SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
March 31, 2008 0-10581
-------------- -------
TRIMEDYNE, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 36-3094439
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
25901 Commercentre Dr., Lake Forest, CA 92630
(Address of principal executive offices) (Zip Code)
(949/951-3800)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report).
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), (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
(Issuers involved in bankruptcy proceedings during the past five years)
Not applicable
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the last practicable date.
Class Outstanding at May 15, 2008
----------------------------- ------------------------------------
Common Stock, $0.01 par value 18,264,351 shares
TRIMEDYNE, INC.
Page Number
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PART I. Financial Information 3
ITEM 1. Condensed consolidated financial statements (Unaudited) 3
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statements of Income (Operations) 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or
Plan of Operation 12
ITEM 3. Controls and Procedures 16
PART II. Other Information 17
SIGNATURE PAGE 18
CERTIFICATIONS 19
2
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
March 31,
2008
-------------
Unaudited
Current assets:
Cash and cash equivalents $ 2,573,000
Trade accounts receivable, net of allowance for doubtful
accounts of $12,000 721,000
Inventories 3,064,000
Other current assets 250,000
------------
Total current assets 6,608,000
Property and equipment, net 1,220,000
Other 40,000
Goodwill 544,000
------------
$ 8,412,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 345,000
Accrued expenses 442,000
Deferred revenue 83,000
Accrued warranty 31,000
Current portion of long-term debt 66,000
------------
Total current liabilities 967,000
Deferred rent 83,000
Long-term debt, net of current portion 302,000
------------
Total liabilities 1,352,000
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding --
Common stock - $0.01 par value; 30,000,000 shares
authorized, 18,365,960 shares issued,
18,264,351 shares outstanding 184,000
Additional paid-in capital 51,405,000
Accumulated deficit (43,816,000)
------------
7,773,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 7,060,000
------------
$ 8,412,000
============
See accompanying notes to condensed consolidated financial statements
3
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net revenues $ 1,519,000 $ 1,468,000 $ 2,705,000 $ 2,893,000
Cost of revenues 1,049,000 860,000 1,880,000 1,639,000
------------ ------------ ------------ ------------
Gross profit 470,000 608,000 825,000 1,254,000
Operating expenses:
Selling, general and administrative 627,000 553,000 1,178,000 1,032,000
Research and development 322,000 255,000 575,000 413,000
------------ ------------ ------------ ------------
Total operating expenses 949,000 808,000 1,753,000 1,445,000
------------ ------------ ------------ ------------
Loss from operations (479,000) (200,000) (928,000) (191,000)
Other income, net 187,000 224,000 259,000 381,000
------------ ------------ ------------ ------------
(Loss) income before provision for income taxes (292,000) 24,000 (669,000) 190,000
Provision for income taxes -- 4,000 -- 4,000
------------ ------------ ------------ ------------
Net income (loss) $ (292,000) $ 20,000 $ (669,000) $ 186,000
============ ============ ============ ===========
Net income (loss) per share:
Basic $ (0.02) $ 0.00 $ (0.04) $ 0.01
============ ============ ============ ============
Diluted $ (0.02) $ 0.00 $ (0.04) $ 0.01
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 18,365,960 17,532,763 18,365,960 17,019,394
============ ============ ============ ============
Diluted 18,365,960 18,769,173 18,365,960 18,251,514
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
2008 2007
----------- -----------
Cash flows from operating activities:
Net income (loss) $ (669,000) $ 186,000
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Stock-based compensation 30,000 30,000
Depreciation and amortization 140,000 116,000
Loss on disposal of property and equipment -- --
Changes in operating assets and liabilities:
Trade accounts receivable (147,000) 84,000
Inventories (73,000) (285,000)
Other assets (4,000) (93,000)
Note due from related party 9,000 12,000
Accounts payable 133,000 (55,000)
Accrued expenses 15,000 4,000
Deferred revenue 38,000 7,000
Accrued warranty 4,000 (3,000)
Accrued interest due officer -- 10,000
Income taxes payable -- (4,000)
Deferred rent (8,000) (3,000)
----------- -----------
Net cash (used in) provided by operating activities (532,000) 6,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (48,000) (33,000)
----------- -----------
Net cash used in investing activities (48,000) (33,000)
----------- -----------
Cash flows from financing activities:
Proceeds from the sale of stock, net of issuance costs -- 3,034,000
Proceeds from the exercise of stock options -- 8,000
Payments on debt (26,000) (70,000)
----------- -----------
Net cash (used in) provided by financing activities (26,000) 2,972,000
----------- -----------
Net (decrease) increase in cash and cash equivalents (606,000) 2,945,000
Cash and cash equivalents at beginning of period 3,179,000 802,000
----------- -----------
Cash and cash equivalents at end of period $ 2,573,000 $3,747,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes during the six months ended March 31, 2008 and 2007 was none and
$1,000, respectively. Cash paid for interest during the six months ended March 31, 2008 and
2007 was approximately $6,000 and $2,000, respectively.
Supplemental disclosure of non-cash investing activity:
During the six months ended March 31, 2008, the Company financed the purchase of equipment
with a $390,000 note.
See accompanying notes to condensed consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include
the accounts of Trimedyne, Inc., its wholly owned subsidiary, Mobile Surgical
Technologies, Inc. ("MST"), and its 90% owned inactive subsidiary, Cardiodyne,
Inc. ("Cardiodyne") (collectively, the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying unaudited condensed condensed consolidated financial statements
have been prepared by the Company in accordance with accounting principles
generally accepted in the United States of America for interim financial
information, and pursuant to the instructions to Form 10-QSB and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission (SEC).
Accordingly, they do not include all information and disclosures required by
generally accepted accounting principles for complete financial statement
presentation. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of March 31, 2008 and the results of its
operations and its cash flows for the six months ended March 31, 2008 and 2007.
Results for the six months ended March 31, 2008 are not necessarily indicative
of the results to be expected fo r the year ending September 30, 2008.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the condensed
consolidated financial statements and the notes included in the Company's 2007
annual report on Form 10-KSB for the year ended September 30, 2007.
Stock-Based Compensation
Effective October 1, 2006, the Company adopted SFAS No. 123(R), "Share Based
Payment," which establishes standards for the accounting of all transactions in
which an entity exchanges its equity instruments for goods or services,
including transactions with non-employees and employees. SFAS No. 123(R)
requires a public entity to measure the cost of non-employee and employee
services received in exchange for an award of equity instruments, including
stock options, based on the grant date fair value of the award, and to recognize
it as compensation expense over the period service is provided in exchange for
the award, usually the vesting period. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Company's condensed consolidated statement of operations.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107,
"Share-Based Payment", relating to SFAS No. 123(R). The Company has applied the
provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
The fair value of stock-based awards is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions
regarding future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the Company's historical volatilities of its common stock. These factors could
change in the future, affecting the determination of stock-based compensation
expense in future periods. During the six months ended March 31, 2008, no stock
options were granted.
6
As of March 31, 2008, there was approximately $135,000 of total unrecognized
compensation cost, net of estimated expected forfeitures, related to employee
and director stock option compensation arrangements. This unrecognized cost is
expected to be recognized on a straight-line basis over the next five years.
The following table summarizes stock-based compensation expense related to
employee and director stock options under SFAS No. 123(R) for the three and six
months ended March 31, 2008, which was allocated as follows:
Three Months Ended Six Months Ended
March 31, 2008 March 31, 2008
------------------ ----------------
Stock-based compensation included in:
Cost of revenues $ 3,000 $ 6,000
Research and development expenses $ 1,000 $ 2,000
Selling, general, and administrative expenses $ 11,000 $ 22,000
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." SFAS No. 141R established principles and requirements for how an
entity which obtains control of one or more businesses (1) recognizes and
measures the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination and (3) determines what
information to disclose regarding business combinations. SFAS No. 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual report period beginning on or after
December 15, 2008. The Company is currently assessing the potential impact of
SFAS No. 141R on its financial statements.
NOTE 2 - Composition of Certain Balance Sheet Captions
March 31,
2008
------------
Inventories, net of reserves, consist of the following:
Raw materials $ 1,296,000
Work-in-process 773,000
Finished goods 995,000
------------
$ 3,064,000
============
For the six months ended March 31, 2008, the aggregate net realizable value of
demonstration and evaluation lasers did not comprise a material amount in
inventories.
Other current assets consist of the following:
Royalty receivable $ 176,000
Short-term deposits 52,000
Prepaid other 22,000
------------
Total other current assets $ 250,000
============
Property and equipment consist of the following:
Furniture and equipment $ 2,953,000
Leasehold improvements 619,000
Other 216,000
------------
3,788,000
Less accumulated depreciation and amortization (2,568,000)
------------
Total property and equipment $ 1,220,000
============
Accrued expenses consist of the following:
Accrued vacation $ 160,000
Accrued salaries and wages 107,000
Sales and use tax 64,000
Customer deposits 11,000
Accrued commissions 72,000
Accrued payroll taxes 10,000
Other 18,000
------------
Total accrued expenses $ 442,000
============
7
NOTE 3 - LONG-TERM DEBT
Long-term debt consists of the following at March 31, 2008:
Loan payable to leasing company, bearing interest at 7.54% per
annum; principal and interest due monthly in equal
installments of $209 through June 2008. The loan is secured by
the related forklift. $ 1,000
Loan payable to finance company bearing interest at 8.69%
per annum principal and interest due in equal installments
of $3,147 through September 2012. The loan is secured by
the related equipment. 114,000
Loan payable to finance company bearing interest at 9.25%
per annum principal and interest due in equal installments
of $4,979 through January 2013. The loan is secured by
the related equipment. 228,000
Loan payable to finance company bearing interest at 9.23%
per annum principal and interest due in equal installments
of $516 through February 2013. The loan is secured by
the related equipment. 25,000
-----------
$ 368,000
Less: current portion (66,000)
-----------
$ 302,000
===========
On April 04, 2008, the Company entered into a capital lease agreement in
connection with the purchasing of equipment for the amount of
$96,884. The lease requires monthly payments of $2,403 through March 2012.
On April 7, 2008 the Company entered into a finance agreement issued in
connection with the purchasing of certain insurance policies. The note bears
interest at 6.8% per annum and require monthly principal and interest payments
of $12,631 through March 2009.
NOTE 4 - Income (Loss) Per Share Information
Basic income (loss) per share is based on the weighted-average number of shares
of common stock outstanding during the period. Diluted income per share also
includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Company's
senior convertible secured notes due to officer for the period of time such
notes were outstanding, if such stock options and convertible notes are
dilutive.
The following table sets forth the computation of the numerator and denominator
of basic and diluted income (loss) per share:
Three Months Ended Six Months Ended
March 31, March 31,
2008 2007 2008 2007
---------- ---------- ---------- ----------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 18,365.960 17,532,763 18,365,960 17,019,394
Effect of Dilutive Options -- 472,918 -- 468,628
Effect of Senior Convertible Secured
Notes due to Officer and accrued interest -- 763,492 -- 763,492
---------- ---------- ---------- ----------
Weighted average common shares outstanding
used in calculating diluted earnings per share 18,365,960 18,769,173 18,365,960 18,251,514
========== ========== ========== ==========
Numerator
Net income (loss) $ (292,000) $ 20,000 $ (669,000) $ 186,000
Add - interest on Senior Convertible
Secured Notes due to Officer -- 5,000 -- 11,000
---------- ---------- ---------- ----------
Net income (loss) available to
common stockholders $ (292,000) $ 25,000 $ (669,000) $ 197,000
========== ========== ========== ==========
8
NOTE 4 - Commitments and Contingencies
Litigation
In February 2008, a lawsuit claiming infringement of certain, now expired, U.S.
patents, was filed against the Company and several other manufacturers of lasers
in the United States District Court for the District of Massachusetts by
CardioFocus, Inc. of Marlborough, Massachusetts. The Company believes it has
adequate defenses against the claims of this lawsuit and intends to vigorously
defend against it. Thus, at March 31, 2008, the Company has not made a provision
for loss due to this lawsuit in the accompanying condensed consolidated
financial statements.
The Company is subject to various claims and actions which arise in the ordinary
course of business. The litigation process is inherently uncertain, and it is
possible that the resolution of any of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters which are not reflected in the condensed consolidated statements of
operations that may have material impact on the Company's financial position,
results of operations or cash flows.
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its users of lasers for certain
claims arising from the use of the lasers. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
condensed consolidated balance sheet.
NOTE 5 - Other Income
During the six month period ended March 31, 2008 and 2007, the Company recorded
$220,000 and $329,000, respectively, in royalties in connection with the terms
of a settlement agreement. These royalties are included in other income in the
accompanying condensed consolidated financial statements.
Note 6 - Related Party Transactions
The Company had a promissory note receivable (the "Note") from Cardiomedics,
Inc. ("Cardiomedics"), a privately held corporation in which the Chairmain/CEO
of Company holds a majority interest and is a member of the Board of Directors.
The COO/President of the Company is also a board member of Cardiomedics. The
Note matured on March 31, 2008, and was paid in full.
On April 7, 2006, the Company entered into an agreement to employ Cardiomedics
as a consultant to provide graphics arts services, since the Company did not
have any employees with experience in the design and production of brochures and
other marketing materials. Under this agreement, Cardiomedics will provide the
services of a graphics art specialist at a rate comparable to those presently
prevailing in the market in the design and production of marketing materials.
During the six months ended March 31, 2008 and 2007, the Company incurred
$18,000 and $12,000, respectively, in expense for the services provided under
the agreement.
9
NOTE 7 - Segment Information
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. Products
consist of lasers, and related products such as disposable systems and component
parts. Services consist of rentals, fees on a per-case basis, as well as service
and warranty repairs and maintenance. Although discrete components that earn
revenues and incur expenses exist, significant expenses such as research and
development and corporate administration are not incurred by nor allocated to
these operating units but rather are employed by the entire enterprise.
Additionally, the chief operating decision maker evaluates resource allocation
not on a product or geographic basis, but rather on an enterprise-wide basis.
Therefore, the Company has concluded that it contains only one reportable
segment, which is the medical systems business. However, data with respect to
these operating activities for the three and six months ended March 31, 2008 and
2007 are as follows:
For the Three Months Ended March 31, 2008 For the Three Months Ended March 31, 2007
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ----------------------------------------
Revenue $ 1,054,000 $ 465,000 $ 1,519,000 $ 1,067,000 $ 401,000 $1,468,000
Cost of sales 681,000 368,000 1,049,000 578,000 282,000 860,000
---------------------------------------- ----------------------------------------
Gross profit 373,000 97,000 470,000 489,000 119,000 608,000
Expenses:
Selling, general and
administrative 515,000 112,000 627,000 455,000 98,000 553,000
Reasearch and development 322,000 -- 322,000 255,000 -- 255,000
---------------------------------------- ----------------------------------------
Income (loss) from operations $ (464,000) $ (15,000) (479,000) $ (221,000) $ 21,000 (200,000)
========================== ===========================
Other:
Interest income 16,000 40,000
Interest expense (8,000) (5,000)
Royalty income 176,000 189,000
Settlements and recoveries 3,000 --
Income taxes -- (4,000)
----------- ----------
Net income (loss) $ (292,000) $ 20,000
=========== ==========
For the Six Months Ended March 31, 2008 For the Six Months Ended March 31, 2007
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- ----------------------------------------
Revenue $ 1,825,000 $ 880,000 $ 2,705,000 $ 2,007,000 $ 886,000 $ 2,893,000
Cost of sales 1,162,000 718,000 1,880,000 1,042,000 597,000 1,639,000
--------------------------------------- ----------------------------------------
Gross profit 663,000 162,000 825,000 965,000 289,000 1,254,000
Expenses:
Selling, general and
administrative 949,000 229,000 1,178,000 869,000 163,000 1,032,000
Research and development 575,000 -- 575,000 413,000 -- 413,000
--------------------------------------- ----------------------------------------
(Loss) from operations $ (861,000) $ (67,000) (928,000) $ (317,000) $ 126,000 (191,000)
========================== =========================
Other:
Interest income 42,000 63,000
Interest expense (11,000) (11,000)
Loss on disposal of equipment -- --
Royalty income 220,000 329,000
Settlements and recoveries 8,000 --
Income taxes -- (4,000)
----------- ----------
Net (loss) $ (669,000) $ 186,000
=========== ==========
10
Sales and gross profit to customers by similar products and services for the
three and six months ended March 31, 2008 and 2007 are as follows:
For the Three Months Ended March 31, For the Six Months Ended March 31,
(Unaudited) (Unaudited)
2008 2007 2008 2007
------------ ------------ ------------ ------------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 342,000 $ 170,000 $ 431,000 $ 305,000
Delivery and disposable devices 712,000 897,000 1,394,000 1,702,000
Service and rental 465,000 401,000 880,000 886,000
------------ ------------ ------------ ------------
Total $ 1,519,000 $ 1,468,000 $ 2,705,000 $ 2,893,000
============ ============ ============ ============
Gross profit
Products:
Laser equipment and accessories $ 54,000 $ 26,000 $ 54,000 $ 72,000
Delivery and disposable devices 319,000 463,000 609,000 893,000
Service and rental 97,000 119,000 162,000 289,000
------------ ------------ ------------ ------------
Total $ 470,000 $ 608,000 $ 825,000 $ 1,254,000
============ ============ ============ ============
Sales in foreign countries for the quarters ended March 31, 2008 and 2007,
accounted for approximately 28% and 26%, respectively, of the Company's total
sales. Sales in foreign countries for the six months ended March 31, 2008 and
2007 accounted for approximately 25% and 23%, respectively, of the Company's
total sales. The breakdown by geographic region is as follows:
Three Months Three Months Six Months Six Months
Ended March Ended March Ended March Ended March
31, 2008 31, 2007 31, 2008 31, 2007
----------- ------------ ------------ ------------
Asia $ 267,000 $ 189,000 $ 317,000 $ 301,000
Europe 36,000 35,000 138,000 152,000
Latin America 14,000 87,000 25,000 92,000
Middle East 80,000 -- 80,000 --
Australia 12,000 4,000 13,000 4,000
Other 19,000 66,000 99,000 117,000
----------- ----------- ------------ ------------
$ 428,000 $ 381,000 $ 672,000 $ 666,000
=========== =========== ============ ============
All long-lived assets were located in the United States during the six months
ended March 31, 2008. All of the Company's remaining long-lived assets were
located in the United States at March 31, 2007, with the exception of two demo
80 watt lasers, each located in Belgium and Australia, respectively.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company's net revenues include revenues from the sale of delivery and
disposable devices, the sale and rental of laser equipment and accessories, and
service contracts for lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices and lasers are
recognized upon shipment and passage of title of the products, provided that all
other revenue recognition criteria have been met. Generally, customers are
required to insure the goods from the Company's place of business. Accordingly,
the risk of loss transfers to the customer once the goods have been shipped from
the Company's warehouse. The Company sells its products primarily through
commission sales representatives in the United States and distributors in
foreign countries. In cases where the Company utilizes distributors, it
recognizes revenue upon shipment, provided that all other revenue recognition
criteria have been met, and ownership risk has transferred. In general, the
Company does not have any post shipment obligations such as installation or
acceptance provisions. All domestic laser systems are sold with a one year
warranty which includes parts and labor. All international lasers systems are
sold with a one year parts only warranty. As each laser sale is recognized, a
liability is accrued for estimated future warranty costs.
The Company utilizes distributors for international sales only. All laser system
sales are non-returnable. Our international distributors typically locate
customers for laser systems before ordering and in general do not maintain
inventories. The Company's return policy for laser accessories, delivery and
disposable devices sold to distributors is as follows: 1) The Company will
accept returns of any unopened, undamaged, standard catalogue items (except
laser systems) within sixty (60) days of invoice date. Acceptable returned
products will be subject to a 20% restocking fee. 2) A return authorization
number is required for all returns. The number can be obtained by contacting the
Customer Service Department. 3) Should a product be found defective at the time
of initial use, the Company will replace it free of charge.
The Company offers service contracts on its lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve month term, the revenue of
each service contract is deferred and recognized ratably over the term of each
service contract.
Trimedyne, Inc. rents its lasers for a flat monthly charge for a period of
years, on a month-to-month basis, or on a fee-per-case basis, sometimes with a
minimum monthly rental fee. During the six months ended March 31, 2008 and 2007,
two lasers were being rented by Trimedyne, Inc., each on a month-to-month basis,
respectively. For these lasers, rental revenue is recorded ratably over the
rental period. MST generally enters into rental service contracts with customers
for a two year period, which unless cancelled, are renewed on an annual basis
after the initial period. During the rental service contract period customers do
not maintain possession of any rental equipment unless it is for the Company's
convenience. Customers are billed on a fee-per-case basis for rentals, which
includes the services of the laser operator and, in some cases, the use of a
reusable or disposable (single use) laser delivery device. Revenue from these
rental service contracts is recognized as the cases are performed.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of our receivables at least quarterly. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
differences could be material and could significantly impact cash flows from
operating activities.
12
Inventories
Inventories consist of raw materials and component parts, work in process and
finished good lasers and dispensing systems. Inventories are recorded at the
lower of cost or market, cost being determined principally by use of the
average-cost method, which approximates the first-in, first-out method. Cost is
determined at the actual cost for raw materials, and at production cost
(materials, labor and indirect manufacturing overhead) for work-in-process and
finished goods.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Tangible Assets." As
a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Deferred Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
Stock-based Compensation
Prior to October 1, 2006, the Company accounted for stock-based compensation
issued to non-employees under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and
Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods and Services" ("EITF No. 96-18"). Under SFAS No. 123 and EITF No.
96-18 all transactions in which goods or services are the consideration received
for the issuance of equity instruments were accounted for based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable.
Also prior to October 1, 2006, as allowed by SFAS No. 123, the Company elected
to account for stock-based compensation issued to employees using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and provide pro
forma net income disclosures for employee stock option grants as if the fair
value based method defined in SFAS No. 123 had been applied. APB No. 25 did not
require compensation to be recorded if the consideration to be received was at
least equal to the fair value of the common stock to be received at the
measurement date. Rather compensation expense was recognized over the respective
vesting period based on the excess, on the date of grant, of the estimated fair
value of the Company's common stock over the grant price, net of forfeitures.
Effective October 1, 2006, the Company adopted SFAS No. 123(R), "Share Based
Payment," which establishes standards for the accounting of all transactions in
which an entity exchanges its equity instruments for goods or services,
including transactions with non-employees and employees. SFAS No. 123(R)
requires a public entity to measure the cost of non-employee and employee
services received in exchange for an award of equity instruments, including
stock options, based on the grant date fair value of the award, and to recognize
it as compensation expense over the period service is provided in exchange for
the award, usually the vesting period. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Company's condensed consolidated statement of income.
SFAS No. 123(R) supersedes the Company's previous accounting under APB No. 25.
In March 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107,
"Share-Based Payment", relating to SFAS No. 123(R). The Company has applied the
provisions of SAB No. 107 in its adoption of SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition
method. Accordingly, the Company's condensed consolidated financial statements
as of and for the six months ended March 31, 2007 reflect the impact of adopting
SFAS No. 123(R). The Company's condensed consolidated financial statements for
periods prior to the adoption of SFAS No. 123(R) have not been restated to
reflect, and do not include, the impact of SFAS No. 123(R).
13
The fair value of stock-based awards is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions
regarding future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility for the six
months ended March 31, 2008 is based on the Company's historical volatilities of
its common stock. These factors could change in the future, affecting the
determination of stock-based compensation expense in future periods.
RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-QSB that are not
historical facts may contain forward-looking statements that involve a number of
known and unknown risks and uncertainties that could cause actual results to
differ materially from those discussed or anticipated by management. Potential
risks and uncertainties include, among other factors, general business
conditions, government regulations governing medical device approvals and
manufacturing practices, competitive market conditions, success of the Company's
business strategy, delay of orders, changes in the mix of products sold,
availability of suppliers, concentration of sales in markets and to certain
customers, changes in manufacturing efficiencies, development and introduction
of new products, fluctuations in margins, timing of significant orders, and
other risks and uncertainties currently unknown to management.
Method of Presentation
The unaudited condensed consolidated financial statements include the accounts
of Trimedyne, Inc., its wholly owned subsidiary Mobile Surgical Technologies,
Inc. ("MST") and its 90% owned inactive subsidiary, Cardiodyne, Inc.
("Cardiodyne").
Quarter ended March 31, 2008 compared to quarter ended March 31, 2007
During the quarter ended March 31, 2008, net revenues were $1,519,000 as
compared to $1,468,000 for the same period of the previous year, a $51,000 or
3.5% increase. Net sales from lasers and accessories increased by $172,000 or
101.2% to $342,000 during the three months ended March 31, 2008 from $170,000 in
the same period of the prior year. Lasers carry a high selling price and are
subject to a longer, less predictable, closing period which, as a result, can
create larger variances between periods. Net sales from delivery and disposable
devices decreased by $185,000 or 20.6% to $712,000 in the current quarter from
$897,000 in the same quarter of the prior year due to increased competition. Net
sales from service and rental increased by $64,000 or 16% to $465,000 from
$401,000 for the same quarters. Export sales increased by $47,000 or 12.3% due
to an increase in laser sales.
Cost of sales during the quarter ended March 31, 2008 was $1,049,000 or 69.1% of
net revenues as compared to $860,000 or 58.6% the prior year three-month period.
Gross profit from the sale of lasers and accessories was 15.8% as compared to
15.3% for the prior year three-month period. Gross profit from the sale of
delivery and disposable devices was 44.8% as compared to 51.6% for the prior
year three-month period. This decrease in gross profit was primarily due to an
increase in the cost of raw materials along with excess overhead being absorbed
as a result of lower production rates of delivery and disposable systems. Gross
profit from revenue received from service and rentals were 20.9% as compared to
29.7% for the prior year three-month period. The lower gross profit for the
current year quarter was primarily the result of increases in parts costs used
in billable service calls and increases in repair costs to upgrade MST's laser
fleet.
Selling, general and administrative expenses increased in the current quarter to
$627,000 from $553,000 in the prior year quarter, an increase of $74,000 or
13.4%. The increase in selling, general and administrative expenses during the
current three-month period was primarily the result of increases of $43,000 in
commissions expense, $15,000 in expenses relating to trade shows, $6,000 in
administrative payroll and approximately $8,000 in insurance related expenses.
Research and development expenditures for the quarter ended March 31, 2008
increased $67,000 or 26% to $322,000 as compared to $255,000 in the quarter
ended March 31, 2007. This increase was a result the Company continuing its
product development efforts and staff in developing its new Side-Firing Laser
Fibers for sale by the Company, Lumenis, Ltd. and Boston Scientific Corporation.
Other income, net, decreased by $37,000 or 16.5% to $187,000 in the quarter
ended March 31, 2008 from $224,000 in the same quarter of the prior year. The
decrease in other income during the quarter ended March 31, 2008 was primarily
result of decreases in bank interest income of $24,000 due to lower maintained
balances in interest bearing accounts along with declining interest rates and
$13,000 in royalty income.
For the current quarter, the Company had a net loss of $292,000 or $0.02 per
share, based on 18,365,960 basic weighted average number of common shares
outstanding, as compared to a net income of $20,000 or $0.00 per share, based on
17,532,763 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
14
Six months ended March 31, 2008 compared to six months ended March 31, 2007
During the six months ended March 31, 2008, net revenues were $2,705,000 as
compared to $2,893,000 for the same period of the previous year, a 6.5%
decrease. Net sales from lasers and accessories increased by $126,000 or 41.3%
to $431,000 during the six months ended March 31, 2008 from $305,000 in the same
period of the prior year. Lasers carry a high selling price and are subject to a
longer, less predictable, closing period which, as a result, can create larger
variances between periods. Net revenues from delivery and disposable devices
decreased by $308,000 or 18.1% to $1,394,000 during the six months ended March
31, 2008 from $1,702,000 for the same period of the prior year due to increased
competition. During the six months ended March 31, 2008 export sales increased
by $6,000 or 0.8% to $672,000 as compared to $666,000 in the same period of the
prior year. Net sales from service and rental decreased by $6,000 or 0.7% to
$880,000 from $886,000 for the same quarter of the prior year.
Cost of sales during the six months ended March 31, 2008 were $1,880,000 or
69.5% of net revenues as compared to $1,639,000 or 56.7% for the same period of
the prior year. Gross profit from the sale of lasers and accessories was 12.5%
as compared to 23.6% for the prior year six-month period. The higher gross
profit from the sale of lasers during the six-month period of the previous year
was due to the sale of a fully amortized demo laser. Gross profit from the sale
of delivery and disposable devices was 43.7% as compared to 52.5% for the prior
year six-month period. This decrease was primarily due to an increase in the
cost of raw materials for the production of delivery and disposable systems
along with a higher absorption of overhead due to decreasing production. Gross
profit from revenue received from service and rentals were 18.4% as compared to
33% for the prior year six-month period. The lower gross profit for the current
year quarter was primarily the result of increases in parts costs used in
billabl e service calls and increases in repair costs to upgrade MST's laser
fleet.
For the six months ended March 31, 2008, selling, general and administrative
expenses totaled $1,178,000 as compared to $1,032,000 for the same period of the
previous year, a $146,000 or 14.1% increase. The increase in selling, general
and administrative expenses during the current six-month period was primarily
the result of increases in payroll related expenses of $92,000 due to increasing
staff and commissions expense of $48,000.
During the six months ended March 31, 2008, research and development expenses
increased to $575,000 from $413,000 in the prior year six-month period, an
increase of $162,000 or 39.2%. This increase was a result the Company continuing
its product development efforts in developing its new Side-Firing Laser
Fibers for sale by the Company, Lumenis, Ltd. and Boston Scientific Corporation.
Other income decreased by $122,000 or 32% to $259,000 in the current six-month
period from $381,000 in the previous six-month period. During the six months
ended March 31, 2008, royalty income decreased $109,000 to $220,000 as compared
to $329,000 in the prior year six-month period. Interest income decreased
$21,000 to $42,000 as compared to $63,000 during the same prior year period as a
result of lower maintained balances in interest bearing accounts along with
declining interest rates.
For the six months ended March 31, 2008, the Company had a net loss of $669,000
or $0.04 per share, based on 18,365,960 basic weighted average number of common
shares outstanding, as compared to a net income of $186,000, or $0.01 per share,
based on 17,019,394 basic weighted average number of common shares outstanding
in the same period of the previous year, resulting from the above mentioned
factors.
Liquidity and Capital Resources
-------------------------------
At March 31, 2008, the Company had working capital of $5,641,000 compared to
$6,815,000 at September 30, 2007. Cash decreased by $606,000 to $2,573,000 from
$3,179,000 at the fiscal year ended September 30, 2007. We believe our existing
working capital will be sufficient to meet Trimedyne's operating needs, and the
operating needs of our 100% owned laser rental subsidiary for the next twelve
months. During the six-month period ended March 31, 2008, net cash used in
operating activities was $532,000, which was the result of decreases in revenue,
higher cost of sales, increases in selling, general and administrative expenses
and research and development expenses. Net cash used in investing activities was
$48,000 due to the purchase of equipment. Net cash used in financing activities
during the current six month period was $26,000, which was the result of
payments on debt. If we fail to continue to operate profitability, or if we
undertake the development, testing and marketing of additional new products in
th e future, we will likely need to raise substantial additional capital. There
can be no assurance that we will be able to operate profitably in the future.
15
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2008, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to March 31, 2008.
(a) Evaluation of Disclosure Controls and Procedures. The Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer ("CEO") of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the CEO concluded that as of March 31, 2008 our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, subject
to the various limitations on effectiveness set forth below under the heading,
"LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS," such that the
information relating to the Company, required to be disclosed in SEC reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no
change in the Company's internal control over financial reporting that occurred
during the six months ended March 31, 2008 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material error. An internal control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
internal control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, control may become inadequate
because of changes in conditions, and/or the degree of compliance with the
policies or procedures may deteriorate.
16
PART II Other Information
ITEM 1. Legal Proceedings
In February 2008, a lawsuit claiming infringement of certain, now expired, U.S.
patents, was filed against the Company and several other manufacturers of lasers
in the United States District Court for the District of Massachusetts by
CardioFocus, Inc. of Marlborough, Massachusetts. The Company believes it has
adequate defenses against the claims of this lawsuit and intends to vigorously
defend against it. Thus, at March 31, 2008, the Company has not made a provision
for loss due to this lawsuit in the accompanying condensed consolidated
financial statements.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
31.1 Certification of CEO
31.2 Certification of Controller
32.1 Officer Certification
32.2 Controller Certification
17
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRIMEDYNE, INC.
Date: May 15, 2008 /s/ Marvin P. Loeb
-------------------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: May 15, 2008 /s/ Jeffrey S. Rudner
-------------------------- -----------------------------------
Jeffrey S. Rudner
Controller
18