10-Q 1 tmed_10q-033115.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

or

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                           to                                           

 

COMMISSION FILE NO. 0-10581

 

TRIMEDYNE, INC.

 

Exact Name of Registrant as Specified in its Charter)

 

NEVADA 36-3094439
(STATE OR OTHER JURISDICTION  OF INCORPORATION) (I.R.S. EMPLOYER  IDENTIFICATION NO.)
   
5 Holland #223 IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

 

Registrant's Telephone Number, Including Area Code:

(949) 951-3800

  

Securities Registered Pursuant to Section 12(b) of the Act:

NONE

 

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value per Share

(Title of Class)

  

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

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 x No o

 

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 o Accelerated filer o
Non-accelerated filer o 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 o No x

 

As of May 15, 2015, there were outstanding 18,395,960 shares of registrant's Common Stock.

 

 
 

 

TRIMEDYNE, INC.

 

    Page
     
PART I. Financial Information 3
     
ITEM 1. Financial Statements (Unaudited) 3
     
  Condensed Consolidated Balance Sheets 3
     
  Condensed Consolidated Statements of Operations 4
     
  Condensed Consolidated Statements of Cash Flows 5
     
  Notes to Condensed Consolidated Financial Statements 6
     
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk - N/A 16
     
ITEM 4. Controls and Procedures 16
     
PART II. Other Information 17
     
ITEM 1. Legal Proceedings 17
     
ITEM 1A. Risk Factors - N/A 17
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
     
ITEM 3. Defaults Upon Senior Securities 17
     
ITEM 4. Mine Safety Disclosures 17
     
ITEM 5. Other Information 17
     
ITEM 6. Exhibits 17
     
SIGNATURES 18

 

2
 

 

PART I - FINANCIAL STATEMENT

 

ITEM 1. FINANCIAL STATEMENTS

 

TRIMEDYNE, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

   March 31,  2015   September 30, 2014 
ASSETS          
           
Current assets:          
Cash and cash equivalents  $578,000   $1,292,000 
Trade accounts receivable, net of allowance for doubtful accounts of $11,000 at March 31, 2015 and September 30, 2014   378,000    463,000 
Inventories   1,805,000    1,581,000 
Other current assets   82,000    123,000 
Total current assets   2,843,000    3,459,000 
           
Property and equipment, net   568,000    635,000 
Other   75,000    73,000 
Goodwill   544,000    544,000 
           
Total Assets  $4,030,000   $4,711,000 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities:          
Accounts payable  $162,000   $278,000 
Accrued expenses   446,000    628,000 
Deferred revenue   65,000    50,000 
Accrued warranty   28,000    27,000 
Income tax payable   4,000     
Current portion of note payable and capital leases   55,000    70,000 
Total current liabilities   760,000    1,053,000 
           
Deferred rent   2,000    6,000 
Capital lease   26,000    43,000 
           
Total liabilities   788,000    1,102,000 
           
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, 18,497,569 shares issued, 18,395,960 shares outstanding at March 31, 2015 and September 30, 2014   186,000    186,000 
Additional paid-in capital   51,313,000    51,311,000 
Accumulated deficit   (47,544,000)   (47,175,000)
    3,955,000    4,322,000 
Treasury stock, at cost (101,609 shares)   (713,000)   (713,000)
           
Total stockholders' equity   3,242,000    3,609,000 
           
Total liabilities and stockholders’ equity  $4,030,000   $4,711,000 

 

See accompanying notes to condensed consolidated financial statements.

 

3
 

 

TRIMEDYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

  

   Three Months Ended
March 31,
   Six Months Ended
March 31,
 
   2015   2014   2015   2014 
Net revenues  $1,193,000   $1,382,000   $2,545,000   $2,781,000 
Cost of sales   810,000    831,000    1,722,000    1,854,000 
Gross profit   383,000    551,000    823,000    927,000 
                     
Operating expenses:                    
Selling, general and administrative   459,000    472,000    937,000    1,021,000 
Research and development   122,000    112,000    250,000    236,000 
Total operating expenses   581,000    584,000    1,187,000    1,257,000 
                     
Loss from operations   (198,000)   (33,000)   (364,000)   (330,000)
                     
Other income, net   1,000    25,000    2,000    63,000 
                     
(Loss) before provision for income taxes   (197,000)   (8,000)   (362,000)   (267,000)
                     
Provision for income taxes   5,000    3,000    7,000    3,000 
                     
Net (loss)  $(202,000)  $(11,000)  $(369,000)  $(270,000)
                     
Net (loss) per share:                    
Basic  $(0.01)  $(0.00)  $(0.02)  $(0.01)
Diluted  $(0.01)  $(0.00)  $(0.02)  $(0.01)
                     
Weighted average number of shares outstanding:                    
Basic   18,395,960    18,395,960    18,395,960    18,395,960 
Diluted   18,395,960    18,395,960    18,395,960    18,395,960 

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

TRIMEDYNE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended
March 31,
 
   2015   2014 
Cash flows from operating activities:          
Net loss  $(369,000)   (270,000)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation   2,000    2,000 
Depreciation and amortization   101,000    115,000 
Changes in operating assets and liabilities:          
Trade accounts receivable   85,000    43,000 
Inventories   (224,000)   24,000 
Other assets   63,000    42,000 
Accounts payable   (116,000)   (49,000)
Accrued expenses   (182,000)   (38,000)
Income tax payable   4,000    3,000 
Deferred revenue   15,000    10,000 
Accrued warranty   1,000    4,000 
Deferred rent   (4,000)   (2,000)
Net cash used in operating activities   (624,000)   (116,000)
           
Cash flows from investing activities:          
Purchase of property and equipment   (34,000)   (6,000)
Net cash used in investing activities   (34,000)   (6,000)
           
Cash flows from financing activities:          
Principal payments on notes payable and capital leases   (56,000)   (76,000)
Net cash used in financing activities   (56,000)   (76,000)
           
Net decrease in cash and cash equivalents   (714,000)   (198,000)
Cash and cash equivalents at beginning of period   1,292,000    1,572,000 
Cash and cash equivalents at end of period  $578,000   $1,374,000 

 

Supplemental disclosure of cash flow information:

 

No cash paid for income taxes for the six-month periods ended March 31, 2015 and March 31, 2014, respectively.

 

Cash paid for interest during the six months ended March 31, 2015 and 2014 was approximately $3,000 and $4,000, respectively.

 

During December 2015 and November 2013, the Company financed an additional insurance policy for $24,000 and $21,000, respectively.

 

During November 2013, the Company financed the upgrading of its IT infrastructure with a lease agreement for $119,000.

 

See accompanying notes to condensed consolidated financial statements.

 

5
 

 

TRIMEDYNE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2015

(UNAUDITED)

 

NOTE 1 - Summary of Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Trimedyne, Inc., a Nevada corporation, its wholly owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), a Texas corporation, and its 90% owned inactive subsidiary, Cardiodyne, Inc. ("Cardiodyne"), a Nevada corporation, (collectively, the "Company"). All intercompany accounts and transactions have been eliminated in consolidation.

 

Going Concern

 

At March 31, 2015, the Company had working capital of $2,083,000 compared to $2,406,000 at the end of the fiscal year ended September 30, 2014. Cash decreased by $714,000 to $578,000 from $1,292,000 at September 30, 2014.

 

As of March 31, 2015 we had cash on hand of $578,000. We intend to fund operations with cash on hand and from operations, however, additional working capital in the next 12 months will be required based upon our current expenditure rate. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company has been pursuing market development efforts in Asia and we have had positive feedback from our efforts. If successful, we could have a significant increase in sales volume during the next two successive quarters in this market area which may improve our financial condition and cash reserves.

 

The Company is currently pursuing market development efforts in Latin America and Eastern Europe. We believe that by expanding healthcare infrastructure in these markets, we may be able to create sustained demand for our Holmium Lasers and Fibers in the fields of Laser Spinal Endoscopy, Laser Lithotripsy and in the laser treatment of other conditions. Additionally, we expect the global trend toward single-use, disposable laser delivery devices may improve sales and profit margins as more hospitals convert from multi-use devices, due to concerns for sterility and handling costs incurred in product sterilization, and we plan to develop more single-use optical fiber devices.

 

If necessary, we will also attempt to raise additional debt and/or equity capital, sell some of our assets, reduce our costs by eliminating certain personnel positions and continue our efforts to reduce certain overhead costs in order to reduce our cash consumption levels.

 

Unaudited Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, and pursuant to the instructions to Form 10-Q promulgated by the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all information and disclosures required by generally accepted accounting principles for complete financial statement presentation. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of March 31, 2015 and the results of their operations and their cash flows for the six months ended March 31, 2015 and 2014. Results for the six months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending September 30, 2015.

 

6
 

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and assumptions include inventory valuation, allowances for doubtful accounts and deferred income tax assets, recoverability of goodwill and long-lived assets, losses for contingencies and certain accrued liabilities, as well as the valuation of equity compensation.

 

While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the condensed consolidated financial statements and the notes included in the Company's 2014 annual report on Form 10-K.

 

Stock-Based Compensation

 

We account for equity based compensation under the provisions of Accounting Standards Codification (“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.

 

The Company measures compensation expense for its non-employee stock-based compensation under ASC 505 “Equity”. The fair value of the option issued or committed to be issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the date the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to stock-based compensation expense and credited to additional paid-in capital.

 

During the quarter ended March 31, 2015, the Company granted 60,000 options to purchase common stock at $0.07 per share, vesting over three years, to a consultant.

 

Stock-based compensation was $2,000 and $2,000 during the six months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there was approximately $5,224 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 eleven reporting periods.

 

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 three and six months ended March 31, 2015 and 2014, outstanding options of 854,900 and 818,900, respectively, were excluded from the diluted net loss per share as the effects would have been anti-dilutive. In addition, the exercise prices of these options, with the exception of 110,000 options, were in excess of the average closing price of the Company’s common stock for the periods ended March 31, 2015 and 2014.

 

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 March 31, 2015, the Company had cash balances in excess of federally insured limits of $250,000 in the amount of $399,000.

 

7
 

 

NOTE 2 - Composition of Certain Balance Sheet Captions

 

Inventories, net of reserves, consist of the following:

 

   March 31,
2015
   September 30,
2014
 
Raw materials  $465,000   $549,000 
Work-in-process   288,000    298,000 
Finished goods   1,052,000    734,000 
   $1,805,000   $1,581,000 

 

As of March 31, 2015 and September 30, 2014, 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:

 

   March 31,
2015
   September 30,
2014
 
Prepaid rent   13,000    13,000 
Prepaid insurance   16,000    55,000 
Short-term deposits   7,000    8,000 
Prepaid income tax   8,000    11,000 
Other   38,000    36,000 
Total other current assets  $82,000   $123,000 

 

Property and equipment consist of the following:

 

   March 31,
2015
   September 30,
2014
 
Furniture and equipment  $3,478,000   $3,474,000 
Leasehold improvements   60,000    57,000 
Other   325,000    316,000 
    3,863,000    3,847,000 
Less accumulated depreciation and amortization   (3,295,000)   (3,212,000)
Total property and equipment  $568,000   $635,000 

 

Accrued expenses consist of the following:

 

   March 31,
2015
   September 30,
2014
 
Accrued vacation  $196,000   $181,000 
Accrued salaries and wages   58,000    60,000 
Sales and use tax   53,000    58,000 
Accrued bonus   7,000    17,000 
Customer deposits   2,000    190,000 
Commissions   20,000    19,000 
Medical device tax   89,000    83,000 
Other   21,000    20,000 
Total accrued expenses  $446,000   $628,000 

 

8
 

 

NOTE 3 - Note Payable and Capital Leases

 

Note payable and capital leases consist of the following:

 

   March 31, 2015   September 30, 2014 
Capital lease agreement in connection with the update of our IT infrastructure bearing an effective interest rate of 8.41% per annum.  The lease requires monthly payments of $3,766 through October 2016.  $67,000   $83,000 
           
Finance agreement issued in connection with the purchasing of an insurance policy. The note bears interest at 4.75% per annum and requires monthly payments principal and interest payments of $2,011 through November 2015.   14,000     
           
Finance agreement issued in connection with the purchasing of insurance policies. The note bears interest at 3.35% per annum and require monthly principal and interest payments of $5,693 through March 2015.       30,000 
   $81,000   $113,000 
           
Less: current portion   (55,000)   (70,000)
   $26,000   $43,000 

 

NOTE 4 - Commitments and Contingencies

 

Litigation

 

We are subject to various claims and actions that arise in the ordinary course of business. The litigation process is inherently uncertain, and it is possible that the resolution of any future litigation may adversely affect us. We are not presently involved in any litigation.

 

Guarantees and Indemnities

 

The Company has made certain indemnities and guarantees, under which it may be required to make payments to a guaranteed or indemnified party. The Company indemnifies its directors, officers, employees and agents to the maximum extent permitted under the laws of the State of California. In connection with its facility leases, the Company has indemnified its users of lasers for certain claims arising from the use of the lasers. The duration of the guarantees and indemnities varies, and in many cases is indefinite. These guarantees and indemnities do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make any payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying condensed consolidated balance sheet.  

 

Risks and Uncertainties

 

The Centers for Medicare and Medicaid Services (CMS), the agency of the U.S. Government that administers the Medicare and Medicaid Programs, does not reimburse for thermal intradiscal procedures to treat spinal discs including the use of the Company's pulsed Holmium Lasers. Since most people suffering from a herniated or ruptured spinal disc are below Medicare age, we do not believe CMS's decision will have an adverse impact on our business.

 

9
 

 

NOTE 5 - Segment Information

 

The Company's segments consist of individual companies managed separately with each manager reporting to the Principal Executive Officer. Revenues, and operating or segment profit, are reflected net of inter-segment sales and profits. Segment profit is comprised of net sales less operating expenses. Other income and expense and income taxes are not allocated and reported by segment since they are excluded from the measure of segment performance reviewed by management.

 

Data with respect to these operating activities for the three and six months ended March 31, 2015 and 2014 are as follows:

 

    For the Three Months Ended March 31, 2015     For the Three Months Ended March 31, 2014  
    Products     Service and Rental     Total     Products     Service and Rental     Total  
Revenue   $ 584,000     $ 609,000     $ 1,193,000     $ 804,000     $ 578,000     $ 1,382,000  
Cost of sales     368,000       442,000       810,000       449,000       382,000       831,000  
                                                 
Gross profit     216,000       167,000       383,000       355,000       196,000       551,000  
                                                 
Expenses:                                                
Selling, general and administrative     309,000       150,000       459,000       320,000       152,000       472,000  
Research and development     122,000             122,000       112,000             112,000  
                                                 
Income (loss) from operations   $ (215,000 )   $ 17,000       (198,000 )   $ (77,000 )   $ 44,000       (33,000 )
                                                 
Other:                                                
Interest expense                     (2,000 )                     (1,000 )
Royalty income                                           24,000  
Other income                     3,000                       2,000  
Income taxes                     (5,000 )                     (3,000 )
Net loss                   $ (202,000                   $ (11,000

 

    For the Six Months Ended March 31, 2015    

For the Six Months Ended March 31, 2014

 
    Products     Service and Rental     Total     Products     Service and Rental     Total  
Revenue   $ 1,253,000     $ 1,292,000     $ 2,545,000     $ 1,564,000     $ 1,217,000     $ 2,781,000  
Cost of sales     782,000       940,000       1,722,000       976,000       878,000       1,854,000  
                                                 
Gross profit     471,000       352,000       823,000       588,000       339,000       927,000  
                                                 
Expenses:                                                
Selling, general and administrative     629,000       308,000       937,000       711,000       310,000       1,021,000  
Research and development     250,000             250,000       236,000             236,000  
                                                 
Income (loss) from operations   $ (408,000 )   $ 44,000       (364,000 )   $ (359,000 )   $ 29,000       (330,000 )
                                                 
Other:                                                
Interest expense                     (3,000 )                     (4,000 )
Royalty income                                           54,000  
Other income                     5,000                       13,000  
Income taxes                     (7,000 )                     (3,000 )
Net loss                   $ (369,000                   $ (270,000

 

10
 

 

Sales and gross profit to customers by similar products and services for the three and six months ended March 31, 2015 and 2014 were as follows:

  

   For the Three Months Ended
March 31,
   For the Six Months Ended
March 31,
 
   2015   2014   2015   2014 
By similar products and services:                    
Revenues:                    
Products:                    
Laser equipment and accessories  $159,000   $84,000   $406,000   $366,000 
Delivery and disposable devices   425,000    720,000    847,000    1,198,000 
Service and rental   609,000    578,000    1,292,000    1,217,000 
Total  $1,193,000   $1,382,000   $2,545,000   $2,781,000 
                     
Gross profit                    
Products:                    
Laser equipment and accessories  $8,000   $(2,000)  $35,000   $52,000 
Delivery and disposable devices   208,000    357,000    436,000    536,000 
Service and rental   167,000    196,000    352,000    339,000 
Total  $383,000   $551,000   $823,000   $927,000 

 

Sales in foreign countries for the three months ended March 31, 2015 and 2014, accounted for approximately 22% and 26%, respectively, of the Company's total sales. Sales in foreign countries for the six months ended March 31, 2015 and 2014 accounted for approximately 25% and 20%, respectively, of the Company's total sales. The breakdown by geographic region is as follows:

 

   Three Months
Ended
March 31, 2015
   Three Months
Ended
March 31, 2014
   Six Months
Ended
March 31, 2015
   Six Months
Ended
March 31, 2014
 
Asia  $182,000   $288,000   $481,000   $455,000 
Europe   69,000    18,000    52,000    23,000 
Latin America       40,000    88,000    50,000 
Middle East   2,000    1,000    2,000    1,000 
Australia   9,000    14,000    13,000    23,000 
   $262,000   $361,000   $636,000   $552,000 

 

During the three and six months ended March 31, 2015 and 2014, one Laser was located in Canada, respectively.

 

Total segment assets at March 31, 2015 and 2014 for the Products segment were $2,464,000 and $2,803,000, respectively, and for the Service and Rental segment were $1,544,000 and $1,600,000, respectively. Total segment assets differ from total assets on a consolidated basis as a result of unallocated corporate assets primarily comprised of immaterial amounts of property and equipment.

 

NOTE 6 - SUBSEQUENT EVENTS

 

On April 1, 2015 the Company entered into a finance agreement to purchase certain insurance policies for $64,000. The note bears interest at 3.35% per annum and requires monthly principal and interest payments of $5,890 through March 2016.

 

On April 21, 2015 the Company granted various individuals 940,000 stock options to purchase common stock at $0.07 per share, of which 640,000 were granted fully vested to various officers and directors and 300,000 were granted, vesting over a period of three years, to certain employees. In addition, the Company elected Edward D. Spriegel as a director and appointed him as Chairman of the Audit and Compensation Committees.

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This information should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 30, 2014, contained in our 2014 Annual Report on Form 10-K.

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts may contain forward-looking statements that involve a number of known and unknown risks and uncertainties that could cause actual results to differ materially from those discussed or anticipated by management. Potential risks and uncertainties include, among other factors, general business conditions, government regulations governing medical device approvals and manufacturing practices, competitive market conditions, success of the Company's business strategy, delay of orders, changes in the mix of products sold, availability of suppliers, concentration of sales in markets and to certain customers, changes in manufacturing efficiencies, development and introduction of new products, fluctuations in margins, timing of significant orders, and other risks and uncertainties currently unknown to management. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

 

OVERVIEW

 

Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the development, manufacturing and marketing of 80 and 30 watt Holmium "cold" pulsed lasers ("Lasers") and a variety of disposable and reusable, fiber optic laser energy delivery devices ("Fibers", "Needles" and "Tips") for use in a broad array of medical applications.

 

Our Lasers, Fibers, Needles and Tips have been cleared for sale by the U.S. Food and Drug Administration for use in orthopedics, urology, ear, nose and throat surgery, gynecology, gastrointestinal surgery, general surgery and other medical specialties. Many of the medical procedures in which our Lasers, Fibers, Needles and Tips are used are being reimbursed by Medicare and many insurance companies and health plans.

 

Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is engaged in the rental of lasers, along with the services of a trained operator and, if requested, the provision of applicable Fibers, Needles or Tips, on a "fee per case" basis to hospitals, surgery centers, group practices and individual physicians in Texas and nearby areas.

 

The principal market for our Lasers and Side Firing Needles is presently in orthopedics to treat herniated (bulging) and ruptured lumbar, thoracic and cervical discs in the spine, two of the four major causes of lower back, neck and leg pain, typically on an outpatient basis. Our Lasers and Tips are also used in orthopedics to treat damage in joints, such as the knee, shoulder, elbow, hip, ankle and wrist, in outpatient, arthroscopic procedures.

 

The Company's Lasers and Fibers are also used in Urology to fragment stones in the kidney, ureter or bladder. The Company's VaporMAX(R) Side Firing Optical Fiber device is also used to vaporize a portion of the male prostate which is used with the Company’s Lasers in the treatment of benign prostate hyperplasia or "BPH", commonly referred to as an "enlarged prostate."

 

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CRITICAL ACCOUNTING POLICIES

 

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

 

The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined "critical accounting policies" as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates 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, as well as the valuation of equity compensation.  We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 1, "Summary of Significant Accounting Policies" in the notes to our reviewed financial statements appearing elsewhere in this quarterly report and Note 2 to our annual audited financial statements appearing on Form 10-K. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates.

 

RESULTS OF OPERATIONS

 

Method of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of Trimedyne, Inc., its wholly owned subsidiary Mobile Surgical Technologies, Inc. ("MST") and its 90% owned subsidiary, Cardiodyne.

 

Three months ended March 31, 2015 compared to three months ended March 31, 2014

 

During the quarter ended March 31, 2015, net revenues were $1,193,000 as compared to $1,382,000 for the same period of the previous year, a decrease of $189,000 or 14%. Net sales from lasers and accessories increased by $75,000 or 89% to $159,000 during the quarter ended March 31, 2015 from $84,000 in the same period of the previous year. Lasers carry a high selling price and are subject to a longer, less predictable closing period which, as a result, can create larger variances between periods. Net sales from delivery and disposable devices decreased by $295,000 or 41% to $425,000 in the quarter ended March 31, 2015 from $720,000 in the same period of the previous year. The higher sales during the quarter ended March 31, 2014, was primarily the result of shipments to fulfill backorders created by the delaying of shipments resulting from the impact on manufacturing due to the relocation of our facility in California during the fiscal year ended September 30, 2013. During the quarter ended March 31, 2015, net sales from service and rental increased by $31,000 or 5% to $609,000 from $578,000 for the same quarter of the prior year. The increase in service and rental revenue was primarily due to an increase in fee-per-case revenue from MST for certain procedures. Revenue from export sales decreased by $99,000 or 27% to $262,000 during the quarter ended March 31, 2015 from $361,000 during the same quarter of the previous year, primarily due to a decrease in sales of Fibers, Needles and Tips during the current three-month period.

 

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Cost of sales during the quarter ended March 31, 2015 was $810,000 or 68% of net revenues as compared to $831,000 or 60% the same period of the previous year. Gross profit as a percentage of sales for Lasers and accessories was 5% as compared to a gross loss of (2%) for the same quarter of the previous year. The lower gross profit for lasers and accessories during the prior year quarter was the result of a volumizing difference due to an 89% decrease in Laser sales during the prior year quarter as compared to the current year quarter. The gross profit as a percentage of sales from the sale of Fibers, Needles and Tips was 49% and 50% for the quarter ended March 31, 2015 and 2014, respectively. Gross profit from revenue received from service and rentals as a percentage of revenues was 27% and 34% during the quarters ended March 31, 2015 and 2014, respectively. The lower gross profit was primarily due to an increase in the cost of service parts for the service department at our California facility resulting from our revaluation of inventory performed during the last quarter of the prior year along with a correction to the allocation of property tax expense for MST’s equipment during the current year quarter.

 

Selling, general and administrative expenses decreased in the quarter ended March 31, 2015 to $459,000 from $472,000 in the same period of the previous year, a decrease of $13,000 or 3%. The decreases in selling, general and administrative expenses during the quarter ended March 31, 2015 compared to the same period of the previous year were primarily the result of decreases in outside administrative services of $17,000, payroll related expense of $14,000, insurance expense of $11,000 and legal expense of $4,000, offset by increases in professional services for audit and tax of $17,000, bad debt expense of $9,000, certifications and licenses expense of $5,000 and commissions expense of $2,000.

 

Research and development expenditures for the quarter ended March 31, 2015, increased $10,000 or 9% to $122,000 as compared to $112,000 in the same period of the previous year. The increase was primarily due the addition of full time staff during the current year quarter replacing temporary outside services utilized during the prior year quarter. During the period ended March 31, 2015, R&D activities consisted of expanding our line of single use and reusable Tapertips™ and bare fibers, researching and procuring components to enhance laser output for proposed laser systems, optimizing label content and inspection for existing products, and updating technical and risk management files in compliance with current international standards.

 

Other income, net, decreased by $24,000 or 96% to $1,000 in the quarter ended March 31, 2015 from $25,000 in the same period of the previous year. This decrease was primarily the result of the receipt of $24,000 in royalty income received from Lumenis during the prior year quarter which has subsequently ceased due to the expiration of the license agreement.

 

For the quarters ended March 31, 2015 and 2014, the Company had a net loss of $202,000 or $0.01 per share, as compared to a net loss of $11,000 or $0.00 per share, respectively, based on 18,395,960 basic weighted average number of common shares outstanding, resulting from the above mentioned factors. 

 

Six months ended March 31, 2015 compared to six months ended March 31, 2014

 

During the six months ended March 31, 2015, net revenues decreased to $2,545,000 as compared to $2,781,000 for the same period of the previous year, a $236,000 or 8% decrease. Net sales from Lasers and accessories increased by $40,000 or 11% to $406,000 during the six months ended March 31, 2015 from $366,000 in the same period of the previous year.  Lasers carry a high selling price and are subject to a longer, less predictable closing period, which as a result, can create larger variances between periods. Net revenues from Fibers, Needles and Tips decreased by $351,000 or 29% to $847,000 during the six months ended March 31, 2015 from $1,198,000 for the same period of the previous year. The higher sales during the six-month ended March 31, 2014, was primarily the result of shipments to fulfill backorders created by the delaying of shipments resulting from the impact on manufacturing due to the relocation of our facility in California during the fiscal year ended September 30, 2013.Net revenues from service and rental increased by $75,000, or 6%, to $1,292,000 from $1,217,000 for the same six-month period of the previous year. The increase in service and rental revenue was primarily due to an increase in billable service revenue during the current six-month period as compared to the same period of the previous year. Revenue from export sales increased by $84,000 to $636,000 during the six-month period ended March 31, 2015 from $552,000 during the same period of the previous year, primarily due to an increase in Laser sales in during the current six-month period.

 

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Cost of sales during the six months ended March 31, 2015 were $1,722,000 or 68% of net revenues as compared to $1,854,000 or 67% for the same period of the previous year. Gross profit as a percentage of sales from the sale of Lasers and accessories was 9% as compared to 14% for the same six-month period of the previous year, primarily due to discounted lasers sales to facilitate the opening of new markets in Asia. Gross profit as a percentage of sales from the sale of Fibers, Needles and Tips was 51% as compared to 45% for the same six-month period of the previous year. Gross profit from revenue received from service and rentals was 27% as compared to 28% for the same six-month period of the previous year. The lower gross profit was primarily due to an increase in the cost of service parts for the service department at our California facility resulting from our revaluation of inventory performed during the last quarter of the prior year along with a correction to the allocation of property tax expense for MST’s equipment during the current year.

 

For the six months ended March 31, 2015, selling, general and administrative expenses decreased $84,000 or 8% to $937,000 as compared to $1,021,000 for the same period of the previous year. The decrease in selling, general and administrative expenses during the six-month period ended March 31, 2015 was primarily the result of decreases in payroll related expense of $37,000, legal expense of $27,000, insurance expense of $22,000, outside administrative service of $21,000, bank service fees of $12,000, and commission expense of $8,000 offset by increases in bad debt expense of $9,000 and certification expense of $5,000.

 

During the six months ended March 31, 2015, research and development expenses increased to $250,000 from $236,000 in the same six-month period of the previous year, an increase of $14,000 or 6%. The increase was primarily due the addition of full time staff during the current year six-month period replacing temporary outside services utilized during the prior year six-month period. During the period ended March 31, 2015, R&D activities consisted of expanding our line of single use and reusable Tapertips™ and bare fibers, researching and procuring components to enhance laser output for proposed laser systems, optimizing label content and inspection for existing products, and updating technical and risk management files in compliance with current international standards.

 

Other income decreased by $61,000 or 97% to $2,000 in the six-month period ended March 31, 2015 from $63,000 in the same six-month period of the previous year. This decrease was primarily the result of the cessation of royalty payments received during the current year due to the expiration of a license agreement during the last quarter of the prior year, of which $54,000 was received during the prior year six-month period.

 

For the six months ended March 31, 2015 and 2014, the Company had a net loss of $369,000 or $0.02 per share, as compared to a net loss of $270,000 or $0.01 per share, respectively, based on 18,395,960 basic weighted average number of common shares outstanding, resulting from the above mentioned factors.

 

Liquidity and Capital

 

At March 31, 2015, the Company had working capital of $2,083,000 compared to $2,406,000 at the end of the fiscal year ended September 30, 2014. Cash decreased by $714,000 to $578,000 from $1,292,000 at September 30, 2014. Cash used in investing activities was $34,000 for the purchase of fixed assets. Cash used in financing activities was $56,000 which was the result of payments on notes payable and a lease.

 

As of March 31, 2015, we had cash on hand of $578,000. We intend to fund operations with cash on hand and from operations; however, additional working capital in the next 12 months will be required based upon our current expenditure rate. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company has been pursuing market development efforts in Asia and we have had positive feedback from our efforts. If successful, we could have a significant increase in sales volume during the next two successive quarters in this market area which may improve our financial condition and cash reserves.

 

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The Company is currently pursuing market development efforts in Latin America and Eastern Europe. We believe that by expanding healthcare infrastructure in these markets, we may be able to create sustained demand for our Holmium Lasers and Fibers in the fields of Laser Spinal Endoscopy, Laser Lithotripsy and in the laser treatment of other conditions. Additionally, we expect the global trend toward single-use, disposable laser delivery devices may improve sales and profit margins as more hospitals convert from multi-use devices, due to concerns for sterility and handling costs incurred in product sterilization, and we plan to develop more single-use optical fiber devices.

 

We plan to supply our Holmium Lasers and patented Side Firing Fibers to one or more separate companies being organized in which we will own a 30% equity interest at nominal cost. Since we cannot afford to fund large, randomized, controlled clinical trials to prove the safety and efficacy of our new Lasers and Side Firing Fibers in the treatment of multiple medical conditions in various fields of medicine, helping these separate companies may become an outlet for our Lasers and Side Firing Fibers. However, the success of their efforts to raise capital cannot be assured and, if they were able to raise capital, there is no assurance that the clinical trials of any of these separate companies will be successful.

The first of these companies, Gastromedix, Inc. (“Gastromedix”), has been incorporated and is attempting to raise at least $10 million of capital to finance three or more, 25 patient “pilot” clinical trials and, if the “pilot” clinical trials are successful, which cannot be assured, one to three, 300 patient, randomized, controlled clinical trials of our Lasers and patented Side Firing Fibers in the treatment of Type II Diabetes, Obesity and GERD, often called “heartburn”, in the gastroenterology field of medicine, on which two U.S. Patent Applications were filed in September, 2012.

These conditions affect millions of people in the U.S. and elsewhere and, if these larger clinical trials are successful, and Gastromedix receives FDA approval or clearance to market these products in the U.S., the CE Mark to market these products in the European Union and Medicare, other third-party payers in the U.S. and foreign governmental healthcare reimbursement, none of which can be assured, it could generate substantial sales of our Lasers and Side Firing Fibers.

Gastromedix is currently talking with leading hospitals outside the U.S. on conducting its “pilot” clinical trials, as clinical trials outside the U.S. cost much less than in the U.S., one of which has indicated it has significant interest in doing so. However, no contract to do so has yet been signed with this hospital.

In the interim, if necessary, we will also attempt to raise additional debt and/or equity capital, sell some of our assets, reduce our costs by eliminating certain personnel positions and continue our efforts to reduce certain overhead costs in order to reduce our cash consumption levels.

OFF BALANCE SHEET ARRANGEMENTS

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures. Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - Other Information

 

Item 1. Legal Proceedings

 

None

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. [Removed and Reserved]

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

(a)    Exhibits

 

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 for Glenn D. Yeik
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 for Jeffrey S. Rudner
32.1 Principal Executive Officer Certification pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002
32.2 Principal Financial Officer Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance document
101.SCH XBRL Schema
101.CAL XBRL Calculation Linkbase
101.DEF XBRL Definition Linkbase
101.LAB XBRL Label Linkbase
101.PRE XBRL Presentation Linkbase

 

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SIGNATURE PAGE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

  TRIMEDYNE, INC.  
       
Date: May 19, 2015 By: /s/ Glenn D. Yeik  
    Glenn D. Yeik  
    Principal Executive Officer  
       

 

 

  TRIMEDYNE, INC.  
       
Date: May 19, 2015 By: /s/ Jeffrey S. Rudner  
    Jeffrey S. Rudner  
    Principal Financial Officer  
       

 

 

 

 

 

 

 

 

 

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