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, 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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o 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 o 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 ☒ 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 x No o

 

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	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

 

The aggregate market value of voting and non-voting common equity stock held by non-affiliates of registrant on March 31, 2015 based upon the closing price of the common stock on such date was approximately $934,353. As of January 13, 2016 there were outstanding 18,395,960 shares of registrant's Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

TABLE OF CONTENTS

 

PART I
ITEM 1.	BUSINESS	1
	Forward Looking Statements	1
	General	1
	The Urology Market	2
	License Agreement with Lumenis	2
	The Lithotripsy Market	2
	The Spinal Disc Market	2
	The Laser Rental Market	3
	Other Markets	3
	Controlling Our Costs	3
	Future Marketing Plans	3
	Research and Development	5
	Manufacturing and Supply Agreements	5
	Marketing	5
	Government Regulation	5
	Investigational Device Exemptions	6
	510(k) Premarket Notification	6
	Premarket Approval	6
	Inspection of Plants	6
	State Regulation	7
	Insurance Reimbursement	7
	Cost of Compliance with FDA and Other Applicable Regulations	7
	Employees	7
	Patents	8
	Competition	8
	Insurance	8
	Foreign Operations	8
ITEM 2.	PROPERTIES	9
ITEM 3.	LEGAL PROCEEDINGS	9
ITEM 4.	MINE SAFETY DISCLOSURES	9
PART II
ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASER OF EQUITY SECURITIES	10
ITEM 6.	SELECTED FINANCIAL DATA	11
ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	17
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	17
ITEM 9A.	CONTROLS AND PROCEDURES	17
ITEM 9B.	OTHER INFORMATION	17
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	18
ITEM 11.	EXECUTIVE COMPENSATION	21
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	22
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	24
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	24
ITEM 15.	EXHIBITS, FINANCIAL STATEMENTS SCHEDULES	25

    

 

PART I

ITEM 1. BUSINESS

 

FORWARD LOOKING STATEMENTS

   

In addition to historical information, this Annual Report on Form 10-K 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 should carefully review the risk factors described in other documents the Company files from time to time with the U.S. Securities and Exchange Commission, including Quarterly Reports on Form 10-Q filed by the Company in fiscal year ended September 30, 2015.

   

GENERAL

 

Trimedyne, Inc. (“Trimedyne”, 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 " Switch Tips") for use in a broad array of medical applications.

 

Our Lasers, Fibers, Needles and Switch Tips have been cleared for sale by the U.S. Food and Drug Administration ("FDA"), are CE marked for sale in the European Union and are registered for sale in Australia, Brazil, Canada, China, Indonesia, Mexico, Korea, Taiwan and other countries. Our Lasers, Fibers, Needles and Switch Tips are used 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 Switch Tips are used are being reimbursed by Medicare and most insurance companies and health plans, but these products are not being reimbursed by Medicare and many other third-party payers for their use in spinal applications.

 

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 Switch 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 approximately 50% of our revenues in the fiscal year ended September 30, 2015.

 

The principal market for our 80 watt and 30 watt Holmium Lasers and Side Firing Needles is presently in orthopedics to treat herniated (bulging) and ruptured spinal discs (lumbar, thoracic and cervical), two of the four major causes of lower back, neck and leg pain. Our minimally-invasive spinal procedures are typically performed on an outpatient basis. Our Lasers and Switch Tips are also used in orthopedics to treat damage in joints, such as those in the spine and the knee, shoulder, elbow, hip, ankle and wrist, in minimally-invasive, outpatient, arthroscopic procedures, called Arthroscopy procedures.

 

 

We also sell Single Use and Reusable FlexMax(R) optical fibers (“Fibers”) for use with our 80 watt and 30 watt Holmium Lasers (and those made by others with compatible connectors) for fragmenting urinary stones in the kidney, ureter or bladder, a procedure called “lithotripsy”. Since lithotripsy is an established procedure that urologists know how to perform, little training is required, and sales of these Fibers and Lasers used with these Fibers represents our second market.

 

We introduced a fast vaporizing, very durable Side Firing VaporMAX(R) Laser Fiber for use in the Urology field with our 80 watt Holmium Lasers, (and 80 watt and 100 watt Holmium Lasers made by others with compatible connectors) for the treatment of benign prostatic hyperplasia or “BPH”, commonly called an enlarged prostate. However, with our small sales force, sales of these Fibers have not been material.

 

We have recruited and trained a small number of distributors outside the U.S. to market our Lasers, Fibers, Needles and Switch Tips, but sales in this uncertain worldwide economy are more difficult to achieve than in the past. 

 

THE UROLOGY MARKET

  

Due to our very small distributor sales organization and limited capital resources to support marketing of our products, sales of our Lasers, Fibers, Needles and Switch Tips in Urology have been less than we would like.

 

LICENSE AGREEMENT WITH LUMENIS

 

In August 2010, we entered into a Settlement and a Non-Exclusive License Agreement (the “License Agreement”) with Lumenis, Ltd. of Yokneam, Isreal (“Lumenis”), covering two of our patents. The License Agreement expired on July 31, 2014, the date on which the last of the patents expired. Lumenis is one of the largest manufacturer of medical lasers.  Royalties paid under the License Agreement in the fiscal year ended September 30, 2014 were $78,000, and royalties from Lumenis were no longer paid after July 31, 2014 as a result of the expiration of the License Agreement.

 

THE LITHOTRIPSY MARKET

 

Many people in the Unites States and elsewhere throughout the world develop stones in the kidney, some of which pass into the ureter, or develop in the bladder. Holmium Lasers are ideal for fragmenting these stones, as our Holmium Lasers produce very short, 350 microsecond pulses of energy, which can shatter or fragment stones of any hardness, composition or color. We manufacture Single use (disposable) and Reusable FLEXMAX(R) straight-ahead firing Fibers, for use in lithotripsy procedures.

  

THE SPINAL DISC MARKET

 

Our 80 watt and 30 watt Holmium Lasers (and those of others with compatible connectors) can be used to transmit laser energy through our Side Firing Laser Needles to treat herniated (contained) or ruptured (non-contained) spinal discs (lumbar, thoracic or cervical) in minimally invasive procedures, which are typically performed on an outpatient basis in as little as 45 minutes, usually with only local anesthesia. The lower back, leg and neck pain typically is significantly reduced or eliminated on the operating table, and the patient walks out with a Band Aid(R) on the puncture (stitches are usually not required). Most patients can return to light activities in a few days and to work in a week or two. Clinical Studies on the use of our Lasers and Needles in spinal disc procedures, published in medical journals, show success rates (good or excellent results, based on accepted pain score criteria) of 80% 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 one to three day or longer hospital stay, bleeding, post-operative pain and a recovery period of a week or two or a month or longer, often with physical therapy or exercise programs for up to six months. Papers on conventional surgery to treat herniated or ruptured discs in the spine, published in medical journals, show the success rates of conventional disc surgery to be only 40% to 77%, based on similar pain score criteria.

 

 

Our clinical results in the spinal disc market are better than those of conventional surgery and are less costly to third party payers. However, randomized, controlled clinical trials are required to obtain Medicare and other third-party reimbursement, are very expensive and are beyond our means. In the absence of large, randomized, controlled clinical trials, our Lasers and Side Firing Laser Needles are not reimbursed by Medicare and many other third-party payors, making it difficult to interest surgeons in their use and expand our sales of these devices.

 

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 $43,000 to $127,500, particularly for new medical procedures whose frequency of use is not known. Hospitals also traditionally suffer from a lack of funds to buy expensive capital equipment, and they prefer to avoid having to train their staff to operate new, complex equipment. As a result, many 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 the demonstration of our products. If requested, MST also supplies Fibers, Needles or Switch Tips and includes their price in the "per case" fee. MST represents one of our three principal businesses.

 

OTHER MARKETS

 

Our Lasers, Fibers, Needles and Switch Tips are also used in a variety of other procedures in gynecology, ear, nose and throat surgery, gastrointestinal surgery and general surgery.

 

CONTROLLING OUR COSTS

 

We are continuing to concentrate on reducing our overhead and cost of operations. We previously moved into a smaller manufacturing facility, which has allowed us to better utilize the available space while reducing rent, utilities, and associated expenses. We have also cross-trained our staff to allow greater working efficiency in certain areas of our business. We are further actively pursuing opportunities to outsource some of our manufacturing operations to reduce inventory levels and operating expenses. As a result of these efforts, we have been able to significantly reduce our fixed costs and will continue to seek opportunities to further these efforts.

 

FUTURE MARKETING PLANS

 

We are continuing to work on new variations of our Lasers, Fibers, Needles and Switch Tips and new applications for our Lasers, Fibers, Needles and Switch Tips. Developing new Lasers, Fibers, Needles and Switch Tips for new medical applications entails considerable expense and risk and will require large, randomized, controlled clinical trials to demonstrate their safety and efficacy for FDA approval or marketing clearance and Medicare and other third-party payer reimbursement, the success of which cannot be assured.

  

While we have about 20 years of experience in designing, developing, manufacturing and marketing Holmium Lasers, Fibers, Needles and Switch Tips, we cannot assure that any new lasers or optical fiber devices we may develop for new applications can be completed at an affordable cost or in a timely manner, or will enable us to raise money to conduct the necessary clinical trials and, if successful, obtain FDA clearance, CE Marks or Medicare and foreign reimbursement to enable us to market these products.

 

We believe our existing and proposed new Lasers and our new, patented and patent pending Side Firing Needles and Fibers can be used to treat a variety of conditions affecting millions of people in the United States and in foreign countries, and we are working on a new plan to bring these products to the market.

 

In order to bring these products to market, we will need adequate capital. The Company continues to review capital requirements and funding sources. We have contemplated raising money within separate affiliated, new companies which the Company will make an investment in and enter into a supply agreement as noted below.

 

 

We plan to supply our Holmium Lasers and Side Firing Fibers, Needles and other Fiber-Optic Devices to one or more of such affiliated companies being organized by our Chairman, Marvin P, Loeb, Sc.D., with which we will enter into a Twenty Year, Renewable, Exclusive Supply and Distribution Agreement to provide our Lasers and Side Firing Needles, Fibers and other Fiber-Optic Devices to them at our GAAP Cost plus 35%, and we will grant them the exclusive right to distribute these Lasers and Fiber-Optic Devices throughout the world, subject to certain conditions.

 

In consideration of our selling the above products to these new companies at our GAAP Cost plus 35% and our granting them Exclusive Worldwide marketing rights to these products, subject to certain conditions, we will own a 30% equity interest in each of these new affiliated, companies at nominal cost.

 

The first of these companies, Gastromedix, Inc., formerly Gastrodyne, Inc., (“Gastromedix”) has been incorporated and is planning to raise up to $30 million to conduct up to three, 300 patent randomized, controlled clinical trials and Fiber-Optic Devices in the treatment of these widespread conditions which, today, are difficult or impossible to effectively treat. On September 11, 2014, the Company purchased 3,000,000 shares of common stock for $30,000 equal to a 30% interest in Gastromedix, Inc.

 

Gastromedix has engaged an investment banking firm to act as the Lead Placement Agent of a Regulation D, Rule 506(c) Offering solely to Accredited Investors of up to $30 million of capital on a “best efforts” basis. If this Offering raises at least $5 million of capital, Gastromedix will conduct one (1) or more 25 patient “Pilot” clinical trials in the treatment of these widespread conditions to test our rationale for treating these three conditions, before we commence one or more of the larger, more expensive 300 patient, randomized, controlled clinical trials, assuming Gastromedix can raise sufficient capital to do so.

 

The treatment of these conditions was conceived by Marvin P. Loeb, Sc.D., and he prepared three U.S. Patent Applications which he assigned, without royalty, to Trimedyne, which are now pending patent applications.

 

These three proposed, 300 patient, randomized, controlled, clinical trials are planned to be conducted in two segments, one of 100 patients treated outside the U.S. for granting of the CE Marks, as well as foreign insurance and governmental health plan reimbursement, and the other segment will consist of 200 patients treated in the U.S. for PMA’s or 510(k) clearances (supported by clinical data) from the FDA and U.S. Medicare and insurance reimbursement.

 

The cost of treating the three above-mentioned conditions in the U.S. is estimated to exceed $160 billion annually in the U.S., including these adverse effects on other organs.

 

Clinical trials are very expensive and can take up to three years or longer. There is no assurance that Gastromedix will be able to raise sufficient capital to conduct any or all of its planned 300 patient clinical trials or that their outcomes will be successful.

 

Start-up companies in the health care field without any clinical data find it very difficult to raise money. Our Chairman is an experienced entrepreneur in the medical field and is guiding Gastromedix and, when formed, he plans to guide another six (6), new companies in raising capital to conduct clinical trials of Trimedyne’s Lasers, Needles, Fibers and other Fiber-Optic Devices in the treatment of other conditions covered by the above-described patent applications in different specialties of medicine, under the same type of 20 Year, Exclusive, Worldwide, Private Label Supply and Distribution Agreements with Trimedyne.

 

Since we cannot afford to fund large, randomized, controlled clinical trials to prove the safety and efficacy of our Lasers, Needles, Fibers and other Fiber-Optic Devices in the treatment of multiple medical conditions in various fields of medicine, helping these new companies, in which we will own a 30% interest at nominal cost, prior to their raising capital, may become a significant outlet for our products, although such cannot be assured.

 

If and when any of these affiliated companies is successful in raising sufficient capital to finance any of its proposed clinical trials of our Lasers, Needles, Fibers or other Fiber-Optic Devices, we will issue Press Releases and describe them in future SEC filings to advise the public of this news.

 

 

RESEARCH AND DEVELOPMENT

 

From its inception to September 30, 2015, an aggregate of $57,011,000 has been expended by the Company for research and development ("R&D"), including clinical and regulatory activities, of which $420,000 and $471,000 was expended during the fiscal years ended September 30, 2015 and 2014, respectively. These expenditures have resulted in the issuance of a number of patents to the Company (See “PATENTS” herein).

 

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.

 

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. The Company anticipates marketing only those products which are customarily sold to the same customer groups to whom its Lasers and Fibers, Needles and SwitchTips are presently marketed. There is no assurance as to the extent to which the Company will be able to penetrate these markets.

 

The Company sells its products in the United States countries through four (4) commissioned sales representatives and, outside the United States, approximately 28 foreign and 22 independent distributors who sell our products and medical products manufactured by others. Our U.S. sales representatives and our foreign distributors devote only a limited portion of their time to selling our products. The Company presently employs a Vice President of Sales and Marketing, who directs the Company's sales and marketing activities in the United States and elsewhere.

 

There is no assurance that the Company will be able to enter into marketing arrangements with any new independent sales representatives 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 US FDA in July 2011, and by the state of California Food and Drug Branch in August 2013. 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.

 

Specific areas of regulation by the FDA and other related matters are described in detail below.

 

 

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. All of the Company’s currently marketed Lasers and fiber-optic laser energy delivery devices have been cleared for sale in the United States by the FDA under 510(k) notifications.

 

All of the Company's currently marketed Lasers and fiber-optic laser energy delivery devices have been cleared for sale in the United States by the FDA, and all but our 30 watt Holmium Lasers have been granted the CE mark.

 

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 under development 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 2011. 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.

 

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 there from 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. Presently, Medicare accepts only randomized, controlled clinical studies which have been published in peer-reviewed medical journals, which are costly. 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, 2015, the Company had 40 full-time employees, of whom 15 were employed by MST. Of the remainder, 18 were engaged in production and engineering, one in sales and marketing, and six in general and administrative functions. On September 30, 2015, the Company had six part-time employees of whom three were engaged in production and R&D, and three 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

 

As of September 30, 2015, the Company owned or had licenses to 14 U.S. Patents, two foreign Patents, and 8 U.S. patent applications.

 

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.

 

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 years ended September 30, 2015 and 2014, the Company did not receive any funds and the Company received $4,000, respectively, as a result of the above sale and agreement.

 

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 Ltd., 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., 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.

 

During the current fiscal year ended September 30, 2015 the Company renewed a directors and officer liability insurance policy in the amount of $1,000,000 obtained during the prior fiscal year.

 

FOREIGN OPERATIONS

 

In fiscal 2015 and 2014, sales of products in foreign countries accounted for approximately 24% and 23%, 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 relocated its facility in California in June of 2013 and currently occupies approximately 9,215 sq. ft, office, R&D, manufacturing and warehouse facility at 5 Holland #223, Irvine, California, 92618. On April 12, 2013 the Company signed a lease for the location of our facility located in California beginning May 1, 2013. The lease term is for 36 months with two increases over the term. The initial monthly amount of rent to be paid is $6,911 with the second month free, followed by an increase in monthly rent to $7,118 beginning month 13 and another increase beginning month 24 to $7,332, with the 25^th month rent free.

 

The Company's subsidiary, MST, currently occupies approximately 3,000 square feet of office space in Dallas, Texas, which it leases at a rental of $3,375 per month through August 31, 2016.

 

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 is currently not a defendant or co-defendant in any litigation. The Company has insurance to cover product liability claims. This insurance provides the Company with $5,000,000 of coverage for each occurrence with a general aggregate of $5,000,000. Trimedyne's liability is limited to a maximum of $25,000 per occurrence unless the judgment against the Company exceeds the insurance coverage. In such case, Trimedyne would be liable for any liability in excess of $5,000,000.

   

ITEM 4. [REMOVED AND RESERVED]

 

 

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 OTC Markets "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:

 

2014		High				Low
Quarter ended:
December 31, 2013		$	0.18			$	0.10
March 31, 2014			0.15				0.08
June 30, 2014			0.29				0.10
September 30, 2014			0.14				0.10

 

2015		High				Low
Quarter ended:
December 31, 2014		$	0.13			$	0.06
March 31, 2015			0.09				0.05
June 30, 2015			0.09				0.06
September 30, 2015			0.07				0.06

 

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, 2015, 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, 2015 with respect to shares of the Company's common stock that may be issued through its employee compensation plans:  

 

		NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS				WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS				NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN(a))
PLAN CATEGORY		(a)				(b)				(c)
Equity compensation plans not approved by security holders			1,697,000			$	0.10				303,000
Total			1,697,000			$	0.10				303,000

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

       

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.

 

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, 2015 and 2014, 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 2015 and 2014 were less than one percent of revenues.

 

 

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 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 fiscal year ended September 30, 2015, the allowance was increased by an additional $5,000 based on additional analysis of slow moving and obsolete inventory net of previously reserved inventory used during the current year. During the fiscal year ended September 30, 2014 the allowance was increased by $114,000 based on additional analysis of slow moving and obsolete inventory.

 

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.

 

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, 2015, 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.

 

 

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.   

 

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.

 

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 value of the Company’s common stock on the date that 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.

 

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 2015 AND 2014

 

The following table sets forth certain items in the consolidated statements of operations as a percentage of net revenues for the years ended September 30, 2015 and 2014:

 

		Year Ended September 30,
		2015				2014
Net revenues			100.0%				100.0%
Cost of sales			66.6				64.3
Selling, general and administrative expenses			35.7				35.6
Research and development expenses			7.9				8.6
Interest expense			0.1				0.2
Other (expense) income, net			(0.5	)			1.8
Income taxes			0.3				0.1
Net income (loss)			(11.2	)			(7.0	)

 

 

NET REVENUES

 

Net revenues decreased $128,000 or 2.3% in fiscal 2015 to $5,333,000 from $5,461,000 in fiscal 2014. Net sales from Lasers and accessories increased by $251,000 or 33.1% to $1,010,000 during the fiscal year ended September 30, 2015 from $759,000 during the prior fiscal year, primarily due to an increase in international sales for those products. Sales from Fibers, Needles and SwitchTips decreased by $546,000 or 25% to $1,645,000 during the current fiscal year ended September 30, 2015 from $2,191,000 during the prior fiscal year. The higher sales during the prior year September 30, 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. International export revenues increased $57,000 or 4.6% to $1,297,000 during fiscal 2015 from $1,240,000 during fiscal 2014 due to an increase in Laser sales revenue in Asia. Net revenues from "per case" rentals and field service and rental increased by $167,000 or 6.7% in fiscal 2015 to $2,678,000 from $2,511,000 in fiscal 2014, primarily due to an increase in per-case revenue from MST.

 

COST OF GOODS SOLD

   

Cost of sales in fiscal 2015 was approximately 66.6% of net revenues, compared to 64.3% in fiscal 2014. Gross profit from the sale of Lasers and accessories during the fiscal year ended September 30, 2015 was 14.6% as compared to 18.8% for the prior year fiscal period. The lower gross profit from the sale of lasers and accessories during the current fiscal year ended September 30, 2015 as compared to the prior fiscal year was primarily the result of the sale of discounted lasers offset by the sale of two fully amortized demo Lasers during the current fiscal year. Gross profit from the sale of Fibers, Needles and Switch Tips during the fiscal year ended September 30, 2015 was 50% as compared to 47% for the prior fiscal year period. The higher gross profit from the sale of Fibers, Needles and Tips was primarily a result of updated overhead application rates applied at the beginning of the fiscal year which reduced manufacturing variances as compared to the prior fiscal year and the cessation of a second shift for production of delivery systems which lowered direct labor costs resulting from the cessation of the payroll differential for the second shift. Gross profit from revenue received from service and per case rentals was 30% in the current fiscal year as compared to 31% 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 billable service revenue received at our California facility.

   

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

Selling, general and administrative ("SG&A") expenses decreased $37,000 or 1.9% to $1,905,000 in fiscal 2015, compared to $1,942,000 in fiscal 2014. The decrease in fiscal 2015 was primarily the result of the following:

 

Expense Description		(Decrease)/Increase
Payroll related			(50,000	)
Outside services			(42,000	)
Legal			(22,000	)
Advertising and promotion			(17,000	)
Corporate fees			(4,000	)
Sales Training			6,000
Employee recruiting expense			7,000
Employee benefits			10,000
Commissions and bonus			10,000
Tax penalties			25,000
Stock-based compensation			40,000

 

RESEARCH AND DEVELOPMENT (R&D) EXPENSES

 

R&D expenses decreased $51,000 or 11% to $420,000 in fiscal 2015, compared to $471,000 in fiscal 2014. R&D as a percentage of net revenues decreased to 7.9% of net revenues in fiscal 2015 as compared to 8.6% in fiscal year 2014 primarily due to a reduction in staff during the current fiscal year. During the fiscal year ended September 30, 2015, R&D activities consisted of updating documentation for existing products due to design changes, renewal of foreign approvals, supplier and third party audits, and updating risk management files in compliance with current international standards.

 

 

OTHER INCOME AND EXPENSE

 

Total other income/expense, net decreased by $127,000 or 138% to a net of $35,000 in expense in fiscal 2015 from net income of $92,000 in fiscal 2014. The decrease in other income during the current fiscal year-ended September 30, 2015 as compared to the prior fiscal year ended September 30, 2014 was primarily the result of no income received from royalties in fiscal 2015 as compared to $78,000 received in fiscal 2014 combined with a one-time write-off of Trimedyne’s investment in Gastromedix, Inc. The decrease in royalty payments was due a cessation of such royalty payments due to the royalty agreement expiring in August, 2014.

 

During the current and prior fiscal years, we accrued a provision for state income tax of $17,000 due to the net income apportioned to MST.

 

NET LOSS

 

As a result of the above, the net loss in fiscal 2015 was $595,000, compared to a net loss of $381,000 in fiscal 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash flows

 

At September 30, 2015, we had working capital of $1,969,000 compared to $2,406,000 at the end of the previous fiscal year ended September 30, 2014. Cash decreased by $927,000 to $365,000 at September 30, 2015 from $1,292,000 at the fiscal year ended September 30, 2014.

 

In fiscal 2015, net cash used in operating activities was $773,000, as compared to net cash used of $103,000 in fiscal 2014. The increase in net cash used was primarily due to the net loss of 595,000 during the current fiscal year combined with a decrease in current liabilities of $342,000 and an increase in inventory of $227,000 offset by a decrease in other current assets. Net cash used in financing activities during fiscal 2015 and 2014 was $119,000 and $149,000, respectively, resulting from the continuing payments on debt from capital leases and the financing of insurance policies.

 

Management's Plans

 

At September 30, 2015, we had working capital of $1,969,000 compared to $2,406,000 at the end of the previous fiscal year ended September 30, 2014. Cash decreased by $927,000 to $365,000 at September 30, 2015 from $1,292,000 at the fiscal year ended September 30, 2014.

 

As of September 30, 2015 we had cash on hand of $365,000. We intend to fund operations with cash on hand and from operations; however, additional working capital in the next 12 months may 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 will attempt to lower our overhead costs on less profitable segments, raise additional debt and/or equity capital, sell some of our assets including utilization of current inventory, outsource some of our manufacturing processes and/or reduce our costs by eliminating certain personnel in order to reduce our cash consumption levels to a supportable level. There can be no assurances that we will be successful in those efforts. If we are unsuccessful in our efforts, we may be forced to reduce or curtail certain operational segments.

 

The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

MATERIAL TRANSACTION WITH RELATED PARTY

 

On September 11, 2014, the Company purchased a 3,000,000 shares of common stock for $30,000, equal to a 30% interest, of Gastromedix, Inc., a company 70% owned by The Marvin P. Loeb Irrevocable Living Trust. During the fiscal year ended September 30, 2015, the Company reviewed its investment of $30,000 and determined that it was impaired. (See “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,” “Note 9.”)

 

 

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. 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 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 principal executive officer and principal 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, 2015, 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, 2015.

 

Changes in Internal Control over Financial Reporting

 

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected or is reasonable likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

DIRECTORS AND EXECUTIVE OFFICERS

 

The following persons served as our officers and directors in the fiscal year ended September, 30, 2015.

 

Name	Age	Position
Marvin P. Loeb	89	Chairman and Chief Scientific Officer
Glenn D. Yeik	48	President, COO, Principal Executive Officer and Director
Brian T. Kenney	59	V.P. - Global Sales and Marketing
Donald Baker	86	Director
Alan E. Loeb	50	Director
Edward Spriegel	77	Director and Audit and Compensation Committee Chairman

 

MARVIN P. LOEB has been a director of our Company since 1980, Chairman of the Board from March 1981 to January 2015 and since June 2015, Chief Executive Officer from April 1991 to January 2000 and July 2001 to January 2015, and Chief Scientific Officer since January 2015. 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. He was formerly Chairman, CEO and a director of Cardiomedics, Inc. from May 1986 to September 2012, a privately held company that is now out of business which developed and marketed a circulatory assist device. Mr. Loeb has been Chairman, CEO and a member of the board of managers from September 2012 to December 2014, Chairman and a member of the board of managers from December 2014 to August 2015, and is currently Chief Scientific Officer and a member of the board of managers since August 2015 of CardioMax, LLC., a privately held company which is marketing a circulatory assist device. Mr. Loeb is Chief Scientific Officer and a director of Gastromedix since September 2014, a privately held company which is developing devices used in minimally invasive gastrointestinal surgeries. 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. Based upon the above and his experience in companies in the healthcare field, with medical devices in particular, along with his extensive background as an entrepreneur that has formed over 28 different companies, he has appropriate qualifications and skills to be a director and officer of our Company.

 

GLENN D. YEIK has been our President, Chief Operating Officer, and Director since September 2003 and Chairman from January 2015 to June 2015. Mr. Yeik was previously a Director of Cardiomedics, Inc., a privately held company which developed and marketed a circulatory assist device, from October 2004 to September 2012. Mr. Yeik is Chairman and a member of the board of managers since December 2014 and is also CEO since August 2015 of CardioMax LLC, a privately held company which is marketing a circulatory assist device. Mr. Yeik is Chairman and a director since September 2014 and is also CEO since August 2015 of Gastromedix a privately held company which is developing devices used in minimally invasive gastrointestinal surgeries. 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. 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. Based upon the above and his engineering, product development, and business experience in medical device manufacturing companies and his knowledge of Trimedyne’s operations for over 20 years, he has appropriate skills and qualifications to be a director and officer of our Company.

 

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. Based upon the above and his sales and marketing experience in medical device companies and his knowledge of the industry and medical procedures for over 30 years, he has appropriate skills and qualifications to be an officer of our Company.

 

DONALD BAKER has been a director of our Company since May 1983 and Audit Committee Chairman from September 2008 to April 2015. He has been a director of Cardiodyne, Inc. since August 1996. He was formerly a director of Cardiomedics, Inc. from May 1986 to September 2012, and is currently a member of the board of managers of CardioMax, LLC. since September 2012. He has also been a director of Gastromedix since September 2014. Mr. Baker retired after 39 years as a Managing Partner of the law firm of Baker & McKenzie, specializing in tax law. 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. He is a member of the Chicago and American Bar Associations. Based upon the above, his legal expertise and his extensive tenure with the Company as a director, he has significant knowledge of Trimedyne’s business for over 30 years, he has appropriate skills and qualifications to be a director of our Company.

 

EDWARD D. SPRIEGEL, age 77, has been a director and Chairman of the Audit and Compensation Committees since April 2015. He is also a Director of the ARCOA Group, an end-of-use assets services company, founded in 1990. In addition, he is also the President of CIMCA, an insurance marketing and consulting services company, which he founded in 1965. Previously, he was Vice President of Marketing for American Mid-States Life Insurance, Assistant to the President, Treasurer and Agency Secretary for Mayflower Life Insurance Company, held supervisory and accounting positions for Life and AH Premium, Zurich-American Life Insurance Companies and Investors Security Group of Life Company and held various middle management positions at Sun Life Insurance Company of Canada. Based upon the above, his over 30 years in the insurance industry involved with insuring many industries including healthcare, and his experience in directing accounting services for different companies, he has appropriate skills and qualifications to be Chairman of the Audit and Compensation Committees, and a director of our Company.

 

 

ALAN E. LOEB, age 50, has been a director of the Company since January 2015. He has been Secretary, Treasurer and a member of the board of managers of CardioMax, LLC since May 2013. He has also been Secretary, Treasurer and a director of Gastromedix since September 2014. He has thirty years of experience in managing, operating and working in a variety of businesses. From 2004 to 2011, Mr. Loeb was the President of a food service company he founded and later sold. He is the sole Trustee of the four Trusts established by Dr. Loeb, which together constitute one of the Company’s principal stockholders. Based upon the above, including his over 30 years of business experience in a variety of businesses, he has appropriate skills and qualifications to be a director of our Company.

 

Family Relationships

 

Our directors Glenn Yeik and Alan Loeb are the son-in-law and son of our Chairman Marvin Loeb, respectively. Other than 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);
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 fiscal 2015.

 

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

 

Edward Spriegel is our Audit Committee Chairman and Director. Mr. Spriegel is an "audit committee financial expert" in accordance with SEC rules. Because we are not a listed on a national exchange, our board of directors and audit committee are not subject to independence requirements.

 

 

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. The Committee met once and acted by unanimous written consent during fiscal 2015 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 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, 2015, 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, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. 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, 2015, for filing with the Securities and Exchange Commission.

 

/s/ Edward Spreigel                         

 

 

 

January 13, 2016

 

 

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 to adopt a charter relative to this committee. Until further determination by the Board, the full Board will undertake the duties of the nominating committee.

 

Code of Ethics

  

We have not formally adopted a written code of ethics that applies to our board of directors, principal executive officer, principal financial officer and employees.

 

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. During the fiscal years ended September 30, 2015 and 2014, 550,000 and no option awards were granted to executive officers, respectively.

 

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, 2015 and 2014, 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 2015 and 2014:

 

Name and Principal Position		Year		Salary ($)				Option Awards ($) (2)				All Other Compensation ($) (3)				Total ($)
Marvin P. Loeb		2015		$	121,258			$	18,023			$	10,400			$	149,681
Chief Scientific Officer and Chairman		2014		$	121,257			$	–			$	20,061			$	141,318
Glenn D. Yeik		2015		$	159,135			$	15,020			$	31,331			$	205,486
COO, President, and Director		2014		$	159,135			$	–			$	32,099			$	191,234
Brian T. Kenney, V.P.		2015		$	80,000			$	–			$	44,305			$	124,305
		2014		$	80,000			$	–			$	45,085			$	125,085

 

(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 2015 and 2014 fiscal year for the fair value of stock options granted to the named executive officers in accordance with ASC 718. 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 2015 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 and (v) Company paid medical benefits.

 

  

		Option Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Equity Incentive Plan Awards: Number of Securities Unexercised Unearned Options (#)				Option Exercise Price ($)			Option Expiration Date
Marvin P. Loeb			300,000												0.07		4/20/2021
			78,000												0.14		5/10/2017
Glenn D Yeik			250,000												0.07		4/20/2021
			60,000												0.14		5/10/2017
			100,000												0.13		3/31/2016
Brian T. Kenney			25,000												0.14		5/10/2021

 

None of Messrs. Loeb, Yeik, or Kenney exercised any options during fiscal years 2015 or 2014.

   

DIRECTOR COMPENSATION IN FISCAL YEAR 2015 AND 2014

 

Each non-employee director is entitled to a grant of 30,000 options to purchase shares every three years, beginning the day the director is so appointed. The options vest in equal amounts over three years.

 

During the fiscal year ended September 30, 2015 and 2014, 60,000 and no such grants were given, respectively. No options were exercised during the fiscals ended September 30, 2015 and 2014.

 

Compensation Committee Interlocks and Insider Participation

 

During the 2015 fiscal year, Ed Spreigel was elected to the Compensation Committee. During the fiscal year 2014, we did not have a compensation committee or another committee of the board of directors performing equivalent functions and 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 2015 and 2014.

 

Compensation Committee Report

 

None.

 

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, 2015 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.

 

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.

 

 

TITLE OF CLASS		NAME AND ADDRESS OF BENEFICIAL OWNER		AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP		PERCENT OF CLASS OUTSTANDING*
		MAJOR SHAREHOLDERS
Common Stock		Marvin P. Loeb, Chairman & Chief Scientific Officer (1)		2,903,028		15.8%
$.01 Par Value		5 Holland #223
		Irvine, CA 92618
		Corsair Capital, LLC. (8)		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, President and COO (3)(7)		700,051		3.8%
		Brian T. Kenney, V.P. (4)(7)		60,000		*
		Edward Spreigel, Director (5)(7)		30,000		*
		Alan E. Loeb, Director (6)(7)		30,000		*
		All Directors and Executive		3,833,079		20.8%
		Officers as a Group (6 persons)

 

* Indicates less than 1%

 

(1)	Consists of 2,525,028 Shares owned by Mr. Loeb and his wife, adult children, grandchildren and trusts for their benefit, of which Mr. Loeb is not a beneficiary, Options to purchase 378,000 Shares (grant date fair value of approximately $27,023).
(2)	Consists of 50,000 Shares and Options to purchase 60,000 Shares (grant date fair value of approximately $36,000).
(3)	Consists of 290,051 Shares, and Options to purchase 410,000 Shares (grant date fair value of approximately $78,000).
(4)	Consists of 35,000 Shares and Options to purchase 25,000 Shares (grant date fair value of approximately $2,000).
(5)	Consists Options to purchase 30,000 Shares (grant date fair value of approximately $2,000).
(6)	Consists of Options to purchase 30,000 Shares (grant date fair value of approximately $2,000).
(7)	Address is 5 Holland #223, Irvine, CA 92618
(8)	Consists of Shares owned by funds managed by Corsair Capital, LLC.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

During the fiscal year ended September 30, 2015 and 2014, the Company had the following related party transactions:

 

The Company has an agreement with its Chairman to share an employee with Cardiomax, LLC., a company owned by the Chairman. Cardiomax, LLC. is billed for the reimbursement of time that the employee is paid by the Company.

 

During the fiscal year ended September 30, 2015 and 2014, the amount received for reimbursement under the above agreement was approximately $25,000 and $6,700, respectively

 

On September 11, 2014, the Company purchased a 3,000,000 shares of common stock for $30,000, equal to a 30% interest, from Gastromedix, Inc., a company 70% owned by The Marvin P. Loeb Irrevocable Living Trust.

 

In addition, the Company has an agreement with its Chairman, to share an employee with Gastromedix, Inc. Gastromedix, Inc. is billed for the reimbursement of time that the employee is paid by the Company.

 

During the fiscal year ended September 30, 2015, the amount received for reimbursement under the above agreement was approximately $18,000, respectively. During the fiscal year ended September 30, 2014, no amount was received for reimbursement under the above agreement.

 

Director Independence

 

Presently, we are not required to comply with the director independence requirements of any securities.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Principal Accountant Fees And Services

 

The following table sets forth fees billed to us by dbbmckennon, our Independent Registered Public Accounting Firm, during the fiscal years ended September 30, 2015 and 2014 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,
				2015				2014
(i)		Audit Fees			81,000				73,000
(ii)		Audit Relate Fees			–			–
(iii)		Tax Fees			8,500				8,500
(iv)		All Other Fees			–				–

 

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. All fees during the periods reported were pre-approved by the audit committee.

 

  

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
	101.INS		XBRL Exhibit
	101.SCH		XBRL Exhibit
	101.CAL		XBRL Exhibit
	101.DEF		XBRL Exhibit
	101.LAB		XBRL Exhibit
	101.PRE		XBRL Exhibit     Filed Herewith

 

*The Company requested and received confidential treatment for portions of those exhibits marked with an asterisk (*).

 

 

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, 2016	By:	/s/ Marvin P. Loeb
		Marvin P. Loeb
		Chairman of the Board of Directors

 

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 of Directors		January 13, 2016
Marvin P. Loeb
/s/ Glenn D. Yeik		Principal Executive Officer, President,		January 13, 2016
Glenn D. Yeik		COO and Director
/s/ Donald Baker		Director		January 13, 2016
Donald Baker
/s/ Jeffrey S. Rudner		Principal Accounting Officer		January 13, 2016
Jeffrey S. Rudner

 

 

TRIMEDYNE, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets at September 30, 2015 and 2014	F-3
Consolidated Statements of Operations for the years ended September 30, 2015 and 2014	F-4
Consolidated Statements of Stockholders' Equity for the years ended September 30, 2015 and 2014	F-5
Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2014	F-6
Notes to Consolidated Financial Statements	F-7

 

 

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Trimedyne, Inc.

 

We have audited the accompanying consolidated balance sheets of Trimedyne, Inc. and subsidiaries (the "Company") as of September 30, 2015 and 2014, and the related consolidated statements of operations, stockholders' equity and cash flows for the years 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 audits.

 

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits 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, 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 audits provide 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 subsidiaries as of September 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 of the consolidated financial statements, the Company has incurred recurring losses from operations and has used cash in operating activities. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with respect to these matters are also discussed in Note 1. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty

 

 

/s/ dbbmckennon                           

 

 

Newport Beach, California

January 13, 2016

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		As of September 30,
		2015				2014
ASSETS (NOTE 4)
Current assets:
Cash and cash equivalents		$	365,000			$	1,292,000
Trade accounts receivable, net of allowance for doubtful accounts of $11,000 for 2015 and 2014			416,000				463,000
Inventories			1,808,000				1,581,000
Other current assets			96,000				123,000
Total current assets			2,685,000				3,459,000
Property and equipment, net			480,000				635,000
Other			75,000				73,000
Goodwill			544,000				544,000
Total assets		$	3,784,000			$	4,711,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	138,000			$	278,000
Accrued expenses			426,000				628,000
Deferred revenue			26,000				50,000
Accrued warranty			50,000				27,000
Taxes payable			8,000				–
Current portion of note payable and capital leases			68,000				70,000
Total current liabilities			716,000				1,053,000
Deferred rent			5,000				6,000
Long-term debt			4,000				43,000
Total liabilities			725,000				1,102,000
Commitments and contingencies (Note 6)
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 September 30, 2015 and 2014			186,000				186,000
Additional paid-in capital			51,356,000				51,311,000
Accumulated deficit			(47,770,000	)			(47,175,000	)
			3,772,000				4,322,000
Treasury stock, at cost (101,609 shares)			(713,000	)			(713,000	)
Total stockholders' equity			3,059,000				3,609,000
Total liabilities and stockholders’ equity		$	3,784,000			$	4,711,000

 

See accompanying notes to consolidated financial statements

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For The Years Ended September 30,
		2015				2014
Net revenues:
Products		$	2,655,000			$	2,950,000
Service and rental			2,678,000				2,511,000
			5,333,000				5,461,000
Cost of sales:
Products			1,686,000				1,776,000
Service and rental			1,865,000				1,738,000
			3,551,000				3,514,000
Gross profit			1,782,000				1,947,000
Selling, general and administrative expenses			1,905,000				1,942,000
Research and development expenses			420,000				471,000
Loss from operations			(543,000	)			(466,000	)
Other income (expense):
Royalty income			–				78,000
Interest expense			(7,000	)			(10,000	)
Settlements and other			(28,000	)			24,000
Total other income, net			(35,000	)			92,000
Loss before provision for income taxes			(578,000	)			(374,000	)
Provision for income taxes			17,000				7,000
Net loss		$	(595,000	)		$	(381,000	)
Basic loss per share		$	(0.03	)		$	(0.02	)
Diluted loss per share		$	(0.03	)		$	(0.02	)
Basic weighted average common shares outstanding:			18,395,960				18,395,960
Diluted weighted average common shares outstanding:			18,395,960				18,395,960

  

See accompanying notes to consolidated financial statements

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

										Additional
		Common Stock								Paid-In				Accumulated				Treasury
		Shares				Amount				Capital				Deficit				Stock				Total
Balances at September 30, 2013			18,497,569			$	186,000			$	51,308,000			$	(46,794,000	)		$	(713,000	)		$	3,987,000
Share-based compensation expense			–				–				3,000				–				–				3,000
Net loss			–				–				–				(381,000	)			–				(381,000	)
Balances at September 30, 2014			18,497,569			$	186,000			$	51,311,000			$	(47,175,000	)		$	(713,000	)		$	3,609,000
Share-based compensation expense			–				–				45,000				–				–				45,000
Net loss			–				–				–				(595,000	)			–				(595,000	)
Balances at September 30, 2015			18,497,569			$	186,000			$	51,356,000			$	(47,770,000	)		$	(713,000	)		$	3,059,000

 

See accompanying notes to consolidated financial statements

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For The Years Ended September 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(595,000	)		$	(381,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation			45,000				3,000
Depreciation and amortization			190,000				218,000
Changes in operating assets and liabilities:
Trade accounts receivable			47,000				12,000
Inventories			(227,000	)			(380,000	)
Other assets			103,000				101,000
Accounts payable			(140,000	)			101,000
Accrued expenses			(202,000	)			212,000
Deferred revenue			(24,000	)			13,000
Accrued warranty			23,000				11,000
Deferred rent			(1,000	)			(5,000	)
Taxes payable			8,000				(8,000	)
Net cash used in operating activities			(773,000	)			(103,000	)
Cash flows from investing activities:
Purchase of property and equipment			(35,000	)			(28,000	)
Net cash used in investing activities			(35,000	)			(28,000	)
Cash flows from financing activities:
Principal payments on note payable and capital leases			(119,000	)			(149,000	)
Net cash used in financing activities			(119,000	)			(149,000	)
Net (decrease) in cash and cash equivalents			(927,000	)			(280,000	)
Cash and cash equivalents at beginning of year			1,292,000				1,572,000
Cash and cash equivalents at end of year		$	365,000			$	1,292,000

 

Cash paid for income taxes in the years ended September 30, 2015 and 2014 was $9,000 and $12,000, respectively. Cash paid for interest in the years ended September 30, 2015 and 2014 was $7,000 and $10,000, respectively.

 

Supplemental disclosure of non-cash investing activity:

 

During the fiscal years ended September 30, 2015 and 2014, the Company financed the purchase of certain insurance policies with notes for $80,000 and $83,000.

 

During the fiscal year ended September 30, 2014, the Company financed the upgrading of its IT infrastructure with a lease agreement for $119,000.

 

See accompanying notes to consolidated financial statements

 

 

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 reusable 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 8).

 

Going Concern

 

At September 30, 2015, we had working capital of $1,969,000 compared to $2,406,000 at the end of the previous fiscal year ended September 30, 2014. Cash decreased by $927,000 to $365,000 at September 30, 2015 from $1,292,000 at the fiscal year ended September 30, 2014.

 

As of September 30, 2015 we had cash on hand of $365,000. We intend to fund operations with cash on hand and from operations; however, additional working capital in the next 12 months may 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 will attempt to lower our overhead costs on less profitable segments, raise additional debt and/or equity capital, outsource some of our manufacturing operations, sell some of our assets including utilization of current inventory, and/or reduce our costs by eliminating certain personnel in order to reduce our cash consumption levels to a supportable level. There can be no assurances that we will be successful in those efforts. If we are unsuccessful in our efforts, we may be forced to reduce or curtail certain operational segments.

 

The Company's continuation as a going concern is dependent on its ability to meet its obligations, to obtain additional financing as may be required and ultimately to attain profitability. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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").  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. 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 2015 and 2014, credit losses were not significant.

 

During the current fiscal year ended 2015, the Company had sales to four customers, which represented approximately 45% of product sales. During the fiscal year ended 2014, the Company had sales to two customers, which represented approximately 30% of product sales. During the fiscal years ended September 30, 2015 and 2014, there were no concentrations of service and rental sales.

 

If the relationship between the Company and these customers was altered, the future results of operations and financial condition could be significantly affected. Additionally, during fiscal 2015 and 2014, export sales approximated 24% and 23% of sales, respectively.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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, 2015, the Company had cash balances in excess of federally insured limits of $250,000 in the amount of approximately $75,000.

 

Accounts Receivable

 

Accounts receivable are reported net of allowance for expected losses. It represents the amount management expects to collect from outstanding balances. Differences between the amount due and the amount management expects to collect are charged to operations in the year in which those differences are determined, with an offsetting entry to a valuation allowance.

 

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. Write-downs are considered permanent reductions at cost basis of the related inventories.

 

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, 2015 and 2014, was a $190,000 and $218,000, respectively.

 

Goodwill

 

The Company accounts for goodwill and acquired intangible assets in accordance with Accounting Standards Codification (“ASC”) 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.

 

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. 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.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

Nonrecurring Fair Value Measurements

 

The Company measures certain assets at fair value on a nonrecurring basis. These assets include cost and equity method investments when they are deemed to be other-than-temporarily impaired. During Fiscal 2015, the Company reviewed its investment of $30,000 in Gastromedix, Inc and determined that it was impaired. This determination was based on the fact that Gastromedix, Inc, to date, has not yet secured funds to commence its intended operations. In addition, if or when funds are raised, the clinical trials planned would likely take years to complete at a significant cost without any assurances that the costs could be recuperated. Accordingly, the Company determined that there was an other-than-temporary impairment of the investment. During fiscal 2015 and 2014, the Company did not have any other significant assets or liabilities that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition.

 

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.

 

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 value of the Company’s common stock on the date that 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.

 

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.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Fair Value of Financial Instruments

 

The Company accounts for financial instruments under the guidance under Financial Accounting Standards Board (“FASB”) ASC 820-10, Fair Value Measurements, as well as certain related FASB staff positions.  This guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

The guidance also establishes a fair value hierarchy for measurements of fair value as follows:

 

·

Level 1 – quoted market prices in active markets for identical assets or liabilities.

 

·

Level 2 – inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·

Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company's financial remaining instruments consisted primarily of (level 1) cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, capital leases and note payable. The carrying amounts of the Company's financial instruments generally approximate their fair values as of September 30, 2015 and 2014 due to the short term nature of these instruments.

 

The Company did not have any level 2 or 3 instruments at September 30, 2015 and 2014.

 

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 years ended September 30, 2015 and 2014, outstanding options of 1,697,000 and 808,900, 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 were in excess of the closing price of the Company's common stock at September 30, 2015 and 2014.

 

Revenue Recognition

 

The Company's revenues include revenues from the sale of reusable and disposable Fibers, Needles, and Switch 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. Sales tax collected from customers are not considered revenue and are included in accounts payable and accrued liabilities until remitted to the taxing authorities.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Revenues from the sale of Fibers, Needles, and Switch 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 Switch 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’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, 2015 and 2014, 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.

 

Cost of Revenues

 

Cost of revenues consists primarily of the cost of materials and allocations of direct and indirect labor and overhead costs. Items included within these costs include but are not limited to personnel costs, depreciation, amortization of intangibles and various overhead allocations for items such as rent, utilities, etc.

 

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.

 

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,
		2015				2014
Balance at beginning of year		$	27,000			$	16,000
Charges to costs and expenses			85,000				49,000
Costs incurred			(62,000	)			(38,000	)
Balance at end of year		$	50,000			$	27,000

  

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

During the fiscal years ended September 30, 2015 and 2014 the Company incurred research and development costs of $420,000 and $471,000, respectively.

 

Income Taxes

 

The Company uses the asset and liability method 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.

 

Potential interest and penalties related to income tax matters are recognized in income tax expense. The Company believes they have appropriate support for the income tax positions taken and to be taken on future income tax returns.

 

Segment Information

 

The Company reports information about operating segments, as well as disclosures about products and services, geographic areas and major customers (see Note 8). 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 2014, the FASB issued new accounting guidance regarding revenue recognition under GAAP. This new guidance will supersede nearly all existing revenue recognition guidance, and is effective for public entities for annual and interim periods beginning after December 31, 2016. Early adoption is not permitted. The Company is currently evaluating the impact of this new guidance on the Company’s financial statements.

 

In August 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, “Presentation of Financial Statements Going Concern”, which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early application is permitted. Management is still in the process of assessing the impact of ASU 2014-15 on the Company’s financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS

 

Inventories consist of the following:

 

		As of September 30,
		2015				2014
Raw materials		$	616,000			$	549,000
Work-in-process			288,000				298,000
Finished goods			904,000				734,000
		$	1,808,000			$	1,581,000

 

For the fiscal years ended September 30, 2015 and 2014, the aggregate net realizable value of demonstration and evaluation lasers did not comprise a material amount in inventories.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Other current assets consist of the following:

 

		As of September 30,
		2015				2014
Prepaid rent			13,000				13,000
Prepaid insurance			49,000				55,000
Short-term deposits			7,000				8,000
Prepaid income tax			3,000				11,000
Other			24,000				36,000
Total other current assets		$	96,000			$	123,000

 

Property and equipment, net consist of the following:

 

		As of September 30,
		2015				2014
Furniture and equipment		$	3,478,000			$	3,474,000
Leasehold improvements			62,000				57,000
Other			325,000				316,000
			3,865,000				3,847,000
Less accumulated depreciation and amortization			(3,385,000	)			(3,212,000	)
		$	480,000			$	635,000

 

As of September 30, 2015 and 2014, equipment purchased under capital leases had a cost of $119,000 and accumulated depreciation of $77,000 and a cost of $119,000 and accumulated depreciation of $36,000, respectively.

  

Accrued expenses consist of the following:

 

		As of September 30,
		2015				2014
Accrued vacation		$	203,000			$	181,000
Accrued salaries and wages			60,000				60,000
Sales and use tax			51,000				58,000
Accrued bonus			23,000				17,000
Accrued compensation			20,000				–
Customer deposits			30,000				190,000
Commissions			16,000				19,000
Medical device tax			–				83,000
Other			23,000				20,000
Total accrued expenses		$	426,000			$	628,000

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4. NOTE PAYABLE AND CAPITAL LEASES

 

Note Payable and Capital Lease Obligations

 

Note payable and capital leases consist of the following at September 30, 2015 and 2014:

 

		2015				2014
Capital lease agreement in connection with the purchasing of equipment bearing an effective interest rate of 8.41% per annum. The lease requires monthly payments of $3,766 through October 2016.		$	47,000				83,000
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
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 $5,890 through March 2016.			25,000				–
		$	72,000			$	113,000
Less: current portion			(68,000	)			(70,000	)
		$	4,000			$	43,000

 

The capital lease agreement noted above for the purchase of equipment is secured by the related equipment with original value of approximately $119,000.

 

Minimum capital lease payments in fiscal 2016 and 2017 will be $49,000 and zero, respectively, which includes interest of approximately $2,000 and zero, respectively.

 

NOTE 5. INCOME TAXES

 

The deferred income tax balances at September 30, 2015 and 2014 are comprised of the following:

		2015				2014
Deferred income tax assets (liabilities):
Net operating loss carry forwards		$	7,030,000			$	7,035,000
Inventories			392,000				380,000
Reserves and accruals			90,000				154,000
Research and development credits			2,464,000				2,379,000
Depreciation and amortization			(359,000	)			(426,000	)
Other			107,000				90,000
Valuation allowance			(9,724,000	)			(9,612,000	)
		$	–			$	–

 

The valuation allowance for deferred tax assets increased approximately $112,000 during the year ended September 30, 2015 and increased approximately $1,479,000 during the year ended September 30, 2014, primarily due to a portion of the Company's net operating loss carryforwards ("NOLS") for federal and state income tax reporting. For the years ended September 30, 2015 and 2014, the Company recorded a current provision for federal and state income taxes of $17,000 and $7,000, respectively. In addition, there was not a provision for deferred income taxes due to a full valuation allowance on the Company’s deferred tax assets for fiscal years ended September 30, 2015 and 2014.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company's effective income tax rate differs from the statutory federal income tax rate as follows for the years ended September 30, 2015 and 2014:

 

		2015				2014
Statutory federal income tax rate			34.0%				34.0%
Increase (decrease) in tax rate resulting from:
State tax benefit, net of federal benefit			(1.3%	)			2.2%
Other			0.6%				2.1%
Valuation Allowance			(36.2%	)			(40.2%	)
Effective income tax rate			(2.9%	)			(1.9%	)

 

At September 30, 2015, the Company had NOL carry forwards for Federal and California income tax purposes, totaling approximately $20.3 million and $2.4 million, respectively. The NOL carryforwards include Federal and State R & D credits of $1.4 million and $1.6 million, respectively. At September 30, 2014, the Company had NOL carry forwards for Federal and California income tax purposes, totaling approximately $20.3 million and $2.3 million, respectively. The NOL carryforwards include Federal and State R & D credits of $1.4 million and $1.5 million, respectively. Federal and California NOL's have begun to expire and fully expire in 2035. 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 2035 for federal tax purposes.

 

The Company has identified the United States Federal tax returns as its "major" tax jurisdiction. The United States Federal return years 2012 through 2014 are still subject to tax examination by the United States Internal Revenue Service; however, we do not currently have any ongoing tax examinations.  The Company is subject to examination by various State agencies for the years ended 2011 through 2014 and currently does not have any ongoing tax examinations.

 

NOTE 6. 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 31, 2016, for $3,375 per month, and a lease for the Company's corporate office and manufacturing facility in Irvine, California. The lease term is for 36 months with two increases over the term. The initial monthly amount of rent to be paid is $6,911 with the second month free, followed by an increase in monthly rent to $7,118 beginning month 13 and another increase beginning month 24 to $7,332, with the 25^th month rent free.

 

Future annual minimum lease payments under the above lease agreements at September 30, 2015, are as follows:

 

Years ending
September 30,
2016		$	83,000
Total		$	83,000

 

Rent expense for the years ended September 30, 2015 and 2014 was approximately $152,000 and $150,000, respectively.

 

Rent expense is 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. As of September 30, 2015 and 2014, this liability was $5,000 and $6,000, respectively.

 

See Note 4 regarding capital leases.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Settlement and OEM Agreement

 

On August 24, 2005, we entered into a five year OEM agreement with Lumenis (the “OEM Agreement”). Under the OEM agreement, Lumenis agreed to pay us a royalty of 7.5% of its worldwide sales of side firing and angled firing laser fibers, and Lumenis also 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. This Agreement expired on August 23, 2010.

 

Under the OEM Agreement dated as of August 23, 2010, Lumenis extended the 7.5% royalty payment period to July 21, 2014.

 

During the fiscal years ended September 30, 2015 and 2014, the Company did not receive any royalty payments due to the expiration of the OEM Agreement and received $78,000, respectively, under the OEM Agreement, which was included in other income.

 

Sale of Patents

 

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, 2015 and 2014, the Company received no revenue and $4,000, respectively, as a result of the above sale and agreement.

 

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, 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.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7. STOCKHOLDERS' EQUITY

 

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 three or 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 the fiscal years ended September 30, 2015 and 2014, 1,000,000 and zero options, respectively, were granted to certain employees, officers, directors and a consultant.

 

As of September 30, 2015 and 2014, there was approximately $20,014 and $2,970 of total unrecognized compensation cost, net of estimated expected forfeitures, related to employee and director stock option compensation arrangements, respectively. The unrecognized cost at September 30, 2015 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 stock options under ASC No. 718 for the fiscal years ended September 30, 2015 and 2014, which was allocated as follows:

 

		Fiscal Years Ended September 30,
		2015				2014
Stock-based compensation included in:
Cost of revenues		$	3,000			$	1,000
Selling, general, and administrative expenses			42,000				2,000
		$	45,000			$	3,000

 

Stock Options Outstanding:

 

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
						Exercise				Term				Intrinsic
		Shares				Price				(Years)				Value
Options outstanding at September 30, 2013			839,400			$	0.20
Options granted			–				–
Options exercised			–				–
Options forfeited			(30,500	)			0.17
Options outstanding at September 30, 2014			808,900			$	0.20
Options granted			1,000,000				0.07
Options exercised			–				–
Options forfeited			(111,900	)			0.60
Options outstanding at September 30, 2015			1,697,000			$	0.10				4.84			$	–
Options exercisable at September 30, 2015			1,309,800			$	0.11				4.63			$	–

  

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, 2015 and 2014, 303,000 and 1,191,100 options were available for issuance under the 2003 Plan, respectively.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes information concerning outstanding and exercisable options at September 30, 2014:

 

		OPTIONS OUTSTANDING												OPTIONS EXERCISABLE
Range of Exercise Prices		Outstanding as of 9/30/2015				Weighted-Average Remaining Contractual Life (years)				Weighted-Average Exercise Price				Exercisable as of 9/30/2015				Weighted-Average Exercise Price
$0.05 - 0.13			1,265,000				4.76			$	0.08				905,000			$	0.08
$0.14 - 0.50			424,000				5.11			$	0.16				396,800			$	0.16
$0.51 - 0.64			8,000				1.88			$	0.64				8,000			$	0.64
			1,697,000				4.84			$	0.10				1,309,800			$	0.11

 

During the fiscal year ended September 30, 2015, 1,000,000 options granted and no options were exercised. During the fiscal year ended September 30, 2014, no options were granted or exercised.

 

As of September 30, 2015, the Company had 387,200 unvested stock options with a weighted average grant date fair value of $0.07.

 

NOTE 8.  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.

 

		For the year ended September 30, 2015												For the year ended September 30, 2014
		Product				Service and Rental				Total				Product				Service and Rental				Total
Revenues		$	2,655,000			$	2,678,000			$	5,333,000			$	2,950,000			$	2,511,000			$	5,461,000
Cost of sales			1,686,000				1,865,000				3,551,000				1,776,000				1,738,000				3,514,000
Gross profit			969,000				813,000				1,782,000				1,174,000				773,000				1,947,000
Expenses:
Selling, general and administrative			1,277,000				628,000				1,905,000				1,335,000				607,000				1,942,000
Research and development			420,000				–				420,000				471,000				–				471,000
Income (loss) from operations		$	(728,000	)		$	185,000				(543,000	)		$	(632,000	)		$	166,000				(466,000	)
Other income (expense):
Royalty income											--												78,000
Interest expense											(7,000	)											(10,000	)
Net gain on disposal of assets											–												--
Other											(28,000	)											24,000
Income (loss) before provision for income taxes											(578,000	)											(374,000	)
Provision for income taxes											17,000												7,000
Net income (loss)										$	(595,000	)										$	(381,000	)

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Sales in foreign countries in fiscal 2015 and 2014 accounted for approximately 24% and 23%, respectively, of the Company's total sales. The breakdown of foreign sales by geographic region is as follows:

 

		2015				2014
Asia		$	1,037,000			$	969,000
Europe			94,000				70,000
Latin America			115,000				131,000
Middle East			3,000				1,000
Australia			48,000				65,000
Other			–				4,000
		$	1,297,000			$	1,240,000

  

Sales and gross profit to customers by similar products and services for the fiscal years ended September 30, 2015 and 2014 were as follows:

 

		2015				2014
By similar products and services:
Sales
Products:
Lasers and accessories		$	1,010,000			$	759,000
Fibers, Needles and SwitchTips			1,645,000				2,191,000
Service and rental			2,678,000				2,511,000
Total		$	5,333,000			$	5,461,000
Gross profit
Products:
Lasers and accessories		$	147,000			$	143,000
Fibers, Needles and Switch Tips			822,000				1,031,000
Service and rental			813,000				773,000
Total		$	1,782,000			$	1,947,000

  

The Company had one laser located in Canada at September 30, 2015 and 2014. Total segment assets for the Products segment were $2,224,000 and Service and Rental were $1,539,000 at September 30, 2015. 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. During the year ended September 30, 2015 and 2014, additions of property and equipment to the Service and Rental segment were $25,000 and $4,000, respectively.

 

 

TRIMEDYNE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9. RELATED-PARTY TRANSACTIONS

 

The Company has an agreement with its Chairman to share an employee with Cardiomax, LLC., a company solely owned by the Chairman. Cardiomax, LLC. is billed for the reimbursement of time that the employee is paid by the Company.

 

During the fiscal year ended September 30, 2015 and 2014, the amount received for reimbursement under the above agreement was approximately $25,000 and $6,700, respectively.

 

In addition, the Company has an agreement with its Chairman, to share an employee with Gastromedix, Inc., a company which is 70% owned by the Chairman and 30% owned by the Company. Gastromedix, Inc. is billed for the reimbursement of time that the employee is paid by the Company.

 

During the fiscal year ended September 30, 2015, the amount received for reimbursement under the above agreement was approximately $18,000, respectively. During the fiscal year ended September 30, 2014, no amount was received for reimbursement under the above agreement.

 

On September 11, 2014, the Company purchased a 3,000,000 shares of common stock for $30,000, equal to a 30% interest, from Gastromedix, Inc., a company 70% owned by The Marvin P. Loeb Irrevocable Living Trust. During Fiscal 2015, the Company reviewed its investment of $30,000 in Gastromedix, Inc. and determined that it was impaired. This determination was based on the fact that Gastromedix, Inc., to date, has not yet secured funds to commence its intended operations. In addition, if or when funds are raised, the clinical trials planned would likely take years to complete at a significant cost without any assurances that the costs could be recuperated. Accordingly, the Company determined that there was an other-than -temporary impairment of the investment.

 

NOTE 10. SUBSEQUENT EVENTS

 

On November 12, 2015, the Company signed an amendment to its existing lease at its facility in Irvine, California extending the term until April 30, 2019. The amendment contains an increase in the base monthly rent beginning May 1, 2016 to $8,754.25 with two annual base rent increases on May 1, 2017 and May 1, 2018 of $9,016.88 and $9,287.39, respectively.

 

On December 1, 2015 the Company entered into a finance agreement to fund an insurance policy for $29,579. The note has an interest rate of 4.9% per annum and requires 14 monthly payments of $2,191 beginning in January 1, 2016.