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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2004

or

For the transition period from              to             .

Commission File Number: 0-22419

CARDIMA, INC.

(Exact name of registrant as specified in its charter)

47266 Benicia Street, Fremont, CA 94538-7330

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (510) 354-0300

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     ¨  Yes    x  No

As of April 30, 2004, there were 84,618,244 shares of Registrant’s Common Stock outstanding.

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CARDIMA, INC.

TABLE OF CONTENTS

PART I. Financial Information

PART II. Other Information

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PART I.

Item 1. Financial Statements

CARDIMA, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share amounts)

See accompanying notes to condensed financial statements

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CARDIMA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed financial statements

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CARDIMA, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

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CARDIMA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

March 31, 2004

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared by the Company according to the rules and regulations of the Securities and Exchange Commission for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the financial information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

The operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004 or for future operating results. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The accompanying balance sheet at December 31, 2003 has been derived from these audited financial statements.

2. MANAGEMENT’S PLANS

As of March 31, 2004 Cardima, Inc. had approximately $6,935,000 in cash and cash equivalents, working capital of $6,851,000 and an accumulated deficit of $106,046,000. Management expects to continue to incur additional losses in the foreseeable future as the Company works towards regulatory approval and commercialization of the REVELATION® Tx in the United States, commercialization of the Cardima Surgical Ablation System, and the commercialization of the REVELATION® Helix in Europe. Our management currently estimates that our cash balances as of March 31, 2004 will be sufficient to fund planned expenditures into the fourth quarter of 2004, but this cannot be predicted with certainty. Although our management recognizes the need to raise funds in the near future, there can be no assurance that we will be successful in consummating any fundraising transaction, or, if we do consummate such a transaction, that its terms and conditions will not be unfavorable to us. Any failure by us to obtain additional funding will have a material adverse effect upon us and there is substantial doubt as to our ability to continue as a going concern.

Cardima, Inc., continues to pursue regulatory approvals and distribution relationships in significant market opportunities worldwide. We currently have distribution agreements for various products covering eight countries with an emphasis on Europe and the Pacific Rim, and we are currently seeking a distributor or distributors for our Surgical Ablation System, which received United States Food and Drug Administration 510(k) clearance in 2003. We have arranged for warehousing capacity in Europe to support both distribution and direct customer sales. Securing

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FDA approval of the REVELATION® Tx remains one of our primary goals. We will continue to pursue regulatory approvals in other markets which we believe have both the clinical potential and adequate medical support structure to accept a developing technology application. We cannot assure you that we will be able to obtain or maintain any necessary regulatory approvals or that, if such regulatory approvals are obtained, that we will be able to successfully market our products, or that we will be able to establish a successful distribution channel for our Surgical Ablation System.

3. STOCK-BASED COMPENSATION

We have elected to follow Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our employee stock options, including Financial Accounting Standard Board Interpretation (“FIN”) 44, “Accounting for Certain Transactions Involving Stock Compensation.”

Compensation expense is based on the difference, if any, between the fair value of our common stock and the exercise price of the option or share right on the measurement date, which is typically the grant date. This amount is recordable as “Deferred stock compensation” in the Balance Sheets and amortized as a charge to operations over the vesting period of the applicable options or share rights. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” we have provided below the pro forma disclosures of the effect on net loss and loss per share as if SFAS 123 had been applied in measuring compensation expense for all periods presented.

The following information regarding pro forma net loss and net loss per share prepared in accordance with SFAS 123 has been determined as if we had accounted for our employee stock options and employee stock plan under the fair value method prescribed by SFAS 123. The resulting effect on net loss and net loss per share pursuant to SFAS 123 is not likely to be representative of the effects on net loss and loss per share pursuant to SFAS 123 in future periods, due to subsequent periods including additional grants and periods of vesting.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

For purposes of disclosures pursuant to SFAS 123 as amended by FAS 148, the estimated fair value of options is amortized to expense over the options’ vesting period.

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The following table illustrates the effect on reported net loss per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in thousands, except per share amounts):

The fair value of options was estimated at the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:

4. CRITICAL ACCOUNTING POLICIES

Use of Estimates

We have prepared our financial statements in conformity with generally accepted accounting principles in the United States, which requires management to make estimates and assumptions that effect the amounts reported in financial statement and accompanying notes. Actual results could differ from these estimates. Significant estimates made by us include those related to accounts receivable and inventory reserves.

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Revenue Recognition

We recognize revenue from two types of customers—end users and distributors. Revenue is recognized in accordance with Staff Accounting Bulletin 101, “Revenue Recognition in Financial Statements” when all of the following criteria are met: persuasive evidence of an agreement exists, shipment of the product has occurred and title of products transferred at the point of shipment, the payment for the product is reasonably assured and no substantive obligations to the customer remain. Customers are not entitled to rights of product return.

Inventories

Our inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in, first-out basis. Inventories are shown net of reserves for excess and obsolete inventory at the lower cost or market. We provide reserves for potential excess quantities and obsolescence as a result of technological advancements which impact inventories on hand.

Allowance for Doubtful Accounts

We establish estimates of the uncollectability of accounts receivable. Our management analyzes accounts receivable, historical write-offs as bad debts, customer concentrations, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. We maintain an allowance for doubtful accounts at an amount that we estimate to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on receivables. We have not experienced significant bad debt expense and our reserve for doubtful accounts of $87,000 should be adequate for any exposure to loss in our March 31, 2004 accounts receivable.

Allowance for Excess and Slow-Moving Inventory

Inventories, which are composed of purchased parts and subassemblies, work in process and finished goods, are valued at the lower of cost or market with cost being determined by the first-in, first-out method. We have analyzed the level of inventory on hand, its cost in relation to market value and estimated customer requirements to determine whether write-downs for excess or slow-moving inventory are required. Actual customer requirements in any future periods are inherently uncertain and thus may differ from estimates. If actual and or expected requirements were significantly greater or lower than the established reserves, a reduction or increase to the obsolescence allowance would be recorded in the period in which such a determination was made. We have established reserves for excess and slow-moving inventories and believe the reserve of $533,000 at March 31, 2004 is adequate.

Research and Development

Research and development costs, which include clinical and regulatory costs, are charged to expense as incurred.

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Stock Based Compensation

We have elected to follow Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our employee stock options, including Financial Accounting Standard Board Interpretation (“FIN”) 44 “Accounting for Certain Transactions Involving Stock Compensation.” Compensation expense is based on the difference, if any, between the fair value of the Company’s common stock and the exercise price of the option or share right on the measurement date, which is basically the date of the grant. This amount is recorded as “Deferred stock compensation” in the Balance Sheet and amortized as a charge to operations over the vesting period of the applicable options or share rights.

5. WARRANT EXERCISE

On March 17, 2004, we announced that all of the warrants that we issued on August 13, 2003, as well as a portion of the warrants issued on August 14 and August 18, 2003, had been exercised for a total of 4,144,839 shares of common stock. Warrant exercise prices ranged from $0.7282 to $0.8375 per share. We had issued a notice of redemption on October 10, 2003 in connection with our ele