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TMED > SEC Filings for TMED > Form 10-K on 14-Jan-2014All Recent SEC Filings

Show all filings for TRIMEDYNE INC



Annual Report






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.

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. Sales tax collected from customers are not considered revenue and are included in accounts payable and accrued liabilities until remitted to the taxing authorities.

Revenues from the sale of Lasers, Fibers, Needles and Switch 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's facility in California may rent 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, 2013 and 2012, one Laser was being rented by Trimedyne's facility in California on a month-to-month basis. For this laser, rental revenue was 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 2013 and 2012 were less than one percent of revenues.


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 standard-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.

During the prior fiscal year ended September 30, 2012, we wrote down our inventory an additional $225,000 for slow-moving products and estimated obsolescence. During the current fiscal year ended September 30, 2013 the allowance was reduced by $61,000 due to our use of previously reserved inventory net of the current inventory reserved.


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.

In September 2011, the Financial Accounting Standards Board ("FASB") issued guidance that simplified how entities test for goodwill impairment. This guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We elected to early adopt this guidance and, in connection with our annual goodwill impairment test that was conducted during the fourth quarter of the year ended September 30, 2013, we concluded that it was more likely than not that the fair values of our reporting units were greater than their carrying amounts. After reaching this conclusion, no further testing was performed. The qualitative factors we considered included, but were not limited to, general economic conditions, our outlook in the rental laser service market, and our recent and forecasted financial performance.

In the event the qualitative assessment results in the conclusion that the carrying value of goodwill may not be supported, 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.


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.


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.


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.


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.


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, 2013
and 2012:

                                                     Year Ended September 30,
                                                      2013               2012
   Net revenues                                         100.0%             100.0%
   Cost of sales                                          60.5               67.2
   Selling, general and administrative expenses           38.9               41.0
   Research and development expenses                       6.8               11.1
   Interest expense                                        0.0                0.2
   Other income, net                                      12.0                5.7
   Income taxes                                            0.3                0.2
   Net income loss                                         5.5              (13.8 )


Net revenues decreased $91,000 or 1.5% in fiscal 2013 to $5,989,000 from $6,080,000 in fiscal 2012. Net sales from Lasers and accessories decreased by $277,000 or 35.5% to $504,000 during the fiscal year ended September 30, 2013 from $781,000 during the prior fiscal year, primarily due to a decrease in domestic sales for those products. Sales from Fibers, Needles and SwitchTips decreased by $181,000 or 6.5% to $2,626,000 during the current fiscal year ended September 30, 2013 from $2,807,000 during the prior fiscal year. Thedecrease in sales from Fibers, Needles and Switch Tips was primarily due to the delaying of shipments resulting from the impact on manufacturing due to the relocation of our facility in California. International export revenues decreased $235,000 or 17.1% to $1,136,000 during fiscal 2013 from $1,371,000 during fiscal 2012 due to a decrease in Laser sales revenue in Latin America and the impact on manufacturing due to the relocation of our facility in California. Net revenues from "per case" rentals and field service and rental increased by $367,000 or 14.7% in fiscal 2013 to $2,859,000 from $2,492,000 in fiscal 2012, primarily due to an decrease in per-case revenue from MST for BPH procedures.


Cost of sales in fiscal 2012 was approximately 60.5% of net revenues, compared to 67.2% in fiscal 2012. Gross profit from the sale of Lasers and accessories during the fiscal year ended September 30, 2013 was 15.7% as compared to (1.41)% for the prior year fiscal period. The lower gross profit from the sale of lasers during the prior fiscal year ended September 30, 2012 as compared to the current fiscal year was the primarily the result of a year-end adjustment of $80,000 to reserve excess inventory of raw materials relating to the production of Lasers during the prior fiscal year along with the sale of a fully amortized demo Laser during the current fiscal year. Gross profit from the sale of Fibers, Needles and Switch Tips during the fiscal year ended September 30, 2013 was 50.7% as compared to 40.3% for the prior fiscal year period. The higher gross profit from the sale of Fibers, Needles and Switch Tips during the current fiscal year ended September 30, 2013 as compared to the prior fiscal year was primarily due a one-time adjustment resulting from the re-evaluation of inventory cost standards during the prior fiscal year along with lower manufacturing overhead resulting from the relocation to a smaller manufacturing facility in California. Gross profit from revenue received from service and per case rentals was 33.6% in the current fiscal year as compared to 35.2% for the prior fiscal year period. The lower gross profit for the service and rental segment during the current year as compared to the previous fiscal year was primarily attributable to a decrease in revenues received for billable services at our California facility due to our temporary shutdown to relocate, while having to maintain existing overhead.


Selling, general and administrative ("SG&A") expenses decreased $165,000 or 6.6% to $2,329,000 in fiscal 2013, compared to $2,494,000 in fiscal 2012. The decrease in fiscal 2013 was primarily the result of decreases in commission expense of $74,000, payroll related expense of $51,000, marketing expense of $94,000, rent expense of $33,000, outside services expense of $24,000 and travel expense of $18,000, offset by expenses incurred for the relocation of the Company's facility in California of $129,000.


R&D expenses decreased $266,000 or 39.5% to $407,000 in fiscal 2013, compared to $673,000 in fiscal 2012. R&D as a percentage of net revenues decreased to 6.8% of net revenues in fiscal 2013 as compared to 11.1% in fiscal year 2012 primarily due to the temporary cessation of projects to prepare for the Company's relocation to a new facility along with reductions in staff. During the fiscal year ended September 30, 2013, R&D activities consisted of producing samples and documentation for interstitial fiber optic delivery systems, expanding the existing line of single use and reusable bare fibers, optimizing label production and inspection for existing products, and updating risk management files in compliance with current international standards.


Total other income, net increased $367,000 or 105.8% to $714,000 in fiscal 2013 from $347,000 in fiscal 2012.

In January 2012, the Company entered into an agreement for the sale of certain patents held by the Company to a third party. Under the terms of the agreement the Company received a non-refundable payment of $200,000, and we received a non-exclusive, royalty free license to the patents. If the third party entered into any litigation regarding any infringement of these patents, the Company would receive 35% of all net (after legal fees) proceeds received by the third party, up to $6 million, less the initial $200,000 payment and 50% of net proceeds over $6 million, if any. The third party filed a lawsuit against a large foreign company that the third party believed was infringing some of the patents sold to the third party by Trimedyne. During the fiscal year ended September 30, 2013, the Company received $433,000 as a result of the litigation above per the agreement.

During the current fiscal year ended September 30, 2013, the Company received $166,000 from our insurance carrier due to its acquisition from another party.

Income from royalties decreased $18,000 or 15.5% to $98,000 in fiscal 2013 from $116,000 in fiscal 2012. This decrease was due to a decrease of Lumenis' sales of side-firing and angled-firing devices for which we receive royalties.

During the current and prior fiscal years, we accrued a provision for state income tax of $9,000 due to the net income apportioned to MST.


As a result of the above, the net income in fiscal 2013 was $329,000, compared to a net loss of $836,000 in fiscal 2012. There were one-time items in 2013 totaling $610,000 to achieve a net profit.


Cash flows

At September 30, 2013, we had working capital of $2,711,000 compared to $2,325,000 at the end of the previous fiscal year ended September 30, 2012. Cash increased by $1,100,000 to $1,572,000 at September 30, 2013 from $472,000 at the fiscal year ended September 30, 2012.

In fiscal 2013, net cash provided by operating activities was $1,434,000, as compared to net cash used of $270,000 in fiscal 2012. The increase in net cash provided by operations was primarily due to the receipt of $600,000 in other income from an agreement for litigation of certain patents combined with a receipt from our insurance carrier (see Other Income and Expense). Net cash used in investing activities was $188,000, primarily for the purchase of leasehold improvements purchased for the relocation of our facility in California in fiscal 2013 and the purchase of equipment for MST, compared to net cash used of $34,000 in fiscal 2012. Net cash used in financing activities during fiscal 2013 was $146,000 compared to net cash used of $375,000 in fiscal 2012. In fiscal 2013, we continued to make payments on capital leases and notes payable related to insurance policies. During the prior fiscal year we made payments of $188,000 on capital leases and notes payable related to insurance policies and we paid off the remainder of $187,000 for a note issued to a related party in fiscal 2011.

Management's Plans

The Company is currently pursuing market development efforts in Asia, Latin America and Eastern Europe. We believe that by expanding healthcare infrastructure in these markets we may be able to create a sustained demand for Holmium Lasers applied to Spinal Endoscopy and Laser Lithotripsy. Additionally, we expect the global trend toward single-use disposable laser delivery products will improve sales and profit margins as more hospitals convert from multi-use products, due to concerns for sterility and interests to reduce handling costs incurred in product sterilization, and we are developing more single-use products.


Secured Note Payable to Related Party

On March 3, 2011, the Company was loaned $250,000 by Marcia H. Yeik Irrevocable Living Trust (the "Trust"), Marcia H. Yeik trustee thereof, the daughter of Marvin Loeb, CEO and Chairman, and the wife of Glenn D. Yeik, President and a member of the Board of Directors of the Company. Evidenced by a Note Payable (the "Note") with a principal amount of $250,000 at an interest rate of 12% per annum, the Note required monthly payments through April 2, 2013. The proceeds from the Note were used to pay accounts payable due to a vendor in connection with the purchase of property and equipment for MST. The Note was subordinated to the security interest of the holder of the Company's Senior Note, and was payable in increments applied to the principal at $10,416 per month along with accrued interest on the remaining principal over the life of the Note.

On June 27, 2011, with the consent of the related party and approval by the Board of Directors, the interest rate of the Note was amended to 6% per annum and the Trust had the right to call the Note at any time and demand immediate payment of all unpaid principal and all accrued interest. The Note was paid in full with accrued interest on January 3, 2012.

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