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
December 31, 2005 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)
15091 Bake Parkway, Irvine, CA 92618
(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 procedings during the past five years)
Not applicable
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 122b-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 February 13, 2006
---------------------------- ------------------------------------
Common Stock, $0.01 par value 14,602,931 shares
ITEM 1.
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Balance Sheet 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 3. Controls and Procedures 17
PART II. Other Information 18
SIGNATURE PAGE 19
CERTIFICATIONS 20
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
December 31,
2005
-------------
Current assets:
Cash and cash equivalents $ 1,699,000
Trade accounts receivable, net of allowance for doubtful
accounts of $12,000 718,000
Inventories 1,972,000
Other 176,000
------------
Total current assets 4,565,000
Goodwill 544,000
Other assets 95,000
Property and equipment, net 337,000
------------
$ 5,541,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 312,000
Accrued expenses 340,000
Deferred revenue 40,000
Accrued warranty 58,000
Income tax payable 8,000
Current portion of long-term debt 12,000
------------
Total current liabilities 770,000
Senior convertible secured notes due to officer 200,000
Accrued interest due officer 93,000
Long-term debt, net of current portion 4,000
------------
Total liabilities 1,067,000
------------
Commitments and contigencies
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, 14,704,540 shares issued,
14,602,931 shares outstanding 148,000
Additional paid-in capital 47,945,000
Accumulated deficit (42,906,000)
------------
5,187,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 4,474,000
------------
$ 5,541,000
============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
December 31,
2005 2004
------------ ------------
Net revenues $ 1,785,000 $ 1,839,000
Cost of revenues 1,148,000 936,000
------------ ------------
Gross profit 637,000 903,000
Operating expenses:
Selling, general and administrative 580,000 623,000
Research and development 145,000 133,000
------------ ------------
Total operating expenses 725,000 756,000
------------ ------------
(Loss) income from operations (88,000) 147,000
Other income, net 103,000 26,000
------------ ------------
Income before income taxes 15,000 173,000
Provision for income taxes 1,000 --
------------ ------------
Net income $ 14,000 $ 173,000
============ ===========
Net income per share:
Basic $ 0.00 $ 0.01
============ ============
Diluted $ 0.00 $ 0.01
============ ============
Weighted average number of
shares outstanding:
Basic 14,704,540 14,704,540
============ ============
Diluted 15,445,735 15,388,385
============ ============
See accompanying notes to consolidated financial statements.
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2005 2004
----------- -----------
Cash flows from operating activities:
Net income $ 14,000 $ 173,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36,000 44,000
Loss on disposal of property and equipment 3,000 3,000
Changes in operating assets and liabilities:
Accounts receivable 62,000 (13,000)
Inventories 166,000 152,000
Other assets 21,000 101,000
Accounts payable (38,000) (40,000)
Accrued expenses (59,000) (144,000)
Deferred revenue (3,000) 1,000
Accrued warranty 15,000 (1,000)
Accrued interest due officer 6,000 6,000
Income taxes payable (6,000) --
----------- -----------
Net cash provided by operating activities 217,000 282,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (12,000) (21,000)
----------- -----------
Net cash used in investing activities (12,000) (21,000)
----------- -----------
Cash flows from financing activities:
Payments on debt (29,000) (43,000)
----------- -----------
Net cash used in financing activities (29,000) (43,000)
----------- -----------
Net increase in cash and cash equivalents 176,000 218,000
Cash and cash equivalents at beginning of period 1,523,000 1,683,000
----------- -----------
Cash and cash equivalents at end of period $ 1,699,000 $1,901,000
=========== ===========
Cash paid for income taxes during the three months ended December 31, 2005 and 2004 was
$6,000 and $0, respectively. Cash paid for interest in the the three months ended
December 31, 2005 and 2004 was approximately $1,000 and $5,000, respectively.
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 and 2004
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trimedyne, Inc., its wholly owned subsidiary, Mobile Surgical Technologies, Inc.
("MST"), and its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne")
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated in consolidation.
Unaudited Interim Financial Information
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, 2005 and the results of operations and its cash
flows for the three months ended December 31, 2005 and 2004. Results for the
three months ended December 31, 2005 are not necessarily indicative of the
results to be expected for the year ending September 30, 2006.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's 2005 annual report on Form
10-KSB. Certain prior period amounts have been reclassed to conform to the
current period presentation.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectation.
Revenue Recognition
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 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. Revenues from the rental of equipment is
recognized over the rental period. Revenues from service contracts are
recognized monthly throughout the term of the service agreement.
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 Intangible 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. There was no impairment of goodwill at December 31, 2005.
6
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever
eventsor changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of the asset is measured by comparison of
its carrying amount to undiscounted future cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized in accordance
with SFAS No. 144 is permanent and may not be restored. To date, the Company has
not recognized any impairment of long-lived assets in connection with SFAS No.
144.
Stock Option Plans
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock option plans. As allowed by SFAS No. 123, the
Company has elected to continue to account for its employee stock-based
compensation plan using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, which does not require compensation to
be recorded if the consideration to be received is at least equal to the fair
value of the common stock to be received at the measurement date. Under the
requirements of SFAS No. 123, non-employee stock-based transactions require
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation:
Three months ended
December 31,
2005 2004
--------- ---------
Net income, as reported $ 10,000 $ 173,000
Deduct: total stock-based employee compensation
expense determined under fair value based method
for awards, net of related tax effects (1,000) --
--------- ---------
Pro forma net income $ 9,000 $ 173,000
========= =========
Net income per share - basic:
As reported $ 0.00 $ 0.01
Pro forma $ 0.00 $ 0.01
========= =========
Net income per share - diluted:
As reported $ 0.00 $ 0.01
========= =========
Pro forma $ 0.00 $ 0.01
========= =========
7
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
Three Months Ended
December 31,
2005 2004
---------- ----------
Dividend yield -- --
Expected volatility 80% 80%
Risk-free interest rate 3.50% 3.50%
Expected lives 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and time
to exercise. Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.
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, accounts payable, accrued expenses and
long-term debt, and two senior convertible secured notes due to the Chief
Executive Officer. The carrying amounts of the Company's financial instruments
generally approximate their fair values as of December 31, 2005 because of the
short maturity of these instruments. Senior convertible secured notes due to
officer cannot be objectively and fairly valued due to the related party nature
of the instruments.
Warranty Costs
The Company provides warranties for certain products and maintains warranty
reserves for estimated product warranty costs at the time of sale. In estimating
its future warranty obligations, the Company considers various relevant factors,
including the Company's stated warranty policies and practices, the historical
frequency of claims and the cost to replace or repair its products under
warranty. The following table provides a reconciliation of the activity related
to the Company's accrued warranty expense:
Three Months Ended
December 31,
----------------------------
2005 2004
------------ ------------
Balance at beginning of period $ 43,000 $ 44,000
Charges to costs and expenses 36,000 16,000
Costs incurred (21,000) (17,000)
------------ ------------
Balance at end of period $ 58,000 $ 43,000
============ ============
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.
8
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments
made by Statement 151 clarify that abnormal amounts of facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23, 2004. The Company has
adopted SFAS No. 151 and determined there was no impact on the Company's overall
results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued
in 1995, established as preferrable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entiti es the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. The
Company is required to adopt this standard during the fiscal quarter ending
December 31, 2006. The Company is in the process of evaluating whether the
adoption of SFAS 123(R) will have a significant impact on the Company's overall
results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its condensed consolidated results of
operations, cash flows or financial position
NOTE 2 - Balance Sheet Items
December 31,
2005
------------
Inventories, net of reserves, consist of the following:
Raw material $ 632,000
Work-in-process 439,000
Finished goods 901,000
-----------
$ 1,972,000
===========
9
Other current assets consist of the following:
Royalty receivable $ 84,000
Prepaid insurance 47,000
Prepaid rent 30,000
Other 15,000
------------
Total other current assets $ 176,000
============
Property and equipment consist of the following:
Furniture and equipment $ 2,482,000
Leasehold improvements 214,000
Other 216,000
------------
2,912,000
Less accumulated depreciation and amortization (2,575,000)
------------
Total property and equipment $ 337,000
============
Accrued expenses consist of the following:
Accrued vacation $ 125,000
Customer deposits 58,000
Accrued professional expenses 42,000
Sales and use tax 38,000
Accrued salaries and wages 28,000
Accrued commissions 26,000
Accrued litigation 14,000
Accrued payroll taxes 7,000
Other 2,000
------------
Total accrued expenses $ 340,000
============
NOTE 3 - Long-term Debt
Loan payable to leasing company, bearing interest at 8% per
annum: principal and interest due monthly in equal
installments of $211 through May 2008. The loan is secured by
the related forklift. $ 6,000
Notes payable to finance company, issued in connection with
financing certain insurance policies. The notes bear interest
at 5.979% per annum and require monthly principal and interest
payments of $9,732 through January 2006. 10,000
------------
16,000
Less: current portion (12,000)
------------
$ 4,000
============
NOTE 4 - Senior Secured Convertible Notes Due to Officer
At December 31, 2005, the Company had two outstanding senior,
secured convertible notes due to its chief executive officer.
These notes mature, with interest at 12% per annum, in
February and April 2007, and are convertible at prices of
$0.40 and $0.50 per share. $ 200,000
============
Accrued interest on these notes was $93,000 at December 31, 2005.
10
NOTE 5 - Earnings Per Share Information
Basic income per share is based on the weighted-average number of shares of
common stock outstanding during the period. Diluted income per share also
includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Company's
senior convertible secured notes due to officer for the period of time such
notes were outstanding, if such stock options and convertible notes are
dilutive.
The following table sets forth the computation of the numerator and denominator
of basic and diluted earnings per share:
Three months ended
December 31,
2005 2004
------------ ------------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 14,704,540 14,704,540
Effect of Dilutive Options 48,695 47,845
Effect of Senior Convertible Secured
Notes due to Officer and accrued interest 692,500 636,000
------------ ------------
Weighted average common shares outstanding
used in calculating diluted earnings per share 15,445,735 15,388,385
============ ============
Numerator
Net income $ 14,000 $ 173,000
Add - interest on Senior Convertible
Secured Notes due to Officer 6,000 6,000
------------ ------------
Net income available to common stockholders $ 20,000 $ 179,000
============ ============
NOTE 6 - Contingencies
Litigation
In November 2003, the Company settled its litigation against Lumenis, Inc.
("Lumenis"). Under the settlement agreement, Lumenis agreed to pay a 7.5%
royalty on their sales of certain side-firing and angled-firing devices
manufactured by Lumenis or purchased by Lumenis from third-party suppliers. In
addition, Lumenis agreed to purchase a majority of its Angled-Firing (60 degree
to 75 degree firing) and 100% of its Side-Firing (75 degree to 90 degree)
Devices from the Company under an OEM Supply Agreement. The OEM Agreement was
executed on September 8, 2005, and the Company has offered to manufacture a
special version of its VaporMAX(TM) Side-Firing Device exclusively for Lumenis,
for use with Lumenis' Holmium lasers for their cleared indications for use,
which include the treatment of benign prostatic hyperplasia or "BPH", commonly
referred to as an enlarged prostate. Royalties per the above agreement are
currently being received and included in other income for the current quarters
ended December 31, 2005 and 2004 (See Note 7).
Product liability
The Company is currently a defendant in one product liability lawsuit. This case
relates to injuries that occurred in connection with medical procedures in which
the Company's laser was used. 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 $50,000 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.
Management has accrued $50,000 for this claim, of which $36,000 has been paid,
based on the deductible under the insurance policy.
In the ordinary course of business, the Company is from time to time involved in
various pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company. However, in the opinion of the Company's
management, matters currently pending or threatened against the Company, as
discussed above, are not expected to have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
11
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 lessors for certain claims
arising from the use of the facilities. 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
consolidated balance sheet.
NOTE 7 - Other Income
During the three month period ended December 31, 2005 and 2004, the Company
recognized $84,000 and $31,000, respectively, in royalties in connection with
the terms of a settlement agreement and subsequent OEM agreement. These
royalties are included in other income in the accompanying financial statemnts.
(See Note 6).
NOTE 8 Segment Information
The Company's revenue base is derived from the sales of medical products and
services. 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. Data with
respect to these operating activities for the three months and three months
ended December 31, 2005 and December 31, 2004 are as follows:
For the three months ended For the three months ended
December 31, 2005 December 31, 2004
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ------------------------------------------
Revenue $ 1,342,000 $ 443,000 $ 1,785,000 $ 1,411,000 $ 428,000 $ 1,839,000
Cost of sales 825,000 323,000 1,148,000 626,000 310,000 936,000
---------------------------------------- ------------------------------------------
Gross profit 517,000 120,000 637,000 785,000 118,000 903,000
Expenses:
Selling, general and
administrative 465,000 115,000 580,000 443,000 180,000 623,000
Research and development 145,000 -- 145,000 133,000 -- 133,000
---------------------------------------- ------------------------------------------
(Loss) income from operations $ (93,000) $ 5,000 (88,000) $ 209,000 $ (62,000) 147,000
=========================== ===========================
Other:
Interest income 5,000 3,000
Interest expense (6,000) (9,000)
Royalty income 84,000 31,000
Settlements and recoveries 23,000 4,000
Loss on disposal of equipment (3,000) (3,000)
Income taxes (1,000) --
----------- -----------
Net income $ 14,000 $ 173,000
=========== ===========
Sales and gross profit to customers by similar products and services for the
three ended December 31, 2005 (unaudited) and December 31, 2004
(unaudited) were as follows:
12
For the three months
ended December 31,
(Unaudited)
2005 2004
---------- ----------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 510,000 $ 491,000
Delivery and disposable devices 832,000 920,000
Service and rental 443,000 428,000
---------- ----------
Total $1,785,000 $1,839,000
========== ==========
Gross profit
Products:
Laser equipment and accessories $ 58,000 $ 284,000
Delivery and disposable devices 458,000 501,000
Service and rental 121,000 118,000
---------- ----------
Total $ 637,000 $ 903,000
========== ==========
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. 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.
Sales in foreign countries for the quarters ended December 31, 2005 (unaudited)
and December 31, 2004 (unaudited) accounted for approximately 36% and 31% of the
Company's total sales, respectively. The breakdown by geographic region is as
follows:
Three months ended Three months ended
December 31, 2005 December 31, 2004
------------ ------------
Asia $ 363,000 $ 314,000
Europe 182,000 164,000
Latin America 4,000 81,000
Middle East -- --
Other 100,000 3,000
------------- ------------
$ 649,000 $ 562,000
============= ============
All long-lived assets were located in the United States during the three months
ended December 31, 2005. With the exception of one demo 80 watt laser located in
Belgium, all the Company's remaining long-lived assets were located in the
United States at December 31, 2005.
13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
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 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.
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.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Tangible Assets." As
a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Deferred Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
Stock-based Compensation
The Company accounts for its employee stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" - an amendment of FASB
Statement No. 123.
14
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 consolidated financial statements include the accounts of the Trimedyne,
Inc., its wholly owned subsidiary Mobile Surgical Technologies, Inc. ("MST") and
its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne").
Quarter ended December 31, 2005 compared to quarter ended December 31, 2004
During the quarter ended December 31, 2005, net revenues were $1,785,000 as
compared to $1,839,000 for the same period of the previous year, a $54,000 or
2.9% decrease. Net sales from lasers and accessories increased by $19,000 or
3.9% to $510,000 during the three months ended December 31, 2005 from $491,000
in the same period of the prior year. Net sales from delivery and disposable
devices decreased by $89,000 or 9.7% to $831,000 in the current quarter from
$920,000 in the same quarter of the prior year. Net sales from service and
rental increased by $16,000 or 3.7% to $444,000 from $428,000 for the same
quarters. Export sales increased by $87,000 or 15.5% due to an increase in laser
sales in Asia.
Cost of sales during the quarter ended December 31, 2005 was 64% of net revenues
as compared to 51% the prior year quarter. This increase was due to the sales
mix of lasers and delivery systems. During the quarter ended December 31, 2005
sales of lasers, which carry relatively low profit margins, increased, while
selling prices due to competition decreased, and sales of delivery systems,
which carry relatively high profit margins, decreased as compared to the prior
year quarter. The result was a lower gross profit for the current quarter ended
December 31, 2005.
Selling, general and administrative expenses decreased in the current quarter to
$580,000 from $623,000 in the prior year quarter, an decrease of $43,000 or 7%.
The decrease in selling, general and administrative expenses was primarily the
result of decreases of $14,000 in audit expenses, $11,000 in marketing expenses
related to trade shows and conventions, $9,000 in expenses related to the
recruitment of staff, and $7,000 in business related travel expenses.
Research and development expenditures for the quarter ended December 31, 2005,
increased $12,000 to $145,000 as compared to $133,000 in the quarter ended
December 31, 2004. This increase was a result the Company increasing its product
development efforts and staff in readying its new VaporMAX(TM) Side-Firing
Device for the market.
Other income, net increased by $77,000 or 296% to $103,000 in the first quarter
ended December 31, 2005 from $26,000 in the first quarter of the prior year.
Other income during the quarter ended December 31, 2005 primarily consisted of
$84,000 of royalty income and $22,000 resulting from the write down of previous
accruals, for which the Company no longer had obligations, offset by $6,000 in
interest expense. During the three months ended December 31, 2004, the Company
received $31,000 in royalty income offset by interest accrued on notes due to an
officer.
For the current quarter, the Company had net income of $14,000 or $0.00 per
share, based on 15,445,735 basic weighted average number of common shares
outstanding, as compared to net income of $173,000, or $0.01 per share, based on
14,704,540 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
15
Liquidity and Capital Resources
-------------------------------
At December 31, 2005, the Company had working capital of $3,795,000 compared to
$3,773,000 at the end of the fiscal year ended September 30, 2005. Cash
increased by $176,000 to $1,699,000 from $1,523,000 at the fiscal year ended
September 30, 2005. 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 three month
period ended December 31, 2005 net cash provided by operating activities was
$217,000. Net cash used in financing activities during the same three month
period was $29,000 for payments on debt incurred for financing general business
liability insurance. While we expect to continue to operate at a profit, we
could incur losses in the future if we fail to generate revenues sufficient to
offset the costs associated with manufacturing and marketing our current
products, our overhead, and the development of new products. If we fail to
continue to operate profi tability, 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.
We have $200,000 of Senior Convertible Notes due to an officer of the Company
(the "Notes") outstanding, which are due, with interest at 12% per annum, in
2007. The Notes and accrued interest are convertible at prices of $0.40 and
$0.50 per share. If the Notes and accrued interest are not converted, we may
have to raise additional capital to pay the Note holder the principal and
interest due on the Notes. Sources of such financing may include the sale of
additional equity securities or the sale or licensing of patent rights. The
issuance of additional common stock or shares of preferred stock will dilute the
equity interests of our shareholders. There is no assurance such financing, if
and when needed, will be available to us on acceptable terms.
16
ITEM 3. CONTROLS AND PROCEDURES
As of December 31, 2005, 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 December 31, 2005.
(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 December 31, 2005 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 fiscal quarter ended December 31, 2005 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.
17
PART II
Other Information
ITEM 1. Legal Proceedings
In November 2003, the Company settled its litigation against Lumenis. Under the
settlement agreement, Lumenis agreed to pay a 7.5% royalty on their sales of
certain side-firing and angled-firing devices manufactured by Lumenis or
purchased by Lumenis from third-party suppliers. In addition, Lumenis agreed to
purchase a majority of its Angled-Firing (60 degree to 75 degree firing) and
100% of its Side-Firing (75 degree to 90 degree) Devices from the Company under
an OEM Supply Agreement. The OEM Agreement was executed on September 8, 2005,
and the Company has offered to manufacture a special version of its VaporMAX(TM)
Side-Firing Device exclusively for Lumenis, for use with Lumenis' Holmium lasers
for their cleared indications for use, which include the treatment of BPH.
Royalties per the above agreement are currently being received and included in
other income for the current quarter ended December 31, 2005.
The Company is currently a defendant in one product liability lawsuit. This case
relates to injuries that occurred in connection to medical procedures in which
the Company's laser was used. This case is currently in litigation. 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
of $5,000,000. Trimedyne's liability is limited to a maximum of $50,000 per
occurrence unless the judgment against the Company exceeds the insurance
coverage. In such case, Trimedyne would be liable for any liability in excess of
$5,000,000. During the fiscal year ended September 30, 2004, Management accrued
a loss contingency for this claim in the amount of $50,000, based on the
deductible under the insurance policy, of which $36,000 has been paid through
December 31, 2005.
Item 2. Changes in Securities
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 Controler
32.1 Officer Certification
32.2 Controller Certification
18
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 14, 2006 /s/ Marvin P. Loeb
-------------------------- ------------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: February 14, 2006 /s/ Jeffrey S. Rudner
-------------------------- ------------------------------------
Jeffrey S. Rudner
Controller
19