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 June 30, 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 August 19, 2008 ----------------------------- ------------------------------------ Common Stock, $0.01 par value 18,264,351 shares TRIMEDYNE, INC. Page Number ----------- PART I. Financial Information 3 ITEM 1. Condensed Consolidated Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheet 3 Condensed Consolidated Statements of 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 June 30, 2008 ------------- Unaudited Current assets: Cash and cash equivalents $ 2,297,000 Trade accounts receivable, net of allowance for doubtful accounts of $12,000 633,000 Inventories 2,878,000 Other current assets 236,000 ------------ Total current assets 6,044,000 Property and equipment, net 1,392,000 Other 55,000 Goodwill 544,000 ------------ $ 8,035,000 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 286,000 Accrued expenses 359,000 Deferred revenue 74,000 Accrued warranty 29,000 Notes Payable 111,000 Current portion of long-term debt 162,000 ------------ Total current liabilities 1,021,000 Deferred rent 78,000 Long-term debt, net of current portion 444,000 ------------ Total liabilities 1,543,000 ------------ 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 51,422,000 Accumulated deficit (44,401,000) ------------ 7,205,000 Treasury stock, at cost (101,609 shares) (713,000) ------------ Total stockholders' equity 6,492,000 ------------ $ 8,035,000 ============ See accompanying notes to condensed consolidated financial statements 3 TRIMEDYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended June 30, June 30, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Net revenues $ 1,385,000 $ 1,197,000 $ 4,090,000 $ 4,090,000 Cost of revenues 1,017,000 685,000 2,897,000 2,324,000 ------------ ------------ ------------ ------------ Gross profit 368,000 512,000 1,193,000 1,766,000 Operating expenses: Selling, general and administrative 602,000 566,000 1,780,000 1,598,000 Research and development 419,000 391,000 994,000 804,000 ------------ ------------ ------------ ------------ Total operating expenses 1,021,000 957,000 2,774,000 2,402,000 ------------ ------------ ------------ ------------ Loss from operations (653,000) (445,000) (1,581,000) (636,000) Other income, net 81,000 101,000 340,000 482,000 ------------ ------------ ------------ ------------ Loss before provision for income taxes (572,000) (344,000) (1,241,000) (154,000) Provision for income taxes 13,000 4,000 13,000 8,000 ------------ ------------ ------------ ------------ Net loss $ (585,000) $ (348,000) $ (1,254,000) $ (162,000) ============ ============ ============ ============ Net loss: Basic $ (0.03) $ (0.02) $ (0.07) $ (0.01) ============ ============ ============ ============ Diluted $ (0.03) $ (0.02) $ (0.07) $ (0.01) ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 18,365,960 17,963,623 18,365,960 17,334,137 ============ ============ ============ ============ Diluted 18,365,960 17,963,623 18,365,960 17,334,137 ============ ============ ============ ============ See accompanying notes to condensed consolidated financial statements 4 TRIMEDYNE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended June 30, 2008 2007 ----------- ----------- Cash flows from operating activities: Net loss $ (1,254,000) $ (162,000) Adjustment to reconcile net loss to net cash provided by operating activities: Stock-based compensation 47,000 48,000 Depreciation and amortization 226,000 170,000 Loss on disposal of property and equipment 17,000 -- Changes in operating assets and liabilities: Trade accounts receivable (59,000) 203,000 Inventories 113,000 (473,000) Other assets 130,000 (22,000) Note due from related party 9,000 20,000 Accounts payable 74,000 6,000 Accrued expenses (68,000) (39,000) Deferred revenue 29,000 (18,000) Accrued warranty 2,000 (3,000) Accrued interest due officer -- 11,000 Income taxes payable -- (4,000) Deferred rent (13,000) (5,000) ----------- ----------- Net cash used in operating activities (747,000) (268,000) ----------- ----------- Cash flows from investing activities: Purchase of property and equipment (64,000) (169,000) ----------- ----------- Net cash used in investing activities (64,000) (169,000) ----------- ----------- 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 -- 11,000 Payments on debt (71,000) (71,000) ----------- ----------- Net cash (used in) provided by financing activities (71,000) 2,974,000 ----------- ----------- Net (decrease) increase in cash and cash equivalents (882,000) 2,537,000 Cash and cash equivalents at beginning of period 3,179,000 802,000 ----------- ----------- Cash and cash equivalents at end of period $ 2,297,000 $3,339,000 =========== =========== Supplemental disclosure of cash flow information: Cash paid for income taxes during the nine months ended June 30, 2008 and 2007 was $13,000 and $6,000, respectively. Cash paid for interest during the nine months ended June 30, 2008 and 2007 was approximately $21,000 and $2,000, respectively. Supplemental disclosure of non-cash investing activity: During the nine months ended June 30, 2008, the Company financed the purchase of equipment with $651,000 in lease agreements. During the nine months ended June 30, 2008, the Company financed the purchase of certain insurance policies with a $134,000 note. During the nine month period ended June 30, 2007, the Company issued 763,958 shares of common stock to its Chief Executive Officer in connection with the conversion of senior convertible notes of $200,000 and accrued interest of $122,000 thereon owed to the officer. See accompanying notes to condensed consolidated financial statements 5 TRIMEDYNE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 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 June 30, 2008 and the results of its operations and its cash flows for the nine months ended June 30, 2008 and 2007. Results for the nine months ended June 30, 2008 are not necessarily indicative of the results to be expected for 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 nine months ended June 30, 2008, the Company granted 35,000 stock options. As of June 30, 2008, there was approximately $132,000 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 nine months ended June 30, 2008, which was allocated as follows: Three Months Ended Nine Months Ended June 30, 2008 June 30, 2008 ------------------ ---------------- Stock-based compensation included in: Cost of revenues $ 3,000 $ 9,000 Research and development expenses $ 1,000 $ 3,000 Selling, general, and administrative expenses $ 13,000 $ 35,000 6 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include inventory valuation, allowances for doubtful accounts and deferred income tax assets, recoverability of goodwill and long-lived assets, losses for contingencies and certain accrued liabilities. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, note due from related party, accounts payable, accrued expenses and long-term debt. The carrying amounts of the Company's financial instruments generally approximate their fair values as of June 30, 2008 because of the short maturity of these instruments. Per Share Information Basic per share information is computed based upon the weighted average number of common shares outstanding during the period. Diluted per share information consists of the weighted average number of common shares outstanding, plus the dilutive effects of options and warrants calculated using the treasury stock method. In loss periods, dilutive common equivalent shares are excluded as the effect would be anti-dilutive. During the nine months ended June 30, 2008 and 2007, outstanding options of 75,056 and 473,538, respectively, were excluded from the diluted net loss per share as the effects would have been anti-dilutive. 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 June 30, 2008 ----------- Inventories, net of reserves, consist of the following: Raw materials $ 1,337,000 Work-in-process 744,000 Finished goods 797,000 ----------- $ 2,878,000 =========== For the nine months ended June 30, 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 $ 95,000 Prepaid insurance 123,000 Prepaid income tax 5,000 Other 13,000 ----------- Total other current assets $ 236,000 ============ Property and equipment consist of the following: Furniture and equipment $ 3,203,000 Leasehold improvements 619,000 Other 216,000 ------------ 4,038,000 Less accumulated depreciation and amortization (2,646,000) ------------ Total property and equipment $ 1,392,000 ============ 7 Accrued expenses consist of the following: Accrued vacation $ 170,000 Accrued salaries and wages 60,000 Sales and use tax 66,000 Customer deposits 19,000 Accrued commissions 30,000 Accrued payroll taxes 4,000 Other 10,000 ----------- Total accrued expenses $ 359,000 =========== NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consists of the following at June 30, 2008: 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. $ 108,000 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. 223,000 Loan payable to finance company bearing interest at 9.23% per annum principal and interest due in equal installments of $526 through February 2013. The loan is secured by the related equipment. 24,000 Capital lease agreement in connection with the purchasing of equipment bearing an effective interest rate of 8.82% per annum. The lease requires monthly payments of $2,403 through March 2012. 95,000 Capital lease agreement in connection with the purchasing of equipment bearing an effective interest rate of 8.66% per annum. The lease requires monthly payments of $2,386 through October 2010. 60,000 Capital lease agreement in connection with the purchasing of ERP software bearing an effective interest rate of 8.51% per annum. The lease requires monthly payments of $3,195 through April 2011. 96,000 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. 111,000 ----------- 717,000 Less: current portion (273,000) ----------- $ 444,000 =========== NOTE 4 - Commitments and Contingencies Litigation In February 2008, the Company and other manufacturers of lasers were named as defendants in a lawsuit in the State Court of Massachusetts by CardioFocus, Inc. as allegedly infringing three of their now expired patents in 2002 -2006. The Company and two of the other defendants submitted a petition to the U.S. Patent and Trademark Office ("USPTO") to re-examine the patents to determine if they are valid, as did several of the other defendants. The Company and the other defendants petitioned the Court to stay the action, which is commonly done in patent cases, to save the court time in conducting a case on patents which may be later invalidated by the USPTO. The USPTO usually takes two to three years to reach a decision on the validity of patents. If the USPTO should find any of the patents to be valid, the Company has other defenses that we believe will enable it to successfully defend against any claims by CardioFocus, Inc. 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. 8 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. Risks and Uncertainties The Centers for Medicare and Medicaid Services (CMS), the agency of the U.S. Government that administers the Medicare Program, recently announced a proposed decision to deny reimbursement for thermal intradiscal procedures (TIPs). Thermal procedures to treat spinal discs typically entail the use of electrothermal (ET) or radiofrequency (RF) energy to heat or coagulate the nucleus of the disc, a spongy, gelatinous material that absorbs shocks when people run, jump or are injured, to prevent damage to the vertebra. CMS, however, included the use of laser energy in its proposed denial of reimbursement, as the early lasers used in spinal disc treatment, Nd:YAG and KTP lasers, emit continuous wave (CW) energy at a constant level, which is thermal, like ET or RF energy. The Company's pulsed Holmium Lasers emit pulsed energy, which is highly absorbed by water. Each pulse of Holmium laser energy is absorbed by the water in the cells, which is rapidly turned to steam, vaporizing the tissue. The tissue cools between the pulses, which last a few hundred microseconds (millionths of a second), and only a small amount of heating or coagulation occurs. That is why our Holmium lasers are commonly referred to as "cold" vaporizing lasers. The Company filed an objection to CMS' lumping our pulsed Holmium Lasers with ET, RF and older, thermal Nd:YAG and KTP lasers, few of which lasers are still in use in the treatment of spinal discs. We explained the different mechanisms of action, tissue effects and improved patient outcomes of pulsed Holmium laser energy, compared to those of ET, RF, Nd:YAG and KTP laser energy, and we attached ten (10) published papers on clinical studies of Holmium laser energy that support our position. The Company believes its objection makes a convincing argument to avoid including our pulsed Holmium Lasers with other thermal devices in CMS' proposed decision. The Company expects it will take until October or later before CMS makes a final decision to either deny or approve reimbursement for TIPS or take no action, leaving the decision on what to reimburse or not to its 30 or so local reimbursement bodies. If CMS makes a final decision to deny reimbursement for the use of our pulsed Holmium Lasers in TIPS, our spinal business would be adversely affected. NOTE 5 - Other Income During the three month period ended June 30, 2008 and 2007, the Company recorded $94,000 and $25,000, respectively, in royalties in connection with the terms of a settlement agreement. During the nine month period ended June 30, 2008 and 2007, the Company recorded $314,000 and $354,000, respectively, in royalties in connection with the terms of the same 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 Chairman/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 nine months ended June 30, 2008 and 2007, the Company incurred $28,000 and $29,000, 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 nine months ended June 30, 2008 and 2007 are as follows: For the quarter ended June 30, 2008 For the quarter ended June 30, 2007 (Unaudited) (Unaudited) Service and Service and Products Rental Total Products Rental Total --------------------------------------- ---------------------------------------- Net revenues $ 778,000 $ 607,000 $ 1,385,000 $ 844,000 $ 353,000 $ 1,197,000 Cost of revenues 606,000 411,000 1,017,000 456,000 229,000 685,000 --------------------------------------- ---------------------------------------- Gross profit 172,000 196,000 368,000 388,000 124,000 512,000 Operating expenses: Selling, general and administrative 486,000 116,000 602,000 470,000 96,000 566,000 Research and development 419,000 -- 419,000 391,000 -- 391,000 --------------------------------------- ---------------------------------------- Income (loss) from operations $ (733,000) $ 80,000 (653,000) $ (473,000) $ 28,000 (445,000) ========================= ========================== Other: Interest income 6,000 37,000 Interest expense (10,000) -- Loss on disposal of equipment (17,000) -- Royalty income 94,000 25,000 Settlements and recoveries 8,000 39,000 Income taxes (13,000) (4,000) ------------ ---------- Net loss $ (585,000) $ (348,000) ============ ========== For the nine months ended June 30, 2008 For the nine months ended June 30, 2007 (Unaudited) (Unaudited) Service and Service and Products Rental Total Products Rental Total --------------------------------------- --------------------------------------- Net revenues $ 2,603,000 $ 1,487,000 $ 4,090,000 $ 2,851,000 $ 1,239,000 $ 4,090,000 Cost of revenues 1,768,000 1,129,000 2,897,000 1,498,000 826,000 2,324,000 --------------------------------------- --------------------------------------- Gross profit 835,000 358,000 1,193,000 1,353,000 413,000 1,766,000 Expenses: Selling, general and administrative 1,435,000 345,000 1,780,000 1,339,000 259,000 1,598,000 Research and development 994,000 -- 994,000 804,000 -- 804,000 --------------------------------------- --------------------------------------- Income (loss) from operations $(1,594,000) $ 13,000 (1,581,000) $ (790,000) $ 154,000 (636,000) ========================= ========================= Other: Interest income 48,000 100,000 Interest expense (21,000) (11,000) Loss on disposal of equipment (17,000) -- Royalty income 314,000 354,000 Settlements and recoveries 16,000 39,000 Income taxes (13,000) (8,000) ------------ ---------- Net loss $ (1,254,000) $ (162,000) ============ ========== 10 Sales and gross profit to customers by similar products and services for the three and nine months ended June 30, 2008 and 2007 were as follows: For the three months ended June 30, For the nine months ended June 30, (Unaudited) (Unaudited) 2008 2007 2008 2007 ----------- ----------- ----------- ----------- By similar products and services: Revenues: Products: Laser equipment and accessories $ 182,000 $ 127,000 $ 613,000 $ 432,000 Delivery and disposable devices 596,000 717,000 1,990,000 2,419,000 Service and rental 607,000 353,000 1,487,000 1,239,000 ----------- ----------- ------------ ----------- Total $ 1,385,000 $ 1,197,000 $ 4,090,000 $ 4,090,000 =========== =========== ============ =========== Gross profit Products: Laser equipment and accessories $ 22,000 $ 31,000 $ 76,000 $ 104,000 Delivery and disposable devices 150,000 357,000 759,000 1,249,000 Service and rental 196,000 124,000 358,000 413,000 ----------- ----------- ------------ ----------- Total $ 368,000 $ 512,000 $ 1,193,000 $ 1,766,000 =========== =========== ============ =========== Sales in foreign countries for the quarters ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) accounted for approximately 13% and 20% of the Company's total sales, respectively. Sales in foreign countries for the nine months ended June 30, 2008 (unaudited) and June 30, 2007 (unaudited) accounted for approximately 21% and 22% of the Company's total sales, respectively. The breakdown by geographic region is as follows: Three months Three months Nine months Nine months ended June ended June ended June ended June 30, 2008 30, 2007 30, 2008 30, 2007 ------------ ------------ ------------ ------------ Asia $ 44,000 $ 84,000 $ 361,000 $ 385,000 Europe 38,000 32,000 176,000 184,000 Latin America 3,000 42,000 28,000 134,000 Middle East -- -- 80,000 -- Australia 96,000 2,000 109,000 6,000 Africa -- -- -- -- Other -- 81,000 99,000 198,000 ------------ ------------ ------------- ------------ $ 181,000 $ 241,000 $ 853,000 $ 907,000 ============ ============ ============= ============ All long-lived assets were located in the United States during the nine months ended June 30, 2008 and 2007. NOTE 8 - SUBSEQUENT EVENTS On August 6, 2008, MST, Inc. entered into an agreement to purchase selected assets from CPT Services, Inc., a company providing similar services, located in Houston, Texas. The Company acquired the assets to expand the operations of MST, Inc. In connection with the acquisition, the Company paid $94,000 and assumed a capital lease. The Company is currently assessing the impact of the asset purchase on its financial statements On August 8, 2008, Trimedyne, Inc. entered into a letter of intent with FemSuite, LLC, a privately-held San Francisco-based company which develops, manufactures, and markets a variety of devices for use in the gynecology field. Under the letter of intent, Trimedyne will license certain intellectual property to FemSuite exclusively in the gynecology field, and exclusively for use in anal (fecal) incontinence in the urology, general surgery, and gastrointestinal fields. In return, FemSuite will organize a subsidiary to which the intellectual property will be licensed, the subsidiary will test and market up to four products based on the intellectual property, the subsidiary will purchase its requirements for lasers and laser energy delivery devices from Trimedyne, and the subsidiary will pay Trimedyne for the further development of the products, including regulatory compliance costs and readying the products for manufacture. Subject to certain milestones being achieved, FemSuite has offered to issue to Trimedyne, without cost, twenty percent (20%) of the fully diluted shares of the FemSuite subsidiary on the date such goals are met by at least two of the products (10% if only one of the products meets the goals). The letter of intent is not binding and is subject to the execution of a definitive exclusive license and OEM supply agreement, which could differ substantially from the terms of the letter of intent, and that is acceptable to the boards of directors of Trimedyne and FemSuite, 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 nine months ended June 30, 2008 and 2007, two lasers were being rented from 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. 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. 12 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. Research and Development Costs All research and development costs, including licensing costs, are charged to expense as incurred. In accordance with this policy, all costs associated with the design, development and testing of the Company's products have been expensed as incurred. 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 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 nine months ended June 30, 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). 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 nine months ended June 30, 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"). 13 Quarter Ended June 30, 2008 Compared to Quarter ended June 30, 2007 During the quarter ended June 30, 2008, net revenues were $1,385,000 as compared to $1,197,000 for the same period of the previous year, a $188,000 or 15% increase. Net sales from lasers and accessories increased by $55,000 or 43% to $182,000 during the three months ended June 30, 2008 from $127,000 in the same period of the prior year. Net sales from delivery and disposable devices decreased by $121,000 or 17% to $596,000 during the three months ended June 30, 2008 from $717,000 in the same period of the prior year. Export sales decreased by $60,000 or 24% to $181,000 from $241,000 for the same quarter of the prior year. The decreases in domestic and export sales was primarily due to domestic customers and international distributors awaiting the introduction of the Company's new VaporMax(R) fiber, which will be used with the Company's Holmium laser for the treatment of benign prostatic hyperplasia ("BPH"). Net sales from service and rental increased by $254,000 or 72% to $607,000 from $353,000 for the same quarters. This increase was primarily due to an increase in case revenues from MST as a result of the addition of sales personnel and the expansion of its service business. Cost of sales during the quarter ended June 30, 2008 was $1,017,000 or 73% of net revenues as compared to $685,000 or 57% the prior year quarter. Gross profit from the sale of lasers and accessories was 12% as compared to 24% for the prior year three-month period. Gross profit from the sale of delivery and disposable devices was 25% as compared to 50% for the prior year three-month period. The decreases in gross profit was primarily the result of a volumizing difference due to a lower production of units created by the 21% decrease in sales of delivery systems during the current quarter along with increasing costs of commodities and other raw materials. Gross profit from revenue received from service and rentals was 32% as compared to 35% for the prior year three-month period. Selling, general and administrative expenses increased in the current quarter to $602,000 from $566,000 in the prior year quarter, an increase of $36,000 or 6%. The increase in selling, general and administrative expenses during the current three-month period was primarily due to increases of $19,000 in payroll related expenses, $22,000 in legal expense,$9,000 in accounting fees, and $5,000 in commission expense, offset by decreases in marketing expense of $9,000, and travel expenses of $8,000. Research and development expenditures for the quarter ended June 30, 2008 increased $28,000 or 7% to $419,000 as compared to $391,000 in the quarter ended June 30, 2007. This increase was a result of the Company expanding its product development efforts and readying its new Side-Firing Laser Fibers for sale by the Company, Lumenis, Inc. and Boston Scientific, Inc., which has taken longer than anticipated due to problems in making the new Fibers consistently durable to withstand the very high energy and powers of today's Holmium lasers. Significant progress has been made in overcoming these problems; however, delivery of the new Fibers is currently not expected to commence until about the quarter ended March 31, 2009. Other income, net, decreased by $20,000 or 20% to $81,000 in the quarter ended June 30, 2008 from $101,000 in the same quarter of the prior year. The decrease in other income during the quarter ended June 30, 2007 was primarily result of a increase in royalty revenue of $69,000 offset by a decrease in bank interest income of $31,000, due to lower interest rates combined with a lower cash balance in interest bearing accounts, interest expense of $10,000, due to the financing of equipment and certain insurance policies, a loss on the disposal of equipment of $17,000 and a $31,000 decrease in settlements and recoveries which was primarily the result of a refund from the state of California of $21,000 for the overpayment of use tax during the current prior year. For the current quarter, the Company had a net loss of $585,000 or $0.03 per share, based on 18,365,960 basic weighted average number of common shares outstanding, as compared to a net loss of $348,000 or $0.02 per share, based on 17,963,623 basic weighted average number of common shares outstanding in the same quarter of the previous year. Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007 During the nine months ended June 30, 2008, net revenues were the same as the same period of the previous year at $4,090,000. Net revenues from lasers and accessories increased by $181,000 or 42% to $613,000 during the nine months ended June 30, 2008 from $432,000 in the same period of the prior year. Net revenues from delivery and disposable devices decreased by $429,000 or 18% to $1,990,000 during the nine months ended June 30, 2008 from $2,419,000 for the same period of the prior year. During the nine months ended June 30, 2008 export sales decreased by $54,000 or 5% to $853,000 as compared to $907,000 in the same period of the prior year. The decreases in domestic and export sales was primarily due to domestic customers and international distributors awaiting the introduction of the Company's new VaporMax(R) fiber, which will be used with the Company's Holmium laser for the treatment of benign prostatic hyperplasia ("BPH"). Net sales from service and rental increased by $248,000 or 20% to $1,487,000 from $1,239,000 for the same quarters in the prior year. This increase was primarily due to an increase in case revenues from MST as a result of the addition of sales personnel and the expansion of its service business. 14 Cost of sales during the nine months ended June 30, 2008 was $2,897,000 or 70% of net revenues as compared to $2,324,000 or 56% for the same period of the prior year. Gross profit from the sale of lasers and accessories was 12% as compared to 23% for the prior year nine-month period. The higher gross profit from the sale of lasers during the prior year nine-month period was primarily due to sale of a fully amortized demo laser during the period. Gross profit from the sale of delivery and disposable devices was 38% as compared to 52% for the prior year nine-month period. The decreases in gross profit was primarily the result of a volumizing difference due to a lower production of units created by the 18% decrease in sales of delivery systems during the nine-month period along with increasing costs of commodities and other raw materials. Gross profit from revenue received from service and rentals was 24% as compared to 33% for the prior year nine-month period. The lower gross profit for the current nine-month was primarily attributable to a higher cost of sales for our subsidiary, MST, during the nine-month period of the previous year. This higher cost of sales was primarily the result of increased repairs to upgrade MST's laser fleet during the previous year period, along with a reduction in Medical Laser Safety Technical staff in the current year. Additionally, overhead for Trimedyne's service department increased during the current quarter as compared the prior year quarter due to a reduction in laser service calls in the current nine-month period. For the nine months ended June 30, 2008, selling, general and administrative expenses totaled $1,780,000 as compared to $1,598,000 for the same period of the previous year, a $182,000 or an 11% increase. The increase in selling, general and administration expense was primarily due to increases in payroll related expenses of $99,000, insurance expense of $33,000, commissions expense of $43,000, which was the result of new agreements with our international distributors, and legal expenses of $20,000, offset by decreases in sales and marketing expense of $11,000 and recruiting expense of $10,000. During the nine months ended June 30, 2008, research and development expenses increased to $994,000 from $804,000 in the prior year nine-month period, an increase of $190,000 or 24%. This increase was a result the Company expanding its product development efforts and readying its new Side-Firing Laser Fibers for sale by the Company, Lumenis, Inc. and Boston Scientific, Inc., which has taken longer than anticipated due to problems in making the new Fibers consistently durable to withstand the very high energy and powers of today's Holmium lasers. Significant progress has been made in overcoming these problems; however, delivery of the new Fibers is currently not expected to commence until about the quarter ended March 31, 2009. Other income decreased by $142,000 or 37% to $340,000 in the current nine-month period from $482,000 in the previous nine-month period of fiscal 2007. During the nine months ended June 30, 2008, royalty income decreased $40,000 to $314,000 as compared to $354,000 in the prior year nine-month period. Interest income decreased $52,000 to $48,000 as compared to $100,000 during the same prior year period due to lower bank interest rates combined with a lower cash balance in interest bearing accounts. Interest expense increased $10,000 during the current nine-month period as the Company entered into lease agreements for the purchase of additional equipment and software along with the financing certain insurance policies. During the nine months ended June 30, 2007, the Company received a $21,000 refund from the State of California for overpayment of use taxes, $2,000 from the State of Texas for a refund of surplus unemployment taxes and reversed $14,000 of previous accruals for which the Company no longer had obligations, offset by $11,000 of accrued interest on notes due to an officer. For the nine months ended June 30, 2008, the Company had net loss of $1,254,000 or $0.07 per share, based on 18,365,960 basic weighted average number of common shares outstanding, as compared to a net loss of $162,000, or $0.01 per share, based on 17,334,137 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 June 30, 2008, the Company had working capital of $5,023,000 compared to $6,285,000 at September 30, 2007. Cash decreased by $882,000 to $2,297,000 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 nine-month period ended June 30, 2008, net cash used in operating activities was $747,000, 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 $64,000 due to the purchase of equipment. Net cash used in financing activities during the current six month period was $71,000, which was the result of payments on debt. If we fail to operate profitability, or if we undertake the development, testing and marketing of additional new products in the 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 June 30, 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 June 30, 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 June 30, 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 nine months ended June 30, 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, the Company and other manufacturers of lasers were named as defendants in a lawsuit in the State Court of Massachusetts by CardioFocus, Inc. as allegedly infringing three of their now expired patents in 2002 -2006. The Company and two of the other defendants submitted a petition to the U.S. Patent and Trademark Office ("USPTO") to re-examine the patents to determine if they are valid, as did several of the other defendants. The Company and the other defendants petitioned the Court to stay the action, which is commonly done in patent cases, to save the court time in conducting a case on patents which may be later invalidated by the USPTO. The USPTO usually takes two to three years to reach a decision on the validity of patents. If the USPTO should find any of the patents to be valid, the Company has other defenses that we believe will enable it to successfully defend against any claims by CardioFocus, Inc. 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: August 19, 2008 /s/ Marvin P. Loeb -------------------------- ----------------------------------- Marvin P. Loeb Chairman and Chief Executive Officer Date: August 19, 2008 /s/ Jeffrey S. Rudner -------------------------- ----------------------------------- Jeffrey S. Rudner Controller 18