Payment ("SFAS 123R"), which requires companies to measure and recognize
compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. SFAS 123R is being applied on the
modified prospective basis. Prior to the adoption of SFAS 123R, the Company
accounted for its stock-based compensation plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, as provided by SFAS 123. Accounting
for Stock based compensation ("SFAS 123") and accordingly, recognized no
compensation expense related to the stock-based plans as stock options granted
to employees and directors were equal to the fair market value of the underlying
stock at the date of grant. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123R.
Under the modified prospective approach, SFAS 123R applies to new awards and to
awards that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized for the first quarter of fiscal 2006 includes compensation cost
for all share-based payments granted prior to, but not yet vested on, January 1,
2006, based on the grant-date fair value estimated in accordance with the pro
forma provisions of SFAS 123, and compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS 123R. Prior periods were not
restated to reflect the impact of adopting the new standard. During the period
ended March 31, 2006, the Company recorded $171,000 in non-cash charges for the
implementation of SFAS 123R. As of March 31, 2006, there was approximately
$1,333,000 of total unrecognized compensation costs related to unvested options.
That cost is expected to be recognized over a weighted average period of 2.29
years.
F-5
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
The following table illustrates the effect on net loss and net loss per share
had the Company accounted for stock-based compensation in accordance with SFAS
123R:
Three Months Ended
March 31, 2005
------------------
Net loss applicable to common
stockholders as reported: $ (3,835,860)
Deduct: total stock-based employee compensation
expense determined under the fair value-based
method for all awards, net of tax (408,325)
------------------
Pro forma net loss $ (4,244,185)
==================
Loss per share:
Basic and diluted - as reported $ (0.21)
==================
Basic and diluted - pro forma $ (0.23)
==================
The weighted average grant date fair value of options granted during the three
months ended March 31, 2006 was estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 87.44%, expected term of 5.71 years, risk-free interest rate of
4.32%, and expected dividend yield of 0%. Expected volatility is based on an
average of the historical volatility of the Company's stock and peer company
volatility. The average expected life was calculated using the simplified method
under SAB 107. The risk-free rate is based on the rate of U.S. Treasury
zero-coupon issues with a remaining term equal to the expected life of option
grants. The Company uses historical data to estimate pre-vesting forfeiture
rates.
(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. For all
periods presented, comprehensive loss consists of the Company's net loss,
changes in the cumulative translation adjustment account, and unrealized gains
(loss) on marketable securities. Comprehensive net loss for all periods
presented is as follows:
Three Months Ended March 31,
----------------------------
2006 2005
------------ ------------
Net loss $ (4,035,727) $ (3,835,860)
Unrealized holding loss on
marketable securities,
net of related tax effects (200) --
Foreign currency translation adjustment 38,621 (137,796)
------------ ------------
Comprehensive loss $ (3,997,306) $ (3,973,656)
============ ============
(e) SHORT TERM INVESTMENTS
Marketable securities with original maturities greater than three months are
classified as short-term investments. Investments designated as short-term
consist of U.S. agency discount notes and corporate bonds, are classified as
available-for-sale, and are reported at fair value using the specific
identification method. Unrealized gains and losses, net of related tax effects,
are reflected in other comprehensive income (loss) until realized.
Marketable securities included in cash and cash equivalents and short term
investments, at March 31, 2006, all of which mature within one year, consist of
the following:
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Money Market Funds $ 3,162,208 $3,162,208 $ -- $ --
Commercial Paper 3,202,651 3,202,561 -- (90)
U.S. Agency Notes 1,494,925 1,495,111 186 --
-------------- ---------- ---------- ----------
$ 7,859,784 $7,859,880 $ 186 $ (90)
============== ========== ========== ==========
As Reported: Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Cash and Cash
Equivalents $ 5,769,557 $5,769,911 $ 354 $ --
Marketable Securities 2,090,227 2,089,969 -- (258)
-------------- ---------- ---------- ----------
$ 7,859,784 $7,859,880 $ 354 $ (258)
============== ========== ========== ==========
Net unrealized gains (losses) for the three months ended March 31, 2006 totaled
$96. The unrealized losses were caused by increasing market interest rates.
Based on the scheduled maturities of these marketable securities and our intent
and ability to hold these securities until maturity, we have concluded that
these unrealized losses are not other-than-temporary. There were no realized
gains or losses in the same period of 2005.
(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. The calculation of net loss applicable to common
stockholders for the three month period ended March 31, 2006 includes $154,991
in non-cash preferred stock dividends accreted for future increasing rate
dividends and $149,188 of preferred stock cash dividends earned during the
period related to the September 30, 2005 private placement.
As a result of the losses incurred by the Company for the three month periods
ended March 31, 2006 and 2005, 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 March 31,
=====================
2006 2005
--------- ---------
Common Stock Options 2,416,487 1,692,347
========= =========
Common Stock Warrants 5,196,775 2,798,452
========= =========
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 or 80% of eligible accounts
receivable ($136,472 at March 31, 2006). The credit line bears interest at a
rate of 2.5% above Barclays' base rate (4.5% at March 31, 2006) and borrowings
are due upon collection of receivables from customers. As security for the line
of credit, Barclay's Bank has a lien on all of the assets of Diomed Ltd.,
excluding certain intellectual property. As of March 31, 2006, there was $44,638
outstanding and at March 31, 2005, there was no amount outstanding under this
line of credit.
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(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.
The Company plans on settling any exercised employee stock options by issuing
authorized but unissued shares.
As of March 31, 2006, 819,394 options and other incentive stock awards were
available for future grants under the 2003 Omnibus Plan. In addition, 4,542
options were available under the 2001 Plan as of March 31, 2006.
A summary of stock option activity is as follows:
Weighted
Range of Number of Average
Exercise Price Shares Exercise Price
-------------- ------------- --------------
Outstanding, December 31, 2005 $2.00 -$205.75 1,733,398 $ 6.01
Granted 1.98 - 2.24 689,250 2.23
Forfeited 5.00 - 100.00 (6,161) 18.82
-------------- ------------- --------------
Outstanding, March 31, 2006 $1.98-$205.75 2,416,487 $ 4.87
============== ============= ==============
Exercisable, March 31, 2006 $1.98-$205.75 1,720,636 $ 5.88
============== ============= ==============
The following table summarizes currently outstanding and exercisable options as
of March 31, 2006.
OUTSTANDING EXERCISABLE
---------------------------------- -----------------------------
Weighted Average Weighted Average
Exercise Price Shares Remaining Life* Exercise Price Shares Exercise Price
- ------------------ --------- --------------- ---------------- --------- ----------------
$ 1.98 - $4.75 1,680,593 9.04 $ 3.22 989,742 $ 3.83
4.76 - 11.50 706,691 7.76 5.53 701,691 5.53
11.51 - 50.00 16,256 5.38 35.82 16,256 35.82
50.01 - 88.00 814 5.18 61.39 814 61.39
$88.01 - $205.75 12,133 1.76 149.10 12,133 149.10
--------- ---------------- --------- ----------------
2,416,487 $ 4.87 1,720,636 $ 5.88
========= ================ ========= ================
* Weighted average remaining contractual life (in years).
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
There were no stock options exercised during the period ended March 31, 2006.
(b) A summary of warrant activity is as follows:
Weighted Average
Remaining
Range of Number of Weighted Average Contractual
Exercise Price Shares Exercise Price Life (In Years)
-------------- ------------- ---------------- ----------------
Outstanding, December 31, 2005 $0.025 - $2.90 5,196,775 $ 2.35 4.00
============== ============= ================ ================
Granted -- -- -- --
Forfeited -- -- -- --
-------------- ------------- ---------------- ----------------
Outstanding, March 31, 2006 $0.025- $87.50 5,196,775 $ 2.35 3.70
============== ============= ================ ================
Exercisable March 31, 2006 $0.025 - $2.90 4,896,775 $ 2.35 3.70
============== ============= ================ ================
(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
March 31,
---------------------------
2006 2005
---------- ----------
Laser systems $1,769,553 $2,117,401
Fibers, accessories, and service 2,806,599 2,014,849
---------- ----------
Total $4,576,152 $4,132,250
========== ==========
The following table represents percentage of revenues and long-lived assets by
geographic destination:
% of Revenue Long-lived Assets
---------------------------- -------------------------
Three Months Ended March 31,
---------------------------- March 31, December 31,
2006 2005 2006 2005
------------ ------------ ---------- ------------
United States 74% 75% $5,861,862 $ 5,930,287
Asia/Pacific 5% 10% -- --
Europe 14% 10% 397,198 339,141
Other 7% 5% -- --
------------ ------------ ---------- ------------
Total 100% 100% $6,259,060 $ 6,269,428
============ ============ ========== ============
(7) COMMITMENTS AND CONTINGENCIES
On July 21, 2005, a lawsuit was filed against us in the United States 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. On
September 15, 2005, the Company filed an answer denying the allegations of
infringement, and counterclaiming against VNUS for a declaration that none of
the patents are infringed and that they are all invalid. On October 12, 2005,
VNUS served an amended complaint adding two additional parties, AngioDynamics,
Inc. and Vascular Solutions, Inc., as defendants. On October 31, 2005, the
Company filed an answer to the First Amended Complaint, again denying the
allegations of infringement, and counterclaiming against VNUS for a declaration
that none of the patents are infringed, that they are all invalid and that two
of VNUS' patents are unenforceable for inequitable conduct. The Company is now
proceeding with the discovery phase of this litigation. A claim construction
hearing is scheduled for November of 2006. The Company intends to continue to
defend its position, however, management is unable to predict the outcome of
this lawsuit.
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
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. The Company is presently
prosecuting these lawsuits, however, management is unable to predict the outcome
of these lawsuits. 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.
Insofar as legal proceedings other than patent litigation are concerned, from
time to time the Company is the defendant in legal and administrative
proceedings and claims of various types. Although any such litigation contains
an element of uncertainty, management, in consultation with the Company's
general counsel, presently believes that the outcome of such 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.
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 2005 Annual
Report on Form SEC 10-KSB/A (the "Annual Report") contains a discussion of
certain of the risks and uncertainties that affect our business. We refer you to
the "Risk Factors" on pages 23 through 38 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 March 31, 2006, we had an accumulated deficit of approximately $85 million
including $17.3 million in non-cash interest expense, $613,000 related to the
adjustment of the market value for the warrant liability, and $171,000 in SFAS
123R compensation 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. Using our proprietary
technology, including our exclusive rights to U.S. Patent No. 6,398,777, we
currently focus 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 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
(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. 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
received FDA clearance to expand the application of EVLT(R) to other superficial
veins in the lower extremities.
1
EVLT(R) was a primary source of revenue in the first three months of 2006, and
will continue to be our primary source of revenue in 2006. 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 attributes, in
addition to EVLT(R)'s superior clinical trial results 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 private
physician practices, hospitals, and clinics and focus on specialists in vascular
surgery, interventional radiology, general surgery, interventional cardiology,
phlebology, gynecology and dermatology.
We primarily use a direct sales force to market our products in the United
States and in select markets internationally, we also utilize 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. The VeinViewer(TM) became commercially available in April 2006.
We currently employ 20 EVLT(R) sales representatives, two regional sales
managers and a vice president of North American sales. We have also added three
sales development personnel to focus on VeinViewer(TM) sales. Additionally, our
current clinical support organization employs four clinical specialists,
including one training manager, who support 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. We also
maintain a corporate website - www.diomedinc.com - which includes information
about the Company and our physician support initiatives, among other things.
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. 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
(2) RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2005
REVENUE
Diomed delivered revenue for the three months ended March 31, 2006 of
$4,576,000, increasing approximately $444,000, or 11%, from $4,132,000 for the
same period in 2005. Revenue from the EVLT(R) product line increased 13% over
the same period last year, including growth of 43% in disposable procedure
product revenue, demonstrating the continued and growing acceptance of EVLT(R)
by the medical community and patients alike.
In the three months ended March 31, 2006, approximately $1,770,000, or 39%, of
our total revenue was derived from laser sales, as compared to approximately
$2,117,000, or 51%, in the same period in 2005. In the three months ended March
31, 2006, approximately $2,807,000, or 61%, of our total revenues were derived
from sales of disposable fibers and kits, accessories and service, as compared
to approximately $2,015,000, or 49%, in the same period in 2005. 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 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 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 three months ended March 31, 2006 was $2,523,000,
increasing approximately $230,000, or 10%, from $2,293,000 for the three months
ended March 31, 2005. The increase in cost of revenue in 2006 was driven by the
corresponding increase in the number of 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.
Gross profit for the three months ended March 31, 2006 was $2,054,000,
increasing approximately $214,000 from $1,839,000 from the three months ended
March 31, 2005. On a percent-of-sales-basis, the gross profit of 45% was
comparable with the gross margin in the prior year. The increase in gross profit
dollars in 2006 was driven by incremental sales volume, as well as improvements
in material costs. The Company believes that gross profit as a percentage of
sales may reach 60% assuming increases in sales volume that may occur after
completion of the patent litigation.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended March 31, 2006 of
$355,000, decreased by $36,000, or 9%, from the three months ended March 31,
2005 as work on our Delta laser platform was completed. We expect R&D
expenditures to remain at approximately the same level as we continue to drive
product functionality, cost improvements, and other enhancements.
SELLING AND MARKETING EXPENSES for the three months ended March 31, 2006 of
$2,793,000, increased $486,000, or 21%, over the three months ended March 31,
2005. The increase from the three months ended March 31, 2005 was driven by a
continued expansion in the size of our sales force of $234,000, primarily
related to salaries and SFAS 123R stock based compensation costs, and $165,000
for trade shows and marketing programs to support the sales efforts to drive the
growing commercialization of EVLT(R). We anticipate continued increased expenses
resulting from the larger sales organization and increased commissions due to
expected increases in volume.
GENERAL AND ADMINISTRATIVE EXPENSES for the three months ended March 31, 2006 of
$2,058,000, increased $487,000, or 31%, from the three months ended March 31,
2005. The increase was primarily attributable to incremental legal fees of
$377,000 and stock based compensation costs of $113,000. Legal costs included
the cost of '777 patent infringement litigation against four competitors we
commenced during 2004, as well as continuing costs of litigation against
Vascular Solutions in trade secrets suit litigation commenced by the Company in
the fourth quarter of 2003. We anticipate general and administrative expenses to
remain at this elevated level as we continue to incur legal fees in connection
with our intellectual property '777 patent infringement actions lawsuits, some
of which we expect to proceed to trial during 2006, as well as defense costs
pertaining to the patent infringement action initiated by VNUS in July 2005 and
the declaratory judgment patent litigation commenced by AngioDynamics in January
2006. We also expect SFAS 123R stock based compensation costs to remain at this
level as we amortize the fair value expense associated with stock options issued
to employees and directors equally over the vesting period.
LOSS FROM OPERATIONS
As a result of the factors outlined above, the loss from operations for the
three months ended March 31, 2006 was $3,152,000, increasing $723,000 from
$2,430,000 for the three months ended March 31, 2005, as the expansion of our
sales and marketing efforts during the quarter drove incremental revenue, which
was offset by the increased legal costs in asserting our intellectual property
rights and the growth of our North American sales force.
3
OTHER (INCOME) EXPENSE, NET
Other expense, net for the three months ended March 31, 2006 was $883,000,
compared to $1,406,000 for the three months ended March 31, 2005. Interest
expense of $113,000 in the three months ended March 31, 2006 included non-cash
charges totaling $96,000 for the amortization of the debt discount related to
debt issued in the September 28, 2004 equity and debt financing. For three
months ended March 31, 2005, interest expense of $1,406,000 included non-cash
interest of $1,305,000 related to amortization and acceleration of the debt
discounts recorded in the September 28, 2004 equity and debt financing.
Loss from the fair value adjustment on warrant liability for the three months
ended March 31, 2006 was $770,000, after giving effect to the change in market
value of the warrants issued in the private placement financing completed on
September 30, 2005. The Company valued the 1,800,000 warrants using the
Black-Scholes model at March 31, 2006.
The Company will continue to revalue the 1,800,000 warrants in each reporting
period based on the Company's stock price, and any subsequent changes in the
fair value will be included as non-cash and non-operating gains or losses from
the fair value adjustment on warrant liability for as long as the warrants are
outstanding. The Company will recognize charges when the market value of the
stock appreciates and income from the change in the fair value of the warrant
liability when the market value of the Company's stock declines. These warrants
were not outstanding in the three month period ended March 31, 2005 and
therefore there was no gain or loss related to the fair value liability in the
same period 2005.
NET LOSS
Net loss for the three months ended March 31, 2006 was $4,036,000 compared to
$3,836,000 for three months ended March 31, 2005. The change in net loss
resulted from the expansion of our sales and marketing efforts during three
months ended March 31, 2006 which drove incremental revenue, resulting in
increased gross margin, and was offset by the increased legal costs and a
$770,000 non-cash, non-operating loss from the fair value adjustment on warrant
liability entered into on September 30, 2005. Net loss for the three months
ended March 31, 2006 also includes $171,000 in non-cash charges for the
implementation of SFAS 123R for the fair value of stock options issued to
employees and directors. This expense has been allocated between Selling,
General and Administrative and Cost of Sales departmental expenses.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
Net loss applicable to common stockholders for the three months ended March 31,
2006 was $4,340,000, or $0.22 per share, compared to $3,836,000, or $0.21 per
share, for the three months ended March 31, 2005. We agreed to pay cash
dividends to holders of the preferred stock on an ongoing basis at 6% for the
first 18 months, 10% for months 19 to 24, and 15% thereafter for as long as the
preferred stock is outstanding, although these dividends will not accrue on any
days where the volume weighted average price of the common stock for the 30
prior trading days equals or exceeds $6.25 (subject to adjustment for stock
splits, stock dividends and similar events). These cash dividends amounted to
$149,000 during the three months ended March 31, 2006. In addition, because the
dividend percentage is considered below market for accounting purposes, we will
continue to record an incremental non-cash dividend as an increase to the
carrying value of the preferred stock to reflect an effective interest rate of
16.5%. As a result, in the three months ended March 31, 2006, we recorded
$155,000 of non-cash preferred stock dividend.
(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 $8,985,000 and $13,129,000 at
March 31, 2006 and December 31, 2005, respectively.
CASH USED IN OPERATIONS
Cash used in operations for the three months ended March 31, 2006 was
$3,630,000. The cash used in operations reflects the net loss of $4,036,000,
reduced by $770,000 for non-cash, non-operating loss from the fair value
adjustment on warrant liability, $777,000 in legal fees incurred in asserting
our EVLT(R) patent, and $188,000 for stock based compensation, offset by working
capital.
4
CASH PROVIDED BY INVESTING
Cash provided by investing activities for the three months ended March 31, 2006
was approximately $1,223,000, including purchases of available-for-sale
securities of $195,000, proceeds from maturities of available-for-sale
securities of $1,700,000, and computer and demonstration equipment of $282,000.
CASH USED IN FINANCING
Cash used in financing activities for the three months ended March 31, 2006 was
$260,000; primarily consisting of $250,000 for the final EVLT(R) technology
acquisition obligation.
BANK LINES OF CREDIT
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 or 80% of eligible accounts
receivable ($136,472 at March 31, 2006). The credit line bears interest at a
rate of 2.5% above Barclays' base rate (4.5% at March 31, 2006) and borrowings
are due upon collection of receivables from customers. As security for the line
of credit, Barclay's Bank has a lien on all of the assets of Diomed Ltd.,
excluding certain intellectual property. As of March 31, 2006, there was $44,638
outstanding and at March 31, 2005, there was no amount outstanding under this
line of credit.
FUTURE AVAILABILITY OF CREDIT
As March 31, 2006, other than the security under the Barclays Bank line of
credit, our assets were not the subject to any liens or encumbrances. Therefore
these unencumbered assets may be available as security for credit facilities we
may seek in the future. However, under the terms of the convertible debentures
that we issued on October 25, 2004, we agreed that, so long as at least 10% of
the original principal amount of any debenture was outstanding, we would not
incur indebtedness or create a lien that is senior to or having an equal
priority with our obligations under the debentures, except for purchase money
security interests and otherwise to the extent that we do so in the ordinary
course of our business. As of March 31, 2006, the three investors who purchased
debentures continued to hold debentures of at least 10% of the original
principal amount. The terms of our preferred stock financing preclude us from
issuing debt obligations without prior approval of 51% of the preferred stock
outstanding, except for a credit facility of up to $1 million that is secured by
accounts receivable.
COMMITMENT FOR LUMINETX INVESTMENT
On August 5, 2005, we entered into a distribution agreement with Luminetx,
pursuant to which Luminetx appointed us a distributor and granted us the
exclusive right to distribute and sell the Luminetx patented biomedical imaging
system known as the VeinViewer(TM) Imaging System for physicians who perform
sclerotherapy, phlebectomies or varicose vein treatments, in the United States
and the United Kingdom Luminetx agreed to sell us a certain minimum number of
VeinViewer(TM) systems for distribution at specified prices during the term of
our distribution agreement. We also agreed to loan $1 million to Luminetx under
the distribution agreement. We loaned $500,000 to Luminetx on August 5, 2005 as
specified in our distribution agreement. We later converted our $500,000 loan to
Luminetx into 250,000 shares of Luminetx preferred stock, convertible into
common stock on a share-for-share basis, and warrants to purchase 50,000 shares
of Luminetx common stock at $2.00 per share, exercisable for five years, as part
of an $11 million private placement financing that Luminetx announced on
November 4, 2005. We will invest the remaining $500,000 of our loan commitment
to Luminetx for preferred stock and warrants on the same terms. We will make
this investment when Luminetx satisfies the conditions precedent to funding our
commitment, which we expect to occur during the second quarter of 2006.
(4) CRITICAL ACCOUNTING POLICIES
In the opinion of management, these unaudited consolidated financial statements
contain all adjustments considered normal and recurring and necessary for their
fair presentation. Interim results are not necessarily indicative of results to
be expected for the year. These interim financial statements have been prepared
in accordance with the instructions for Form 10-QSB, and therefore, do not
include all information and footnotes necessary for a complete presentation of
operations, financial position, and cash flows of the Company in conformity with
accounting principles generally accepted in the United States. The Company filed
its 2005 Annual Report on Form 10-KSB/A with the Securities and Exchange
Commission on April 13, 2006, which included audited consolidated financial
statements for the year ended December 31, 2005, 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/A for the year ended December 31, 2005.
5
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. We have chosen accounting policies we believe are appropriate to
report accurately and fairly our operating results and financial position, and
we apply those accounting policies in a consistent manner. As discussed in Item
6, "Management's Discussion and Analysis of Financial Condition or Plan of
Operation" of the Company's Annual Report on Form 10-KSB/A for the fiscal year
ended December 31, 2005, we consider certain policies to be the most critical in
the preparation of our consolidated financial statements because they involve
the most difficult, or subjective judgments about the effect of matters that are
inherently uncertain. 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. In connection with the adoption of SFAS 123R as of
the beginning of the Company's first quarter of fiscal year 2006, we have added
"Stock-Based Compensation" as a critical accounting policy.
Stock Based Compensation
We maintain stock-based incentive plans, under which we provide stock incentives
to employees and directors. We grant options to employees and directors to
purchase common stock at an option price equal to the market value of the stock
at the date of grant. Prior to the effective date of SFAS 123R, we applied APB
25, and related interpretations, for our stock option grants. APB 25 provides
that the compensation expense relative to our stock options is measured based on
the intrinsic value of the stock option at date of grant.
Effective the beginning of the first quarter of fiscal year 2006, we adopted the
provisions of SFAS 123R using the modified prospective transition method. Under
this method, prior periods are not restated. We use the Black-Scholes option
pricing model which requires extensive use of accounting judgment and financial
estimates, including estimates of the expected term participants will retain
their vested stock options before exercising them, the estimated volatility of
our common stock price over the expected term, and the number of options that
will be forfeited prior to the completion of their vesting requirements.
Application of alternative assumptions could produce significantly different
estimates of the fair value of stock-based compensation and consequently, the
related amounts recognized in the Consolidated Statements of Operations. The
provisions of SFAS 123R apply to new stock options and stock options
outstanding, but not yet vested, on the date we adopted SFAS 123R. Stock-based
compensation expense was included in applicable departmental expense categories
in the Consolidated Statements of Operations.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 151 ("SFAS 151"), Inventory Costs. SFAS 151
amends Accounting Research Bulletin No. 43 to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling and spoilage. The
statement also requires that the allocation of fixed production overheads to
inventory be based on normal production capacity. We adopted the standard as of
January 1, 2006. The adoption did not have an impact on our consolidated
financial statements.
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 March 31, 2006 and have concluded that,
as of such date, the Company's disclosure controls and procedures in place are
operating effectively 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.
6
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
'777 Patent Litigation
On January 6, 2004, we filed a lawsuit in the United States District Court for
the District of Massachusetts against AngioDynamics, Inc. seeking injunctive
relief and damages for infringement of our U.S. Patent No. 6,398,777 (the "`777
patent"), which covers 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. 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.
On March 4, 2004, we filed a lawsuit against Vascular Solutions Inc. in the
United States District Court for the District of Massachusetts seeking
injunctive relief and damages for infringement of the `777 patent. This lawsuit
was the second of the two suits that we filed against Vascular Solutions.
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. At
the parties' joint request, however, our patent cases involving AngioDynamics
and Vascular Solutions have been consolidated by the court for pretrial
purposes. We have completed the discovery phase of the 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 December 21, 2005, we moved for summary judgment that the `777 patent is
valid, enforcable, and infringed by both Vascular Solutions and AngioDynamics.
On the same date, AngioDynamics and Vascular Solutions moved for summary
judgment of noninfringement The court has scheduled a hearing for June 1, 2006
to hear the parties' respective motions.
On April 2, 2004, we filed a lawsuit in the same court 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 same court 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 in the discovery phase of this litigation.
VNUS Technologies Litigation
On July 21, 2005, a lawsuit was filed against us in the United States 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. On September 15,
2005, we filed an answer denying the allegations of infringement, and
counterclaiming against VNUS for a declaration that none of the patents are
infringed and that they are all invalid. On October 12, 2005, VNUS served an
amended complaint adding two additional parties, AngioDynamics and Vascular
Solutions, as defendants. On October 31, 2005, we filed an answer to the amended
complaint again denying the allegations of infringement, and counterclaiming
against VNUS for a declaration that none of the patents are infringed, that all
of the patents are invalid and that two of VNUS' patents are unenforceable for
inequitable conduct. We are now proceeding with the discovery phase of this
litigation. A claim construction hearing is scheduled for November of 2006. We
intend to continue to defend against the allegations against us in this case.
7
Misappropriation Litigation vs. Vascular Solutions
On December 12, 2003, we filed a lawsuit in the United States District Court for
the District of Massachusetts seeking injunctive and other relief against
Vascular Solutions 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.
On January 31, 2006, the court denied Vascular Solutions' motion for summary
judgment in which Vascular Solutions had sought dismissal of the trade secret
misappropriation claim. The court dismissed certain subsidiary counts alleging
breach of contract and tortious interference.
On March 2, 2006, the court denied the remaining components of Vascular
Solutions' motion for summary judgment concerning damages and concerning
Vascular Solutions' counterclaim.
On March 3, 2006, the court referred the parties to nonbinding mediation, which
is scheduled to take place on May 24, 2006.
'971 and '976 Patent Declaratory Judgment Litigation
On January 3, 2006, AngioDynamics filed a lawsuit against us in the U.S.
District Court for the District of Delaware, seeking a declaratory judgment that
the claims of our U.S. Patent Number 6,981,971 (the "'971 patent"), for an
introducer sheath/optical fiber arrangement that may be used in the endovascular
laser treatment of varicose veins, are invalid, unenforceable and not infringed
by AngioDynamics. The '971 patent was issued by the U.S. Patent and Trademark
Office on January 3, 2006, the same day AngioDynamics filed the lawsuit. On
January 17, 2006, AngioDynamics filed an Amended Complaint seeking a declaratory
judgment with respect to our U.S. Patent Number 6,986,766 (the "'766 patent").
The '766 patent relates to methods of using an introducer sheath/optical fiber
arrangement in the endovascular laser treatment of varicose veins. We filed a
motion to dismiss AngioDynamics' declaratory judgment action in its entirety,
based primarily on lack of declaratory judgment jurisdiction. We also assert in
our motion to dismiss that the court should dismiss the action in its
discretion, and because AngioDynamics' complaint contains a number of
deficiencies which we believe warrant dismissal. That motion is pending.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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(b) Reports on Form 8-K.
During the fiscal quarter ended March 31, 2006, we filed with the Securities and
Exchange Commission Current Reports on Form 8-K as follows:
On January 6, 2006, we filed a Current Report on Form 8-K, disclosing that on
January 3, 2006, Angiodynamics, Inc. filed a lawsuit against Diomed Holdings,
Inc. in the U.S. Federal District Court for the District of Delaware, seeking a
declaratory judgment that the claims of our U.S. Patent Number 6,981,971 are
invalid, unenforceable and not infringed by AngioDynamics. See "Legal
Proceedings," above, for further information.
On February 3, 2006, we filed a Current Report on Form 8-K, disclosing that on
January 17, 2006, AngioDynamics amended its lawsuit by seeking a declaratory
judgment with respect to our U.S. Patent Number 6,986,766 in addition to U.S.
Patent Number 6,981,971, the subject of Angiodynamic's January 3, 2006 lawsuit,
and that on January 31, 2006, we filed a motion to dismiss AngioDynamics'
declaratory judgment action in its entirety. See "Legal Proceedings," above, for
further information.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
DIOMED HOLDINGS, INC.
(REGISTRANT)
By: /s/ JAMES A. WYLIE, JR.
----------------------------------------
Name: James A. Wylie, Jr.
Title: President and Chief Executive Officer,
Director
Date: May 12, 2006
By: /s/ DAVID B. SWANK
----------------------------------------
Name: David B. Swank
Title: Chief Financial Officer, Director
Date: May 12, 2006
10