UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _______________________
COMMISSION FILE NO. 0-10581
----------------------
TRIMEDYNE, INC.
---------------
(Exact Name of Registrant as Specified in its Charter)
NEVADA 36-3094439
------ ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
25901 COMMERCENTRE DRIVE 92630
LAKE FOREST, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code:
(949) 951-3800
----------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value per Share
(Title of Class)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act of 1934). Yes [ ] No [X]
As of February 18, 2011, there were outstanding 18,365,960 shares of
registrant's Common Stock.
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 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 of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk - N/A 14
ITEM 4. Controls and Procedures 14
PART II. Other Information 15
ITEM 1. Legal Proceedings 15
ITEM 1A. Risk Factors - N/A 15
ITEM 2. Unregistered Sales of Equity Securities and Use of
Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. [Removed and Reserved] 15
ITEM 5. Other Information 15
ITEM 6. Exhibits 15
SIGNATURES 16
2
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
December 31, 2010 September 30, 2010
------------------ ------------------
Current assets:
Cash and cash equivalents $ 2,353,000 $ 2,528,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 at December 31, 2010
and September 30, 2010 741,000 691,000
Inventories 2,471,000 2,613,000
Other current assets 221,000 177,000
------------------ ------------------
Total current assets 5,786,000 6,009,000
Property and equipment, net 855,000 908,000
Other 98,000 102,000
Goodwill 544,000 544,000
------------------ ------------------
Total Assets $ 7,283,000 $ 7,563,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 200,000 $ 129,000
Accrued expenses 586,000 588,000
Deferred revenue 61,000 75,000
Accrued warranty 23,000 17,000
Income tax payable 13,000 11,000
Current portion of note payable and capital leases 127,000 161,000
Accrued interest due to related party 11,000 3,000
------------------ ------------------
Total current liabilities 1,021,000 984,000
Senior secured convertible note to related party,
net of discount of $94,000 and $99,000, respectively 406,000 401,000
Note payable and capital leases, net of current portion 71,000 92,000
Deferred rent 83,000 80,000
Derivative liabilities 81,000 96,000
------------------ ------------------
Total liabilities 1,662,000 1,653,000
------------------ ------------------
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,
18,467,569 shares issued at December 31, 2010 and
September 30, 2010, 18,365,960 shares outstanding at
December 31, 2010 and September 30, 2010 186,000 186,000
Additional paid-in capital 51,242,000 51,238,000
Accumulated deficit (45,094,000) (44,801,000)
------------------ ------------------
6,334,000 6,623,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------------ ------------------
Total stockholders' equity 5,621,000 5,910,000
------------------ ------------------
Total liabilities and stockholder's equity $ 7,283,000 $ 7,563,000
================== ==================
See accompanying notes to condensed consolidated financial statements
3
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
December 31,
2010 2009
------------ ------------
Net revenues $ 1,635,000 $ 1,654,000
Cost of revenues 1,026,000 1,076,000
------------ ------------
Gross profit 609,000 578,000
Operating expenses:
Selling, general and administrative 707,000 629,000
Research and development 210,000 305,000
------------ ------------
Total operating expenses 917,000 934,000
------------ ------------
(Loss) from operations (308,000) (356,000)
Other income, net 17,000 61,000
------------ ------------
(Loss) before income taxes (291,000) (295,000)
Provision for income taxes 2,000 5,000
------------ ------------
Net (loss) $ (293,000) $ (300,000)
============ ============
Net (loss) per share:
Basic $ (0.02) $ (0.02)
============ ============
Diluted $ (0.02) $ (0.02)
============ ============
Weighted average number of shares outstanding:
Basic 18,365,960 18,365,960
============ ============
Diluted 18,365,960 18,365,960
============ ============
See accompanying notes to condensed consolidated financial statements
4
TRIMEDYNE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2010 2009
----------- -----------
Cash flows from operating activities:
Net loss (293,000) (300,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation 4,000 6,000
Depreciation and amortization 63,000 78,000
Amortization of debt discount 5,000 --
Change in fair value of derivative liabilities (15,000) --
Loss on disposal of fixed assets 2,000 --
Changes in operating assets and liabilities:
Trade accounts receivable (50,000) 52,000
Inventories 142,000 (310,000)
Other assets (40,000) 90,000
Accounts payable 71,000 (22,000)
Accrued expenses (2,000) 16,000
Accrued interest to related party 8,000 --
Income tax payable 2,000 5,000
Deferred revenue (14,000) --
Accrued warranty 6,000 (5,000)
Deferred rent 3,000 (9,000)
----------- -----------
Net cash used in operating activities (108,000) (399,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (12,000) (25,000)
----------- -----------
Net cash used in investing activities (12,000) (25,000)
----------- -----------
Cash flows from financing activities:
Principal payments on notes payable and capital leases (55,000) (66,000)
----------- -----------
Net cash used in financing activities (55,000) (66,000)
----------- -----------
Net decrease in cash and cash equivalents (175,000) (490,000)
Cash and cash equivalents at beginning of period 2,528,000 1,621,000
----------- -----------
Cash and cash equivalents at end of period $ 2,353,000 $ 1,131,000
=========== ===========
Supplemental disclosure of cash flow information:
No cash was paid for income taxes during the three months ended December 31,
2010 and 2009. Cash paid for interest during the three months ended December 31,
2010 and 2009 was approximately $10,000 and $10,000, respectively.
See accompanying notes to condensed consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of Trimedyne, Inc., a Nevada corporation, its wholly owned subsidiary,
Mobile Surgical Technologies, Inc. ("MST"), a Texas corporation, and its 90%
owned inactive subsidiary, Cardiodyne, Inc. ("Cardiodyne"), a Nevada
corporation, (collectively, the "Company"). All intercompany accounts and
transactions have been eliminated in consolidation.
Management's Plans
We are about to introduce a new line of Single Use optical fibers to supplement
our line of Reusable optical fibers. These optical fibers are used with our
Holmium lasers and Holmium lasers with compatible connectors made by others for
the fragmentation of urinary stones in the kidney, ureter and bladder and
biliary stones in the gall bladder. Many hospitals in the United States and
other developed countries prefer having a new, sterile optical fiber for each
stone case, rather than having to clean, clip and re-sterilize a reusable
optical fiber after each case.
We are exploring various avenues to reduce our cost of manufacturing Lasers,
expand the distribution of our products, particularly our new VaporMAX Side
Firing Fiber and Single Use Optical Fibers, to increase our revenues and improve
our profit margins. We are continuing to seek licensees of our patents and
proprietary technologies. There is, of course, no assurance that these efforts
will be successful.
We believe that existing cash flows are sufficient to fund operations through
December 31, 2011; however, we have incurred losses from operations for the past
three years. There can be no assurance that we will be able to maintain or
achieve sales growth in the next 12 months, or that the Company will be
profitable. Thus, it is possible that additional working capital in the next 12
months may be required. If necessary, we will raise additional debt and/or
equity capital, sell some of our assets, reduce our costs by eliminating certain
personnel positions and reducing certain overhead costs in order to fund
operations. There is no assurance that our efforts to do so will be successful.
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-Q 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 December 31, 2010 and the
results of its operations and its cash flows for the three months ended December
31, 2010 and 2009. Results for the three months ended December 31, 2010 are not
necessarily indicative of the results to be expected for the year ending
September 30, 2011.
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 2010
annual report on Form 10-K for the year ended September 30, 2010.
Stock-Based Compensation
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 three months ended December 31, 2010,
there were no stock options granted.
As of December 31, 2010, there was approximately $27,078 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 three years.
The following table summarizes stock-based compensation expense related to
employee and director stock options under Accounting Standards Codification
("ASC") No. 718 Stock Compensation for the three months ended December 31, 2010
and 2009, which was allocated as follows:
Three Months Ended
December 31, 2010 December 31, 2009
(Unaudited)
----------------- -----------------
Stock-based compensation included in:
Cost of revenues $ 1,000 $ 1,000
Research and development expenses $ 1,000 $ 1,000
Selling, general, and administrative expenses $ 2,000 $ 4,000
6
NOTE 2 - Composition of Certain Balance Sheet Captions
Inventories, net of reserves, consist of the following:
December 31, September 30,
2010 2010
(Unaudited)
----------- ------------
Raw materials $ 908,000 $ 885,000
Work-in-process 718,000 635,000
Finished goods 845,000 1,093,000
----------- ------------
$ 2,471,000 $ 2,613,000
=========== ============
For the three months ended December 31, 2010 and 2009, 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:
December 31, September 30,
2010 2010
(Unaudited)
----------- ------------
Royalty receivable $ 19,000 $ 61,000
Prepaid insurance 38,000 55,000
Prepaid income tax 87,000 4,000
Prepaid Rent 26,000 26,000
Short-term deposits 33,000 8,000
Other 18,000 23,000
----------- ------------
Total other current assets $ 221,000 $ 177,000
=========== ============
Property and equipment consist of the following:
December 31, September 30,
2010 2010
(Unaudited)
----------- ------------
Furniture and equipment $ 3,384,000 $ 3,377,000
Leasehold improvements 643,000 643,000
Other 244,000 244,000
------------ ------------
4,271,000 4,264,000
Less accumulated depreciation and amortization (3,416,000) (3,356,000)
------------ ------------
Total property and equipment $ 855,000 $ 908,000
============ ============
Accrued expenses consist of the following:
December 31, September 30,
2010 2010
(Unaudited)
------------ -------------
Accrued vacation $ 176,000 $ 169,000
Accrued salaries and wages 94,000 78,000
Sales and use tax 65,000 63,000
Accrued legal -- 175,000
Customer deposits 163,000 6,000
Accrued commissions 62,000 79,000
Accrued payroll taxes 13,000 3,000
Other 13,000 15,000
----------- -----------
Total accrued expenses $ 586,000 $ 588,000
=========== ===========
7
NOTE 3 - Convertible Note Payable to Related Party, Notes Payable and Capital
Leases
Senior Secured Convertible Note Payable to Related Party
On August 20, 2010, Marvin P. Loeb, the Company's Chairman and CEO, loaned the
Company $500,000 evidenced by a 6% Senior Secured Convertible Note with a
principal amount of $500,000 (the "Note"), which is secured by all of the assets
of the Company, and is due August 19, 2015. However, the Note contained a
provision whereby the CEO can redeem the note at any time. The CEO agreed not to
redeem the Note, without the written consent of the Company, for a period of two
years from September 30, 2010. Thus, the Note is reflected as a long-term
obligation as of December 31, 2010 on the accompanying consolidated balance
sheet. The funds provided under the Note are to be used for operations.
The Note can be converted at any time into shares of the Company's common stock
at a conversion price of $0.21 per share. The conversion price equaled the fair
market value of the Company's common stock on the date of the purchase of the
Note, and thus no beneficial conversion feature was recorded. However, the Note
contains an anti-dilution provision whereby the price resets in the event of the
sale or issuance of shares at a price lower than the conversion price
set forth in the Note. Thus, the Company determined that this provision caused
the conversion feature to be bifurcated from the Note and treated as a
derivative and accounted for at its fair value. The Company will revalue the
derivative at each reporting period.
At September 30, 2010, management determined the fair market value of the
conversion feature was $94,000 and recorded the offset as a discount to the
Note. At December 31, 2010, management determined the fair market value of the
conversion feature was $80,000, resulting in a gain on change in derivative
liability of $14,000.
8
The Company estimated the fair value of the conversion feature using the Lattice
model. Accordingly, the fair value of the conversion feature as determined using
the Lattice model is affected by our stock price on the date of issuance as well
as assumptions regarding a number of complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility
over the term of the Notes, actual and projected redemptions and conversion
price resets.
Expected volatility is based primarily on historical volatility. Historical
volatility was computed using daily pricing observations for recent periods that
correspond to expected remaining life of the Notes. We believe this method
produces an estimate that is representative of our expectations of future
volatility over the expected term of this conversion feature. We currently have
no reason to believe future volatility over the expected remaining life of the
conversion feature is likely to differ materially from historical volatility.
Volatility used in the calculation ranged from a low of 124% in year one to a
high of 301% in year five. Management estimated that the probability of the Note
being redeemed 0% increasing by 10% per quarter.
The Company is amortizing the discount over the period of two years, the term of
the CEO's commitment not to call the Note, using the effective interest method.
During the three months ended December 31, 2010, the Company amortized $5,000 of
the discount to interest expense. As of December 31, 2010, the unamortized
discount is $94,000.
NOTE 3 - Notes Payable and Capital Leases
Notes payable and capital leases consists of the following at December 31, 2010 and September 30, 2010:
December 31, September 30,
2010 2010
(Unaudited)
----------- ------------
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.69% per annum. The lease requires monthly
payments of $3,147 through September 2012. $ 27,000 $ 37,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 9.25% per annum. The lease requires monthly
payments of $4,979 through January 2013. 109,000 121,000
Capital lease agreement in connection with the purchasing of equipment
bearing an effective interest rate of 9.23% per annum. The lease requires
monthly payments of $526 through February 2013. 12,000 14,000
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. 34,000 38,000
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. 10,000 19,000
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 4.7% per annum and require monthly
principal and interest payments of $6,042 through January 2011. 6,000 24,000
----------- ----------
$ 198,000 $ 253,000
Less: current portion (127,000) (161,000)
----------- ----------
$ 71,000 $ 92,000
=========== ==========
NOTE 5 - Commitments and Contingencies
Litigation
We are subject to various claims and actions that arise in the ordinary course
of business. The litigation process is inherently uncertain, and it is possible
that the resolution of any future litigation may adversely affect us.
The Company had no product liability lawsuits commenced against it during the
three months ended December 31, 2009 and 2010. The Company has insurance to
cover product liability claims. This insurance provides the Company with
$5,000,000 of coverage for each occurrence with a general aggregate coverage of
$5,000,000. Trimedyne's liability is limited to a maximum of $25,000 per
occurrence unless the judgment against the Company exceeds the $5,000,000
insurance coverage. In such case, Trimedyne would be liable for any liability in
excess of $5,000,000.
To avoid the cost and uncertainty of litigation, on November 24, 2010, we
settled the lawsuit filed against us and others by CardioFocus. We paid
CardioFocus $175,000,entered into mutual releases and the lawsuit was dismissed.
This settlement expense was accrued and included in other expense for the year
ended September 30, 2010 and paid during the three months ended December 31,
2010.
9
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, does not reimburse for thermal
intradiscal procedures to treat spinal discs including the use of the Company's
pulsed Holmium Lasers. Since most people suffering from a herniated or ruptured
spinal disc are below Medicare age, we do not believe CMS's decision will have
an adverse impact on our business.
NOTE 7 - Segment Information
The Company's segments consist of individual companies managed separately with
each manager reporting to the Chief Executive Officer. Revenues, and operating
or segment profit, are reflected net of inter-segment sales and profits. Segment
profit is comprised of net sales less operating expenses. Other income and
expense and income taxes are not allocated and reported by segment since they
are excluded from the measure of segment performance reviewed by management.
Data with respect to these operating activities for the three months ended
December 31, 2010 and 2009 are as follows:
For the Three Months Ended For the Three Months Ended
December 31, 2010 December 31, 2009
(Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- -----------------------------------------
Revenue $ 929,000 $ 706,000 $ 1,635,000 $ 951,000 $ 703,000 $ 1,654,000
Cost of sales 611,000 415,000 1,026,000 682,000 394,000 1,076,000
--------------------------------------- -----------------------------------------
Gross profit 318,000 291,000 609,000 269,000 309,000 578,000
Expenses:
Selling, general and
administrative 529,000 178,000 707,000 462,000 167,000 629,000
Research and development 210,000 -- 210,000 305,000 -- 305,000
--------------------------------------- -----------------------------------------
Income (loss) from operations $ (421,000) $ 113,000 (308,000) $ (498,000) $ 142,000 (356,000)
========================= ==========================
Other:
Interest income 1,000 --
Interest expense (18,000) (10,000)
Royalty income 19,000 68,000
Change in fair market value of derivative liabilities 15,000 --
Other income -- 3,000
Provision for income tax (2,000) (5,000)
----------- -----------
Net loss $ (293,000) $ (300,000)
=========== ===========
Sales and gross profit to customers by similar products and services for the
three months ended December 31, 2010 and 2009 were as follows:
For the Three Months
Ended December 31,
2010 2009
(Unaudited)
---------- ----------
By similar products and services:
Revenues:
Laser equipment and accessories $ 256,000 $ 261,000
Delivery and disposable devices 673,000 690,000
Service and rental 706,000 703,000
---------- ----------
Total $1,635,000 $1,654,000
========== ==========
10
Gross profit
Laser equipment and accessories $ 15,000 $ 15,000
Delivery and disposable devices 303,000 254,000
Service and rental 291,000 309,000
---------- ----------
Total $ 609,000 $ 578,000
========== ==========
Sales in foreign countries for the three months ended December 31, 2010 and 2009
accounted for approximately 23% and 18%, respectively, of the Company's total
sales. The breakdown by geographic region is as follows:
Three Months Ended Three Months Ended
December 31, 2010 December 31, 2009
(Unaudited)
----------------- -----------------
Asia $ 276,000 $ 132,000
Europe 40,000 62,000
Latin America 44,000 14,000
Australia 11,000 89,000
Middle East 8,000 3,000
Other -- 2,000
----------------- -----------------
$ 379,000 $ 302,000
================= =================
All long-lived assets were located in the United States during the three months
ended December 31, 2010 and 2009 with the exception of one laser located in
Canada. Total segment assets at December 31, 2010 and 2009 for the Products
segment were $5,714,000 and $4,841,000, respectively, and for the Service and
Rental segment were $1,547,000 and $1,663,000, respectively. Total segment
assets differ from total assets on a consolidated basis as a result of
unallocated corporate assets primarily comprised of immaterial amounts of
property and equipment, etc.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This information should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in Item 1 of Part I of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the year ended September 30, 2010 contained in our
2010 Annual Report on Form 10-K.
The statements contained in this Quarterly Report on Form 10-Q 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. We do not
undertake any duty to update forward-looking statements after the date they are
made or to conform them to actual results or to changes in circumstances or
expectations.
OVERVIEW
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 and 30 watt Holmium "cold" pulsed
lasers ("Lasers") and a variety of disposable and reusable, fiber optic laser
energy delivery devices ("Fibers", "Needles" and "Tips") for use in a broad
array of medical applications.
Our Lasers, Fibers, Needles and Tips have been cleared for sale by the U.S. Food
and Drug Administration for use in orthopedics, urology, ear, nose and throat
surgery, gynecology, gastrointestinal surgery, general surgery and other medical
specialties. Many of the medical procedures in which our Lasers, Fibers, Needles
and Tips are used are being reimbursed by Medicare and many insurance companies
and health plans.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is
engaged in the rental of lasers, along with the services of a trained operator
and, if requested, the provision of applicable Fibers, Needles or Tips, on a
"fee per case" basis to hospitals, surgery centers, group practices and
individual physicians in Texas and nearby areas.
The principal market for our Lasers and Side Firing Needles is presently in
orthopedics to treat herniated (bulging) and ruptured lumbar, thoracic and
cervical discs in the spine, two of the four major causes of lower back, neck
and leg pain, typically on an outpatient basis. Our Lasers and Tips are also
used in orthopedics to treat damage in joints, such as the knee, shoulder,
elbow, hip, ankle and wrist, in outpatient, arthroscopic procedures.
The Company's Lasers and Fibers are also used in Urology to fragment stones in
the Kidney, ureter or bladder. The Company's new VaporMAX(R) Side Firing Optical
Fiber device is also used to vaporize a portion of the male prostate to treat
benign prostate hyperplasia of "BPH", commonly referred to as an "enlarged
prostate."
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements require the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
12
The methods, estimates, and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined "critical accounting policies" as
those accounting policies that are most important to the portrayal of our
financial condition and results, and require us to make our most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based upon this definition, our most critical
estimates relate to the fair value of warrant liabilities. We also have other
key accounting estimates and policies, but we believe that these other policies
either do not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a material
impact on our reported results of operations for a given period. For additional
information see Note 2, "Summary of Significant Accounting Policies" in the
notes to our reviewed financial statements appearing elsewhere in this quarterly
report and our annual audited financial statements appearing on Form 10-K.
Although we believe that our estimates and assumptions are reasonable, they are
based upon information presently available, and actual results may differ
significantly from these estimates.
RESULTS OF OPERATIONS
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 subsidiary, Cardiodyne.
Quarter ended December 31, 2010 compared to quarter ended December 31, 2009
During the quarter ended December 31, 2010, net revenues were $1,635,000 as
compared to $1,654,000 for the same period of the previous year, a $19,000 or
1.2% decrease. Net sales from lasers and accessories decreased by $5,000 or
1.9% to $256,000 during the three months ended December 31, 2010 from $261,000
in the same period of the prior year. Net sales from delivery and disposable
devices decreased by $17,000 or 2.5% to $673,000 in the current quarter from
$690,000 in the same quarter of the prior year. Net sales from service and
rental increased by $3,000 or 0.4% to $706,000 from $703,000 for the same
quarters.
Cost of sales during the quarter ended December 31, 2010 was 62.8% of net
revenue as compared to 65.1% of net revenues for the prior year quarter. Gross
profit from the sale of lasers and accessories was 5.9% as compared to 5.7% of
net revenues for the prior year three-month period. Gross profit from the sale
of delivery and disposable devices was 45.0% as compared to 36.8% for the prior
year period. The increase in gross profit during the the current quarter ended
December 31, 2010 was primarily due to cost reductions resulting from the
reduction of manufacturing staff and less material scrapped due to increased
efficiencies in manufacturing. Gross profit from revenue received from service
and rentals was 41.2% in the current quarter, as compared to 43.9% for the prior
three-month period. The reduction in gross profit for service and rentals was
primarily due to periodic repairs and maintenance for the laser fleet and
equipment utilized by MST.
Selling, general and administrative expenses increased in the current quarter to
$707,000 from $629,000 in the prior year quarter, an increase of $78,000 or
12.4%. The increase in selling, general and administrative expenses was
primarily the result of increases of $59,000 in legal expense and $41,000 in
marketing expense, offset by decreases of $17,000 in commissions expense, and
$9,000 in insurance expense.
Research and development expenditures for the quarter ended December 31, 2010,
decreased $95,000 or 3.0% to $210,000 as compared to $305,000 in the quarter
ended December 31, 2009. This decrease was a result the Company decreasing its
product development efforts and staff as it completed the development of its new
VaporMAX(TM) Side-Firing Device.
Other income, net decreased by $44,000 or 72.1% to $17,000 in the first quarter
ended December 31, 2010 from $61,000 in the first quarter of the prior year,
primarily due to a $49,000 reduction in royalty income received from Lumenis.
Other income during the quarter ended December 31, 2010 primarily consisted of
$19,000 of royalty income and $15,000 resulting from the change in fair market
value of derivative liabilities, offset by $18,000 in interest expense. Other
income during the quarter ended December 31, 2009 primarily consisted of $68,000
in royalty income offset by $10,000 in interest expense.
To avoid the cost and uncertainty of litigation, we settled the lawsuit filed
against us and others by CardioFocus. We paid CardioFocus $175,000,entered into
mutual releases and the lawsuit was dismissed. This settlement expense was
accrued and included in other expense for the year ended September 30, 2010.
For the current quarter, the Company had a net loss of $293,000 or $0.02 per
share, based on 18,365,960 basic weighted average number of common shares
outstanding, as compared to net loss of $300,000, or $0.02 per share, based on
18,365,960 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
13
Liquidity and Capital
At December 31, 2010, the Company had working capital of $4,765,000 compared to
$5,025,000 at the end of the fiscal year ended September 30, 2010. Cash
decreased by $175,000 to $2,353,000 from $2,528,000 at the fiscal year ended
September 30, 2010. During the three month period ended December 31, 2010, net
cash used in operating activities was $108,000. Net cash used in investing
activities was $12,000 for the purchase of equipment. Net cash used in financing
activities during the same three month period was $55,000, which was the result
of payments on debt incurred for the servicing of loans for equipment and
certain insurance policies.
We are about to introduce a new line of Single Use optical fibers to supplement
our line of Reusable optical fibers. These optical fibers are used with our
Holmium lasers and Holmium lasers with compatible connectors made by others for
the fragmentation of urinary stones in the kidney, ureter and bladder and
biliary stones in the gall bladder. Many hospitals in the United States and
other developed countries prefer having a new, sterile optical fiber for each
stone case, rather than having to clean, clip and re-sterilize a reusable
optical fiber after each case.
We are exploring various avenues to reduce our cost of manufacturing Lasers,
expand the distribution of our products, particularly our new VaporMAX Side
Firing Fiber and Single Use Optical Fibers, to increase our revenues and improve
our profit margins. We are continuing to seek licensees of our patents and
proprietary technologies. There is, of course, no assurance that these efforts
will be successful.
We believe that existing cash flows are sufficient to fund operations through
December 31, 2011; however, we have incurred losses from operations for the past
three years. There can be no assurance that we will be able to maintain or
achieve sales growth in the next 12 months, or that the Company will be
profitable. Thus, it is possible that additional working capital in the next 12
may be required. If necessary, we will raise additional debt and/or equity
capital, sell some of our assets, reduce our costs by eliminating certain
personnel positions and reducing certain overhead costs in order to fund
operations. There is no assurance that our efforts to do so will be successful.
OFF BALANCE SHEET ARRANGEMENTS
None.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. Our management has evaluated, under the
supervision and with the participation of our chief executive officer and
principal financial officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to Rule
13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based
on that evaluation, our chief executive officer and principal financial officer
have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed in our Exchange Act reports is (1) recorded, processed,
summarized and reported in a timely manner, and (2) accumulated and communicated
to our management, including our chief executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting. There have been no changes
in our internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
14
PART II Other Information
ITEM 1. Legal Proceedings
To avoid the cost and uncertainty of litigation, as of November 24, 2010, we
settled the lawsuit filed against us and others by CardioFocus. We paid
CardioFocus $175,000,entered into mutual releases and the lawsuit was dismissed.
This settlement expense was accrued and included in other expense for the year
ended September 30, 2010 and paid during the three months ended December 31,
2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. [Removed and Reserved]
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Marvin P. Loeb
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Jeffrey S. Rudner
32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Principal Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
15
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: February 18, 2011 /s/ Marvin P. Loeb
------------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: February 18, 2011 /s/ Jeffrey S. Rudner
------------------- -----------------------------------
Jeffrey S. Rudner
Principal Financial Officer
16