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, 2006 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)
25091 Commercecentre 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 February 9, 2007
----------------------------- ------------------------------------
Common Stock, $0.01 par value 17,584,902 shares
TRIMEDYNE, INC.
Page Number
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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 or
Plan of Operation 16
ITEM 3. Controls and Procedures 20
PART II. Other Information 21
SIGNATURE PAGE 22
CERTIFICATIONS 23
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
December 31,
2006
-------------
Current assets:
Cash and cash equivalents $ 3,815,000
Trade accounts receivable, net of allowance for doubtful
accounts of $12,000 573,000
Inventories 2,775,000
Other current assets 222,000
------------
Total current assets 7,385,000
Note due from related party 31,000
Property and equipment, net 893,000
Other 39,000
Goodwill 544,000
------------
$ 8,892,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 285,000
Accrued expenses 324,000
Deferred revenue 38,000
Accrued warranty 18,000
Notes payable and current portion of long-term debt 19,000
------------
Total current liabilities 684,000
Senior convertible secured notes due to officer 200,000
Accrued interest due to officer 117,000
Deferred rent 95,000
Long-term debt, net of current portion 1,000
------------
Total liabilities 1,097,000
------------
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, 17,421,511 shares issued,
17,319,902 shares outstanding 175,000
Additional paid-in capital 50,990,000
Accumulated deficit (42,657,000)
------------
8,508,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 7,795,000
------------
$ 8,892,000
============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
December 31,
2006 2005
------------ ------------
Net revenues $ 1,425,000 $ 1,785,000
Cost of revenues 779,000 1,148,000
------------ ------------
Gross profit 646,000 637,000
Operating expenses:
Selling, general and administrative 479,000 580,000
Research and development 158,000 145,000
------------ ------------
Total operating expenses 637,000 725,000
------------ ------------
Income (loss) from operations 9,000 (88,000)
Other income, net 157,000 103,000
------------ ------------
Income before income taxes 166,000 15,000
Provision for income taxes -- 1,000
------------ ------------
Net income $ 166,000 $ 14,000
============ ===========
Net income per share:
Basic $ 0.01 $ --
============ ============
Diluted $ 0.01 $ --
============ ============
Weighted average number of
shares outstanding:
Basic 16,537,495 14,704,540
============ ============
Diluted 17,736,491 15,445,735
============ ============
See accompanying notes to consolidated financial statements.
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
December 31,
2006 2005
----------- -----------
Cash flows from operating activities:
Net income $ 166,000 $ 14,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock-based compensation 2,000 --
Depreciation and amortization 57,000 36,000
Loss on disposal of property and equipment -- 3,000
Changes in operating assets and liabilities:
Trade accounts receivable 169,000 62,000
Inventories (179,000) 166,000
Other assets (38,000) 21,000
Accounts payable (38,000) (38,000)
Note from related party 7,000 --
Accrued expenses (75,000) (59,000)
Deferred revenue (10,000) (3,000)
Accrued warranty (5,000) 15,000
Accrued interest due officer 6,000 6,000
Income taxes payable (4,000) (6,000)
Deferred rent (2,000) --
----------- -----------
Net cash provided by operating activities 56,000 217,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (25,000) (12,000)
----------- -----------
Net cash used in investing activities (25,000) (12,000)
----------- -----------
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 1,000 --
Payments on debt (53,000) (29,000)
----------- -----------
Net cash provided by (used in) financing activities 2,982,000 (29,000)
----------- -----------
Net increase in cash and cash equivalents 3,013,000 176,000
Cash and cash equivalents at beginning of period 802,000 1,523,000
----------- -----------
Cash and cash equivalents at end of period $ 3,815,000 $1,699,000
=========== ===========
Cash paid for income taxes during the three months ended December 31, 2006 and
2005 was $1,000 and $6,000, respectively. Cash paid for interest was
approximately $1,000 in each of the three month periods ended December 31, 2006
and 2005.
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
(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
The accompanying unaudited condensed financial statements have been prepared by
Trimedyne, Inc. 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 December 31,
2006 and the results of its operations and its cash flows for the three months
ended December 31, 2006 and 2005. Results for the three months ended December
31, 2006 are not necessarily indicative of the results to be expected for the
year ending September 30, 2007.
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 2006 annual report on Form
10-KSB for the year ended September 30, 2006.
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
The Company's 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, and 3) Should a product be found defective at the
time of initial use, the Company will replace it free of charge.
6
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
or on a month-to-month basis, or on a fee-per-case basis sometimes with a
minimum monthly rental fee. During the three months ended December 31, 2006 and
2005, three lasers were being rented by Trimedyne, Inc., each on a
month-to-month basis. 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 single use laser delivery device. Revenue from these
rental service contracts is recognized as the cases are performed.
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, 2006.
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
events or 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-Based Compensation
Prior to October 1, 2006, the Company accounted for stock-based compensation
issued to non-employees under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" and Emerging Issues
Task Force No. 96-18, "Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and
Services" ("EITF No. 96-18"). Under SFAS No. 123 and EITF No. 96-18 all
transactions in which goods or services are the consideration received for the
issuance of equity instruments were accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
Also prior to October 1, 2006, as allowed by SFAS No. 123, the Company elected
to account for stock-based compensation issued to employees using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25") and provide pro
forma net income disclosures for employee stock option grants as if the fair
value based method defined in SFAS No. 123 had been applied. APB No. 25 did not
require compensation to be recorded if the consideration to be received was at
least equal to the fair value of the common stock to be received at the
measurement date. Rather compensation expense was recognized over the respective
vesting period based on the excess, on the date of grant, of the estimated fair
value of the Company's common stock over the grant price, net of forfeitures.
Had compensation expense for the Company's stock-based awards to employees been
determined based on the estimated fair value at the grant dates consistentwith
the fair value method of SFAS No. 123, the Company's net income and income per
share for the three months ended December 31, 2005 would have approximated the
pro forma amounts indicated below:
7
Net income, as reported $ 14,000
Add: stock-based employee compensation included in
reported net income, net of tax --
Less: stock-based employee compensation determined
Under fair value based method, net of tax (1,000)
---------
Pro forma net income $ 13,000
=========
Net income per common share as reported:
Basic $ --
Diluted $ --
Pro forma income per common share:
Basic $ --
Diluted $ --
The fair value of options granted under the Company's equity incentive plan
during the three months ended December 31, 2005 was estimated on the date of
grant using the Black-Scholes option-pricing model utilizing the single option
approach using the following weighted-average assumptions:
Weighted-average risk free rate 3.50%
Expected term 5 years
Expected stock volatility 80%
Dividend yield --
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 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 consolidated financial statements as of and
for the three months ended December 31, 2006 reflect the impact of adopting SFAS
No. 123(R). The Company's consolidated financial statements for periods prior to
December 31, 2006 have not been restated to reflect, and do not include, the
impact of SFAS No. 123(R).
Stock-based compensation expense recognized in the Company's consolidated
statement of income for the three months ended December 31, 2006 includes
compensation expense for share-based payment awards granted prior to, but not
yet vested as of September 30, 2006 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS No. 123 and compensation
expense for the share-based payment awards granted subsequent to September 30,
2006 based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). As stock-based compensation expense recognized in
the consolidated statement of income for the three months ended December 31,
2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The estimated average forfeiture rate
for the three months ended December 31, 2006 of approximately 5% was based on
historical forfeiture experience and estimated future employee forfeitures. The
estimated term of option grants for the three months ended December 31, 2006 was
five years. In the Company's pro forma information required under SFAS No. 123
for the periods prior to October 1, 2006, the Company accounted for forfeitures
as they occurred.
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
three months ended December 31, 2006 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. The assumptions used for options granted during the three months ended
December 31,2006 are as follows:
8
Three Months Ended
December 31, 2006
------------------
Expected term 5 years
Expected stock volatility 98%
Risk free rate 4.75%
Dividend yield --%
A summary of option activity as of December 31, 2006 and changes during the
three months ended, is presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Shares Price (Years) Value
---------- --------- ----------- -----------
Options outstanding at October 1, 2006 1,425,979 $ 1.16
Options granted 76,000 $ 1.50
Options exercised (1,000) $ 0.60
Options forfeited (74,700) $ 1.11
---------- ----------
Options outstanding at December 31, 2006 1,426,279 $ 1.18 5.2 $ 658,434
========== ========== =========== ===========
Options exercisable at December 31, 2006 1,134,129 $ 0.80 4.7 $ 475,384
========== ========== =========== ===========
The weighted-average grant date fair value of options granted during the three
months ended December 31, 2006 was $1.14 per option. The total intrinsic value
of options exercised during the three months ended December 31, 2006 was $1,020.
A summary of the status of the Company's non-vested stock options as of December
31, 2006 and changes during the three months then ended is presented below:
Weighted-
Average Grant
Date Fair Value
Shares Per Share
----------- ---------------
Non-vested stock options at October 1, 2006 293,850 $ 0.59
Vested stock options (8,700) $ 0.85
Non-vested options granted 69,300 $ 1.16
Forfeited / cancelled stock options (69,000) $ 0.79
----------- ---------------
Non-vested stock options at December 31, 2006 292,150 $ 0.68
=========== ===============
As of December 31, 2006, there was approximately $187,000 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
total fair value of stock options vested during the three months ended December
31, 2006 was approximately $2,000.
As a result of adopting SFAS No. 123(R) on October 1, 2006, the Company's income
before provision for income taxes and net income for the three months ended
December 31, 2006 were approximately $2,000 lower than if it had continued to
account for share-based compensation under APB No. 25. Basic and diluted net
income per share were not affected as a result of the adoption of SFAS No.
123(R).
The following table summarizes stock-based compensation expense related to
employee and director stock options under SFAS No. 123 (R) for the three months
ended December 31, 2006, which was allocated as follows:
Stock-based compensation included in:
Cost of revenues $ --
Research and development expenses $ --
Selling, general, and administrative expenses $ 2,000
9
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, 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,
2006 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,
----------------------------
2006 2005
------------ ------------
Balance at beginning of period $ 23,000 $ 43,000
Charges to costs and expenses 11,000 36,000
Costs incurred (16,000) (21,000)
------------ ------------
Balance at end of period $ 18,000 $ 58,000
============ ============
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.
Recently Issued Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in -Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements the impact of tax position, if that position is more likely
than not of being sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006 with the cumulative effect of the change in accounting principle recorded
as an adjustment to beginning retained earnings. The adoption of this statement
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
standard defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Earlier application is
encouraged. The adoption of this accounting pronouncement is not expected to
have a material effect on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued SAB No. 108
"Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements", which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The guidance is applicable beginning fiscal 2008. The Company does not believe
SAB No. 108 will have a material impact on the consolidated financial
statements.
10
NOTE 2 - Composition of Certain Balance Sheet Captions
December 31,
2006
------------
Inventories, net of reserves, consist of the following:
Raw materials $ 1,025,000
Work-in-process 669,000
Finished goods 1,081,000
------------
$ 2,775,000
============
For the three months ended December 31, 2006, 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 $ 140,000
Short-term deposits 15,000
Prepaid insurance 41,000
Prepaid other 26,000
------------
Total other current assets $ 222,000
============
Property and equipment consist of the following:
Furniture and equipment $ 2,524,000
Leasehold improvements 614,000
Other 216,000
------------
3,354,000
Less accumulated depreciation and amortization (2,461,000)
------------
Total property and equipment $ 893,000
============
Accrued expenses consist of the following:
Accrued vacation $ 128,000
Accrued salaries and wages 40,000
Sales and use tax 61,000
Accrued professional expenses 30,000
Customer deposits 33,000
Accrued commissions 19,000
Accrued payroll taxes 6,000
Other 7,000
------------
Total accrued expenses $ 324,000
============
NOTE 3 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at December 31, 2006:
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. $ 3,000
Notes payable to finance company, issued in connection with
financing certain insurance policies. The notes bear interest
at 6.566% per annum and require monthly principal and interest
payments of $17,369 through January 2007. 17,000
------------
20,000
Less: current portion (19,000)
------------
$ 1,000
============
11
NOTE 5 - Senior Secured Convertible Notes Due to Officer
The Company has two Senior Convertible Secured Notes (the "Convertible Notes")
in the amounts of $150,000 and $50,000 to its Chief Executive Officer. The
Convertible Notes bear interest at 12%, per annum, with maturity dates of
February 27, and April 15, 2007, respectively, and are convertible, including
accrued interest, into common stock, at a price of $0.40 per share and $0.50 per
share (the "Conversion Price"), respectively. The Conversion Price was
determined based on the closing market price of the Company's common stock on
the date of issuance. The Convertible Notes are secured by substantially all the
Company's assets. The conversion prices of the Convertible Notes are subject to
reduction if the Company issues or sells any shares of its common stock for
consideration per share less than the Conversion Price, in which case the
Conversion Price will be reduced to the price at which the shares of common
stock were sold. However, no later sale of common stock at a price higher than
the Conversion Price shall cause the Conversion Price to be increased. During
the current quarter ended December 31, 2006, the Chief Executive officer agreed
to convert the Notes and their respective accrued interest into 760,000 shares
common stock upon their maturity.
As of December 31, 2006 and 2005, the Company accrued $117,000 and $93,000,
respectively, in interest on the above Convertible Notes. No interest was paid
during the three months ended December 31, 2006 and 2005.
In accordance with SFAS No. 6, "Classification of Short-term Obligations
Expected To Be Refinanced", the Convertible Notes and the accrued interest
thereon which will be converted into shares of the Company's common stock upon
their maturity have been classified as non-current liabilities in the
accompanying balance sheet as of December 31, 2006.
NOTE 6 - Income (Loss) Per Share Information
Basic income (loss) per share is based on the weighted-average number of shares
of common stock outstanding during the period. Diluted income (loss) per share
also includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Company's
senior convertible secured notes due to officer for the period of time such
notes were outstanding, if such stock options and convertible notes are
dilutive.
The following table sets forth the computation of the numerator and denominator
of basic and diluted income (loss) per share:
Three months ended
December 31,
2006 2005
------------ ------------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 16,537,495 14,704,540
Effect of dilutive options 475,496 48,695
Effect of senior convertible secured
notes due to officer and accrued interest 723,500 692,500
------------ ------------
Weighted average common shares outstanding
used in calculating diluted earnings per share 17,736,491 15,445,735
============ ============
Numerator
Net income $ 166,000 $ 14,000
Add - interest on senior convertible
secured notes due to officer 6,000 6,000
------------ ------------
Net income available to common stockholders $ 172,000 $ 20,000
============ ============
NOTE 7 - Commitments and Contingencies
Litigation
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 consolidated statements of income that
may have material impact on the Company's financial position, results of
operations or cash flows.
12
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 8 - Other Income
During the three month periods ended December 31, 2006 and 2005, the Company
recognized $140,000 and $84,000, 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 statements of income.
Note 9 - Related Party Transactions
The Company has a promissory note receivable (the "Note") from Cardiomedics,
Inc. ("Cardiomedics"), a privately held corporation in which the Chairmain/CEO
of Company holds a majority interest and is a member of the Board of Directors.
The COO/President of the Company is also a board member of Cardiomedics. The
Note bears interest at 8.0% per annum, matures on March 31, 2008, and is secured
by a personal guarantee from the Chairman/CEO of the Company. During the quarter
ended December 31, 2006 the Company received $8,000 in principal reduction
payments from Cardiomedics, offset by interest, reducing the principal balance
of the Note to $31,000 at December 31, 2006. The Company received no interest on
this Note during the quarter ended December 31, 2005.
On April 7, 2006, the Company entered into an agreement to employ Cardiomedics
as a consultant to provide graphics arts services, since the Company had no
employee 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 quarter ended December 31, 2006, the Company incurred $8,000 in
expense for the services provided under the agreement.
NOTE 10 - Stockholders' Equity
During the three months ended December 31, 2006, the Company sold 2,650,000
shares of its common stock through J. H. Darbie & Co., Inc. ("Darbie") and First
Island Capital, Inc. ("FIC"). The Company sold 2,600,000 shares through Darbie
to four institutional investors and a related accredited individual at a price
of $1.25 per share for an aggregate of $3,250,000, and 50,000 shares through FIC
at a price of $1.25 per share for $62,500 to an accredited individual. The
Company paid Darbie $260,000 for commissions and incurred $18,500 in legal
expenses and other costs.
On December 21, 2006, the Company filed a Registration Statement on Form SB-2
with the SEC covering the potential resale of the above 2,650,000 shares of
common stock by the holders thereof, the shares underlying the 212,000 Warrants
issued to Darbie and FIC, 600,000 shares of common stock reserved for issuance
pursuant to Non-Qualified Stock Options which may be granted under the Company's
2007 Non-Qualified Stock Option Plan and resales of such shares, and an
indeterminate number of shares of common stock which the Company may be required
to issue under the anti-dilution provisions of the above described Subscription
Agreements and Warrants.
In January 2007, the Company and the investors renegotiated the terms of the
offering above, and the Company issued 265,000 additional shares of common stock
to the investors without cost, bringing the total number of shares issued to
2,915,000 at an average cost of $1.136 per share. The Company filed an Amended
Registration Statement on Form SB-2 reflecting the issuance of the additional
shares, which became effective on January 17, 2007. In January 2007, the Company
issued warrants, exercisable to purchase 208,000 and 4,000 shares of common
stock to Darbie and FIC, respectively, at a price of $1.25 per share, with a
customary anti-dilution provision.
13
NOTE 11 - 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 months ended December 31, 2006 and 2005
are as follows:
For the three months ended For the three months ended
December 31, 2006 December 31, 2005
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ------------------------------------------
Revenue $ 940,000 $ 485,000 $ 1,425,000 $ 1,342,000 $ 443,000 $ 1,785,000
Cost of sales 464,000 315,000 779,000 825,000 323,000 1,148,000
---------------------------------------- ------------------------------------------
Gross profit 476,000 170,000 646,000 517,000 120,000 637,000
Expenses:
Selling, general and
administrative 414,000 65,000 479,000 465,000 115,000 580,000
Research and development 158,000 -- 158,000 145,000 -- 145,000
---------------------------------------- ------------------------------------------
(Loss) income from operations $ (96,000) $ 105,000 9,000 $ (93,000) $ 5,000 (88,000)
========================== ==========================
Other:
Interest income 23,000 5,000
Interest expense (6,000) (6,000)
Royalty income 140,000 84,000
Settlements and recoveries -- 23,000
Loss on disposal of equipment -- (3,000)
Income taxes -- (1,000)
----------- -----------
Net income $ 166,000 $ 14,000
=========== ===========
Sales and gross profit to customers by similar products and services for the
three months ended December 31, 2006 and December 31, 2005 were as follows:
For the three months
ended December 31,
(Unaudited)
2006 2005
---------- ----------
By similar products and services:
Revenues:
Laser equipment and accessories $ 135,000 $ 510,000
Delivery and disposable devices 805,000 832,000
Service and rental 485,000 443,000
---------- ----------
Total $1,425,000 $1,785,000
========== ==========
Gross profit
Laser equipment and accessories $ 43,000 $ 58,000
Delivery and disposable devices 433,000 459,000
Service and rental 170,000 120,000
---------- ----------
Total $ 646,000 $ 637,000
========== ==========
14
Sales in foreign countries for the quarters ended December 31, 2006 and 2005
accounted for approximately 20% and 36%, respectively, of the Company's total
sales. The breakdown by geographic region is as follows:
Three months ended Three months ended
December 31, 2006 December 31, 2005
------------ ------------
Asia $ 112,000 $ 363,000
Europe 117,000 182,000
Latin America 5,000 4,000
Middle East 1,000 --
Australia -- 81,000
Other 51,000 19,000
------------- ------------
$ 286,000 $ 649,000
============= ============
All long-lived assets were located in the United States during the three months
ended December 31, 2006. 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, 2006.
15
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
or on a month-to-month basis, or on a fee per case basis sometimes with a
minimum monthly rental fee. During the three months ended December 31, 2006 and
2005, three lasers were being rented by Trimedyne, Inc., each on a
month-to-month basis. 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 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.
16
Inventories
Inventories consist of raw materials and component parts, work in process and
finished good lasers and dispensing systems. Inventories are recorded at the
lower of cost or market, cost being determined principally by use of the
average-cost method, which approximates the first-in, first-out method. Cost is
determined at the actual cost for raw materials, and at production cost
(materials, labor and indirect manufacturing overhead) for work-in-process and
finished goods.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Tangible Assets." As
a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Deferred Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
Stock-based Compensation
Prior to October 1, 2006, the Company accounted for stock-based compensation
issued to non-employees under Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and
Emerging Issues Task Force No. 96-18, "Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods and Services" ("EITF No. 96-18"). Under SFAS No. 123 and EITF No.
96-18 all transactions in which goods or services are the consideration received
for the issuance of equity instruments were accounted for based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable.
Stock-based compensation expense recognized in the Company's consolidated
statement of income for the three months ended December 31, 2006 includes
compensation expense for share-based payment awards granted prior to, but not
yet vested as of September 30, 2006 based on the grant date fair value estimated
in accordance with the pro forma provisions of SFAS No. 123 and compensation
expense for the share-based payment awards granted subsequent to September 30,
2006 based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). As stock-based compensation expense recognized in
the consolidated statement of income for the three months ended December 31,
2006 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.
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
three months ended December 31, 2006 is based on the Company's historical
volatilities of the common. 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.
17
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, 2006 compared to quarter ended December 31, 2005
During the quarter ended December 31, 2006, net revenues were $1,425,000 as
compared to $1,785,000 for the same period of the previous year, a $360,000 or
20.2% decrease. Net sales from lasers and accessories decreased by $375,000 or
73.5% to $135,000 during the three months ended December 31, 2005 from $510,000
in the same period of the prior year. Net sales from delivery and disposable
devices decreased by $27,000 or 3.2% to $805,000 in the current quarter from
$832,000 in the same quarter of the prior year. Net sales from service and
rental increased by $42,000 or 9.5% to $485,000 from $443,000 for the same
quarters. Export sales decreased by $363,000 or 55.9% primarily due to an
decrease in laser sales in Asia.
Cost of sales during the quarter ended December 31, 2006 was 54.7% of net
revenues as compared to 64.3% the prior year quarter. Gross profit from the sale
of lasers and accessories was 31.9% as compared to 11.4% for the prior year
three-month period. This increase in gross profit was primarily due to the sale
of a laser used for demonstrations with a fully amortized cost. Gross profit
from the sale of delivery and disposable devices was 53.8% as compared to 55.1%
for the prior year three-month period. This decrease was due to efficiencies in
manufacturing of disposables at Trimedyne's new production facility. Gross
profit from revenue received from service and rentals was 35.1% as compared to
27.3% for the prior year three-month period. This increase in gross profit was
due to efficiencies in manufacturing of service parts and lower overhead costs
at Trimedyne's new facility combined with a reduction in technical staff due to
increased scheduling efficiencies at MST.
Selling, general and administrative expenses decreased in the current quarter to
$479,000 from $580,000 in the prior year quarter, a decrease of $101,000 or
17.4%. The decrease in selling, general and administrative expenses was
primarily the result of decreases in the following: rent expense and related
property taxes of $51,000 resulting from the Company relocating to its new
facility, commission expense of $24,000, consulting fees of $19,000, and $17,000
related to the recruitment of new staff. These decreases were offset primarily
by increases of $8,000 in marketing expenses and $4,000 in insurance expense.
Research and development expenditures for the quarter ended December 31, 2006,
increased $13,000 to $158,000 as compared to $145,000 in the quarter ended
December 31, 2005. 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 $54,000 or 52.4% to $157,000 in the first quarter
ended December 31, 2006 from $103,000 in the first quarter of the prior year.
Other income during the quarter ended December 31, 2006 primarily consisted of
$140,000 of royalty income and $23,000 in interest income, offset by $6,000 in
interest expense. In the period ended December 31, 2005, other income primarily
consisted of $84,000 of royalty income and $23,000 resulting from the write down
of previous accruals, for which the Company no longer had obligations, offset by
$6,000 in interest expense.
For the current quarter, the Company had net income of $166,000 or $0.01 per
share, based on 17,319,693 basic weighted average number of common shares
outstanding, as compared to net income of $14,000, or $0.00 per share, based on
14,704,540 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
18
Liquidity and Capital Resources
-------------------------------
At December 31, 2006, the Company had working capital of $6,701,000 compared to
$3,456,000 at the end of the fiscal year ended September 30, 2006. Cash
increased by $3,013,000 to $3,815,000 from $802,000 at the fiscal year ended
September 30, 2006. 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, 2006 net cash provided by operating activities was
$56,000. Net cash provided by financing activities during the same three month
period was $2,982,000, which was the result of the sale of common stock during
the period net of 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 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.
We have $200,000 of Senior Convertible Notes due to an officer of the Company
(the "Notes") outstanding, on which have accrued interest of $117,000 at
December 31, 2006. The notes bear interest at 12% per annum, and are due in
2007. The Notes and accrued interest are convertible at prices of $0.40 and
$0.50 per share. During the current quarter ended December 31, 2006, the Chief
Executive Officer agreed to convert the Notes and their respective accrued
interest into 760,000 shares common stock upon their maturity.
19
ITEM 3. CONTROLS AND PROCEDURES
As of December 31, 2006, 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, 2006.
(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, 2006 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, 2006 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.
20
PART II Other Information
ITEM 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended December 31, 2006, the Company sold
2,650,000 shares of its common stock through J. H. Darbie & Co., Inc.
("Darbie") and First Island Capital, Inc. ("FIC"). The Company sold
2,600,000 shares through Darbie to four institutional investors and a
related accredited individual at a price of $1.25 per share for an
aggregate of $3,250,000, and 50,000 shares through FIC at a price of
$1.25 per share for $62,500 to an accredited individual. The Company
paid Darbie $260,000 for commissions.
In January 2007, the Company and the investors renegotiated the terms of
the offering and the sale of 2,650,000 shares of common stock to the
investors (see Note 10), and the Company issued 265,000 additional
shares of common stock to the investors without cost, bringing the total
number of shares issued to 2,915,000 at an average cost of $1.136 per
share. The Company filed an Amended Registration Statement on Form SB-2
reflecting the issuance of the additional shares, which became effective
on January 17, 2007. In January 2007, the Company issued warrants,
exercisable to purchase 208,000 and 4,000 shares of common stock to
Darbie and FIC, respectively at a price of $1.25 per share, with a
customary anti-dilution provision.
The principal use of these funds will be to finance the increased level
of business expected to arise from sales of our new Fiber by Boston
Scientific and Lumenis.
These issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933 on the ground that the transactions did
not involve a public offering of securities and these transactions
complied with the requirements of Regulation D promulgated under that
section.
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
21
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 12, 2007 /s/ Marvin P. Loeb
-------------------------- -----------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: February 12, 2007 /s/ Jeffrey S. Rudner
-------------------------- -----------------------------------
Jeffrey S. Rudner
Controller
22