UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to _______________________
COMMISSION FILE NO. 0-10581
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TRIMEDYNE, INC.
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(Exact Name of Registrant as Specified in its Charter)
NEVADA 36-3094439
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
25901 COMMERCENTRE DRIVE 92630
LAKE FOREST, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code:
(949) 951-3800
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value per Share
(Title of Class)
----------------------
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss. 232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act of 1934). Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of registrant
on January 12, 2010 based upon the closing price of the common stock on such
date was approximately $1,915,637
As of January 12, 2010, there were outstanding 18,365,960 shares of registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................................... 3
Forward Looking Statements......................................... 3
General............................................................ 3
The Urology Market................................................. 3
The Orthopedic Market.............................................. 5
Other Markets...................................................... 6
Laser Rental Market ............................................... 6
License Agreements ................................................ 6
Research and Development .......................................... 6
Manufacturing, Supply Agreements .................................. 7
Marketing ......................................................... 7
Government Regulation ............................................. 8
Investigational Device Exemptions.................................. 8
510(k) Premarket Notification ..................................... 8
Premarket Approval ................................................ 8
Inspection of Plants .............................................. 9
State Regulation .................................................. 9
Insurance Reimbursement ........................................... 9
Cost of Compliance with FDA and Other Applicable Regulations ...... 9
Employees ......................................................... 9
Patents and Patent Applications ................................... 10
Competition ....................................................... 10
Insurance ......................................................... 10
Foreign Operations ................................................ 10
ITEM 2. PROPERTIES ............................................................ 10
ITEM 3. LEGAL PROCEEDINGS...................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................... 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASER OF EQUITY SECURITIES ................................. 12
ITEM 6. SELECTED FINANCIAL DATA ............................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................... 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................... 17
ITEM 9A(T). CONTROLS AND PROCEDURES................................................ 17
ITEM 9B. OTHER INFORMATION...................................................... 18
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE................. 19
ITEM 11. EXECUTIVE COMPENSATION ................................................ 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.............................................. 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE............................................................ 23
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................. 24
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES................................ 24
2
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis or of
Financial Condition and Results of Operations". Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's opinions only as of the date hereof. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers shouldcarefully review the risk factors
described in other documents the Company files from time to time with the
U.S.Securities and Exchange Commission, including the Quarterly Reports on Form
10-Q filed by the Company in fiscal year 200 9.
GENERAL
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 and 30 watt Holmium "cold" pulsed
lasers ("Lasers") and a variety of disposable and reusable, fiber optic laser
energy delivery devices ("Fibers", "Needles" and "Tips") for use in a broad
array of medical applications.
Our Lasers, Fibers, Needles and Tips have been cleared for sale by the U.S. Food
and Drug Administration ("FDA") for use in orthopedics, urology, ear, nose and
throat ("ENT") surgery, gynecology, gastrointestinal surgery, general surgery
and other medical specialties. Many of the medical procedures in which our
Lasers, Fibers, Needles and Tips are used are being reimbursed by Medicare and
most insurance companies and health plans.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is
engaged in the rental of lasers, along with the services of a trained operator
and, if requested, the provision of applicable Fibers, Needles or Tips, on a
"fee per case" basis to hospitals, surgery centers, group practices and
individual physicians in Texas and nearby areas. MST's revenues and those of our
field service department represented about 30% of our revenues in the fiscal
year ended September 30, 2009.
The principal market for our Lasers and Side Firing Needles is presently in
orthopedics to treat herniated (bulging) and ruptured lumbar, thoracic and
cervical discs in the spine, two of the four major causes of lower back, neck
and leg pain, typically on an outpatient basis. Our Lasers and Tips are also
used in orthopedics to treat damage in joints, such as the knee, shoulder,
elbow, hip, ankle and wrist, in outpatient, arthroscopic procedures.
THE UROLOGY MARKET
While our Lasers and Fibers are presently used in urology to fragment stones in
the kidney, ureter and bladder, we have developed a new, proprietary, Side
Firing Laser Fiber for use with our Holmium Lasers and other Holmium Lasers with
a compatible connector to vaporize a portion of the prostate to treat benign
prostatic hyperplasia or "BPH", commonly called an enlarged prostate.
Enlargement of the prostate causes difficulty in urinating and an urgency to
urinate, which often causes the patient to wake-up, interrupting his sleep.
We will market this new Fiber under our VaporMAX registered trademark through a
limited number of commission sales representatives in the United States and by
distributors in certain foreign countries.
In 2005, we entered into an OEM Agreement with Lumenis, Ltd. of Yokneam, Israel
("Lumenis"), as a result of our settling our patent infringement and unfair
competition lawsuit against Lumenis. Under this Agreement, Lumenis agreed to
purchase 100% of its needs for side firing laser fibers and 75% of its needs for
angled firing laser fibers from us, subject to our laser fibers meeting certain
performance standards and satisfactory completion of an audit of our
manufacturing process and quality system.
We have developed a differently appearing Side Firing Laser Fiber, which
functions in substantially the same manner as our VaporMAX(R) Side Firing Fiber,
for use with 80 and 100 watt Holmium Lasers manufactured by Lumenis. Lumenis is
one of the world's largest manufacturers of medical lasers, has revenues
exceeding 250 million per year and has a large worldwide sales force. Lumenis
distributes its Holmium Lasers and Angled Firing Laser Fibers through Boston
Scientific Corporation ("Boston Scientific") in the United States and Japan.
The Side Firing Fibers we will be manufacturing for Lumenis will be distributed
for Lumenis in the U.S. and Japan by Boston Scientific under Lumenis' DuraMAX
trademark and by Lumenis' large sales organization elsewhere throughout the
world. This will not begin until Boston Scientific and Lumenis successfully
complete their quality audit of our manufacturing process and quality system,
which is expected to take several months from the time they start this process.
3
THE ENLARGED PROSTATE MARKET
An enlarged prostate affects about 50% of men over age 55, and a higher
percentage of men at advanced ages. While drugs are used to treat millions of
men with an enlarged prostate, when the drugs are no longer able to adequately
treat this condition, removal of the prostate is needed to open a channel to
permit proper urine flow.
Each year, about 200,000 men in the United States and an estimated one million
men in foreign countries are treated with a procedure using radiofrequency
("RF") energy or laser energy to remove a portion of the prostate to open a
channel for urine flow. While RF energy is used to do this, laser vaporization
or resection of the prostate is becoming increasingly popular, as the laser
procedure typically reduces procedural bleeding and can be performed on an
outpatient basis, whereas the RF procedure usually entails a hospital stay,
significant bleeding, a variety of adverse effects and a recuperation period of
days to weeks.
As a result, when Boston Scientific and Lumenis begin selling our new Side
Firing Fiber for use with Lumenis' Holmium Lasers, we believe sales of these
Fibers by Boston Scientific's and Lumenis' large sales organizations will
contribute substantially to our revenues.
The development of our new Side Firing Fiber for use with our 80 watt Holmium
Lasers and Lumenis' 80 and 100 watt Holmium Lasers took longer than expected,
due to obstacles imposed by the high peak powers and other characteristics of
Holmium Lasers, which make them excellent at vaporizing tissue, but also makes
them very hard on the glass components of the Fibers. Our new Side Firing Fiber
has been shown in our bench testing on animal tissue, using Lumenis' 100 watt
Holmium Laser at full power, to vaporize tissue faster and to be significantly
more durable than the Side Firing Fibers presently being manufactured by Lumenis
and marketed by Boston Scientific and Lumenis. Our new Side Firing Fiber was
also tested by an Independent Testing Laboratory, using Lumenis' 100 watt
Holmium Laser at full power, that confirmed our successful testing of its
vaporization rate and durability on Lumenis' Holmium Laser.
Our new Side Firing Fiber has been cleared for sale by the FDA.
We have delivered a number of our new Side Firing Fibers to Boston Scientific
for laboratory testing and a number of our new Side Firing Fibers to Lumenis for
physician evaluation, which is presently underway. Lumenis' initial
report on their physician evaluations was very favorable.
PROBLEMS ENCOUNTERED IN DEVELOPING THE NEW SIDE FIRING FIBER
Holmium Lasers emit very short pulses of laser energy. At 80 watts, our Holmium
Lasers emit pulses of energy with a duration or pulse width of about 400
microseconds, with a peak pulse power level of up to 9,000 watts. The laser
energy is transmitted from the laser through an optical fiber to a tip designed
to direct the laser energy to the side at an angle of about 80 to 90 degrees.
Holmium Laser energy is highly absorbed by water. When tissue is struck by the
laser beam, water in the cells is almost instantly turned to steam, vaporizing
the tissue. As a result, Holmium Lasers vaporize tissue more efficiently than
most other lasers whose energy can be transmitted through conventional optical
fibers, such as KTP Lasers, whose energy is highly absorbed by hemoglobin in
blood, and Diode lasers, whose energy is moderately absorbed in both hemoglobin
and water.
KTP and Diode lasers, at very high power, can vaporize tissue, but can also
cause significant charring and thermal damage to the remaining tissue. Charred
tissue is removed from the body by macrophages and other mechanisms. Macrophages
emit harsh chemicals to dissolve char and other foreign matter, which causes the
patient to experience irritation at the vaporization site in the prostate for a
week or longer.
Holmium lasers are able to vaporize tissue with little or no charring or damage
to the remaining tissue. However, the very high power energy pulses of Holmium
Lasers cause a steam bubble to almost instantly be formed in a sort of
explosion. These explosions of steam typically occur at a rate of about 25 times
per second with our Holmium Lasers and at a rate of about 50 times per second
with Lumenis' Holmium Lasers.
When the steam bubble collapses between pulses, it causes an acoustic shock,
which can damage the glass components in the tip of the Fibers. And, the water
and steam heated by the laser energy can act as a catalyst for erosion of the
glass surface at the tip of the optical fiber, which can damage the Fiber's tip.
Furthermore, when the laser energy strikes the tissue, some of the laser energy
is reflected back into the tip of the optical fiber. This can cause thermal
damage that affects the integrity of the Fiber's tip.
The combination of the above described steam explosions, the shock waves from
the collapse of the steam bubbles and laser energy reflected back from tissue
can damage and, ultimately, fracture the glass enclosure of the Fiber's tip,
reducing the Side Firing Fiber's vaporization rate and useful lifetime.
4
As a result of the above described problems, it took us much longer than
anticipated to develop a durable, fast vaporizing, Side Firing Fiber for use
with our 80 watt Holmium Lasers. We have begun physician evaluations by a number
of our customers and prospective customers to obtain orders and have begun
marketing our VaporMAX(R) Side Firing Fiber for use with our Holmium Lasers and
other Holmium Lasers with a compatible connector for the treatment of enlarged
prostates.
PARTICULAR PROBLEMS ENCOUNTERED WHEN USING LUMENIS' 100 WATT HOLMIUM LASER
We encountered a more difficult problem in developing a similar Side Firing
Fiber for use with Lumenis' 100 watt Holmium Lasers. At 100 watts of power,
Lumenis' Holmium Laser produces 25% more laser energy than our 80 watt Holmium
Laser, and its pulse width or duration is about 250 microseconds at this power
level, with a peak pulse power of up to 11,000 watts.
In addition to the optical fiber's tip having to emit 25% more energy per pulse,
since the pulse width of Lumenis' 100 watt Holmium Laser is about one-half that
of our 80 watt Holmium Laser, 25% more power must be transmitted through the tip
of the optical fiber at about twice the number of pulses per second as with our
80 watt Holmium Laser, and the steam explosions at the surface of the tip of the
Fiber are more powerful, the acoustic shocks caused by the collapse of the steam
bubble are more intense and the amount of laser energy reflected from the
tissue, which can damage the tip of the Fiber, is greater.
As a result, developing a fast vaporizing, durable, Side Firing Fiber for use
with Lumenis' 100 watt Holmium Lasers proved to be a formidable challenge.
However, our testing of the new Fiber on Lumenis' 100 watt Laser at full power
and the Independent Testing Laboratory's testing on Lumenis' 100 watt Laser at
full power demonstrated its faster vaporization rate and durability on an animal
tissue model.
A very significant portion of our management and R & D efforts over the past
year were devoted to the development of the new Side Firing Laser Fiber for use
with Lumenis' 100 watt Holmium Lasers and our 80 watt Holmium Lasers.
THE MARKET FOR OUR LASERS AND FIBERS IN UROLOGY
Side firing laser fibers to treat an enlarged prostate typically sell for about
$650 or more and are labeled "single use" and should be discarded after one use.
However, we are told some illicit re-use of these fibers occurs in the United
States and Europe and is common throughout the rest of the world, where
government reimbursement, insurance plans and self-pay patients cannot afford
such expensive devices.
Our Lasers and our FlexMAX(R) plain, straight-ahead firing Fibers are used in
urology to fragment stones in the kidney, ureter or bladder in "lithotripsy"
procedures. However, our plain, straight-ahead firing Fibers are reusable and
are used an average of about 20-30 times. As a result, revenues from the sale of
$400 plain Fibers to fragment stones do not result in as significant sales
revenues as those expected from the use of single use, disposable Side Firing
Fibers with our Holmium Lasers and others to treat enlarged prostates.
THE ORTHOPEDIC MARKET
Our Side Firing Laser Needles are used with our Holmium Lasers to treat
herniated or ruptured lumbar, thoracic or cervical discs in the spine in
minimally invasive procedures, which are typically performed on an outpatient
basis in as little as 30-40 minute procedures, usually with only local
anesthesia. The lower back, leg and neck pain disappears on the operating table,
and the patient walks out with only a Band Aid(R) on the puncture (stitches may
not be required). Most patients can return to light activities in a few days.
Clinical Studies on our disc procedures, published in medical journals, show
success rates (good or excellent results, based on pain scores) of 85% to 94%.
Approximately 600,000 conventional surgical laminectomy or discectomy procedures
are performed each year in the United States to treat herniated or ruptured
discs. These surgeries typically require general anesthesia and entail a two to
three day or longer hospital stay, some bleeding, post-operative pain and a
recovery period of a month or longer, often with physical therapy or exercise
programs for up to six months. Conventional surgery to treat herniated or
ruptured discs in the spine, published in medical journals, show the success
rates of disc surgery to be only 40% to 77%, based on similar pain scores.
While our laser procedures to treat herniated or ruptured spinal discs have
demonstrated higher success rates, fewer adverse effects and typically do not
require hospitalization, which are common to the conventional surgical
procedures to treat herniated or ruptured spinal discs, and are less costly to
third party payors, before surgeons can perform our laser procedures, they must
attend a one or more training courses in which they practice the procedure on
cadavers. In addition to difficulty in convincing busy surgeons to take two to
three days away from their practice to attend a training course, we incur
substantial costs in conducting the training courses.
5
In addition, surgeons are generally paid more by Medicare and insurance
companies for performing conventional disc surgery than for our outpatient laser
rocedures, reducing their desire to take time away from their practice to attend
a training course for a lower-paying procedure. However, once experienced in our
shorter procedure, many spinal surgeons are able to perform two, three or more
of our laser procedures a day, compared to usually one procedure a day for
conventional surgery.
Since we can afford to conduct (or participate with makers of endoscopes used in
these procedures) in only a few training courses each year in the U.S. and only
occasionally in Europe, Latin America and Asia, our spinal disc market is
expected to grow only if we are able to conduct or participate in a larger
number of training courses. If our sales continue to grow, we plan to expand the
marketing of our Holmium Lasers and Side Firing Fibers for treating herniated or
ruptured spinal discs By conducting or participating in more training courses.
OTHER MARKETS
Our Lasers, Fibers, Needles and Tips are also used in a variety of other
procedures in gynecology, ear, nose and throat surgery, gastrointestinal surgery
and general surgery.
We also plan to develop new optical fiber devices for use with our Holmium
Lasers and others to treat other conditions. Developing new optical fiber
devices for new medical applications entails considerable risk. While we have
almost twenty years of experience in designing, developing, manufacturing and
marketing Holmium Lasers and Side Firing Laser Fibers, we cannot assure that any
new optical fiber devices or different lasers we attempt to develop for new
applications can be completed at a reasonable cost or in a timely manner, will
be clinically successful, can compete successfully in the marketplace or be
profitable to us.
THE LASER RENTAL MARKET
Many hospitals, surgery centers and physicians are reluctant to purchase "big
ticket" medical equipment, such as our Lasers, which sell for $55,000 to
$127,000, particularly for new medical procedures. Hospitals also traditionally
suffer from a lack of funds to buy expensive medical equipment, and they prefer
to avoid having to train their staff to operate new, complex equipment. As a
result, laser rental companies have been formed in the United States and
elsewhere to fill this void. These companies typically provide lasers,
endoscopes and other types of medical equipment, along with a trained operator,
to hospitals, surgery centers and physicians on a "fee per case" basis.
Mobile Surgical Technologies, Inc. ("MST") was organized in 1997 to rent lasers
with a trained operator to hospitals, surgery centers and physicians in Texas on
a "fee per case" basis. We acquired MST in late 2000 and expanded its "fee per
case" rental Business. MST is particularly well suited to our introduction and
testing of new laser products. If requested, MST also supplies Side Firing or
plain Fibers or Tips and includes their price in the "per case" fee.
We also plan to rent lasers, without an operator, to hospitals and surgery
centers in other states on a month-to-month basis. When a surgeon is trained to
perform a new procedure, such as our Laser procedures for treating an enlarged
prostate or a herniated or ruptured disc in the spine, instead of waiting for
his hospital or surgery center to purchase the Laser, the hospital or surgery
center can rent it on a "per case" basis or for a fixed monthly rental.
When the hospital's or surgery center's staff has been trained and is
comfortable with the patient results, the volume of patients and the amount
third-party payors are reimbursing for the procedure, they can buy the Laser,
lease it under a conventional, long term lease or continue to rent it. Since the
six to twelve month average delay in purchasing "big ticket" medical equipment
is eliminated, the hospital or surgery center can immediately start buying
Fibers, Needles and Tips from us, which typically carry higher profit margins
than our Lasers.
LICENSE AGREEMENTS
The Company has license agreements with a number of universities and inventors,
under which royalties on sales, if any, are payable. Sales of products covered
by these licenses are presently not material. Patent applications have been
filed with the U.S. Patent Office and U.S. Patents covering certain of the
Company's products have been issued to officers and employees of the Company,
all of which have been assigned to the Company without royalty. The Company's
patent applications are currently being processed by the U.S. Patent Office and,
to the Company's knowledge, are proceeding in the normal course of review.
RESEARCH AND DEVELOPMENT
From its inception to September 30, 2009, an aggregate of $53,127,000 has been
expended by the Company for research and development ("R&D"), including clinical
and regulatory activities, of which $1,316,000 and $1,311,000 was expended
during the fiscal years ended September 30, 2009 and 2008, respectively. As it
has in the past, the Company expects to contract with unaffiliated hospitals and
research institutions for the clinical testing of its developmental products.
6
MANUFACTURING AND SUPPLY AGREEMENTS
The Company believes that it has adequate engineering, design and manufacturing
facilities (see "PROPERTIES" section herein).
The Company has supply agreements with several suppliers for components and
materials used in the production of its products. However, the Company has no
long-term volume commitments. The materials used in the Company's products,
consisting primarily of certain plastics, optical fibers, lenses, various metal
alloys, lasers and laser assemblies and components used in the manufacture of
its lasers are, in most cases, available from several vendors. The Company has,
on occasion, experienced temporary delays or increased costs in obtaining these
materials. An extended shortage of required materials and supplies could have an
adverse effect upon the revenue and earnings of the Company. In addition, the
Company must allow for significant lead time when procuring certain materials
and supplies. Where the Company is currently using only one source of supply,
the Company believes that a second source could be obtained within a reasonable
period of time. However, no assurance can be given that the Company's results of
operations would not be adversely affected until a new source could be located.
Resulting for a prior settled patent litigation with Lumenis, Inc. ("Lumenis"),
Lumenis has agreed to pay a 7.5% royalty to us 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 75%
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 is
developing a special version of its VaporMAX(TM) Side-Firing Device exclusively
for Lumenis, under Lumenis' DuraMAX trademark, 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.
MARKETING
The principal markets for the Company's current products are hospitals with
orthopedic, urology, ENT, gynecology, gastrointestinal, general surgery and
other surgical operating room facilities, as well as outpatient surgery centers.
In the United States, this market represents approximately 5,500 hospitals, as
well as 1,000 or more outpatient surgery centers. Any new products the Company
develops will, if cleared for sale by the FDA and marketed, be sold to hospitals
and outpatient surgery centers, as well as to physicians for use in their
offices. The Company anticipates marketing only those products which are
customarily sold to the same customer groups to whom its Lasers and Fibers,
Needles and Tips are presently marketed. There is no assurance as to the extent
to which the Company will be able to penetrate these markets.
At September 30, 2009, the Company had marketing arrangements for the sale of
its Lasers, Fibers, Needles and Tips with a limited number of straight
commission sales representatives in the United States. Outside the United
States, the Company sells its products through 23 independent distributors who
sell various medical products in approximately 25 foreign countries. Our U.S.
sales representatives and our foreign distributors devote only a portion of
their time to selling our products. The Company presently employs a Vice
President of Sales who directs the Company's sales activities in the United
States and elsewhere.
The Company intends in the future to increase the number of domestic sales
representatives and appoint additional distributors in foreign countries for the
purpose of expanding sales of the Company's VaporMAX Fiber, its Side Firing
Needles for treating spinal discs and other products. There is no assurance that
the Company will be able to enter into marketing arrangements with any sales
persons or distributors, as the Company is devoting limited resources to these
activities, or that the Company will be able to maintain its existing selling
arrangements.
GOVERNMENT REGULATION
All of the Company's products are, and will in the future, be subject to
extensive governmental regulation and supervision, principally by the FDA and
comparable agencies in other countries. The FDA regulates the introduction,
advertising, manufacturing practices, labeling and record keeping of all drugs
and medical devices. The FDA has the power to seize adulterated or misbranded
devices, require removal of devices from the market, enjoin further manufacture
or sale of devices, and publicize relevant facts regarding devices.
Prior to the sale of any of its products, the Company is required to obtain
marketing clearance or approval for each product from the FDA and comparable
agencies in foreign countries. Extensive clinical testing of each product, which
is both costly and time-consuming, may be required to obtain such approvals. The
Company's business would be adversely affected if it were unable to obtain such
approvals or to comply with continuing regulations of the FDA and other
governmental agencies. In addition, the Company cannot predict whether future
changes in government regulations might increase the cost of conducting its
business or affect the time required to develop and introduce new products. The
Company's facilities were inspected by the FDA in September 2008 and no
deficiencies in the Company's compliance with the FDA's requirements were cited
by the FDA.
Specific areas of regulation by the FDA and other related matters are described
in detail below.
7
INVESTIGATIONAL DEVICE EXEMPTION
Before a new medical device may be used for investigational research in the
United States, an Investigational Device Exemption ("IDE") application must be
approved by the FDA. In order to obtain an IDE, the sponsor of the
investigational research must first obtain approval for the research from an
Institutional Review Board or Committee ("IRB") established for this purpose at
the institution (e.g. hospital, medical center, etc.) at which the research is
to be conducted.
510(k) PREMARKET NOTIFICATION
The procedure for obtaining clearance from the FDA to market a new medical
device involves many steps, such as IDE's and PMA's (see "Premarket Approval").
However, if a device is substantially equivalent to a product marketed prior to
May 28, 1976, or a comparable product subsequently cleared by the FDA under a
510(k) Premarket Notification, a 510(k) Premarket Notification may be filed to
establish the device's equivalence. The FDA's review process can take three
months or longer. However, if additional testing or data are requested by the
FDA, it is common for the overall review process to be extended.
All of the Company's currently marketed lasers and fiber-optic laser energy
delivery devices were cleared for sale under 510(k) Notifications. However, some
or all of the new products the Company plans to develop may require extensive
clinical trials and the filing of a PMA, which will entail substantially more
cost over a significantly longer period of time.
PREMARKET APPROVAL
Under the Medical Device Amendments of 1976, all medical devices are classified
by the FDA into one of three classes. A "Class I" device is one that is subject
only to general controls, such as labeling requirements and good manufacturing
practices ("GMP"). A "Class II" device is one that is subject to general
controls and must comply with performance standards established by the FDA. A
"Class III" device is one for which general controls and performance standards
alone are insufficient to assure safety and effectiveness, unless the device
qualifies for sale under a 510(k) Premarket Notification. Such devices require
clinical testing to establish their safety and efficacy in treating specific
diseases or conditions, and a Premarket Approval ("PMA"). Application for the
intended use must be approved by the FDA before the device can be marketed in
the United States. A device is generally classified as a Class I, II, or III
device based on recommendations of advisory panels appointed by the FDA.
The filing of a PMA Application entails a rigorous review by the FDA, which can
take one year or longer, unless additional testing or data are requested by the
FDA, in which case the review process can be considerably longer. The Company
believes the majority of its urology, orthopedic and other surgical products can
be cleared for sale pursuant to 510(k) Premarket Notifications, which in some
cases may require limited clinical trials, although such cannot be assured.
There is no assurance that required PMA approvals or 510(k) clearances for any
new products the Company may develop can be obtained or that 510(k) clearances
for the Company's present products can be maintained. The failure to maintain
510(k) clearances for existing products or to obtain needed PMA approvals or
510(k) clearances for new products might have a material adverse effect on the
Company's future operations.
INSPECTION OF PLANTS
The FDA also has authority to conduct detailed inspections of manufacturing
plants, to determine whether or not the manufacturer has followed its GMP
requirements, which are required for the manufacture of medical devices.
Additionally, the FDA requires reporting of certain product defects and
prohibits the domestic sale or exportation of devices that do not comply with
the law. The Company's manufacturing facility was inspected by the FDA in
September 2008 and no deficiencies in the Company's compliance with the FDA's
requirements were cited by the FDA. The Company believes it is currently in
compliance in all material respects with these regulatory requirements, and
expects that the processes and procedures in place will satisfy the FDA,
although such cannot be assured.
STATE REGULATION
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local regulation
of medical devices which is either more stringent than federal regulations or is
required because of compelling local conditions. To date, and to the best of the
Company's knowledge, only California has filed such an application. On October
5, 1980, the FDA granted partial approval to such application, effective
December 9, 1980. The California requirements which have been exempted from
preemption have not had a materially adverse effect on the Company.
8
INSURANCE REIMBURSEMENT
To permit the users of the Company's products to obtain reimbursement under
Federal health care programs such as Medicare, the Company may be required to
demonstrate, in an application to the Centers for Medicare and Medicaid Services
("CMS"), at either the local or federal level or both, the safety and efficacy
of its products and the benefit to patients therefrom which justify the cost of
such treatment. Criteria for demonstrating such benefits are in the process of
being defined by CMS, and there does not yet exist a clear method or requirement
to receive approval for reimbursement. There is no assurance that such an
application, if made, will be approved by CMS. Most private health insurance
companies and state health care programs have standards for reimbursement
similar to those of CMS. If an application for reimbursement of a product is not
approved by CMS, private insurers and/or health care programs, marketing of such
product would be adversely affected.
COST OF COMPLIANCE WITH FDA AND OTHER APPLICABLE REGULATIONS
The costs of complying with FDA and other governmental regulations prior to the
sale of approved products are reflected mainly in the Company's R&D
expenditures. The cost of first obtaining an IDE for a product and, after having
developed a product which in the Company's view is safe and effective, obtaining
a PMA approval therefore, as well as making the necessary application to CMS in
order to establish insurance reimbursability for treatments utilizing such
product, adds significantly to the cost of developing and bringing a product to
market over what such cost would have been if such regulatory requirements did
not exist.
Such regulatory requirements also lengthen the time which is required to develop
and commence marketing a product. These delays increase the Company's R&D
costs by (a) lengthening the time during which the Company must maintain and
bear the carrying costs of a given research and development effort and (b)
delaying the time when the Company can commence realizing revenues from sales of
a product, during which time, however, the Company must nevertheless continue to
bear administrative and overhead costs. It is, however, not possible for the
Company to quantify or estimate in advance the direct and indirect costs of
complying with such regulatory requirements, particularly since the expense and
difficulty of such compliance can vary greatly, depending upon the nature of the
product, its intended use, the technological success of the R&D effort and the
results of clinical testing of its products.
To the extent applicable regulations require more rigorous testing than might
otherwise be deemed necessary by the Company, the costs entailed in conducting
testing of its products by such institutions (and fees or royalties, if any,
payable to them) may be deemed in part a cost to the Company of compliance with
such regulatory requirements.
EMPLOYEES
On September 30, 2009, the Company had 59 full-time employees, of whom 12 were
employed by MST. Of the remainder, 36 were engaged in production and
engineering, one in sales and marketing, and 10 in general and administrative
functions. On September 30, 2009, the Company had five part-time employees of
whom three were engaged in production and R&D, and two in general and
administrative functions.
The Company may require additional employees in the areas of administration,
product development, research, production, regulatory affairs, quality control,
sales and marketing in the future. There is intense competition for capable,
experienced personnel in the medical device and laser fields, and there is no
assurance the Company will be able to obtain new qualified employees when
required.
Management believes its relations with its employees are good.
PATENTS AND PATENT APPLICATIONS
As of September 30, 2009, the Company owned or had licenses to 19 U.S. Patents
and 2 foreign and 6 U.S. patent applications. The validity of one of the U.S.
Patents covering the Company's 80 watt Holmium Laser was challenged by a
competitor in the U.S. in an action before the U.S. Patent and Trademark Office
("USPTO"). In December 1996, the USPTO upheld the validity of all of the claims
of this Patent. There is no assurance that (a) any patents will be issued from
the pending applications, (b) any issued patents will prove enforceable, (c) the
Company will derive any competitive advantage therefrom or (d) that the
Company's products may not infringe patents owned by others, licenses to which
may not be available to the Company. To the extent that pending patent
applications do not issue, the Company may be subject to more competition. There
can also be no assurance that the already patented products, methods and
processes will be medically useful or commercially viable. The issuance of
patents on some but not all aspects of a product may be insufficient to prevent
competitors from essentially duplicating the product by designing around the
patented aspects. The Company is obligated, under certain of its patent
licenses, to make royalty payments. Part of the Company's R&D activities will be
directed towards obtaining additional patent rights, which may entail future
royalty and minimum payment obligations.
9
COMPETITION
The Company faces competition from a number of both small and large companies in
the medical field. The larger companies include Medtronic, Inc., Johnson &
Johnson, Boston Scientific, Inc., Lumenis, Inc., American Medical Systems
Holdings, Inc., Olympus, Inc., and others, all of which have greater financial
resources, R&D and manufacturing facilities, technical skills, management staffs
and/or sales and marketing organizations than the Company's.
Among the smaller companies with which the Company competes are: Dornier, Inc.,
PhotoMedex, Inc., Lisa Lasers, Convergent, Inc. and others, certain of which are
publicly held.
INSURANCE
The Company has a commercial general liability insurance policy, including an
umbrella policy, providing coverage in the aggregate amount of $5,000,000 and a
products liability insurance policy providing coverage in the amount per
occurrence of $5,000,000. There is no assurance that such amounts of insurance
will be sufficient to protect the Company's assets against claims by users of
its products. Although there have been no successful claims against the Company,
there is no assurance the Company will be able to maintain such liability
insurance in force in the future at an acceptable cost, or at all, in which case
the Company's assets would be at risk in the event of successful claims against
it. Successful claims in excess of the amount of insurance then in force could
have a serious adverse effect upon the Company's financial condition and its
future viability. The Company does not carry director and officer liability
insurance, but does have indemnification agreements covering its officers and
directors.
FOREIGN OPERATIONS
In fiscal 2009 and 2008, sales of products in foreign countries accounted for
approximately 25.2% and 24.6%, respectively, of the Company's total sales. See
"Marketing" herein for information on the marketing of the Company's products in
foreign countries.
ITEM 2. PROPERTIES
The Company currently occupies approximately 28,700 sq. ft, office, R&D,
manufacturing and warehouse facility at 25901 Commercentre Drive, Lake Forest,
CA 92630. The lease became effective April 1, 2006, and has a five-year term
with two five-year renewal options. The lease agreement provides for rent of
$29,251 per month through July 2009, and then for a 4% rental increase effective
on August 2009.
The Company's subsidiary, MST, currently occupies approximately 1,500 square
feet of office space in Dallas, Texas, which it leases at a rental of $1,688 per
month through August 2010.
Management considers all of its facilities to be well maintained and adequate
for its purposes.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims and actions that arise in the ordinary course
of business. The litigation process is inherently uncertain, and it is possible
that the resolution of any future litigation may adversely affect us.
The Company had no product liability lawsuits commenced againt it during the
year ended September 30, 2009. 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.
In February, 2008, we and six other laser manufacturers were sued in the
district court of Massachusetts by CardioFocus, Inc., alleging infringement of
three of their now expired U.S. Patents, which limits their claim for royalties
to six years from their date of expiration. We and two other laser companies
joined in a petition to the U.S. Patent & Trademark Office ("USPTO") to
re-examine these patents and declare them invalid. The other four defendants
likewise individually requested a re-examination of these patents and a
declaration of invalidity by the USPTO. The court issued a stay of the
proceedings until October 14, 2009. On October 14, 2009, the defendents
(including Trimedyne) sought to extend the stay of the proceedings until October
14, 2010, or until the reexamination proceedings have concluded for all three
patents-in-suit, whichever is sooner. CardioFocus has opposed the defendant's
motion and, as of this filing, we have not received any determination from the
court.
No amount of monetary or other damages is stated in CardioFocus's preliminary
case filings and, because the patents are expired, CardioFocus is not entitled
to anything other than monetary damages. We have not established a reserve for
any damages in the event these patents are finally declared valid by the USPTO
in a non-appealable decision.
10
In the event the litigation is restarted, the Company will defend itself
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's quarter ended September 30, 2009, no matters were
submitted to a vote of securities holders.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
A. MARKET INFORMATION
Since November 18, 2003, the Company's Common Stock has been quoted on the
Over-The-Counter Bulletin Board under the symbol "TMED." The following
table sets forth the high and low closing sales prices for the Common Stock
for each quarterly period within the Company's two most recent fiscal years:
2008 High Low
---- ---- ----
Quarter ended:
December 31, 2007 $ 0.89 $ 0.60
March 31, 2008 0.62 0.33
June 30, 2008 0.48 0.33
September 30, 2008 0.33 0.21
2009 High Low
---- ---- ----
Quarter ended:
December 31, 2008 $ 0.22 $ 0.08
March 31, 2009 0.29 0.13
June 30, 2009 0.26 0.18
September 30, 2009 0.49 0.20
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
B. HOLDERS OF COMMON STOCK
As of September 30, 2009, there were approximately 1,000 holders of record of
the Company's Common Stock and an estimated 9,000 additional holders who
maintain the beneficial ownership of their shares in "Street Name".
C. DIVIDENDS
The Company has never paid cash dividends on its Common Stock, and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will be dependent upon the
Company's financial condition and results of operations and other factors then
deemed relevant by the Board of Directors.
D. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of September 30, 2009 with respect
to shares of the Company's common stock that may be issued through its employee
compensation plans:
NUMBER OF
SECURITIES REMAINING
NUMBER OF AVAILABLE FOR FUTURE
SECURITIES TO BE ISSUANCE UNDER
ISSUED UPON WEIGHTED-AVERAGE EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN COLUMN
AND RIGHTS AND RIGHTS (a))
----------------- ----------------- ---------------------
PLAN CATEGORY (a) (b) (c)
--------------------- ----------------- ----------------- ---------------------
Equity compensation
plans approved by
security holders 168,329 $ 1.42 --
Equity compensation
plans not approved by
security holders 1,348,450 $ 1.12 963,100
---------------- ---------------- ---------------------
Total 1,516,779 $ 1.15 963,100
================ ================ =====================
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
12
ITEM 6. SELECTED FINANCIAL DATA - N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
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 Lasers, Fibers, Needles and Tips 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 Lasers are sold with a one year warranty which includes parts and
labor. All international Lasers 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 Lasers sales
are non-returnable. Our international distributors typically locate customers
for Lasers 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.
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 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 fiscal years ended September 30, 2009 and 2008,
two Lasers, respectively, were being rented by Trimedyne, 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.
Allowances for doubtful accounts are estimated based on estimates of losses
related to customer receivable balances. Estimates are developed based on
historical losses, adjusting for current economic conditions and, in some cases,
evaluating specific customer accounts for risk of loss. The establishment of
reserves requires the use of judgment and assumptions regarding the potential
for losses on receivable balances. Though we consider these balances adequate
and proper, changes in economic conditions in specific markets in which we
operate could have a material effect on reserved balances required. Our credit
losses in 2009 and 2008, were less than one percent of revenues.
13
INVENTORIES
Inventories consist of raw materials and component parts, work in process and
finished Lasers. 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.
Laser units located at medical facilities for sales evaluation and demonstration
purposes or those units used for development and medical training are included
in inventory since the lasers will ultimately be sold. These units are written
down to reflect their net realizable values.
We write-down our inventory for estimated obsolescence equal to the net
realizable value of the obsolete inventory. Product obsolescence may be caused
by changes in technology discontinuance of a product line, replacement products
in the marketplace or other competitive situations. We maintain a reserve on
inventories that we consider to be slow moving or obsolete, to reduce the
inventory to their net estimated realizable value. Once specific inventory is
written-down, the write-down is permanent until the inventory is physically
disposed of.
GOODWILL
We account for goodwill and acquired intangible assets in accordance with ASC
No. 350 "Intangible Goodwill and Other", whereby goodwill is not amortized, and
is tested for impairment at the reporting unit level annually during the fourth
quarter and in interim periods if certain events occur indicating that the
carrying value of goodwill may be impaired. A reporting unit is an operating
segment for which discrete financial information is available and is regularly
reviewed by management. We have one reporting unit, our service and rental
group, to which goodwill is assigned.
ASC No. 350 requires a two-step approach to test goodwill for impairment for
each reporting unit. The first step tests for impairment by applying fair
value-based tests to a reporting unit. The second step, if deemed necessary,
measures the impairment by applying fair value-based tests to specific assets
and liabilities within the reporting unit. Application of the goodwill
impairment tests require judgment, including identification of reporting units,
assignment of assets and liabilities to each reporting unit, assignment of
goodwill to each reporting unit, and determination of the fair value of each
reporting unit. The determination of fair value for a reporting unit could be
materially affected by changes in these estimates and assumptions.
As part of the first step, we generally estimates the fair value of the
reporting unit based on market prices (i.e., the amount for which the assets
could be bought by or sold to a third party), when available. When market prices
are not available, we estimate the fair value of the reporting unit using the
income approach. The income approach uses cash flow projections. Inherent in our
development of cash flow projections are assumptions and estimates derived from
a review of our historical operating results, future business plans, expected
growth rates, cost of capital, future economic conditions, etc. Many of the
factors used in assessing fair value are outside the control of management, and
these assumptions and estimates can change in future periods. During the fourth
quarter of the year ended September 30, 2008, we conducted a goodwill
impairment test for its service and rental group using a combination of the
market and income approach. As a result of the first step analysis, the expected
cash flows to be generated by the service and rental were sufficient enough to
support the carrying value of the goodwill. Thus, we determined there
was no impairment of the goodwill as of September 30, 2009.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property and equipment and purchased intangibles
subject to amortization, are 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
our best estimate based on currently available information and reasonable and
supportable assumptions. Any impairment recognized is permanent and may not be
restored. To date, we have not recognized any impairment of long-lived assets.
DEFERRED TAXES
We record a valuation allowance to reduce the deferred tax assets to the amount
that is more likely than not to be realized. We have 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 our
deferred tax assets have been reserved. If actual results differ favorably from
those estimates used, we may be able to realize all or part of our net deferred
tax assets. Such realization could positively impact our operating results and
cash flows from operating activities.
14
STOCK-BASED COMPENSATION
We account for equity based compensation under the provisions of ASC No. 718,
"Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the recognition
of the fair value of equity-based compensation in operations. The fair value of
our stock option awards are estimated using a Black-Scholes option valuation
model. This model requires the input of highly subjective assumptions and
elections including expected stock price volatility and the estimated life of
each award. In addition, the calculation of equity-based compensation costs
requires that we estimate the number of awards that will be forfeited during the
vesting period. The fair value of equity-based awards is amortized over the
vesting period of the award and we elected to use the straight-line method for
awards granted after the adoption of ASC 718.
RISKS AND UNCERTAINTIES
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.
CONSOLIDATED RESULTS OF OPERATIONS FOR FISCAL YEARS 2009 AND 2008
The following table sets forth certain items in the consolidated statements of
income as a percentage of net revenues for the years ended September 30, 2009
and 2008:
Year Ended September 30,
2009 2008
------ ------
Net revenues 100.0% 100.0%
Cost of sales 62.5 70.9
Selling, general and administrative expenses 36.1 40.4
Research and development expenses 17.7 22.3
Interest expense 0.6 0.6
Other income, net 4.5 6.8
Income taxes 0.4 0.2
Net loss (12.2) (27.0)
NET REVENUES
Net revenues increased $1,551,000 or 26.4% in fiscal 2009 to $7,422,000 from
$5,871,000 in fiscal 2008. Net sales from Lasers and accessories increased by
$488,000 or 43.8% to $1,599,000 during the fiscal year ended September 30, 2009
from $1,111,000 during the prior fiscal year, primarily due to international
sales. Sales from Fibers, Needles and Tips increased by $398,000 or 14.6% to
$3,119,000 during the current fiscal year ended September 30, 2009 from
$2,721,000 during the prior fiscal year. The increase in sales from Fibers,
Needles and Tips was primarily due an increase in Needles and Tips sold for use
in spinal procedures. International export revenues increased $425,000 or 29.4%
to $1,869,000 during fiscal 2009 from $1,444,000 during fiscal 2008 primarily
due to sales in foreign countries where our products are sold through
non-stocking distributors who are paid commissions, resulting in higher invoiced
prices offset by commissions and customers taking advantage of volume discount
pricing for lasers. Net revenues from "per case" rentals and field service and
rental increased by $665,000 or 32.6% in fiscal 2009 to $2,704,000 from
$2,039,000 in fiscal 2008, primarily due to an increase in per case revenues
from MST as a result of the addition of sales personnel and the expansion of its
service business.
COST OF GOODS SOLD
Cost of sales in fiscal 2009 was approximately 63% of net revenues, compared to
71% in fiscal 2008. Gross profit from the sale of lasers and accessories was 23%
in the fiscal year ended September 30, 2009 as compared to 6% for the prior year
fiscal period, primarily due to sales in foreign countries where product is sold
through non-stocking distributors who are paid commissions, resulting in higher
margins offset by commissions. Gross profit from the sale of Fibers, Needles and
Tips during the fiscal year ended September 30, 2009 was 43% as compared to 41%
for the prior fiscal year period. The increase in gross profit was primarily the
result of a volumizing difference due to a higher production of units created by
the 14.6% increase in sales of delivery systems during the current year as
compared to the prior year offset by a non-recurring year-end adjustment of
$54,000 to reserve obsolete and slow moving inventory. Gross profit from revenue
received from service and per case rentals was 41% in the current fiscal year as
compared to 26% for the prior fiscal year period. The higher gross profit for
the current year was primarily attributable to a lower cost of sales for our
subsidiary, MST, which was the result of decreased repairs to MST's laser fleet
combined with higher margins received from increases in procedures which have a
higher per case rate.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 13% to
$2,683,000 in fiscal 2009, compared to $2,373,000 in fiscal 2008. The $310,000
increase in fiscal 2009 was primarily the result of increases in commission
expense of $196,000, $38,000 in administrative payroll expense, $30,000 in bonus
expense for MST, $43,000 in temporary administrative staff, $25,000 in
professional fees, $21,000 in bad debt expense and property expense of $5,000,
and $18,000 in depreciation and amortization, offset by decreases in legal
expense of $30,000, sales tax expense of $10,000 recruiting expense of $12,000,
stock-based compensation of $15,000.
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
R&D expenses increased $5,000 or 0.4% to $1,316,000 in fiscal 2009, compared to
$1,311,000 in fiscal 2008. R&D as a percentage of net revenues decreased to
17.7% of net revenues in fiscal 2009 as compared to 21.8% in fiscal year 2008.
R&D spending in fiscal 2009 was higher as we are nearing the completion of our
product development efforts in readying its new Side-Firing Fibers for use with
its Lasers and Lumenis' Holmium Lasers.
OTHER INCOME AND EXPENSE
Total other income, net decreased $66,000 or 16.5% to $333,000 in fiscal 2009
from $399,000 in fiscal 2008. Interest income decreased by $40,000 or 75.5% to
$13,000 in fiscal 2009 compared to $53,000 in fiscal 2008. The levels of cash
available for investment in interest bearing securities were $1,621,000 and
$2,007,000 as of September 30, 2009 and 2008, respectively. The decrease in
interest income was due to our decrease in the levels of cash available for
investment in interest bearing securities due to negative cash flows along with
lower interest rates paid by institutions during fiscal 2009. Income from
royalties decreased $79,000 or 21% to $295,000 in fiscal 2009 from $374,000 in
fiscal 2008. This decrease was due to royalties received from Lumenis based on a
percentage of Lumenis' sales of side-firing and angled-firing devices
manufactured by Lumenis, as stipulated in the settlement agreement entered into
on November 17, 2003 between Lumenis, Inc. and us. During the fiscal year ended
September 30, 2009 and 2008, the Company incurred a gain from the sale of assets
of $12,000 and a loss from the sale of assets of $17,000, respectively. During
the current fiscal year, we accrued a provision for state income tax of $20,000
for MST.
NET LOSS
As a result of the above, the net loss in fiscal 2009 was $909,000, compared
to a net loss of $1,590,000 in fiscal 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows
In fiscal 2009, net cash used in operating activities was $54,000, as compared
to net cash used of $878,000 in fiscal 2008. Net cash used in investing
activities was $136,000 in fiscal 2009, compared to net cash used of $143,000 in
fiscal 2008. The increase in cash used in investing activities in fiscal 2009 as
compared to fiscal 2008 was primarily due to the purchasing of additional
equipment. Net cash used in financing activities during fiscal 2009 and 2008 was
$196,000 and $151,000, respectivley, for payments on debt comprising of
equipment leases and financed insurance premiums.
Liquidity and Management's Plans
At September 30, 2009, we had working capital of $3,772,000 compared to
$4,625,000 at the end of the previous fiscal year ended September 30, 2008. Cash
decreased by $386,000 to $1,621,000 at September 30, 2009 from $2,007,000 at the
fiscal year ended September 30, 2008. We believe that existing cash flows are
sufficient to fund operations through September 30, 2010; however, we have
incurred losses from operations for the past two years. There can be no
assurance that we will be able to maintain or achieve sales growth in the next
12 months, or that the Company will be profitable. Thus, it is possible that
additional working capital in the next 12 months may be required. If necessary,
we will raise additional debt and/or equity capital, sell some of our assets,
reduce our costs by eliminating certain personnel positions and reducing certain
overhead costs in order to fund operations. There is no assurance that our
efforts to do so will be successful.
Recently Issued Accounting Standards
In May 2009, the FASB issued ASC 855 "Subsequent Events" (formerly SFAS No. 165,
Subsequent Events). FASB ASC 855 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 is
effective for interim and annual financial periods ending after June 15, 2009.
The Company adopted ASC 855 during the nine months ended June 30, 2009. The
Company evaluated subsequent events through the issuance date of the financial
statements, January 13, 2010, and has disclosed the events identified within
this filing.
16
In June 2009, the FASB issued ASC 105 "Generally Accepted Accounting Principles"
(formerly SFAS No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. ASC 105, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. The Company adopted ASC 105 during the fiscal
year ended September 30, 2009 with no impact to its financial statements, except
for the changes related to the referencing of financial standards.
In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, "Determination
of the Useful Life of Intangible Assets" ("FSP 142-3"). This pronouncement
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). This pronouncement aims to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R). The provisions of FSP 142-3 were incorporated into the
Codification within ASC Subtopic 350-30 "General Intangibles other than
Goodwill" and are effective for fiscal years beginning after December 15, 2008.
The Company is currently in the process of determining the impact that adoption
of this Statement will have on its financial statements.
Effective October 1, 2009, the Company will adopte the provisions of Emerging
Issues Task Force 07-5, "Determining Whether an Instrument (or Embedded Feature)
is Indexed to an Entity's Own Stock" ("EITF 07-5"), which has been codified into
ASC 815 . The guidance applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(which was codified into ASC 815) and to any freestanding financial instruments
that are potentially settled in an entity's own common stock. The guidance is
expected to have an impact on the Company's financial statements and position
due to certain warrants in which the exercise price resets upon certain events.
The Company is currently evaluating the impact of the adoption.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 of this Annual Report are set forth
in the index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Item 9A(T). Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation
of our chief executive officer and chief financial officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). Based on that evaluation, our chief executive officer and
chief financial officer have concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures are effective in ensuring
that information required to be disclosed in our Exchange Act reports is (1)
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and (2) accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of September 30, 2009, based on the criteria set forth in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under such
criteria, our management concluded that our internal control over financial
reporting was effective as of the fiscal year ended September 30, 2009.
This Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. We were not required to have, nor have we engaged our independent
registered public accounting firm to perform, an audit on our internal control
over financial reporting pursuant to the rules of the Securities and Exchange
Commission that permit us to provide only management's report in this Annual
Report.
17
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during
the fourth quarter of fiscal 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
18
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
The following persons served as our officers and directors in fiscal 2009.
Name Age Position
---- --- --------
Marvin P. Loeb 83 Chairman and CEO
Glenn D. Yeik 42 President, COO, and Director
Brian T. Kenney 53 V.P. - Global Sales and Marketing
Donald Baker 80 Director
MARVIN P. LOEB has been a director of our Company since 1980, Chairman of the
Board since March 1981, Chief Executive Officer from April 1991 to November 2000
and since July 2001. He has been the Chairman of the Board of Cardiodyne, Inc.
(formerly Trioptic Laser, Inc., a 90% owned, inactive subsidiary of the Company)
since May 1992. Since May 1986, he has been Chairman, CEO and a director of
Cardiomedics, Inc., a privately held company which developed and is marketing a
circulatory assist device. Since November 1988, he has been Chairman of
Ultramedics, Inc., a privately held company whose principal interest is its
investment in Cardiomedics, Inc. Mr. Loeb has been President of Master Health
Services, Inc., a family held medical consulting firm, since 1973, and Marvin P.
Loeb and Company, a family held patent licensing firm, since 1983. Mr. Loeb
holds an honorary Doctor of Science Degree from Pacific States University and a
Bachelor of Science Degree from the University of Illinois.
GLENN D. YEIK has been our President, Chief Operating Officer, and Director
since September 2003. Since October 2004, he has been a Director of Cadiomedics,
Inc., a privately held company which developed and is marketing a circulatory
assist device. Before September 2003, he was our Executive Vice President from
April 2002 to September 2003 and Vice President Product Development from March
2000 to April 2002 to September 2003. Mr. Yeik was Manager and Director of
Electronic Systems at AngioTrax, Inc. from May 1998 to March 2000. He was our
Manager, Laser Engineering from May 1994 to May 1998 and our Senior Electrical
Engineer from July 1992 to May 1994. Before joining Trimedyne, Mr. Yeik was a
Software Engineer at Cardiac Science, Inc. from June 1991 to July 1992. Mr. Yeik
received a Bachelor of Science of Engineering Degree in Electrical Engineering
from LeTourneau University. Mr. Yeik is Mr. Loeb's son-in-law.
BRIAN T. KENNEY has been our Vice President of Sales and Marketing since January
2000. Mr. Kenney had been our Director of International Sales from January 1999
to January 2000. Before joining Trimedyne, Mr. Kenney held sales and sales
management positions with Exogen, a division of Smith & Nephew from April 1996
to November 1999, U.S. Surgical Corporation from January 1982 to December 1984,
Stryker Corporation/Endoscopy Division from May 1988 to December 1992, and
Surgical Laser Technologies from January 1993 to February 1996. Mr. Kenney is a
graduate of the University of Oklahoma with a Bachelors Degree in Business
Administration in Marketing and Finance.
DONALD BAKER has been a director of our Company since May 1983. He also has been
a director of Cardiodyne, Inc. since August 1996. Mr. Baker retired after 39
years as a partner of the law firm of Baker & McKenzie. He holds a J.D.S. degree
from the University of Chicago Law School. Mr. Baker was a Director of the
management committee of the Mid-America Committee of Chicago for many years, a
director of various medical technology companies and is currently on the board
of Cardiomedics, Inc., of Irvine, CA. He is a member of the Chicago and American
Bar Associations.
Family Relationships
Our director Glenn Yeik is the son-in-law of our Chairman Marvin Loeb. Other
then the foregoing, there are no family relationships among the individuals
comprising our board of directors, management and other key personnel.
Involvement in Certain Legal Proceedings
During the past five years, none of the following have occurred that are
material to an evaluation of the ability or integrity of any director, person
nominated to become a director, executive officer, promoter or control person of
the Company:
1. Any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer
either at the time of the bankruptcy or within two years prior
to that time;
2. Any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and
other minor offenses);
19
3. Being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in
any type of business, securities or banking activities; and
4. Being found by a court of competent jurisdiction (in a civil
action) , the Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed,
suspended, or vacated.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires "insiders," including our executive
officers, directors and beneficial owners of more than 10% of our common stock,
to file reports of ownership and changes in ownership of our common stock with
the Securities and Exchange Commission and to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the copies of such
forms received by us, or written representations from reporting persons, we
believe that our insiders complied with all applicable Section 16(a) filing
requirements during 2008.
Changes to Nominating Process
There have been no changes to the nominating process or adoption of procedures
by which security holders may recommend nominees to our board of directors.
Audit Committee
Don Baker is our Audit Committee member and non-board member. Mr. Baker is an
"audit committee financial expert" in accordance with SEC rules. Because we are
not a listed issuer, members of our Audit Committee are not subject to the
independence requirements of any national securities exchange or association.
REPORT OF THE AUDIT COMMITTEE
The following Report of the Audit Committee does not constitute soliciting
material and should not be deemed filed or incorporated by reference into any
other Company filing under the Securities Act of 1933 or the Securities Exchange
Act of 1934, except to the extent we specifically incorporate this Report by
reference therein.
The Audit Committee of the Board of Directors operates pursuant to a written
charter. Our Audit Committee charter is available on our website,
www.trimdeyne.com. The Committee met once and acted by unanimous written consent
during fiscal 2009 to fulfill its responsibilities. To ensure independence, the
Audit Committee also meets separately with the Company's independent registered
public accounting firm and members of management. The sole member of the Audit
Committee is a non-employee, non-board member and satisfies the SEC requirements
with respect to independence, financial sophistication and experience.
The role of the Audit Committee is to oversee the Company's financial reporting
process on behalf of the Board of Directors. Management of the Company has the
primary responsibility for the Company's consolidated financial statements as
well as the Company's financial reporting process, principles and internal
controls. The independent registered public accounting firm is responsible for
performing an audit of the Company's financial statements and expressing an
opinion as to the conformity of such consolidated financial statements with
generally accepted accounting principles.
In this context, the Audit Committee has reviewed and discussed the audited
financial statements of the Company as of and for the year ended September 30,
2009, with management and the independent registered public accounting firm.
These reviews included discussion with the outside independent registered public
accountants of matters required to be discussed pursuant to Statement on
Auditing Standards No. 61 (Communication with Audit Committees). In addition,
the Audit Committee has received the written disclosures required by PCAOB Rule
3526, and it has discussed with the independent registered public accountants
its independence with respect to the Company.
Based on the reports and discussions described above, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, for filing with the Securities and Exchange Commission.
/s/ Don Baker
December 31, 2009
Other Committees
The Board intends to appoint such persons and form such committees as are
required to meet the corporate governance requirements imposed by the national
securities exchanges. Therefore, we intend that a majority of our directors will
eventually be independent directors and at least one director will continue to
qualify as an "audit committee financial expert." Additionally, the Board is
expected to appoint a nominating committee and compensation committee, and to
adopt charters relative to each such committee. Until further determination by
the Board, the full Board will undertake the duties of the compensation
committee and nominating committee.
20
Code of Ethics
We have formally adopted a written code of ethics that applies to our board of
directors, principal executive officer, principal financial officer and
employees; it can be found on our website at www.trimedyne.com.
Compliance With Section 16(A) of the Exchange Act
Not applicable.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
All executives are employed as salaried employees on an "at-will"
basis. The issuance of all bonuses, stock and option awards are discretionary
and are approved by the Board of Directors. No bonuses, stock, or option awards
were granted to executive officers during the fiscal year ended September 30,
2009.
Our company does not provide its executives with perquisites and does not have
any deferred compensation programs or retirement programs other than our 401(k)
plan, which is generally available to all employees. All of our full-time
employees are eligible to enroll in our health, dental and life and disability
insurance programs.
The following table sets forth the information required by Securities and
Exchange Commission Regulation S-B Item 402 as to the compensation paid or
accrued by us for the years ended September 30, 2009 and 2008 for
services rendered in all capacities, by all persons who served as our executive
officers who earned more than $100,000 in combined salary, stock option awards
and other compensation in fiscal 2009:
Option All Other
Salary Awards Compensation Total
Name and Principal Position Year ($) ($)(2) ($)(3) ($)
------------------------------- ---- ---------- -------- ------------ ---------
Marvin P. Loeb................. 2009 $ 121,257 0 $ 6,996 $ 128,253
CEO and Chairman 2008 $ 121,257 0 $ 6,996 $ 128,253
Glenn D. Yeik.................. 2009 $ 159,135 0 $ 21,421 $ 180,556
COO, President, and Director 2008 $ 159,135 14,110 $ 18,240 $ 195,035
Brian T. Kenney, V.P........... 2009 $ 120,000 0 $ 105,954 $ 225,954
2008 $ 120,000 0 $ 86,234 $ 206,234
-----------------------------------------------------------------------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by
our executive officers.
(2) This column represents the dollar amount recognized for financial statement
reporting purposes with respect to the 2009 and 2008 fiscal year for the fair
value of stock options granted to the named executive officers in accordance
with ASC 718. We did not grant awards to named executive officers in fiscal
2009 or 2008. For additional information on the valuation assumptions used by
us in calculating these amounts refer to Note 2 to Consolidated
Financial Statements incorporated by reference in this Form 10-K. The amounts
reported in the Summary Compensation Table for these awards may not represent
the amounts the named executive officers will actually realize from the awards.
Whether and to what extent, a named executive officer realizes value will depend
on stock price fluctuations and the named executive officer's continued
employment. Additional information on all outstanding awards is reflected in the
Outstanding Equity Awards at 2009 Fiscal Year-End table.
(3) Amounts of Other Compensation shown for the above listed officers include
the cost of (i) car allowances and expenses and (ii) costs to us of 401(k)
matching contributions (iii) accrued vacation and (iv)commissions.
21
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
-------------------------------------------------------------------
Equity
Incentive
Number of Number of Plan Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying Option
Options Options Unexercised Exercise Option
(#) (#) Unearned Price Expiration
Name Exercisable Unexercisable Options (#) ($) Date
------------------- ------------- ------------- ----------- -------- ----------
Marvin P. Loeb 30,000 1.25 4/04/2011
48,000 2.75 4/18/2010
Glenn D. Yeik 50,000 0.14 1/14/2013
22,000 0.50 8/13/2013
30,000 0.50 4/15/2012
75,000 0.60 4/15/2015
100,000 0.92 3/31/2016
25,000 1.25 4/04/2011
48,000 3.84 3/20/2010
Brian T. Kenney 20,000 0.50 4/15/2012
50,000 1.25 4/04/2011
15,000 2.75 4/18/2010
-------------------------------------------------------------------------------------------
None of Messrs. Loeb, Yeik, or Kenney exercised any options during fiscal year 2009.
DIRECTOR COMPENSATION IN FISCAL YEAR 2008 AND 2009
Each non-employee director who is appointed to the committee to administer our
2003 Non-Qualified Stock Option Plan (the "Committee") is entitled to a grant of
30,000 options to purchase shares every three years, beginning the day the
director is so appointed, for so long as he or she serves on the Committee. The
options vest in equal amounts over three years.
DIRECTOR COMPENSATION FISCAL YEAR 2008
Change in
Pension
Value and
Nonqualified
Fees Earned Non-Equity Deferred All
or Stock Option Incentive Plan Compensation Other
Paid in Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) (1) ($) ($) ($) ($)
------------------- ------------ ------ -------- ------------- ------------- ------------ -------
Donald Baker 10,172 10,172
------------------------------------------------------------------------------------------------------------
Mr. Baker did not exercise any options during fiscal year 2008
1) This column represents the dollar amount recognized for financial statement
reporting purposes with respect to the 2008 fiscal year for the fair value of
stock options granted to directors, in 2008 as well as prior years, in
accordance with SFAS 123R. Portions of awards granted over several years are
included. For additional information on the valuation assumptions used by the
Company in calculating these amounts refer to Note 2 to Consolidated Financial
Statements incorporated by reference in this Form 10-K. The amounts reported
in the Summary Compensation Table for these awards may not represent the amounts
the directors will actually realize from the awards. Whether and to what extent,
a director realizes value will depend on stock price fluctuations and the
director's continued service on the Board.
No such grants were given during the fiscal year ended September 30, 2009.
Compensation Committee Interlocks and Insider Participation
During 2009, we did not have a compensation committee or another committee of
the board of directors performing equivalent functions. Instead the entire board
of directors performed the function of compensation committee. Our board of
directors approved the executive compensation, however, there were no
deliberations relating to executive officer compensation during 2009.
Compensation Committee Report
None.
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth the name of and address of each beneficial owner
of more than five percent of the Company's Common Stock known to the Company,
each director of the Company, each named executive officer, and all directors
and executive officers as a group, the number of shares beneficially owned by
such persons as of September 30, 2009 and the percent of the class so owned. In
computing the number of shares beneficially owned by a person and the percentage
of ownership of that person, shares of common stock subject to options held by
that person that are currently exercisable, as appropriate, or will become
exercisable within 60 days of the reporting date are deemed outstanding, even if
they have not actually been exercised. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.
Each person named in the table has sole investment and sole voting power with
respect to the shares of Common Stock set forth opposite his name, except as
otherwise indicated. All shares are directly owned or are held for the
stockholder in street name, except as otherwise indicated.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING*
-------------- ------------------- -------------------- -----------------
MAJOR SHAREHOLDERS
------------------
Common Stock Marvin P. Loeb, Chairman & CEO (1) 2,555,028 13.8%
$.01 Par Value 25901 Commercentre Drive
Lake Forest, CA 92630
Corsair Capital, LLC. (6) 1,140,000 6.2%
717 Fifth Avenue, 24 Floor
New York, NY 10022
Seth Hamot and his associates 1,013,536 5.5%
c/o Costa Brava Partnership III L.P.
420 Boylston Street
Boston, MA 02116
Bruce J. Haber and his associates 931,653 5.1%
145 Huguenot Street, Suite 405
New Rochelle, NY 10801
OTHER DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------------
Donald Baker, Director (2) 110,000 *
544 Earlston Road
Kenilworth, IL 60043
Glenn D. Yeik, Pres. COO (3)(5) 580,351 3.1%
Brian T. Kenney, V.P. (4)(5) 120,000 *
All Directors and Executive 3,334,375 18.1%
Officers as a Group (5 persons)
-------------------
* Indicates less than 1%
(1) Consists of 2,555,028 Shares owned by Mr. Loeb and his wife, adult
children, grandchildren and trusts for their benefit, of which Mr. Loeb is
not a beneficiary, and Options to purchase 78,000 Shares.
(2) Consists of 50,000 Shares and Options to purchase 40,000 Shares.
(3) Consists of 230,351 Shares, and Options to purchase 350,000 Shares.
(4) Consists of 35,000 Shares and Options to purchase 85,000 Shares.
(5) Address is 25901 Commercentre Drive Lake Forest, CA 92630
(6) Consists of Shares owned by funds managed by Corsair Capital, LLC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
During the prior fiscal year ended September 30, 2008, we incurred $7,600 of
legal services with a Director, of which $3,800 was paid during the that fiscal
year.
During the fiscal year ended September 30, 2009, no such transactions occurred.
Director Independence
Presently, we are not required to comply with the director independence
requirements of any securities.
23
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees And Services
The following table sets forth fees billed to us by our Independent Registered
Public Accounting Firm during the fiscal years ended September 30, 2009 and
September 30, 2008 for: (i) services rendered for the audit of our annual
financial statements and the review of our quarterly financial statements, (ii)
services by our auditors that are reasonably related to the performance of the
audit or review of our financial statements and that are not reported as Audit
Fees, (iii) services rendered in connection with tax compliance, tax advice and
tax planning, and (iv) all other fees for services rendered. "Audit Related
Fees" consisted of consulting regarding accounting issues. "All Other Fees"
consisted of fees related to the issuance of consents for our Registration
Statements and this Annual Report.
September 30,
2009 2008
--------- ---------
(i) Audit Fees 35,000 42,900
(ii) Audit Related Fees 24,000 30,750
(iii) Tax Fees 8,500 7,250
(iv) All Other Fees 1,700 37,622
During the fiscal year ended September 30, 2009, dbbMckennon billed $16,000 in
"Audit Fees" which arte included above. All other amounts disclosed were billed
by McKennon Wilson & Morgan.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
The audit committee is responsible for pre-approving all audit and permitted
non-audit services to be performed for us by our independent registered public
accounting firm.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Financial Statements.
See "Index to Consolidated Financial Statements" included in
this report at Page F-1.
(b) Exhibits
Filed Previously:
10(b) Development, Supply and License Agreement with C.R. Bard,
Inc., dated June 28, 1991.
10(c) Industrial Lease (for Barranca Parkway headquarters) with
Griswold Controls dated June 19, 1991, and Addendum thereto
dated July 1, 1991.
10(d) Patent Licensing Agreement with Royice B. Everett, M.D.
(covering the Lateralase Catheter) dated April 1, 1988 as
amended.
10(f) Addendum to Industrial Lease with Griswold Controls dated
September 14, 1993
10(i)* Amendment to Development Supply and License Agreement with
C.R. Bard dated June 14, 1994.
10(j) Industrial Lease (for Bake Parkway headquarters) with Buckhead
Industrial Properties, Inc, dated October 25, 2000.
10(k) Industrial Lease effective July 26, 2005
21.1 Subsidiaries
31.1 Rule 13a-14(a)/ 15d-14(a) Certification
31.2 Rule 13a-14(a)/ 15d-14(a) Certification
32.1 Certification Pursuant to 18 U.S.C. section 1350
32.2 Certification Pursuant to 18 U.S.C. section 1350
* The Company requested and received confidential treatment for
portions of those exhibits marked with an asterisk (*).
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Trimedyne, Inc.
Date: January 13, 2010 /s/ Marvin P. Loeb
-------------------------------
Marvin P. Loeb,
Chairman, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Marvin P. Loeb Chairman of the Board January 13, 2010
------------------------------ of Directors & CEO
Marvin P. Loeb
/s/ Glenn D. Yeik President, COO January 13, 2010
------------------------------ Director
Glenn D. Yeik
/s/ Donald Baker Director January 13, 2010
------------------------------
Donald Baker
/s/ Jeffrey S. Rudner Treasurer & January 13, 2010
------------------------------ Principal Accounting Officer
Jeffrey S. Rudner
25
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets at September 30, 2009 and 2008 F-4
Consolidated Statements of Operations for the years ended
September 30, 2009 and 2008 F-5
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2009 and 2008 F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 2009 and 2008 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Trimedyne, Inc.
We have audited the accompanying consolidated balance sheet of Trimedyne, Inc.
and its subsidiaries (the "Company") as of September 30, 2009, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit on its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Trimedyne, Inc. and their subsidiaries as of September 30, 2009, and the
consolidated results of their operations and its cash flow the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ dbbmckennon
Newport Beach, California
January 13, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Trimedyne, Inc.
We have audited the accompanying consolidated balance sheet of Trimedyne, Inc.
and its subsidiaries (the "Company") as of September 30, 2008, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit on its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Trimedyne, Inc. and their subsidiaries as of September 30, 2008, and the
consolidated results of their operations and its cash flow the year then ended,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ McKennon Wilson & Morgan, LLP
Irvine, California
January 13, 2009
F-3
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
As of September 30,
----------------------------------
2009 2008
------------ -----------
Current assets:
Cash and cash equivalents $ 1,621,000 $ 2,007,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 and
$12,000, respectively 988,000 954,000
Inventories 2,266,000 2,584,000
Other current assets 226,000 171,000
------------ ------------
Total current assets 5,101,000 5,716,000
Property and equipment, net 1,168,000 1,382,000
Other 87,000 83,000
Goodwill 544,000 544,000
------------ ------------
$ 6,900,000 $ 7,725,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 449,000 $ 256,000
Accrued expenses 497,000 469,000
Deferred revenue 100,000 75,000
Accrued warranty 54,000 54,000
Income tax payable 20,000 --
Current portion of note payable and capital leases 209,000 237,000
------------ ------------
Total current liabilities 1,329,000 1,091,000
Note payable and capital leases, net of current portion 232,000 400,000
Deferred rent 51,000 73,000
------------ ------------
Total liabilities 1,612,000 1,564,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock - $0.01 par value; 30,000,000 shares authorized,
18,467,569 shares issued, 18,365,960 shares outstanding at
September 30, 2009 and 2008 186,000 186,000
Additional paid-in capital 51,461,000 51,425,000
Accumulated deficit (45,646,000) (44,737,000)
------------ ------------
6,001,000 6,874,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------ ------------
Total stockholders' equity 5,288,000 6,161,000
------------ ------------
$ 6,900,000 $ 7,725,000
============ ============
See accompanying notes to consolidated financial statements
F-4
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended
September 30,
----------------------------
2009 2008
------------ ------------
Net revenues:
Products $ 4,718,000 $ 3,832,000
Service and rental 2,704,000 2,039,000
------------ ------------
7,422,000 5,871,000
------------ ------------
Cost of sales:
Products 3,029,000 2,657,000
Service and rental 1,608,000 1,506,000
------------ ------------
4,637,000 4,163,000
------------ ------------
Gross profit 2,785,000 1,708,000
Selling, general and administrative expenses 2,683,000 2,373,000
Research and development expenses 1,316,000 1,311,000
------------ ------------
Loss from operations (1,214,000) (1,976,000)
------------ ------------
Other income (expense):
Interest income 13,000 53,000
Royalty income 295,000 374,000
Interest expense (48,000) (38,000)
Creditor settlements and recoveries 61,000 27,000
Gain (loss) on disposal of equipment 12,000 (17,000)
------------ ------------
Total other income, net 333,000 399,000
------------ ------------
Loss before provision for income taxes (881,000) (1,577,000)
Provision for income taxes 28,000 13,000
------------ ------------
Net loss $ (909,000) $ (1,590,000)
============ ============
Basic and diluted net loss per share $ (0.05) $ (0.09)
============ ============
Basic and diluted weighted average
common shares outstanding: 18,365,960 18,365,960
============ ============
See accompanying notes to consolidated financial statements
F-5
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------ Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balances at
October 1, 2007 18,467,569 $ 186,000 $ 51,373,000 $(43,147,000) $ (713,000) $ 7,699,000
Share-based compensation
expense -- -- 52,000 -- -- 52,000
Net loss -- -- -- (1,590,000) -- (1,590,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2008 18,467,569 186,000 51,425,000 (44,737,000) (713,000) 6,161,000
Share-based compensation
expense -- -- 36,000 -- -- 36,000
Net loss -- -- -- (909,000) -- (909,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2009 18,467,569 $ 186,000 $ 51,461,000 $(45,646,000) $ (713,000) $ 5,288,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-6
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30,
---------------------------------
2009 2008
------------ -----------
Cash flows from operating activities:
Net loss $ (909,000) $ (1,590,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation 36,000 52,000
Depreciation and amortization 362,000 315,000
Changes in operating assets and liabilities:
Trade accounts receivable (34,000) (380,000)
Inventories 318,000 407,000
Other assets (59,000) 167,000
Accounts payable 193,000 44,000
Note from related party -- 9,000
Accrued expenses 28,000 42,000
Deferred revenue 25,000 30,000
Accrued warranty -- 27,000
Deferred rent (22,000) (18,000)
Income tax payable 20,000 --
(Gain) loss on disposal of fixed assets (12,000) 17,000
----------- -----------
Net cash used in operating activities (54,000) (878,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (136,000) (143,000)
----------- -----------
Net cash used in investing activities (136,000) (143,000)
----------- -----------
Cash flows from financing activities:
Principal payments on capital leases and debt (196,000) (151,000)
----------- -----------
Net cash used in financing activities (196,000) (151,000)
----------- -----------
Net decrease in cash and cash equivalents (386,000) (1,172,000)
Cash and cash equivalents at beginning of year 2,007,000 3,179,000
----------- -----------
Cash and cash equivalents at end of year $ 1,621,000 $ 2,007,000
=========== ===========
Cash paid for income taxes in the years ended September 30, 2009 and 2008 was
$8,000 and $13,000, respectively. Cash paid for interest in the years ended
September 30, 2009 and 2008 was $48,000 and $38,000, respectively.
Supplemental disclosure of non-cash investing activity:
During the fiscal year ended September 30, 2008, the Company financed the
purchases of equipment with $651,000 in note and lease agreements.
During the fiscal year ended September 30, 2009, the Company financed the
purchase of certain insurance policies with an $85,000 note. During the fiscal
year ended September 30, 2008, the Company financed the purchase of certain
insurance policies with a $134,000 note.
See accompanying notes to consolidated financial statements
F-7
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
Trimedyne, Inc. ("Trimedyne") and its subsidiaries (collectively "the Company")
are engaged primarily in the manufacture and sale of lasers, and disposable and
reuseable fiber-optic laser devices in the medical field. The Company's
operations include the provision of services and rental of lasers and other
medical equipment to hospitals and surgery centers on a "fee-per-case" basis in
the Southwestern United States, through its wholly owned subsidiary Mobile
Surgical Technologies, Inc. ("MST"), located in Dallas, Texas. The Company's
operations are primarily located in Southern California with distribution of its
products worldwide (see Note 9).
Managements' Plans
We have incurred losses from operations for the past two years. However, we
believe that existing cash flows are sufficient enough to fund operations
through September 30, 2010. There can be no assurance that we will be able to
maintain or achieve sales growth in the next 12 months, or that the Company will
be profitable. Thus, it is possible that additional working capital in the next
12 months may be required. If necessary, we will raise additional debt and/or
equity capital to fund operations through the sale of some of our assets and
reduce ours costs by eliminating certain personnel positions and reducing
certain overhead costs in order to reduce our losses. There are no assurances
that our plans will be successful.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 2009, the Financial Accounting Standards Board ("FASB") issued revised
accounting guidance which establishes the FASB Accounting Standards Codification
("ASC") as the authoritative source for accounting principles of
non-governmental entities to conform to United States Generally Accepted
Accounting Principles ("GAAP") used in the preparation of financial statements.
The ASC is not intended to change existing guidance for public companies. The
new guidance is effective for interim and annual reporting periods ending after
September 15, 2009.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trimedyne, Inc., its wholly owned subsidiary, MST, Inc., and its 90% owned and
inactive subsidiary, Cardiodyne, Inc. ("Cardiodyne") (collectively, the
"Company"). All intercompany accounts and transactions have been eliminated in
consolidation.
Concentration of Credit Risk and Customer Concentration
The Company generates revenues principally from sales of products in the medical
field. As a result, the Company's trade accounts receivable are concentrated
primarily in this industry. As of September 30, 2009 two customers accounted for
19% and 11% of the Company's receivables. During the years ended September 30,
2008 two customers accounted for 24% and 12% of the Company's receivables. The
Company performs limited credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses. The Company considers the following factors when determining if
collection of a fee is reasonably assured: customer credit-worthiness, past
transaction history with the customer, current economic industry trends and
changes in customer payment terms. In some cases in regards to new customers,
management requires payment in full or letters of credit before goods are
shipped or services are performed. If these factors do not indicate collection
is reasonably assured, revenue is deferred until collection becomes reasonably
assured, which is generally upon receipt of cash. During fiscal 2009 and 2008,
credit losses were not significant.
Cash and Cash Equivalents
The Company considers all highly liquid investments with insignificant interest
rate risk and original maturities of three months or less from the date of
purchase to be cash equivalents. The carrying amounts of cash and cash
equivalents approximate their fair values.
At September 30, 2009, the Company had cash balances in excess of federally
insured limits of $250,000 in the amount of $1,333,661.
Inventories
Inventories consist of raw materials and component parts, work-in-process and
finished goods consisting of 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.
Laser units located at medical facilities for sales evaluation and demonstration
purposes or those units used for development and medical training are included
in inventory since the lasers will ultimately be sold. These units are written
down to reflect their net realizable values. Writedowns are considered permanent
reductions at cost basis of the related inventories.
F-8
Goodwill
The Company accounts for goodwill and acquired intangible assets in accordance
with ASC No. 350 "Intangible and Other", whereby goodwill is not amortized, and
is tested for impairment at the reporting unit level annually during the fourth
quarter and in interim periods if certain events occur indicating that the
carrying value of goodwill may be impaired. A reporting unit is an operating
segment for which discrete financial information is available and is regularly
reviewed by management. The Company has one reporting unit, our service and
rental group, to which goodwill is assigned.
ASC No. 350 requires a two-step approach to test goodwill for impairment for
each reporting unit. The first step tests for impairment by applying fair
value-based tests to a reporting unit. The second step, if deemed necessary,
measures the impairment by applying fair value-based tests to specific assets
and liabilities within the reporting unit. Application of the goodwill
impairment tests require judgment, including identification of reporting units,
assignment of assets and liabilities to each reporting unit, assignment of
goodwill to each reporting unit, and determination of the fair value of each
reporting unit. The determination of fair value for a reporting unit could be
materially affected by changes in these estimates and assumptions.
As part of the first step, the Company generally estimates the fair value of the
reporting unit based on market prices (i.e., the amount for which the assets
could be bought by or sold to a third party), when available. When market prices
are not available, we estimate the fair value of the reporting unit using the
income approach. The income approach uses cash flow projections. Inherent in our
development of cash flow projections are assumptions and estimates derived from
a review of our historical operating results, future business plans, expected
growth rates, cost of capital, future economic conditions, etc. Many of the
factors used in assessing fair value are outside the control of management, and
these assumptions and estimates can change in future periods. During the fourth
quarter of the year ended September 30, 2009, the Company conducted a goodwill
impairment test for its service and rental group using a combination of the
market and income approach. As a result of the first step analysis, the expected
cash flows to be generated by the service and rental were sufficient enough to
support the carrying value of the goodwill. Thus, the Company determined there
was no impairment of the goodwill as of September 30, 2009.
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles
subject to amortization, are 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 net 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 is permanent
and may not be restored. To date, the Company has not recognized any impairment
of long-lived assets.
Stock-Based Compensation
The Company accounts for equity based compensation under the provisions of ASC
No. 718, "Compensation, Stock Compensation" ("ASC 718"). ASC 718 requires the
recognition of the fair value of equity-based compensation in operations. The
fair value of the Company's stock option awards are estimated using a
Black-Scholes option valuation model. This model requires the input of highly
subjective assumptions and elections including expected stock price volatility
and the estimated life of each award. In addition, the calculation of
equity-based compensation costs requires that the Company estimate the number of
awards that will be forfeited during the vesting period. The fair value of
equity-based awards is amortized over the vesting period of the award and the
Company elected to use the straight-line method for awards granted after the
adoption of ASC 718.
As stock-based compensation expense recognized in the consolidated statements of
operations for the fiscal year ended September 30, 2009 and 2008 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 fiscal
year ended September 30, 2008 of approximately 5% is based on historical
forfeiture experience and estimated future employee forfeitures. The estimated
term of option grants for the fiscal year ended September 30, 2008 was five
years.
F-9
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
fiscal year ended September 30, 2008 is primarily 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 fiscal year
ended September 30, 2008, are as follows:
Expected term 5 years
Expected stock volatility 94%
Risk free rate 3.07%
Dividend yield --%
The weighted-average grant date fair value of options granted during the fiscal
year ended September 30, 2008 was $0.29 per option.
There were no options granted or exercised during the fiscal year ended
September 30, 2009.
As of September 30, 2009, there was approximately $41,017 of total unrecognized
compensation cost, net of estimated expected forfeitures, related to employee
and director stock option compensation arrangements. This unrecognized cost is
expected to be recognized on a straight-line basis over the next three years,
which is consistent with the vesting period.
The following table summarizes stock-based compensation expense related to
employee and director stock options under ASC No. 718 for the fiscal years
ended September 30, 2009 and 2008, which was allocated as follows:
Fiscal Years Ended September 30,
-------------------------------
2009 2008
---------- ---------
Stock-based compensation included in:
Cost of revenues $ 5,000 $ 10,000
Research and development expenses 5,000 5,000
Selling, general, and administrative expenses 26,000 37,000
-------- --------
$36,000 $ 52,000
======== =========
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
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which has been codified into Accounting Standards Codification 825 ("ASC 825").
The standard defines fair value, establishes a framework for measuring fair
value in GAAP, and expands disclosures about fair value measurements. ASC 825
does not require any new fair value measurements, but provides guidance on how
to measure fair value by providing a fair value hierarchy used to classify the
source of the information. In February 2008, the FASB deferred the effective
date of ASC 825 by one year for certain non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). On October 1,
2008, we adopted the provisions of ASC 825, except as it applies to those
nonfinancial assets and nonfinancial liabilities for which the effective date
has been delayed by one year, which we adopted on October 1, 2009. The adoption
of ASC 825 did not have a material effect on our financial position or results
of operations. The book values of cash, accounts receivable and accounts payable
approximate their respective fair values due to the short-term nature of these
instruments.
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and
long-term debt. The carrying amounts of the Company's financial instruments
generally approximate their fair values as of September 30, 2009 and 2008 due to
the short term nature of these instruments.
F-10
Per Share Information
Basic per share information is computed based upon the weighted average number
of common shares outstanding during the period. Diluted per share information
consists of the weighted average number of common shares outstanding, plus the
dilutive effects of options and warrants calculated using the treasury stock
method. In loss periods, dilutive common equivalent shares are excluded as the
effect would be anti-dilutive. During the year ended September 30, 2009 and
2008, outstanding options of 41,364 and 60,842, respectively, were excluded
from the diluted net loss per share as the effects would have been
anti-dilutive.
Revenue Recognition
The Company's revenues include revenues from the sale of reusable and disposable
Fibers, Needles, and Tips, the sale and rental of Lasers and accessories, and
service contracts for Lasers manufactured by the Company.
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 fibers, needles, and tips 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 lasers before ordering and in general do not maintain inventories.
The Company's return policy for laser accessories, fibers, needles, and tips
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, which 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.
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 the
service contract.
Trimedyne 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, which sometimes includes a
minimum monthly rental fee. During both fiscal years ended September 30, 2009
and 2008, two lasers were rented by Trimedyne, 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 Fiber, Needle, and Tip. Revenue from these rental service contracts
is recognized as the cases are performed.
Shipping and Handling Costs
Costs incurred for shipping and handling are included in cost of equipment and
services revenues at the time the related revenue is recognized. Amounts billed
to a customer for shipping and handling are reported as revenues. Previously the
Company included such revenues as an offset to costs of goods sold. The change
in classification did not have a significant impact on the presentation of the
Company's financial statements for the fiscal year ended September 30, 2009.
F-11
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product 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 summary of the activity related to the
Company's accrued warranty expense:
For The Years Ended
September 30,
----------------------------
2009 2008
------------ ------------
Balance at beginning of period $ 54,000 $ 27,000
Charges to costs and expenses 93,000 74,000
Costs incurred (93,000) (47,000)
------------ ------------
Balance at end of period $ 54,000 $ 54,000
============ ============
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.
Income Taxes
The Company uses the asset and liability method of SFAS No. 109 "Accounting for
Income Taxes," which has been codified into ASC 740, which requires the
recognition of deferred tax liabilities and assets for expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities. Management provides a valuation allowance for
deferred tax assets when it is more likely than not that all or a portion of
such assets will not be recoverable based on future operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48")" which
has been codified into ASC 740. ASC 740 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with ASC, describes a recognition threshold and measurement attribute for the
recognition and measurement of tax positions taken or expected to be taken in a
tax return and also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. ASC 740
is effective for fiscal years beginning after December 15, 2006. The cumulative
effect of adopting ASC 740 was required to be reported as an adjustment to the
opening balance of retained earnings (or other appropriate components of equity)
for that fiscal year, presented separately. The adoption of ASC 740 did not have
a material impact to the Company's financial statements.
Property and Equipment
Property and equipment is recorded at cost. Depreciation of property and
equipment is calculated on a straight-line basis over the estimated useful lives
of the assets ranging from three to ten years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the useful lives or the
term of the lease. Depreciation expense for the years ended September 30, 2009
and 2008, was $362,000 and $315,000, respectively.
Segment Information
The Company reports information about operating segments, as well as disclosures
about products and services, geographic areas and major customers (see Note 9).
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance.
Recently Issued Accounting Pronouncements
In May 2009, the FASB issued ASC 855 "Subsequent Events" (formerly SFAS No. 165,
Subsequent Events). FASB ASC 855 establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC 855 is
effective for interim and annual financial periods ending after June 15, 2009.
The Company adopted ASC 855 during the nine months ended June 30, 2009. The
Company evaluated subsequent events through the issuance date of the financial
statements, January 13, 2010, and has disclosed the events identified within
this filing.
F-12
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2009, the FASB issued ASC 105 "Generally Accepted Accounting Principles"
(formerly SFAS No. 168 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB
Statement No. 162). ASC 105 establishes the FASB Accounting Standards
Codification as the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. ASC 105, which changes the referencing
of financial standards, is effective for interim or annual financial periods
ending after September 15, 2009. The Company adopted ASC 105 during the fiscal
year ended September 30, 2009 with no impact to its financial statements, except
for the changes related to the referencing of financial standards.
In April 2008 the FASB issued FASB Staff Position No. FAS 142-3, "Determination
of the Useful Life of Intangible Assets" ("FSP 142-3"). This pronouncement
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). This pronouncement aims to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R). The provisions of FSP 142-3 were incorporated into the
Codification within ASC Subtopic 350-30 "General Intangibles other than
Goodwill" and are effective for fiscal years beginning after December 15, 2008.
The Company is currently in the process of determining the impact that adoption
of this Statement will have on its financial statements.
Effective October 1, 2009, the Company will adopte the provisions of Emerging
Issues Task Force 07-5, "Determining Whether an Instrument (or Embedded Feature)
is Indexed to an Entity's Own Stock" ("EITF 07-5"), which has been codified into
ASC 815 . The guidance applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
(which was codified into ASC 815) and to any freestanding financial instruments
that are potentially settled in an entity's own common stock. The guidance is
expected to have an impact on the Company's financial statements and position
due to certain warrants in which the exercise price resets upon certain events.
The Company is currently evaluating the impact of the adoption.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Inventories consist of the following:
As of September 30,
---------------------------------
2009 2008
------------ -----------
Raw materials $ 848,000 $ 1,036,000
Work-in-process 800,000 722,000
Finished goods 618,000 826,000
------------ -----------
$ 2,266,000 $ 2,584,000
============ ===========
For the fiscal years ended September 30, 2009 and 2008, the aggregate net
realizable value of demonstration and evaluation lasers did not comprise a
material amount in inventories.
Other current assets consist of the following:
As of September 30,
---------------------------------
2009 2008
------------ -----------
Royalty receivable $ 93,000 $ 58,000
Other receivables 34,000 --
Prepaid insurance 66,000 86,000
Deposits 8,000 9,000
Prepaid income tax 5,000 5,000
Other 20,000 13,000
----------- -----------
Total other current assets $ 226,000 $ 171,000
============ ===========
Property and equipment, net consists of the following:
As of September 30,
---------------------------------
2009 2008
------------ -----------
Furniture and equipment $ 3,354,000 $ 3,216,000
Leasehold improvements 619,000 619,000
Other 244,000 282,000
----------- -----------
$ 4,217,000 $ 4,117,000
Less accumulated depreciation and amortization (3,049,000) (2,735,000)
----------- -----------
$ 1,168,000 $ 1,382,000
=========== ===========
F-13
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2009, equipment purchased under capital leases had a cost of
$651,000 and accumulated depreciation of $176,000.
Accrued expenses consist of the following:
As of September 30,
-------------------------------
2009 2008
------------ -----------
Accrued vacation 182,000 $ 187,000
Accrued salaries and wages 62,000 130,000
Sales and use tax 75,000 67,000
Accrued professional fees -- 4,000
Customer deposits 4,000 13,000
Commissions 145,000 51,000
Accrued payroll tax 11,000 8,000
Accrued 401(k) 9,000 --
Other 9,000 9,000
------------ -----------
Total accrued expenses $ 497,000 $ 469,000
============ ===========
NOTE 4. ACQUISITION OF CPT
On August 6, 2008, the Company, through its subsidiary MST, acquired certain
assets and assumed certain liabilities of CPT Services, Inc. ("CPT") for an
aggregate cash purchase price of $21,000. CPT provided laser service and repair
services similar to the MST. The acquisition assisted MST in the expansion of
its services.
Since the assets acquired constituted a business, the acquisition has been
accounted for using the purchase method of accounting in accordance with SFAS
No. 141, which was codified into ASC 805, whereby the estimated purchase price
has been allocated to tangible and intangible net assets acquired based upon
their fair values at the date of acquisition.
The purchase price of CPT has been allocated to assets acquired and liabilities
assumed based on their estimated fair values determined by management as
follows:
Property and equipment $ 129,000
Intangible asset - customer list 30,000
Notes and leases payable (138,000)
-------------
Cash paid $ 21,000
=============
The customer relationships are considered an intangible asset and are being
amortized over the estimated useful live of five years from the date of the
acquisition. The estimated useful life was determined based upon the historical
lives of the customer base. The pro-forma financial statements have not been
provided as they are insignificant to the Company's financial statements. During
the fiscal year ended September 30, 2009, the Company amortized $7,000 of the
intangible asset to costs of goods sold. As of September 30, 2009, the carrying
value of the intangible asset was $23,000.
F-14
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consists of the following at September 30,
2009 and 2008:
2009 2008
----------- ----------
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.69% per annum. The lease requires monthly
payments of $3,147 through September 2012. $ 69,000 $ 99,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 9.25% per annum. The lease requires monthly
payments of $4,979 through January 2013. 170,000 213,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 9.23% per annum. The lease requires
monthly payments of $526 through February 2013. 19,000 23,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.82% per annum. The lease requires monthly
payments of $2,403 through March 2012. 64,000 87,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.66% per annum. The lease requires monthly
payments of $2,386 through October 2010. 27,000 52,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 8.51% per annum. The lease requires
monthly payments of $3,195 through April 2011. 53,000 89,000
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 6.5% per annum and require monthly
principal and interest payments of $8,018 through March 2010. 39,000 --
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 6.8% per annum and require monthly
principal and interest payments of $12,631 through March 2009. -- 74,000
----------- ----------
$ 441,000 $ 637,000
Less: current portion (209,000) (237,000)
----------- ----------
$ 232,000 $ 400,000
=========== ==========
The Company leases certain equipment under capital leases with terms ranging
from three to five years. Future annual minimum lease payments are as follows as
of September 30, 2009:
2010 $ 196,000
2011 155,000
2012 80,000
2013 23,000
-----------
Total minimum lease payments 454,000
Less amount representing interest (52,000)
-----------
Present value of future minimum lease payments 402,000
Less current portion of capital lease payments (170,000)
-----------
Capital lease obligations, net of current portion $ 232,000
===========
F-15
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES
The deferred income tax balances at September 30, 2009 and 2008, are comprised
of the following:
September 30,
2009 2008
------------- -------------
Deferred income tax assets (liabilities):
Net operating loss carry forwards $ 12,022,000 $ 12,422,000
Inventories 170,000 139,000
Reserves and accruals 379,000 252,000
Research and development credits 2,594,000 2,591,000
Depreciation and amortization (34,000) (72,000)
Other (5,000) 4,000
Valuation allowance (15,126,000) (15,336,000)
------------- -------------
$ -- $ --
============= =============
The valuation allowance for deferred tax assets decreased approximately $210,000
during the year ended September 30, 2009 and approximately $504,000 during the
year ended September 30. 2008, primarily due to a portion of the Company's net
operating loss carryforwards ("NOLS") for federal and state income tax
reporting, as well as research and development tax credits that expired. For the
years ended September 30, 2009 and 2008, the Company recorded a current
provision for state income taxes of $28,000 and $13,000, respectively. There was
not a provision for federal income taxes.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows for the years ended September 30, 2009 and 2008:
September 30,
2009 2008
---------- ----------
Statutory federal income tax rate (34.00) % (34.00) %
Increase (decrease) in tax rate resulting from:
State tax benefit, net of federal benefit (2.10) % (5.80) %
Other (2.01) % (0.03) %
Valuation Allowance 41.29 % 40.63 %
---------- ----------
Effective income tax rate 3.18 % 0.80 %
========== ==========
At September 30, 2009, the Company had NOL carry forwards for Federal and
California income tax purposes totaling approximately $34.4 million and $5.9
million, respectively. At September 30, 2008, the Company had NOL carry forwards
for Federal and California income tax purposes totaling approximately $35.6
million and $5.0 million, respectively. Federal and California NOL's have begun
to expire and fully expire in 2029 and 2014, respectively. The Tax Reform Act of
1986 includes provisions which may limit the new operating loss carry forwards
available for use in any given year if certain events occur, including
significant changes in stock ownership. In addition, the Company has R & D
credits that have begun to expire and fully expire in 2029 for federal tax
purposes.
F-16
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has two non-cancelable operating leases, which include a lease for
MST's facility in Dallas, Texas, which expires in August 2010, and a lease for
the Company's corporate office and manufacturing facility in Lake Forest,
California, which expires in March 2011.
Future annual minimum lease payments under the above lease agreements, at
September 30, 2009 are as follows:
Years ending
September 30,
-------------
2010 $ 385,000
2011 183,000
-----------
Total $ 568,000
===========
Rent expense for the years ended September 30, 2009 and 2008 was approximately
$358,000.
Rent expense on the leases are recognized on a straight-line basis over the term
of the lease. Therefore, rent expense on the leases does not correspond with the
actual rent payments due. Additionally, as part of the Company's lease agreement
of its facility in Lake Forest, California, the Company received $100,000 from
the lessor as an allowance for leasehold improvements contributed by the
Company. The unamortized portion of the $100,000 payment received is being
recognized on a straight-line basis over the term of the lease as reduction to
rent expense and the unamortized portion is included in deferred rent. The
difference between the cumulative rent payments, net of the $100,000 allowance
on leasehold improvements versus the cumulative rent expense on a straight-line
basis is recorded as a deferred rent liability. As of September 30, 2009, this
liability was $51,000.
The Company is subject to various claims and actions which arise in the ordinary
course of business. The litigation process is inherently uncertain, and it is
possible that the resolution of any of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters which are not reflected in the condensed consolidated statements of
operations that may have material impact on the Company's financial position,
results of operations or cash flows.
See Note 5 regarding capital leases.
Settlement and OEM Agreement
Under the terms of a settlement agreement with Lumenis, Inc. ("Lumenis"),
Lumenis has agreed to pay a 7.5% royalty on their sales of certain side-firing
and angled-firing devices manufactured by Lumenis. In addition, Lumenis agreed
to purchase 75% of its Angled-Firing (60 to 75 degree firing) and 100% of its
Side-Firing (75 to 90 degree) Fibers from the Company under an OEM agreement
("OEM Agreement"). The OEM Agreement was executed on September 8, 2005, under
which the Company agreed 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.
For the years ended September 30, 2009 and 2008 the Company recognized as income
$295,000 and $374,000, respectively, in royalties from Lumenis. These amounts
are all included as other income in the accompanying statements of operations.
F-17
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Product Liability
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 financial statements that
may have material impact on the Company's financial position, results of
operations or cash flows.
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its 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.
Risks and Uncertainties
The Centers for Medicare and Medicaid Services (CMS), the agency of the U.S.
Government that administers the Medicare Program, recently announced its
decision to deny reimbursement for thermal intradiscal procedures (TIPs).
Thermal procedures to treat spinal discs typically entail the use of
electrothermal (ET) or radiofrequency (RF) energy to heat or coagulate the
nucleus of the disc, a spongy, gelatinous material that absorbs shocks when
people run, jump or are injured, to prevent damage to the vertebra.
CMS, however, included the use of laser energy in its proposed denial of
reimbursement for Tips, as the early lasers used in spinal disc treatment,
Nd:YAG and KTP lasers, emit continuous wave (CW) energy at a constant level,
which is thermal, like ET or RF energy.
The Company's pulsed Holmium Lasers emit pulsed energy, which is highly absorbed
by water. Each pulse of Holmium laser energy is absorbed by the water in the
cells, which is rapidly turned to steam, vaporizing the tissue. The tissue cools
between the pulses, which last a few hundred microseconds (millionths of a
second), and only a small amount of heating or coagulation occurs. That is why
our Holmium lasers are commonly referred to as "cold" vaporizing lasers.
The Company filed an objection to CMS' lumping our pulsed Holmium Lasers with
ET, RF and older, thermal Nd:YAG and KTP lasers, few if any of which lasers
are still in use in the treatment of spinal discs. We explained the different
mechanisms of action, tissue effects and improved patient outcomes of pulsed
Holmium laser energy, compared to those of ET, RF, Nd:YAG and KTP laser energy,
and we attached ten (10) published papers on clinical studies of Holmium laser
energy that support our position.
Regardless of our objection and ten published papers supporting our position,
CMS refused to change its decision. Since most people suffering from a herniated
or ruptured spinal disc are below Medicare age, we do not believe CMS's decision
will have an adverse impact on our business. In the period since CMS's decision,
our revenues significantly increased.
Litigation
In February, 2008, we and six other laser manufacturers were sued in the
district court of Massachusetts by CardioFocus, Inc., alleging infringement of
three of their now expired U.S. Patents, which limits their claim for royalties
to six years from their date of expiration in 2006. We and two other laser
companies joined in a petition to the U.S. Patent & Trademark Office ("USPTO")
to re-examine these patents and declare them invalid. The other four defendants
likewise individually requested a re-examination of these patents and a
declaration of invalidity by the USPTO. The court issued a stay of the
proceedings until October 14, 2009. On October 14, 2009, the defendents
(including Trimedyne) sought to extend the stay of the proceedings until October
14, 2010, or until the reexamination proceedings have concluded for all three
patents-in-suit, whichever is sooner. CardioFocus has opposed the defendant's
motion and, as of this filing, we have not received any determination from the
court.
No amount of monetary or other damages is stated in CardioFocus's preliminary
case filings and, because the patents are expired, CardioFocus is not entitled
to anything other than monetary damages. We have not established a reserve for
any damages in the event these patents are finally declared valid by the USPTO
in a non-appealable decision.
In the event the litigation is restarted, the Company will defend itself
vigorously.
F-18
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCKHOLDERS' EQUITY
Warrants
The following is a summary of warrants outstanding during the fiscal years ended
September 30, 2009 and 2008:
Shares of Weighted
Common Stock Average Range of
Issuable Upon Exercise Price Exercise
Exercise of Warrants Per Share Prices
---------------------- ----------------- ---------------
Outstanding, at September 30, 2008 212,000 $ 1.25 $ 1.25
Issued -- $
----------------------
Outstanding, at September 30, 2009 212,000 $ 1.25 $ 1.25
======================
Stock Options
The Company has adopted stock option plans that authorize the granting of
options to key employees, directors, and consultants to purchase unissued common
stock subject to certain conditions, such as continued employment. Options are
generally granted at the fair market value of the Company's common stock at the
date of grant, become exercisable over a period of five years from the date of
grant, and generally expire in six or ten years specific to their respective
plan. Forfeitures of stock options are returned to the Company and become
available for grant under the respective plan. Upon exercise the Company issues
new shares of common stock.
During fiscal 2008, the Board of Directors authorized the grant of
non-qualified stock options to purchase 96,500 shares as follows:
Number of Option Exercise
Options(1) Price Per Share(2)
--------- -----------------
41,500 $0.38
30,000 $0.35
25,000 $0.77
(1) These options vest over five years and expire ten (10) years from the date
of grant.
(2) Exercise price per share is based on the closing price of the Company's
common stock on the date of grant.
There were no options granted during the fiscal year ended September 30, 2009.
Stock Options Outstanding:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Shares Price (Years) Value
---------- --------- ----------- -----------
Options outstanding at October 1, 2007 1,426,979 $ 1.14
Options granted 96,500 0.47
Options exercised -- --
Options forfeited (97,000) 1.04
---------- ---------
Options outstanding at September 30, 2008 1,426,479 $ 1.10 4.0 $ 4,550
Options granted -- --
Options exercised -- --
Options forfeited (193,700) 0.63
---------- ---------
Options outstanding at September 30, 2009 1,232,779 $ 1.18 3.3 $ 37,750
========== ======== =========== ===========
Options exercisable at September 30, 2009 1,133,179 $ 1.20 2.9 $ 25,990
========== ========= =========== ===========
On August 13,2003 the Company's Board of Directors adopted the 2003
Non-statutory Stock Option Plan ("2003 Plan") for issuance of stock options to
employees and others. Under the 2003 Plan, the Company reserved two million
shares for issuance. As of September 30, 2009 and 2008, 1,015,550 and 852,550
options were available for issuance under the 2003 Plan, respectively.
F-19
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2009:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -------------------
Outstanding Weighted-Average Exercisable Weighted-
Range of as of Remaining Weighted-Average as of Average
Exercise Prices 9/30/2009 Contractual Life (years) Exercise Price 9/30/2009 Exercise Price
----------------- --------- ------------------------ -------------- --------- --------------
$0.14 - $0.38 110,000 4.7 $0.23 86,000 $0.19
$0.39 - $0.94 477,179 4.1 $0.61 451,479 $0.61
$0.95 - $1.88 481,900 2.8 $1.31 432,000 $1.31
$1.89 - $2.61 16,000 0.7 $2.29 16,000 $2.29
$2.62 - $3.38 99,700 0.5 $2.75 99,700 $2.75
$3.39 - $4.25 48,000 0.5 $3.84 48,000 $3.84
---------- ---------- -------- ---------- --------
1,232,779 3.4 $1.18 1,133,179 $1.20
========== ========== ======== ========== ========
The weighted-average grant date fair value of options granted during the fiscal
years ended September 30, 2008 was $0.29 per option. There were no options
granted during the fiscal year ended September 30, 2009. There were no options
exercised during the fiscal years ended September 30, 2009 and 2008.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement savings plan (the "Retirement Plan"). Under
the terms of the Retirement Plan, employees may, subject to certain limitations,
contribute up to 15% of their total compensation. The Company contributes an
additional $0.50 for each dollar of employee contributions up to 4% of eligible
employee compensation. Employees become vested in the Company's contribution at
20% per year over five years. The Company's annual contributions to the
Retirement Plan for the fiscal years ended September 30, 2009 and 2008 totaled
$37,000 and $32,000, respectively.
NOTE 10. SEGMENT INFORMATION:
The Company's segments consist of individual companies managed separately with
each manager reporting to the Chief Executive Officer. Revenue, and operating or
segment profit, are reflected net of inter-segment sales and profits. Segment
profit is comprised of net sales less operating expenses. Other income and
expense and income taxes are not allocated and reported by segment since they
are excluded from the measure of segment performance reviewed by management.
F-20
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended September 30, 2009: For the year ended September 30, 2008:
Service and Service and
Product Rental Total Product Rental Total
------------------------------------------ ------------------------------------------
Revenues $ 4,718,000 $2,704,000 $ 7,422,000 $ 3,832,000 $2,039,000 $5,871,000
Cost of sales 3,029,000 1,608,000 4,637,000 2,657,000 1,506,000 4,163,000
------------------------------------------ ------------------------------------------
Gross profit 1,689,000 1,096,000 2,785,000 1,175,000 533,000 1,708,000
Expenses:
Selling, general and
administrative 2,039,000 644,000 2,683,000 1,877,000 496,000 2,373,000
Research and development 1,316,000 -- 1,316,000 1,311,000 -- 1,311,000
------------------------------------------ ------------------------------------------
(Loss) income from operations $(1,666,000) $452,000 (1,214,000) $(2,013,000) $ 37,000 (1,976,000)
=========== ========= =========== =========
Other income (expense):
Interest income 13,000 53,000
Royalty income 295,000 374,000
Interest expense (48,000) (38,000)
Creditor settlements and recoveries 61,000 27,000
Gain (loss) on disposal of equipment 12,000 (17,000)
---------- -----------
(Loss) before provision for income taxes (881,000) (1,577,000)
Provision for income taxes 28,000 13,000
---------- -----------
Net (loss) $ (909,000) $(1,590,000)
=========== ===========
Sales in foreign countries in fiscal 2009 and 2008 accounted for approximately
25.2% and 24.6%, respectively, of the Company's total sales. The breakdown by
geographic region is as follows:
2009 2008
---------- ----------
Asia $1,048,000 $ 802,000
Europe 473,000 224,000
Latin America 118,000 118,000
Middle East 3,000 80,000
Australia 226,000 121,000
Africa 1,000 --
Other -- 99,000
---------- ----------
$1,869,000 $1,444,000
========== ==========
Sales and gross profit to customers by similar products and services for the
fiscal year ended September 30, 2009 and September 30, 2008 were as follows:
For the year ended September 30,
2009 2008
----------- -----------
By similar products and services:
Sales
Products:
Lasers and accessories $ 1,599,000 $ 1,111,000
Fibers, Needles and Tips 3,119,000 2,721,000
Service and rental 2,704,000 2,039,000
----------- -----------
Total $ 7,422,000 $ 5,871,000
=========== ===========
Gross profit
Products:
Lasers and accessories $ 361,000 $ 66,000
Fibers, Needles and Tips 1,328,000 1,109,000
Service and rental 1,096,000 533,000
----------- -----------
Total $ 2,785,000 $ 1,708,000
=========== ===========
F-21
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had two lasers located outside the United States, one each in Canada
and India, at September 30, 2009. Total segment assets for the Products segment
were $5,152,000 and Service and Rental were $1,726,000 at September 30, 2009.
Total segment assets differ from total assets on a consolidated basis as a
result of unallocated corporate assets primarily comprised of immaterial amounts
of property and equipment, etc.
NOTE 11. RELATED PARTY TRANSACTIONS
During the fiscal year ended September 2008, the Company incurred $6,900 of
legal services rendered by a Director, of which $1,000 was still outstanding and
included in accounts payable as of September 30, 2008. There were no legal
services incurred by any related party during the fiscal year ended September
30, 2009.
The Company entered into a service agreement with Cardiomedics, Inc.
("Cardiomedics"), a privately held corporation in which the Chairman/CEO of
Trimedyne, Inc. 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. Under the agreement, Trimedyne agreed to provide warranty service,
periodic maintenance, and repair on Cardiomedics' heart assist devices for which
Trimedyne billed Cardiomedics $40,000 on account and recorded as service income,
including $29,000 during the year ended September 30, 2006. During the quarter
ended March 31, 2006 Cardiomedics' account with Trimedyne, Inc. became
delinquent and the Company ceased providing services to Cardiomedics.
Cardiomedics also entered into a reimbursement agreement with the Company for
business expenses incurred by the CEO/Chairman of the Company on behalf of
Cardiomedics in the amount of $11,000.
The above balances due were consolidated and converted into a $51,000 promissory
note (the "Note"). The Note bore interest at 8.0% per annum, and matured on
March 31, 2008. During the fiscal year ended September 30, 2008 the Note was
paid in full.
In connection with the above service agreement with Cardiomedics, the Company
received $16,000 and $33,000, respectively, in service income during the fiscal
years ended September 30, 2009 and 2008.
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 provides 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 years
ended September 30, 2009 and 2008, the Company incurred $7,000 and $36,000,
respectively, in expense for the services provided under the agreement, which
was recorded to marketing expense, of which $4,000 was included in the balance
of accounts payable at September 30, 2008.
F-22