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, 2007
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 11, 2007, THERE WERE 29,847,031 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, 2007
TABLE OF CONTENTS
Item Page
Number Number
- ------ ------
Part I - Financial Information
1 Condensed Consolidated Balance Sheets - F-1
March 31, 2007 (unaudited) and December 31, 2006
Unaudited Consolidated Statements of Operations - F-2
Three Months Ended March 31, 2007 and 2006
Unaudited Consolidated Statements of Cash Flows - F-3
Three Months Ended March 31, 2007 and 2006
Notes to Consolidated Financial Statements F-4
2 Management's Discussion and Analysis or Plan of Operation 1
3 Controls and Procedures 6
Part II - Other Information 7
1 Legal Proceedings 7
6 Exhibits 9
Signatures 9
Diomed Holdings, Inc.
Condensed Consolidated Balance Sheets
As of March 31, 2007 (unaudited) and December 31, 2006
March 31, December 31,
2007 2006
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 6,813,219 $ 7,306,578
Short term investments 499,670 2,626,880
Accounts receivable, net 2,926,972 3,144,056
Inventories 4,650,959 4,021,217
Prepaid expenses and other current assets 578,527 268,343
----------- -----------
Total current assets 15,469,347 17,367,074
Property, plant and equipment, net 1,183,806 1,260,507
Intangible assets, net 3,888,561 4,006,927
Investment in Luminetx 1,000,000 1,000,000
Other assets 182,054 204,770
----------- -----------
Total assets $21,723,768 $23,839,278
=========== ===========
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 4,048,789 $ 2,970,443
Accrued expenses 2,835,998 2,158,157
Current portion of deferred revenue 294,284 278,284
Bank loan 331,026 223,491
----------- -----------
Total current liabilities 7,510,097 5,630,375
Deferred revenue, net of current portion 120,903 110,044
Convertible notes payable ($3,712,000 face value, net of
$2,293,228 debt discount at March 31, 2007 and
$3,712,000 face value, net of $2,671,285 debt
discount at December 31, 2006) 1,418,772 1,040,715
----------- -----------
Total liabilities 9,049,772 6,781,134
----------- -----------
Commitments and contingencies
Stockholders' equity 12,673,996 17,058,144
----------- -----------
Total liabilities and stockholders' equity $21,723,768 $23,839,278
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-1
Diomed Holdings, Inc.
Unaudited Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2007 and 2006
Three Months Ended
March 31,
-------------------------
2007 2006
----------- -----------
Revenues $ 5,905,271 $ 4,576,152
Cost of revenues 3,225,430 2,522,631
----------- -----------
Gross profit 2,679,841 2,053,521
----------- -----------
Operating expenses:
Research and development 415,346 354,547
Selling and marketing 3,136,332 2,793,067
General and administrative 3,072,590 2,058,222
----------- -----------
Total operating expenses 6,624,268 5,205,836
----------- -----------
Loss from operations (3,944,427) (3,152,315)
----------- -----------
Other expense, net:
Loss on fair value adjustment on
warrant liability -- 770,421
Interest expense, non-cash 378,057 96,076
Interest expense, net 29,323 16,915
----------- -----------
Total other expense, net 407,380 883,412
----------- -----------
Net loss (4,351,807) (4,035,727)
Less preferred stock cash dividends -- (149,188)
Less preferred stock non-cash dividends -- (154,991)
----------- -----------
Net loss applicable to common stockholders $(4,351,807) $(4,339,906)
=========== ===========
Basic and diluted net loss per share
applicable to common stockholders $ (0.20) $ (0.22)
=========== ===========
Basic and diluted weighted average
common shares outstanding 21,410,721 19,445,950
=========== ===========
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,
-------------------------
2007 2006
----------- -----------
Cash Flows from Operating Activities:
Net loss $(4,351,807) $(4,035,727)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 262,463 197,263
Amortization of EVLT(R) discount -- 4,902
Non-cash interest expense 378,057 96,076
Accretion of discount on marketable securities (35,797) (68,307)
Amortization of deferred financing costs 24,243 24,243
Fair value of stock options 164,352 188,140
Gain on fair value adjustment on warrant liability -- 770,421
Changes in operating assets and liabilities:
Accounts receivable 222,323 118,820
Inventories (674,474) (311,633)
Prepaid expenses and other current assets (309,681) (186,718)
Deposits (1,526) --
Accounts payable 928,910 (555,943)
Accrued expenses and deferred revenue 704,024 127,416
----------- -----------
Net cash used in operating activities (2,688,913) (3,631,047)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (66,974) (282,171)
Purchase of available for sale securities -- (195,280)
Proceeds from maturities of available for sale
securities 2,150,000 1,700,000
----------- -----------
Net cash provided by investing activities 2,083,026 1,222,549
----------- -----------
Cash Flows from Financing Activities:
Net proceeds (payments) on bank borrowings 107,535 (9,286)
Payments on EVLT(R) purchase obligation -- (250,000)
----------- -----------
Net cash provided by(used in)financing activities 107,535 (259,286)
----------- -----------
Effect of Exchange Rate Changes 4,993 341
----------- -----------
Net Decrease in Cash and Cash Equivalents (493,359) (2,667,443)
Cash and Cash Equivalents, beginning of period 7,306,578 9,562,087
----------- -----------
Cash and Cash Equivalents, end of period $ 6,813,219 $ 6,894,644
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 95,692 $ 83,965
=========== ===========
Non-cash Investing and Financing Activities:
Issuance of common stock in exchange for preferred stock $10,229,574 $ 54,250
=========== ===========
Non-cash increasing rate preferred stock dividend $ - $ 154,991
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(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 2006 annual report on Form
10-KSB on March 20, 2007, which included audited consolidated financial
statements for the year ended December 31, 2006, and included information and
footnotes necessary for such presentation. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in our annual report on Form
10-KSB for the year ended December 31, 2006.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Annual Report on Form 10-KSB for the year ended December 31, 2006 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
MARCH 31, 2007
(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:
March 31, December 31,
2007 2006
------------- -----------
Raw Materials $1,504,450 $1,571,135
Work-in-Process 1,368,775 797,934
Finished Goods 1,777,734 1,652,148
---------- ----------
$4,650,959 $4,021,217
========== ==========
(c) DEFERRED REVENUE
Deferred revenue at March 31, 2007 was as follows:
March 31,
2007
-------------
Beginning balance $ 388,328
Additions 252,595
Revenue/release (225,736)
---------
Ending balance $ 415,187
=========
(d) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company maintains stock-based incentive plans, providing stock incentives to
employees and directors. The Company grants 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. Effective January 1, 2006, the Company accounts for
share-based payments in accordance with SFAS 123(R). Prior to the effective date
of SFAS 123R, the Company applied APB 25 and related interpretations to stock
option grants. APB 25 provided that the compensation expense relative to stock
options was measured based on the intrinsic value of the stock option at date of
grant.
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 includes 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 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. Compensation cost is
recognized as expense over the requisite service period, which is generally the
vesting period. Prior periods were not restated to reflect the impact of
adopting the new standard.
The weighted-average grant date fair value of options granted in 2007 and 2006
was $0.59 and $1.65, respectively. The intrinsic value of options outstanding
and exercisable at March 31, 2007 was $442,343 and $45,496, respectively. The
intrinsic value of options outstanding and exercisable at March 31, 2006 was
$234,178 and $63,722, respectively. The Company used the market price of $1.44
and $2.52 versus the exercise price at March 31, 2007 and 2006, respectively.
F-5
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period:
Three Months Ended March 31,
-----------------------------------------
2007 2006
------------------- ------------------
Risk-free interest rate 3.01 - 4.70% 3.01 - 4.37%
Expected dividend yield --% --%
Expected lives (in years) 5.6 - 5.8 years 1.6 - 5.9 years
Expected volatility 85.2 - 88.5% 71.2 - 89.3%
Expected volatility is based on a weighted average of the historical daily
volatility of the Company's stock and peer company volatility commensurate with
the expected life of the option. The average expected life used in 2006 was
calculated using the simplified method under Staff Accounting Bulletin No. 107
which averages the contractual term of the option with the vesting term. 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 of 5%.
(e) 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,
-------------------------
2007 2006
----------- -----------
Net loss $(4,351,807) $(4,035,727)
Unrealized holding gain (loss)
on marketable securities 59 (200)
Foreign currency translation adjustment (40,386) 38,621
----------- -----------
Comprehensive loss $(4,392,134) $(3,997,306)
=========== ===========
(f) 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, 2007, all of which mature within one year, consist of
the following:
Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Money Market Funds $2,756,314 $2,756,314 $ -- $ --
Commercial Paper 3,016,916 3,017,275 359 --
---------- ---------- ---- ----
$5,773,230 $5,773,589 $359 $ --
========== ========== ==== ====
As Reported:
Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Cash and Cash
Equivalents $5,273,628 $5,273,919 $291 $ --
Marketable Securities 499,602 499,670 68 --
---------- ---------- ---- ----
$5,773,230 $5,773,589 $359 $ --
========== ========== ==== ====
F-6
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Marketable securities included in cash and cash equivalents and short term
investments at December 31, 2006, all of which mature within one year, consist
of the following:
Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Money Market Funds $ 2,521,968 $ 2,521,968 $ -- $ --
Commercial Paper 6,063,871 6,064,172 301 --
----------- ----------- ---- -----
$ 8,585,839 $ 8,586,139 $301 $ --
=========== =========== ==== =====
As Reported:
Unrealized Unrealized
Amortized Cost Fair Value Gains Losses
-------------- ---------- ---------- ----------
Cash and Cash
Equivalents $ 5,958,921 $ 5,959,260 $339 $ --
Marketable Securities 2,626,918 2,626,880 -- 38
----------- ----------- ---- ----
$ 8,585,839 $ 8,586,139 $339 $ 38
=========== =========== ==== ====
Net unrealized gain for the three month period ended March 31, 2007 totaled
$359.
(g) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement No. 109. This
interpretation addresses the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. It prescribes a comprehensive model for
recognizing, measuring, presenting and disclosing in the financial statements
tax positions taken or expected to be taken in a tax return. It requires that
only benefits from tax positions that are more-likely-than-not of being
sustained upon examination should be recognized in the financial statements.
These benefits would be recorded at amounts considered to be the maximum amounts
more-likely-than-not of being sustained. At the time these positions become
more-likely-than-not to be disallowed, their recognition would be reversed. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to retained earnings. The Company adopted the provisions of FIN 48
effective January 1, 2007. The Company's practice is to recognize interest
and/or penalties related to income tax matters in income tax expense. Upon
adoption of FIN 48 on January 1, 2007, the Company did not record any interest
or penalties.
The Company is subject to taxation in the UK, US and various state
jurisdictions. The Company's tax years for 1998 and forward are subject to
examination by the US tax authorities due to the carryforward of unutilized net
operating losses. The Company's tax years for 2004 and forward are subject to
examination by the UK tax authorities.
The adoption of FIN 48 did not have a material impact on the financial
condition, results of operations or cash flows. At January 1, 2007, the Company
had US net operating loss ("NOL") carryforwards of approximately $46 million and
foreign NOLs of approximately $20 million. At January 1, 2007, the Company had a
net deferred tax asset of approximately $25 million related to these NOLs. Due
to uncertainties surrounding the Company's ability to generate future taxable
income to realize these assets, a full valuation has been established to offset
the net deferred tax asset. Additionally, the future utilization of the US NOL
carryforwards to offset future taxable income may be subject to a substantial
annual limitation as a result of Section 382 ownership changes that may have
occurred previously or that could occur in the future. In general, an ownership
change, as defined by Section 382, results from transactions increasing the
ownership of certain shareholders or public groups in the stock of a corporation
by more than 50 percentage points over a three year period. Since the Company's
formation, the Company has raised capital through the issuance of capital stock
which, combined with the purchasing shareholders' subsequent disposition of
those shares, may have resulted in a change of control, as defined by Section
382, or could result in a change of control in the future upon subsequent
disposition. If the Company has experienced a change in control at any time
since the Company's formation, utilization of the Company's NOL carryforwards
would be subject to an annual limitation under Section 382. Any limitation may
result in expiration of a portion of the NOL carryforwards before utilization.
Any carryforwards that will expire prior to utilization as a result of such
limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance. Due to the existence of the valuation
allowance, future changes in our unrecognized tax benefits related to NOLs will
not impact the Company's effective tax rate.
(4) 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
of 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. Upon completion of
the 2006 preferred stock financing, the Company exchanged the 2005 preferred
stock for new preferred stock which does not currently accrue dividends.
Therefore, there were no dividends recorded during the period ended March 31,
2007.
F-7
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
As a result of the losses incurred by the Company for the three month periods
ended March 31, 2007 and 2006, 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,
----------------------
2007 2006
---------- ---------
Common Stock Options 2,936,352 2,416,487
========== =========
Common Stock Warrants 6,055,304 5,197,775
========== =========
Convertible Debt 3,227,826 1,620,961
========== =========
Preferred Stock 8,982,565 3,975,000
========== =========
(5) 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. As of March 31, 2007, Barclay's had provided a temporary
increase in the overdraft facility up to approximately $331,000. The credit line
bears interest at a rate of 2.5% above Barclays' base rate (5.25% at March 31,
2007) 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, 2007,
there was approximately $331,000 outstanding and at December 31, 2006, there was
approximately $223,000 outstanding under this line of credit.
(6) 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 three 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, 2007, 275,400 options and other incentive stock awards were
available for future grants under the 2003 Omnibus Plan. In addition, 11,138
options were available under the 2001 Plan and 1,123 options were available
under the 1998 Plan as of March 31, 2007.
A summary of stock option activity for the 2003 Omnibus Plan, the 2001 Plan and
the 1998 Plan is as follows:
Range of Number Weighted Average Weighted Average
Exercise Price of Shares Exercise Price Remaining Life
--------------- --------- ---------------- ----------------
Outstanding, December 31, 2006 $0.96 - $205.75 2,478,376 $4.63
Granted 0.81 - 0.81 643,000 0.81
Forfeited 4.68 - 4.68 (195,275) 4.68
--------------- --------- -----
Outstanding, March 31, 2007 $0.81 - $205.75 2,926,101 $3.78 8.12
=============== ========= ===== ====
Exercisable, March 31, 2007 $0.81 - $205.75 1,932,428 $5.04 7.46
=============== ========= ===== ====
F-8
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The intrinsic value of options vested at March 31, 2007 was $45,496. The fair
value of options vested during the quarter ended March 31, 2007 was $143,166. At
March 31, 2007, there were 993,673 unvested shares outstanding with a weighted
average grant date fair value of $0.97.
The following table summarizes currently outstanding and exercisable options as
of March 31, 2007.
OUTSTANDING EXERCISABLE
---------------------------------------------- ----------------------------
Weighted Average Weighted Average
Exercise Price Shares Remaining Life* Exercise Price Shares Exercise Price
---------------- --------- --------------- ---------------- --------- ----------------
$ 0.81 - 1.04 725,000 9.75 $ 0.84 72,731 $ 0.86
1.05 - 2.15 107,857 7.26 1.83 91,399 1.92
2.16 - 2.29 580,868 8.79 2.24 292,170 2.24
2.30 - 4.00 161,750 7.45 3.19 125,502 3.19
4.01 - 4.75 678,463 7.57 4.25 678,463 4.25
4.76 - 5.00 554,300 6.91 5.00 554,300 5.00
5.01 - 11.50 96,811 5.87 8.66 96,811 8.66
11.51 - 49.00 6,640 4.24 31.16 6,640 31.16
49.01 - 87.00 4,700 4.81 51.06 4,700 51.06
87.01 - 205.75 9,712 1.00 155.21 9,712 155.21
--------- ------- --------- -------
2,926,101 $ 3.78 1,932,428 $ 5.04
========= ======= ========= =======
* Weighted average remaining contractual life (in years).
(b) During the period ended March 31, 2007, no warrants were granted or
exercised. A summary of warrant information is as follows:
Weighted Average
Range of Number of Weighted Average Remaining Contractual
Exercise Price Shares Exercise Price Life (In Years)
-------------- --------- ---------------- ---------------------
Outstanding, December 31, 2006 $0.025 - $2.90 6,055,303 $1.63 3.36
-------------- --------- ----- ----
Outstanding, March 31, 2007 $0.025 - $2.90 6,055,303 $1.63 3.11
============== ========= ===== ====
Exercisable, March 31, 2007 $0.025 - $2.90 6,055,303 $1.63 3.11
============== ========= ===== ====
(7) SEGMENT REPORTING
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
March 31,
-----------------------
2007 2006
---------- ----------
Laser systems $1,845,263 $1,769,553
Fibers, accessories, and service 4,060,008 2,806,599
---------- ----------
Total $5,905,271 $4,576,152
========== ==========
F-9
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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,
2007 2006 2007 2006
-------- -------- ------------- ------------
United States 70% 74% $5,769,053 $5,994,202
Asia/Pacific 10% 5% -- --
Europe 16% 14% 471,258 478,002
Other 4% 7% 14,110 --
---- ---- ---------- ----------
Total 100% 100% $6,254,421 $6,472,204
==== ==== ========== ==========
(8) COMMITMENTS AND CONTINGENCIES
(a) Litigation
'777 PATENT LITIGATION
On January 6, 2004, the Company 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 Number
6,398,777 (the "'777 patent") covering the endovascular laser treatment of
varicose veins which the Company uses in our EVLT(R) product line, the exclusive
rights to which we acquired on September 3, 2003. AngioDynamics generally denied
the Company's allegations and sought a declaratory judgment of invalidity of the
'777 patent. AngioDynamics also added certain counterclaims against the Company,
including antitrust violations, patent misuse and other allegations, all arising
from our obtaining and seeking to enforce the '777 patent.
On March 4, 2004, the Company filed a second lawsuit against Vascular Solutions
in the United States District Court for the District of Massachusetts seeking
injunctive relief and damages for infringement of the '777 patent. 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. At the parties' joint request, our patent cases involving
AngioDynamics and Vascular Solutions were consolidated by the court.
On December 21, 2005, the Company moved for summary judgment that the `777
patent is valid, enforceable, and infringed by both Vascular Solutions and
AngioDynamics. On the same date, AngioDynamics and Vascular Solutions moved for
summary judgment of noninfringement. On August 20, 2006, Judge Nathaniel Gorton
issued a favorable ruling on the summary judgment motions. In particular, Judge
Gorton rejected all of the various challenges raised by the defendants to the
validity or enforceability of our '777 patent, and granted us summary judgment
of validity and enforceability of the patent. Judge Gorton further denied all
parties' cross-motions for summary judgment on infringement.
Trial commenced on March 12, 2007 and on March 28, 2007, the jury found in favor
of Diomed and against both defendants, both for inducing infringement and for
contributory infringement of Diomed's patent, and awarded nearly $12.5 million
in damages. The Company will not record this amount until final resolution of
the appeal. In particular, the jury awarded $8.36 million against AngioDynamics
and $4.1 million against Vascular Solutions. On March 30, 2007 Diomed filed a
Motion for a Permanent Injunction against AngioDynamics and Vascular Solutions.
In addition the parties have filed a series of post-judgment motions. Defendants
have sought judgment as a matter of law and/or a new trial. Diomed has sought
prejudgment interest and additional post-judgment damages. The post-trial
motions are pending and will be heard by the court on May 22, 2007.
On April 2, 2004, the Company filed a lawsuit in the United States District
Court for the District of Massachusetts against Total Vein Solutions, LLC,
seeking injunctive relief and damages for infringement of the '777 patent. Total
Vein Solutions answered the complaint, generally denying the Company's
allegations and counterclaiming for declaratory judgment of non-infringement and
invalidity of the EVLT(R) patent. The Company is in the discovery phase of this
litigation. This case is also pending before Judge Gorton.
On October 14, 2004, the Company filed a lawsuit in the United States District
Court for the District of Massachusetts against New Star Lasers, Inc., d/b/a
Cooltouch, Inc., seeking injunctive relief and damages for infringement of the
'777. CoolTouch answered the complaint, generally denying the Company's
allegations and counterclaiming for declaratory judgment of non-infringement and
invalidity of the '777 patent. The Company is now proceeding with the discovery
phase of this litigation. This case is also pending before Judge Gorton.
F-10
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
On March 29, 2007 the Company filed a lawsuit in United States District Court
for the District of Massachusetts against Dornier Medtech America, Inc. seeking
injunctive relief and damages for infringement of the '777 patent. This case is
also pending before Judge Gorton.
If the Company does not prevail in the appeal and infringement actions and is
not be able to exclude third parties from using the Company's EVLT(R)
technology, the EVLT(R) patent may be determined to be impaired and the
Company's EVLT(R) revenue stream may be adversely affected.
F-11
DIOMED HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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 the Company 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, which
is scheduled to continue through mid-2007, with a trial date currently scheduled
for October 2007. The Court held a claim construction tutorial and a hearing on
claim construction issues on October 30, 2006 and issued a ruling on claims
construction on November 20, 2006. The Company intends to continue to defend
against the allegations against us in this case.
OTHER
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.
b) Commitments
On August 5, 2005, the Company entered into a distribution agreement with
Luminetx, pursuant to which Luminetx appointed the Company as a distributor and
granted the Company the exclusive right to distribute and sell the Luminetx
patented biomedical imaging system known as the VeinViewer(TM) Imaging System to
physicians who perform sclerotherapy, phlebectomies or varicose vein treatments,
initially in the United States and the United Kingdom, with additional
territories to be negotiated as VeinViewer(TM) receives regulatory clearance in
other countries, on terms to be agreed. Luminetx agreed to supply the Company
with a certain minimum number of VeinViewer(TM) systems for distribution by the
Company at specified prices during the term of the distribution agreement,
initially three years. During May 2007, the Company and Luminetx amended the
agreement and revised the targeted number of VeinViewer(TM) systems to be
purchased through December 31, 2007 and through April 30, 2008, to better
reflect current market development and positioning strategies. The agreement was
also amended so that both companies may sell to dermatologists who are not
performing EVLT(R). If the Company fails to purchase the annual target number of
VeinViewer(TM) systems prior to May 1, 2008, for any reason, Luminetx may
terminate the distribution agreement with written notice.
(9) STOCKHOLDERS' EQUITY
At December 31, 2006, the Company had 19,448,728 shares of common stock
outstanding. During the period ended March 31, 2007, the holders of 837.782
shares of preferred stock exchanged their shares of preferred stock into
8,371,782 shares of common stock. At March 31, 2007, the Company had 27,820,510
shares of common stock outstanding.
On September 29, 2006, the Company issued 1,735.4347 shares of preferred stock,
each share of which has a stated value of $11,500 per share. The Company issued
870.4348 of these shares to investors who purchased these shares for cash at a
price of $11,500 per share, and the Company issued 864.9999 shares to investors
who tendered 3,975,000 shares of preferred stock issued in 2005, all in
accordance with the terms of a securities purchase agreement entered into with
the investors in July 2006. Each share of preferred stock is exchangeable for
10,000 shares of common stock. At December 31, 2006, the Company had 1,735.4347
shares of preferred stock outstanding.
During the period ended March 31, 2007, the holders of 837.782 shares of
preferred stock exchanged their shares of preferred stock into 8,371,782 shares
of common stock. At March 31, 2007, the Company had 898.2565 shares of preferred
stock outstanding.
(10) SUBSEQUENT EVENTS
Subsequent to March 31, 2007, the holders of 202.6521 shares of preferred stock
purchased in the September 29, 2006 private placement equity financing elected
to exchange these share into common stock on a one-for10,000 basis, and
accordingly the Company issued 2,026,521 shares of common stock to these
holders.
During May 2007, the Company and Luminetx amended the agreement and revised the
targeted number of VeinViewer(TM) systems to be purchased through December 31,
2007 and through April 30, 2008 to better reflect current market development and
positioning strategies. The agreement was also amended so that both companies
may sell to dermatologists who are not performing EVLT(R). If the Company fails
to purchase the annual target number of VeinViewer(TM) systems prior to May 1,
2008, for any reason, Luminetx may terminate the distribution agreement with
written notice.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 2006 Annual
Report on Form SEC 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 19 through 34 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,
we have incurred substantial costs to create or acquire our products. As of
March 31, 2007, we had an accumulated deficit of approximately $95 million
including $18.2 million in non-cash interest expense, $1,129,000 gain related to
the adjustment of the market value of a warrant liability, and $735,000 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 we
generate 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 the primary source of revenue in the first quarter of 2007, and will
continue to be our primary source of revenue in 2007. We believe that EVLT(R)
will achieve a high level of commercial acceptance due to its relativly 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 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 with significant market potential. 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, 2007 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2006
REVENUE
Diomed delivered revenue for the three months ended March 31, 2007 of
$5,905,000, increasing approximately $1,329,000, or 29%, from $4,576,000 for the
same period in 2006. Revenue from the EVLT(R) product line increased 23% over
the same period last year, including growth of 40% 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, 2007, approximately $1,845,000, or 31%, of
our total revenue was derived from laser sales, as compared to approximately
$1,770,000, or 39%, in the same period in 2006. In the three months ended March
31, 2007, approximately $4,060,000, or 69%, of our total revenues were from
sales of disposable fibers and kits, accessories, service and VeinViewer(TM), as
compared to approximately $2,807,000, or 61%, in the same period in 2006. We
expect the proportion of revenue derived from disposables to increase as we
establish a larger base of installed lasers and the number of EVLT(R) procedures
performed grows.
The increase in revenue is attributable primarily to:
- - increased penetration in the EVLT(R) market,
- - the compounding impact of the recurring revenue stream from disposable sales
to both new and existing customers,
2
- - 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, 2007 was $3,225,000,
increasing approximately $703,000, or 28%, from $2,523,000 for the three months
ended March 31, 2006. The increase in cost of revenue in 2007 was primarily a
result of increased revenues and increased indirect overhead costs.
Gross profit for the three months ended March 31, 2007 was $2,680,000,
increasing approximately $626,000, or 30% from $2,054,000 from the three months
ended March 31, 2006. The increase in gross profit in 2007 was primarily a
result of incremental sales volume. On a percent-of-sales basis, the gross
profit of 45.4% increased fifty basis points compared with the gross margin of
44.9% in the prior year. We believe that gross profit as a percentage of sales
may reach 60%, or more, assuming increases in sales volume and pricing
adjustments that may occur after successful completion of the '777 patent
litigation.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT EXPENSES for the three months ended March 31, 2007 of
$415,000, increased by $61,000, or 17%, from the three months ended March 31,
2006. We expect R&D expenditures to remain relatively stable, as we continue to
drive product functionality, cost improvements, and other enhancements.
SELLING AND MARKETING EXPENSES for the three months ended March 31, 2007 of
$3,136,000, increased $343,000, or 12%, over the three months ended March 31,
2006. The increase was driven by an expansion in the size of the sales force
resulting in increased costs of $84,000 and higher sales commissions resulting
from the increased sales volume, and increased sales and marketing expenditures
in support of the sales efforts. 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, 2007 of
$3,073,000, increased $1,014,000, or 49%, from the three months ended March 31,
2006. The increase was primarily attributable to increased legal costs during
the trial phase of the `777 litigation. For the three months ended March 31,
2007, legal and patent related costs of $1,700,000 included $1,500,000 of trial
related costs, and increased $900,000 compared to the three months ended March
31, 2006. These costs were partially offset by a decrease in our defense cost in
the VNUS Medical Technologies, Inc. ("VNUS") litigation.
LOSS FROM OPERATIONS
As a result of the factors outlined above, the loss from operations for the
three months ended March 31, 2007 was $3,944,000, increasing $792,000 from
$3,152,000 for the three months ended March 31, 2006, as the expansion of our
sales and marketing efforts during the quarter drove incremental revenue, which
was offset by an increase in `777 patent trial related costs.
OTHER EXPENSE, NET
Other expense, net for the three months ended March 31, 2007 was $407,000,
compared to other expense, net of $883,000 for the three months ended March 31,
2006. Other expense, net for the three months ended March 31, 2006 includes
$770,000 for the non-cash, non-operating charge for the effect of the change in
market value of warrants issued in the private placement financing completed on
September 30, 2005.
As a result of the financing which closed on September 29, 2006, the Company
marked to market the warrant obligation for a final time and reclassified its
mezzanine level preferred stock and warrant liability to permanent equity during
the quarter ended September 30, 2006.
3
NET LOSS
Net loss for the three months ended March 31, 2007 was $4,352,000 compared to
$4,036,000 for three months ended March 31, 2006. The expansion of our sales and
marketing efforts during the three months ended March 31, 2007 drove incremental
revenue, resulting in increased gross margin, increased commissions, and
increases in other sales and marketing costs. Also, included in the net loss is
approximately $1.5 million in `777 patent trial costs.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
Net loss applicable to common stockholders for the three months ended March 31,
2007 was $4,352,000, or $0.20 per share, compared to $4,340,000, or $0.22 per
share, for the three months ended March 31, 2006. During 2006, we were required
to pay cash dividends to holders of the 2005 preferred stock. These cash
dividends amounted to $149,000 during the three months ended March 31, 2006. In
addition, because the dividend percentage was considered below market for
accounting purposes, we recorded an incremental non-cash dividend of $155,000 to
reflect an effective interest rate of 16.5%. As a result of the preferred stock
financing closed on September 29, 2006, the 2005 preferred stock was exchanged
for the 2006 preferred stock, which does not accrue dividends unless a future
dilutive financing is completed within certain terms. Therefore, we ceased
paying or accreting these dividends on a prospective basis subject to the terms
of the 2006 preferred stock.
(3) LIQUIDITY, CAPITAL RESOURCES AND CAPITAL TRANSACTIONS
CASH POSITION AND CASH FLOW
We have financed our operations primarily through private placements of common
stock and preferred stock and private placements of convertible notes and
short-term notes and credit arrangements. We had cash and short-term investment
balances of approximately $7,313,000 and $9,933,000 at March 31, 2007 and
December 31, 2006, respectively.
CASH USED IN OPERATIONS
Cash used in operations for the three months ended March 31, 2007 was
$2,689,000. The cash used in operations reflects the net loss of $4,352,000,
which includes $1,462,000 in legal fees incurred in asserting our EVLT(R)
patent, and was partially offset by non-cash charges such as $378,000 of
non-cash interest and $164,000 for stock based compensation. The cash flow
impact of the net loss was offset by changes in working capital items totaling
approximately $870,000 primarily attributed to increased accounts payable and
accrued expenses for patent litigation fees.
CASH PROVIDED BY INVESTING
Cash provided by investing activities for the three months ended March 31, 2007
was approximately $2,083,000, including proceeds from maturities of marketable
securities of $2,150,000 as the Company limited reinvestment as a result of cash
requirements, and purchases of computer and demonstration equipment of $67,000.
CASH PROVIDED BY FINANCING
Cash provided by financing activities for the three months ended March 31, 2007
was $108,000 of proceeds from our bank line of credit.
BANK LINES OF CREDIT
Diomed, Ltd., our 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. As
of March 31, 2007, Barclay's had provided a temporary increase in the overdraft
facility up to approximately $331,000. The credit line bears interest at a rate
of 2.5% above Barclays' base rate (5.25% at March 31, 2007) 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, 2007, there was approximately
$331,000 outstanding and at December 31, 2006, there was approximately $223,000
outstanding under this line of credit.
4
FUTURE AVAILABILITY OF CREDIT
As of March 31, 2007, other than the security under the Barclays Bank line of
credit, our assets were not 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, 2007, two of the three investors who
purchased debentures in 2004 continued to hold debentures of at least 10% of the
original principal amount. Also, under the terms of the September 29, 2006
financing transaction, we agreed that so long as any investor owned at least 25%
of the shares of preferred stock initially purchased, we would not incur
indebtedness (other than ordinary course trade payables and installment loans)
in excess of $1 million (including the Barclays Bank line of credit) without
prior approval of the holders of the 65% of the outstanding 2006 preferred
stock.
EQUITY TRANSACTIONS
During the period ended March 31, 2007, the holders of 837.782 shares of
preferred stock exchanged their shares of preferred stock into 8,371,782 shares
of common stock. At March 31, 2007, 898.2565 shares of preferred stock remain
outstanding.
At December 31, 2006, we had 19,448,728 shares of common stock outstanding and
as a result of the conversions of preferred stock during the quarter, at March
31, 2007, we had 27,820,510 shares of common stock outstanding.
COMMITMENT FOR LUMINETX DISTRIBUTION AGREEMENT
On August 5, 2005, we entered into a distribution agreement with Luminetx,
pursuant to which Luminetx appointed us as a distributor and granted the Company
the exclusive right to distribute and sell the Luminetx patented biomedical
imaging system known as the VeinViewer(TM) Imaging System to physicians who
perform sclerotherapy, phlebectomies or varicose vein treatments, initially in
the United States and the United Kingdom, with additional territories to be
negotiated as VeinViewer(TM) receives regulatory clearance in other countries,
on terms to be agreed. Luminetx agreed to supply us with a certain minimum
number of VeinViewer(TM) systems for distribution by us at specified prices
during the term of the distribution agreement, initially three years. During May
2007, we and Luminetx amended the agreement and revised the targeted number of
VeinViewer(TM) systems to be purchased through December 31, 2007 and through
April 30, 2008 to better reflect current market development and positioning
strategies. The agreement was also amended so that both companies may sell to
dermatologists who are not performing EVLT(R). If we fail to purchase the annual
target number of VeinViewer(TM) systems prior to May 1, 2008, for any reason,
Luminetx may terminate the distribution agreement with written notice.
(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 2006 Annual Report on Form 10-KSB with the Securities and Exchange
Commission on March 20, 2007, which included audited consolidated financial
statements for the year ended December 31, 2006, and included information and
footnotes necessary for such presentation. These unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in our annual report on Form
10-KSB for the year ended December 31, 2006.
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 for the fiscal year
ended December 31, 2006, 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.
During the first quarter 2007, we adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109. This interpretation addresses the accounting for uncertainty
in income taxes recognized in a company's financial statements in accordance
with FASB Statement No. 109, Accounting for Income Taxes. It prescribes a
comprehensive model for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken in a tax
return. It requires that only benefits from tax positions that are
more-likely-than-not of being sustained upon examination should be recognized in
the financial statements. These benefits would be recorded at amounts considered
to be the maximum amounts more-likely-than-not of being sustained. At the time
these positions become more-likely-than-not to be disallowed, their recognition
would be reversed. This interpretation is effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to retained earnings. We adopted the
provisions of FIN 48 effective January 1, 2007. Our practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
Upon adoption of FIN 48 on January 1, 2007, we did not record any interest or
penalties.
We are subject to taxation in the UK, US and various state jurisdictions. Our
tax years for 1998 and forward are subject to examination by the US tax
authorities due to the carryforward of unutilized net operating losses.
The adoption of FIN 48 did not have a material impact on our financial
condition, results of operations or cash flows. At January 1, 2007, we had US
net operating loss ("NOL") carryforwards of approximately $46 million and
foreign NOLs of approximately $20 million. At January 1, 2007, the Company had a
net deferred tax asset of approximately $25 million related to these NOLs. Due
to uncertainties surrounding our ability to generate future taxable income to
realize these assets, a full valuation has been established to offset our net
deferred tax asset. Additionally, the future utilization of our US NOL
carryforwards to offset future taxable income may be subject to a substantial
annual limitation as a result of Section 382 ownership changes that may have
occurred previously or that could occur in the future. In general, an ownership
change, as defined by Section 382, results from transactions increasing the
ownership of certain shareholders or public groups in the stock of a corporation
by more than 50 percentage points over a three year period. Since our formation,
we have raised capital through the issuance of capital stock which, combined
with the purchasing shareholders' subsequent disposition of those shares, may
have resulted in a change of control, as defined by Section 382, or could result
in a change of control in the future upon subsequent disposition. If we have
experienced a change in control at any time since our formation, utilization of
the NOL carryforwards would be subject to an annual limitation under Section
382. Any limitation may result in expiration of a portion of the NOL
carryforwards before utilization. Any carryforwards that will expire prior to
utilization as a result of such limitations will be removed from deferred tax
assets with a corresponding reduction of the valuation allowance. Due to the
existence of the valuation allowance, future changes in our unrecognized tax
benefits related to NOLs will not impact our effective tax rate.
5
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, 2007 and have concluded that,
as of such date, the Company's disclosure controls and procedures in place are
effective in ensuring that 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 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 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. AngioDynamics generally denied our allegations and sought a
declaratory judgment of invalidity of the '777 patent. AngioDynamics 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.
On March 4, 2004, we filed a second lawsuit against Vascular Solutions in the
United States District Court for the District of Massachusetts seeking
injunctive relief and damages for infringement of the '777 patent. 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. At the parties' joint request, our patent cases involving
AngioDynamics and Vascular Solutions were consolidated by the court.
On December 21, 2005, we moved for summary judgment that the `777 patent is
valid, enforceable, and infringed by both Vascular Solutions and AngioDynamics.
On the same date, AngioDynamics and Vascular Solutions moved for summary
judgment of noninfringement. On August 20, 2006, Judge Nathaniel Gorton issued a
favorable ruling on the summary judgment motions. In particular, Judge Gorton
rejected all of the various challenges raised by the defendants to the validity
or enforceability of our '777 patent, and granted us summary judgment of
validity and enforceability of the patent. Judge Gorton further denied all
parties' cross-motions for summary judgment on infringement.7
Trial commenced on March 12, 2007 and on March 28, 2007, the jury found in favor
of Diomed and against both defendants, both for inducing infringement and for
contributory infringement of Diomed's patent, and awarded nearly $12.5 million
in damages. In particular, the jury awarded $8.36 million against AngioDynamics
and $4.1 million against Vascular Solutions. On March 30, 2007 Diomed filed a
Motion for a Permanent Injunction against AngioDynamics and Vascular Solutions.
In addition the parties have filed a series of post-judgment motions. Defendants
have sought judgment as a matter of law and/or a new trial. Diomed has sought
prejudgment interest and additional post-judgment damages. The post-trial
motions are pending and will be heard by the court on May 22, 2007.
On April 2, 2004, we filed a lawsuit in the United States District Court for the
District of Massachusetts against Total Vein Solutions, LLC, seeking injunctive
relief and damages for infringement of the '777 patent. 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. This case is also
pending before Judge Gorton.
On October 14, 2004, we filed a lawsuit in the United States District Court for
the District of Massachusetts against New Star Lasers, Inc., d/b/a Cooltouch,
Inc., seeking injunctive relief and damages for infringement of the '777.
CoolTouch answered the complaint, generally denying our allegations and
counterclaiming for declaratory judgment of non-infringement and invalidity of
the '777 patent. We are now proceeding with the discovery phase of this
litigation. This case is also pending before Judge Gorton.
On March 29, 2007 we filed a lawsuit in United States District Court for the
District of Massachusetts against Dornier Medtech America, Inc. seeking
injunctive relief and damages for infringement of the '777 patent. This case is
also pending before Judge Gorton.
7
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, Inc. and Vascular Solutions, Inc., as defendants. On
October 31, 2005, we 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. We are
now proceeding with the discovery phase of this litigation, which is scheduled
to continue through mid-2007, with a trial date currently scheduled for October
2007. The Court held a claim construction tutorial and a hearing on claim
construction issues on October 30, 2006 and issued a ruling on claims
construction on November 20, 2006. We intend to continue to defend against the
allegations against us in this case.
8
ITEM 6. EXHIBITS AND CURRENT 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
(b) Current reports on Form 8-K.
During the fiscal quarter ended March 31, 2007, we filed with the Securities and
Exchange Commission Current Reports on Form 8-K as follows:
On February 2, 2007, we filed a Current Report on Form 8-K regarding the
compensatory arrangements with certain officers.
On February 26, 2007, we filed a Current Report on Form 8-K regarding the press
release we filed related to the earnings results for the period ending December
31, 2006.
On March 14, 2007, we filed a Current Report on Form 8-K regarding David B.
Swank's testimony in relation to the `777 patent trial.
On March 21, 2007, we filed a Current Report on Form 8-K regarding the
management incentive program payments to our executive officers earned during
the year December 31, 2006 in accordance with management incentive agreements.
O March 28, 2007, we filed a Current Report on Form 8-K regarding the positive
jury verdict and damages awarded in conjunction with the `777 patent trial.
On March 30, 2007, we filed a Current Report on Form 8-K regarding our
resolution of the listing deficiency previously noted by the American Stock
Exchange.
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 14, 2007
By: /s/ DAVID B. SWANK
------------------------------------
Name: David B. Swank
Title: Chief Financial Officer,
Director
Date: May 14, 2007
9