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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-22419
 
CARDIMA, INC.
(Exact name of registrant as specified in its charter)
 
 DELAWARE
 94-3177883
 (State or other jurisdiction of incorporation or organization)
 (I.R.S. Employer Identification Number)
   
47266 BENICIA STREET, FREMONT, CALIFORNIA 94538-7330
 (Address of Principal Executive Offices)

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

Securities registered under Section 12(b) of the Exchange Act:
NONE

Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files.   Yes [ ] No [ ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s 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 definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]                                                                                                                 Accelerated Filer [ ]       
Non-accelerated filer [ ] (Do not check if a smaller reporting company)                                  Smaller reporting company[x]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 30, 2009 was approximately $13,379,000.

As of March 15, 2010, the Company had outstanding 143,971,034 shares of Common Stock, $0.001 par value.
 
 
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TABLE OF CONTENTS
 
PART I
 
Page No.
     
Item 1
Business
3
Item 1 A
Risk Factors
18
Item 1 B
Unresolved Staff Comments
28
Item 2
Properties
28
Item 3
Legal Proceedings
28
Item 4
Reserved
28
     
PART II
   
     
Item 5
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
Item 6
Selected Financial Data
31
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 7 A
Quantitative and Qualitative Disclosures about Market Risk
39
Item 8
Financial Statements and Supplementary Data
39
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
64
Item 9 A
Controls and Procedures
64
Item 9 B
Other Information
65
     
PART III
   
     
Item 10
Directors, Executive Officers and Corporate Governance
66
Item 11
Executive Compensation
69
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
72
Item 13
Certain Relationships and Related Transactions, and Director Independence
73
Item 14
Principal Accountant Fees and Services
74
     
PART IV
   
     
Item 15
Exhibits and Financial Statement Schedules
75
     
SIGNATURES
 
77

 
 
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FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These statements may use words such as "anticipate," "believe," "estimate," "expect," "intend," "predict," "project" and similar expressions as they relate to us or our management. Unless the context otherwise requires, references in this annual report to “we,” “us,” “our,” or the “Company” refer to Cardima, Inc. When we make forward-looking statements, we are basing them on our management's beliefs and assumptions, using information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in this annual report. Factors that can cause or contribute to these differences include those described under the headings "Risk Factors" and "Management Discussion and Analysis and Plan of Operation." If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. All subsequent written and oral forward-looking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors identified in this annual report, which would cause actual results to differ before making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this annual report or to conform these statements to actual results.
 
PART I

ITEM 1.    DESCRIPTION OF BUSINESS

Overview
 
Cardima® is a medical device company focused on the diagnosis and treatment of cardiac arrhythmias.  Arrhythmias develop from abnormal electrical currents within the heart, and can be associated with fast, slow and/or irregular heartbeats.  Most arrhythmias are symptomatic, and some are associated with significant morbidity and even mortality.  Our products have been developed for the diagnosis and treatment of the two most common forms of arrhythmias, atrial fibrillation (AF) and ventricular tachycardia (VT), with AF being of most of our clinical and commercial efforts.
 
Our products include the PATHFINDER® and REVELATION® Series of diagnostic catheters, the VUEPORT® and NAVIPORT® Series of guiding catheters, the INTELLITEMP® Energy Management Device and the Surgical Ablation System.  All of these devices have received CE mark approval and U.S. Food and Drug Administration (FDA) 510(k) clearance.  The REVELATION® Series of ablation catheters with the INTELLITEMP® EP Energy Management Device, developed for the treatment of atrial fibrillation (AF), has received CE mark approval and is marketed in Europe. Our INTELLITEMP device has also received Chinese State Food and Drug Administration (the “SFDA”) approval to market the device in the People’s Republic of China.

PATHFINDER®, TRACER™, VUEPORT®, NAVIPORT®, REVELATION® and INTELLITEMP® are our registered trademarks. Cardima CadenceTM XR and Cardima CadenceTM EPL are our trademarks.
 
The PATHFINDER Series of microcatheters are small, flexible wire based devices. Their unique design makes them the Go-To catheter for all difficult procedures when accessing and mapping in the coronary sinus. The linear ablation systems for EP and Surgical ablation deliver Controlled RF energy to create thin, continuous, linear, transmural lesions.

Normal Heart Rhythm
 
The heart is an electromechanical pump that relies on self-generated electrical signals to contract its muscle fibers and pump blood throughout the body. It is divided into four chambers.  The two upper chambers, or atria, receive blood from the lungs (LA) and body (RA), and the two lower chambers, or ventricles, pump blood to the lungs (RV) and body (LV).   On average the heart “beats” 72 times/minute.
  
The heart's pumping action is controlled by its electrical conduction system within the heart muscle tissue. This conduction system allows electrical signals to propagate through the heart in a systematic and very organized way. These specialized conduction cells are placed throughout the walls of the four chambers of the heart. In a systematically timed sequence, this conduction system carries electrical signals to the muscle cells throughout the heart. This electrical conduction cycle results in a normal heartbeat that originates in the right atrium, commencing in a specialized group of cells called the Sino-Atrial node.
 
The Sino-Atrial node is the heart's natural pacemaker, regularly discharging an electrical signal that is responsible for setting the heart rate.  The signal generated in the Sino Atrial node is propagated through the atrial tissue until it reaches the Atrio-Ventricular node, located just above the ventricles. A momentary delay of the signal provides enough time for the atria to fill the ventricles with blood before the ventricles are signaled to contract.
 
Once the electrical signal exits the Atrio-Ventricular node, it is rapidly conducted down the Bundle of His, a thin bundle of specialized cardiac muscle which conducts the electrical signals from the right atrium to the ventricles, and is distributed widely throughout both ventricles via the Purkinje Fibers, causing the ventricles to contract in unison. Since the ventricles pump blood to the lungs and the rest of the body, they consist of a much greater muscle mass than the atria.  The left ventricle, in particular, is the stronger of the two ventricles, generating higher pressure and working harder in order to pump oxygenated blood through the entire body.
 
 
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Arrhythmias

Arrhythmias adversely affect the mechanical activities of the heart, have detrimental physical effects and impair a person’s quality of life. Arrhythmias result in insufficient blood flow, which may cause dizziness, inadequate function of important organs in the body, stroke and even death. Arrhythmias have numerous causes, including congenital defects and tissue damage from either heart attacks or arteriosclerosis. There are two general types of arrhythmias: tachycardia, a fast resting heart rate, and bradycardia, a slow resting heart rate.  Tachycardias fall into one of two major categories: (i) atrial tachycardia, which has its origin in the atria and (ii) ventricular tachycardia, which has its origin in the wall of the ventricles.  Many arrhythmias worsen over time.
 
Atrial Fibrillation

Atrial fibrillation, the most common form of atrial tachycardia, is characterized by the irregular fluttering and/or very rapid beating of the atria resulting from malfunctioning of the electrical conduction system in the walls of the atria. During AF the regular pumping action of the atria is replaced by irregular, disorganized and quivering spasms of atrial muscle tissue. Symptoms of AF typically include a rapid and irregular heartbeat, palpitations, discomfort and dizziness. This malfunction results in the failure of the atria to fill the ventricles completely and, consequently, the failure of the heart to pump adequate amounts of blood to the body. Once AF becomes symptomatic, it is typically associated with significant morbidity related to reduced blood flow. Often the greatest concern is that the reduced atrial contraction can lead to blood pooling in the atria and cause the formation of blood clots.  Blood clots in the left atrium can dislodge and travel through the bloodstream to the brain, resulting in stroke or even death.
 
According to the European Heart Journal Supplements (2008), AF is the most common cardiac arrhythmia in clinical practice, with over 3 million cases in the US and 4.5 million in Europe. Its incidence is rising rapidly, and the number of individuals with AF is expected to triple or even quadruple between now and 2050. The majority of patients with AF are elderly and 83% are aged over 65 years.
  
Traditional AF treatments are primarily supportive and palliative and do not cure AF. The most common are anti-arrhythmic and anticoagulant drugs. Anti-arrhythmic drugs are typically used in an attempt to reduce the number of episodes of AF and/or to reduce the duration of each individual episode. Anti-coagulants are used to reduce the normal clotting mechanism of the blood, therefore reducing the potential of creating blood clots and thus strokes.  Anti-arrhythmic drug therapy often becomes less effective over time, with approximately half of the patients developing resistance to the drugs. In addition, anti-arrhythmic drugs have potentially severe side effects including pulmonary fibrosis, impaired liver function, thyroid problems and the development of worse and even life-threatening ventricular arrhythmias.

Another palliative procedure for AF is external cardioversion, or the application of a strong electrical current using an external defibrillator to attempt to shock the heart back into normal sinus rhythm. This treatment only affects a single episode of AF.  Another treatment is the deliberate destruction of the atrio-ventricular node and subsequent implantation of a pacemaker. This is typically considered a treatment of last resort for AF patients as it does not cure or treat the AF itself, but rather allows rate control of the ventricles. The patient still has AF. Also, the patient is dependent on the pacemaker for life. Pacemakers are a device implanted into the chest, are battery-powered and typically require replacement approximately every seven to ten years.  Patients with pacemakers are usually required to continue with chronic anticoagulant drug therapy to prevent clotting. Anticoagulant therapy carries the risk of bleeding, including fatal brain hemorrhaging.

The only curative therapy for AF used today is an open-heart operation commonly known as the surgical "maze" procedure. The maze procedure is usually done concomitantly with another heart procedure such as a valve replacement or coronary artery bypass. The surgeon makes a series of cuts in a specific “maze-like” formation through the wall of the atrium with a scalpel, and then sutures these cuts back together. The scars that result re-direct and contain the chaotic electrical impulses, and channel the electrical signal emanating from the Sino-Atrial node, thereby returning the heart to normal sinus rhythm. This open-heart operation is traumatic to the patient, is very expensive, is associated with long hospital stays and may require a three to six month recovery time. Although this approach is not commonly used because it is limited to AF patients who also have some other surgical need, it is generally considered highly effective in controlling AF.

For almost two decades thought leaders in electrophysiology and cardiac surgery have worked to develop less invasive catheter approaches to cause scarring in the heart which would treat AF as successfully as the surgical Maze.  Various energy sources have been evaluated, and various “lesion sets” in or on the heart have been tested. The most successful results to date are obtained when most or all of the Cox-Maze lesions are recreated. 

If a catheter procedure is to successfully mimic the maze procedure, it is necessary to make various shaped lines, including straight, curvilinear and circumferential lesions.  These lesions need to have adequate depth into atrial tissue, and be contiguous, leaving no gaps. Therefore we developed the REVELATION Tx, REVELATION T-Flex and REVELATION Helix respectively, to mimic these required shapes and create deep, effective lesions. Cardima’s ablation systems for both inside and on top of the heart accomplish these goals. We are also in the process of developing the next generation of these catheters, i.e., the Cardima Cadence EPL, which we plan to initiate small trials in late 2010.
 
 
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Ventricular Tachycardia

Ventricular tachycardia is a life-threatening condition in which heartbeats are improperly initiated from within the ventricular wall, bypassing the heart's normal conduction system. A typical VT patient has experienced a myocardial infarction, or heart attack, resulting in the formation of a ventricular scar and electrical instability.  During episodes of VT, the ventricles beat at such an abnormally rapid rate that they are unable to fill completely with blood, thus reducing the amount of oxygenated blood being pumped throughout the body. The resulting reduction in the amount of oxygen transported to the tissues and organs of the body can cause dizziness and loss of consciousness. VT can often progress into ventricular fibrillation, an extremely irregular, chaotic and ineffective spasming of the ventricles, resulting in sudden death.
 
Limitations of Current Catheter-Based Diagnosis and Therapy
 
The potential medical benefits and cost efficiency of minimally invasive procedures have encouraged electro-physiologists and surgeons to seek new, minimally invasive techniques for the diagnosis and treatment of arrhythmias. In the case of AF, electro-physiologists have experimented with a  technique, often referred to as the "drag and burn procedure," in which conventional radio frequency tip ablation catheters are dragged across the inside surface of an atrium in an attempt to replicate a linear lesion similar to the surgical maze procedure. Creating continuous, linear, trans-mural lesions to isolate portions of the atria using standard tip catheters can be time consuming and difficult.
 
We maintain that the disadvantages of existing catheter-based approaches to treat AF are attributable not to the minimally invasive approach of the procedure, but rather to the existing catheter technology. The catheters currently used are larger and stiffer than our products and most have a single electrode at the end of the catheter designed to create an ablation at the tip only. This single electrode catheter approach makes creating a solid or continuous line of scar lesion difficult.
 
Cardima’s Micro-catheter System Solution for Electrophysiologists
 
We believe our micro-catheter-based systems have the potential to offer the effectiveness of the open-heart surgical cure for AF (the “maze” procedure) but with less trauma, fewer complications, reduced pain, shorter hospital stays and lower procedure costs. In our quest to achieve those goals, we have designed micro-catheter systems that we believe provide more extensive and safe access to the arrhythmia-causing tissue.   All of our micro-catheter systems are designed to offer the following perceived advantages over existing, competitive catheters:
 
· Minimally invasive approach. Our micro-catheter systems are designed to provide greater access simply because they are smaller and more flexible than competitive technologies. Size constraints prevent other EP systems from reaching some small vessels that our micro-catheters can reach.  Our smaller surgical systems allow for easy port access into the chest and on top of the heart. We believe that this increased access results in decreased procedure time, shorter hospital stays, lower procedure costs and fewer complications than the procedures currently in use.
 
· Single micro-catheter that can both map and ablate. We initially developed micro-catheters for diagnosing arrhythmias. Our focus today is the refinement of therapeutic micro-catheters, which we call the REVELATION series of micro-catheters, capable of both mapping and ablating. Because our micro-catheter systems can both map and ablate, we believe that it will be able to decrease procedure times, improve treatment outcomes and enhance the overall safety of the procedure.  Cardima is launching multicenter EP clinical studies in Europe and in the US.  There will also be a focus on market awareness and development through seminars, tradeshows, and site visits.
 
· Enhanced access to the vasculature of the heart. Our micro-catheters are approximately one-third to one-fourth the size of standard electrophysiology catheters, and incorporate what is called variable stiffness technology. Variable stiffness technology involves our use of a tapered core guide wire as the basic building block of each catheter. We then attach a highly flexible, atraumatic tip to the leading end of each catheter. As a result of this variable stiffness technology, our micro-catheters are more torqueable and flexible than standard electrophysiology catheters and thus allow more extensive and less traumatic access to the vasculature of the heart. This variable stiffness technology also allows for our REVELATION series of mapping and ablation catheters to conform to the contours of the heart wall, with the goal of maintaining controlled, regular contact even in a fast-beating heart.
 
· Less tissue damage at safer power setting. Because our REVELATION series ablation catheters are smaller, we create thinner lesion lines while maintaining adequate depth of tissue penetration. This significant reduction in surface tissue damage may be important in lesion formation in and around the pulmonary veins where pulmonary vein stenosis, (or the narrowing of the lumen of the pulmonary veins) after conventional ablation therapy is an issue.  Our catheters also can create these lesions at lower power settings because of the effect of current density emitted from our smaller coiled electrodes. We believe that lower power has the potential to preserve more cardiac tissue and therefore more cardiac function when compared to conventional ablation.
 
· Reduced procedure and radiation exposure times. We believe that the dual functionality of our micro-catheter systems has the potential to reduce procedure times and enhance safety. Since the electro-physiologists must use x-rays to place and determine location of all catheters, faster procedures equate to decreased cumulative x-ray exposure to patients, physicians and lab personnel.
 
 
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Cardima’s Surgical Ablation System- A Solution for Cardiothoracic Surgeons
 
 Cardiothoracic surgeons continue to search for better options to treat atrial fibrillation. As the number of patients with AF increases, Cardima has an opportunity to capture increased market share.  The features and benefits of the Surgical Ablation System include physician control, patient feedback, increased safety, and reduced procedure time and length of stay for the patient. Since the first quarter of 2008, we had a limited market release of our surgical ablation system, which is based on the EP technology that has been used in over 450 documented clinical cases.  As of this writing, over 100 surgical ablations have been performed using the Cardima Surgical Ablation Probe. This probe can be used in both concomitant (in conjunction with another open-heart procedure) and minimally invasive, (port approach) stand-alone procedures.

· Physician Control. The Cardima Surgical System allows the physician to choose ablation length, ablation time, lesion shape and placement. The tight-wound coil design of our surgical probe allows for more efficient delivery of energy at higher operating temperatures than is available in competitive devices.

· Physician Feedback. Our system is also unique in the fact that it gives feedback directly to the user.  Tissue temperature is monitored by two thermocouples adjacent to each ablating electrode.  The thermocouples give direct feedback on the temperature of the tissue surface that is being ablated. It is this temperature feedback mechanism that allows the Intellitemp™ to control the delivery of power to each individual electrode resulting in more efficient delivery of therapeutic energy. There is also a temperature safety limit that is settable providing the surgeon with confidence in the safety of the device.  This temperature safety limit allows for an automatic shut off of the device so as not to cause any charring.  Charring leaves a “blackened” area which can result in the inability of RF energy to penetrate and achieve lesion formation. 

Contact is also crucial to optimal lesion formation.  The Cardima Surgical Ablation Probe uses suction and irrigation to enhance probe to tissue contact. Additionally, our Surgical System provides impedance feedback for each electrode activated.  Through this impedance feedback mechanism, the surgeon is aware when there is less than optimal contact with the tissue.  These readings allow the surgeon to reposition the probe as needed to maintain contact throughout the ablation.

· Safer Power Settings and Feedback to the Physician. Because the Surgical Probes are constructed with the same material and process as the EP catheters, we create thinner lesion lines while maintaining depth of tissue penetration. This reduction in surface tissue damage may be important in lesion formation around the pulmonary veins where pulmonary vein stenosis, (a common complication with older EP procedures) can occur after conventional ablation therapy. Our system also creates these lesions at lower power settings because of the effect of higher current density emitted from our smaller coiled electrodes.  We believe that lower power can potentially preserve more cardiac tissue and therefore more cardiac function when compared to conventional ablation.  The user receives feedback from the system on how much power (W) is being emitted by each electrode.

· Added Patient Safety.   Our Surgical Ablation systems feedback provides for additional patient safety.  Additionally a protective shield around the electrodes ensures only tissue in contact with the electrodes as selected by the surgeon will be ablated.  The surrounding tissue is shielded, therefore eliminating inadvertent ablation of non-cardiac tissue.

· Reduced procedure time and hospital stay for the patient. We believe that the procedure performed through two ports using a scope to visualize the access can potentially reduce procedure time for the patient and makes this a viable procedure for more patients who would not normally be able to have an open chest procedure.  The heart does not have to be arrested and the patient can go home after being monitored over night in the short stay unit.

REVELATION and Cardima Cadence EPL Catheters

Our REVELATION Series micro-catheter systems are designed to diagnose AF and for the ablation of cardiac tissue by creating long, thin, continuous, linear, transmural lesions. The REVELATION T-Flex, with an atraumatic ball-tip, available with 8 or 16 electrodes, received CE Mark approval in June 2005. Our REVELATION Helix micro-catheter system is designed to diagnose and treat AF that originates from the pulmonary veins, located in the left atria. The REVELATION Helix can both diagnose and treat focal, or localized, AF. The REVELATION Helix makes circumferential or partially circumferential scar patterns within the pulmonary veins, on the ostia or outer base of the pulmonary veins, and on the outside wall where the pulmonary veins enter the atria in order to contain AF causing signals. The REVELATION Helix STX received CE Mark approval in the European Union from its European Notified Body Rheinisch Westphaelischer Technischer Ueberwachungsverein e.V., (RWTUV) in 2003 to treat AF originating in the pulmonary veins. We are developing our next generation of Cardima Cadence EPL catheters, which we plan to initiate small trials in late 2010.
 
 
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Curative Approach for Ventricular Tachycardia

Our PATHFINDER and PATHFINDER mini diagnostic micro-catheter systems for mapping VT are all designed for use inside the vasculature of the heart wall, facilitating access to arrhythmia-causing tissue through the venous system. We believe that at least half of the VT foci are located in the intramyocardium and the epicardium, areas that are ineffectively accessed using standard endocardial catheters or basket type catheters currently in development. The intravascular approach to VT ablation should permit our micro-catheters to be positioned in close proximity to the arrhythmia-causing tissue, facilitating the creation of smaller, more focused lesions. We believe that this approach has the potential to be more effective than standard endocardial ablation procedures, with reduced destruction of surrounding healthy tissue, thus maximizing and optimizing the normal function of the heart after the procedure. We also believe that the smaller catheter sizes of our ventricular systems may be particularly appealing to the pediatric market. We are aware of at least one other epicardial mapping catheter in addition to the PATHFINDER and PATHFINDER mini. We have temporary decided to focus our efforts on our AF program and postpone our work on the therapeutic VT program. These products are currently used to help localize placement of bi-ventricular pacing leads via CS access. 
 
Our Business Strategy
 
Our objective is to develop innovative products that provide safer and more effective diagnosis of AF and the Controlled RF Surgical Ablation System for the ablation of cardiac tissue. We aim to commercialize all of our REVELATION and the next generation Cardima Cadence series of ablation products for the treatment of AF in the electrophysiology market and to deliver a Controlled RF Surgical Ablation System to Cardiothoracic surgeons.
 
Our Controlled RF Surgical Ablation System, a micro-catheter-based surgical probe coupled with the INTELLITEMP, an RF energy management device, received 510(k) clearance for use in the United States in January 2003. In June 2008, we have also received the SFDA approval to market the device in the People’s Republic of China. The FDA also awarded 510(k) clearance in May 2006 for a longer version of the surgical probe having an integrated stabilization sheath.
 
Our strategy incorporates the following key elements:
 
· Seek funding necessary to continue operations. Due to our limited cash resources, we plan to continue to seek additional funding. There can be no assurance that we will receive additional funding or that funding can be obtained on terms that are reasonable and acceptable to us.

· Continue Market Launch and Clinical Studies. We are launching the technology on several fronts.  In the US, our partnership with other companies and distributors who have close relationships with Cardiothoracic surgeons will be leveraged to initiate market development of the Surgical Ablation System.  We intend to penetrate the market by selecting key sites and developing them into Centers of Excellence (“COE”).  Once the COE are established, we will be able to penetrate the market with post-approval data, symposia presentations, major meeting/tradeshow strategies, and a registry database. In 2008, we achieved our objective and established regional COE. These centers will train new surgeons as we continue the launch of our Surgical Program. We will continue to present at symposia and major meetings/tradeshows to establish our clinical excellence in the Electrophysiology Field.  Multi-center clinical studies are expected to begin in the UK and Germany followed by the US.  The additional data gained from these studies will assist in achieving FDA/PMA approval for the EP Ablation System.  We will also be launching our technology in China, Thailand, Russia and Australia.  We anticipate that funds will be needed to develop new markets, penetrate existing markets, and continue clinical studies world-wide. There can be no assurance that we will receive additional funding or that funding can be obtained on terms that are reasonable and acceptable to us.

·Enhance micro-catheter technology to address unmet clinical needs for both mapping and ablation. We are refining our micro-catheter systems to address new clinical needs by enhancing current technology and developing new technology for endocardial access and a treatment for AF.

· Provide micro-catheter systems that lower the cost of treating electrophysiological disorders. Our micro-catheter systems are designed to reduce the average time required for AF and the diagnostic and therapeutic procedures for VT. As a result, less time should be spent in high cost electrophysiology laboratories, reducing the overall cost of AF or VT treatments. The shorter procedure time that we believe will result from the use of our micro-catheter systems should enable physicians to perform a greater number of AF or VT procedures and reduce the overall cost per procedure. In addition, we intend to use data derived from our clinical studies to establish enhanced reimbursement for AF and VT procedures using our micro-catheter systems. We believe that our micro-catheter systems will appeal to patients and third-party payers seeking a cost-effective solution to the diagnosis and treatment of AF and VT.
 
 
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· Provide Surgical Ablation System that lowers the cost of surgical ablation. Our Surgical Ablation System is designed to reduce the average time required for cardiac tissue ablation. As a result, less time should be spent in high cost operating rooms, and post procedure hospital stay.  We believe that the shorter procedure time will result in the physicians being able to perform a greater number of procedures and reduce the overall cost per procedure. In addition, we intend to use data derived from our post market data to establish enhanced reimbursement.  We believe that our Surgical Ablation System will appeal to patients and third-party payers seeking a cost-effective solution.
 
· Accelerate acceptance and adoption of our Ablation Systems by leading physicians.  We have formed relationships with leading physicians and medical centers in the United States, Europe, China, Thailand and Japan.  We believe that successful acceptance and adoption of these systems by widely recognized experts in the field of electrophysiology and cardiac surgery is an important step in the overall market acceptance of our Systems. We intend to continue to work with leading physicians and medical centers to demonstrate the safety and effectiveness.  We hope this will allow us to establish broad market acceptance of our products.  In addition, we intend to accelerate physician education through additional training with our clinical investigators and peer-reviewed publications.
 
Products
 
We are currently focused on market development of the micro-catheter systems for the diagnosis of AF and the Controlled RF Surgical Ablation System for the ablation of cardiac tissue. These systems are designed to access both the right and left atria.
 
Our micro-catheter systems are designed to be used in both endocardially and epicardially on the atria, to diagnose and to replicate the surgical maze procedure through the creation of long, thin, continuous, linear, lesions. The series of electrodes at the distal end of each micro-catheter, depending on the particular product, may both receive electrical signals for mapping, and, emit radio frequency energy for ablation. In addition, these micro-catheter systems are smaller in diameter and are designed to be more flexible than other existing electrophysiology catheters, providing thinner, continuous linear lesions, and therefore cause less destruction of tissue. Our micro-catheters are single use, disposable products. We are designing our EP products to be used with existing electrophysiology recording systems and radio frequency ablation generators. Our ancillary products, including guiding catheters, electrical switch boxes and connecting cables, support these micro-catheter systems.
 
Our Surgical Ablation System is a CONTROLLED RF delivery system.  As described previously, our management believes that user control, user feedback, and added patient safety along with our patented technology make it stand out from the competition.  The Probes incorporate irrigation, suction, and illumination.  This aids placement and lesion depth.  The small, flexible, design offers sole port-hole access, potentially decreasing procedure time, patient hospital stay, and patient discomfort. 
 
 
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The following table describes our current products and their intended indications and regulatory status:
 
Therapeutic Products
 
Description
 
Indication
 
U.S. Regulatory Status(1)
 
International
Regulatory Status(1)
REVELATION
Mapping Catheter 
 
Eight-electrode micro-catheter designed to map in both right and left atria.
 
 
 
Mapping
 
510(k) (2) clearance obtained.
 
 
 
 
Approved in the European Economic Area (CE Mark) (3) and Canada.
 
 
                 
REVELATION Tx
 
Guidewire based eight-electrode micro-catheter system with tissue temperature sensors designed to map and create long, thin, continuous, linear, transmural lesions in the atrium.
 
Mapping and Ablation
 
No immediate plans
 
Approved in the European Economic Area (CE Mark) and Canada
                 
REVELATION T-Flex
 
Deflectable and steerable eight-and sixteen-electrode micro-catheter system with temperature sensors designed to map and create long, thin, continuous, linear, transmural lesions in the right atrium.
 
Mapping and Ablation
 
Seeking FDA approval to treat AF.  Currently in study trial design development.
 
Approved in the European Economic Area (CE Mark) and Canada
                 
REVELATION Helix
 
Helical shaped guide-wire eight-electrode micro-catheter system with temperature sensors designed to map and create circumferential, focal linear lesions in the pulmonary vein ostia of the left atrium.
 
Mapping and Ablation
 
No immediate plans
 
 
Approved in the European Economic Area (CE Mark)
                 
REVELATION Helix STX   Helical shaped guide-wire 16 -electrode micro-catheter system with temperature sensors and designed to map and create circumferential, focal linear lesions in larger pulmonary vein ostia of the left atrium.   Pacing Mapping and Ablation   No immediate plans    
                 
Surgical Ablation
System
  Single use Cardima Surgical Ablation Probe with INTELLITEMP Radio Frequency(RF) Energy Management Device   Ablation using radiofrequency energy   510(k) clearance obtained.   Probe is approved in European Economic Area (CE Mark), Thailand
                 
INTELLITEMP
and INTELLITEMP EP Radio Frequency (RF) Energy Management Device
  Radio frequency energy management device           Approved in European Economic Area (CE Mark), China
                 
Diagnostic Products
               
PATHFINDER
 
Guide-wire based multi-electrode micro-catheter system designed for accessing coronary sinus vasculature to locate arrhythmia-causing tissue.
 
Mapping
 
510(k) clearance obtained.
 
Approved in the European Economic Area (CE Mark) Canada, Thailand and Japan
                 
PATHFINDER mini
 
 
 
 
 
 
Smallest Cardima PATHFINDER® micro-catheter (1.5 French) designed to provide access to more distal and smaller coronary veins
 
 
 
Mapping
 
510(k) clearance obtained.
 
Approved in the European Economic Area (CE Mark), Japan, Thailand and Canada
 

(1)  The regulatory status of our micro-catheter systems reflects our current status of regulatory submission or approvals in the United States, Europe, Japan, China and Thailand. See “—Government Regulation.” The actual submission times could differ materially from those anticipated in these estimates as a result of certain factors, including failure to complete development of micro-catheter systems or to demonstrate safety or effectiveness in clinical studies, as well as the other factors set forth under our “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors Affecting Future Results” and elsewhere in this Annual Report on Form 10-K.
 
 
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(2)  510(k) clearance is granted when a product has been found by the Food and Drug Administration to be substantially equivalent to other similar and legally marketed devices and receives clearance for commercial distribution. A 510(k) product usually requires less time to receive FDA approval to market than a Class III PMA device.
 
(3)  CE Mark means that a medical device is in substantial compliance with provisions set forth under the jurisdiction of the Medical Device Directive 93/42/EC and national derivatives in any European Member State. The affixed CE Mark allows commercial distribution throughout the European Economic Area.
 
(4)  An Investigational Device Exemption (IDE) is issued by the U.S. FDA to study the safety and effectiveness of an unapproved investigational device in humans. Approval to begin an IDE study is issued if the U.S. Food and Drug Administration concludes that the device potentially offers benefits for public health that outweigh the identified risk(s).
 
(5)  Premarket Approval (PMA) is the most stringent type of device marketing application required by FDA. A PMA application is submitted to FDA to request approval to market, or to continue to market, a Class III medical device. Unlike pre-market notification, PMA approval is based on a determination by FDA that the PMA application contains sufficient valid scientific evidence that provides reasonable assurance that the device is safe and effective for its intended use(s).
 
In addition to the major products listed above, our other support products include VENAPORT, VUEPORT, and NAVIPORT.

Japanese Diagnostic Market

In the first quarter of 2007, our Japanese distributor notified us of its failure to maintain the legal documentation standard required to sell our PATHFINDER in Japan, which resulted in no sales of our products in 2008 until December 2009. In December 2009, we received regulatory approval to re-enter the Japanese market with our family of guidewire-based, PATHFINDER diagnostic micro-mapping catheters.  Our PATHFINDER catheters, which are designed for accessing and mapping the smallest and most tortuous vasculature of the heart wall to facilitate treatment of arrhythmias, will be marketed in Japan though an exclusive agreement with medical device, distributor Japan Lifeline Co. Ltd., a sub-distributor of Robert Reid Inc., our logistics and regulatory partner in that country.  We believe that the Japanese market for diagnostic catheters is robust and we have resumed shipments of our PATHFINDER products to Japan in December 2009. We believe that Japan Lifeline is an ideal marketing partner for our diagnostic line of products as they have a significant presence in Japan’s electrophysiology market and sales representatives with established relationships with key physicians and clinical centers nationwide.

Our PATHFINDER diagnostic mapping catheters are currently approved for marketing in the U.S., Europe, Canada and Thailand.

Surgical Ablation System – U.S.

We are training a number of cardiothoracic surgeons at leading U.S. medical centers on the use of our Surgical Ablation System (“SAS”).  Our training program focuses on establishing commercial centers with some designated as regional training centers to facilitate additional training of surgeons.  Certain centers also will collect registry data to track product performance and safety.  Dr. Li Poa, a pioneer in minimally invasive thoracoscopic atrial ablation and long-time user of the Cardima SAS, recently performed his first case at Kaiser Permanente Hospital – Sunset in Los Angeles.  The SAS performed well and the probe was well received by other surgeons and electrophysiologists (“EPs”) in attendance.  Additionally, several leading U.S. surgeons are planning clinical studies using the Cardima Surgical Ablation System.

Surgical Ablation System – Europe

We had launched surgical programs in the fourth quarter of 2009 at hospitals affiliated with select leading European cardiac surgeons who have extensive experience in the surgical treatment of AF.  These programs highlight the benefits and advantages of our Surgical Ablation System over competing products for European physicians, patients and hospitals.  A European surgical study using our Surgical Ablation System is also planned.

Surgical Ablation System – Thailand

We have completed the first stage of surgeon training on our Surgical Ablation System at the Ramathibodhi Hospital, a large public and teaching hospital in Bangkok.  Ramathibodhi Hospital is preparing to launch its AF Center of Excellence utilizing our Surgical Ablation System.  This Center of Excellence will be promoted in Thailand, as well as more broadly throughout Asia.  We also expect to begin training surgeons at one of Thailand’s leading private and tourist medicine cardiac centers, Bangkok Heart Hospital.  Thailand is known as a significant “tourist medicine” market and our move into the private market in Thailand are expected to commence in 2010.
 
 
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Surgical Ablation System – China

We expect to receive marketing approval for our Surgical Ablation System in China in 2010, acknowledging the approval is outside of our control.  We have established relationships with leading physicians at cardiac centers involved in the treatment of AF to facilitate market entry, subject to marketing approval.  Some of these physicians also are attached to academic teaching hospitals, and clinical studies with our Surgical Ablation System are being actively considered in the Chinese market.

Surgical Ablation System – Regulatory and Clinical

We are actively considering entering additional markets with our Surgical Ablation System, including Australia, Russia and several European markets.  A decision to enter these markets is dependent on regulatory approvals, and an assessment of the individual market’s potential and the resources available to us.

EP Ablation System

As part of our regulatory and commercial strategy in the electrophysiology ablation market, we maintain contact with several leading EPs around the world.  We are in regular dialogue with these leading EPs, getting their input and feedback on the clinical performance of our EP Ablation System and regulatory strategy.

We concluded in early 2009 that an opportunity existed to significantly improve our existing EP Ablation System with the key objective of marketing a system with a significantly higher clinical success rate from a single ablation procedure compared with existing commercial products.  We elected to implement and clinically validate product improvements prior to a wide commercial launch of the EP Ablation System in Europe and the filing of a premarket approval application with the U.S. FDA.

We have made significant advances and are currently validating and clinically evaluating our next generation EP ablation system, the Cardima Cadence EPL.  We expect that EPs will benefit from the new Cardima Cadence EPL’s improved power delivery, temperature feedback, tissue temperature stability, tissue contact, deflection characteristics and ease of catheter manipulation, as well as shorten total procedure times and improved formation of critical target lesions.

Based on the performance of the new Cardima Cadence EPL in studies to date, we are considering seeking regulatory approvals for a range of clinical indications that can benefit from linear, deep and contiguous lesions, including AF and atrial flutter.  We are planning an aggressive regulatory strategy focused on seeking CE Mark approval for marketing the Cardima Cadence EPL in the European Union in 2011, a PMA filing with the FDA for the treatment of AF in the second half of 2011, an updated filing for China that incorporates product modifications, and potentially seeking approvals in additional global markets, like Thailand, Australia and Russia.

New Energy Management Device

We are developing an entirely new and updated energy management device to improve both the Surgical Ablation System and EP Ablations System.  Clinical studies with this new unit are scheduled to begin in the later part of 2010 and, following clinical evaluation, the new unit will be validated for sale in Europe and the U.S in the later part of 2011.  This new unit will incorporate its own radiofrequency (“RF”) energy source and is expected to offer significant benefits in terms of improved power delivery and stability over our current INTELLITEMP, which relies on a third-party RF generator.  Commercial sale and use of this new unit in each market will be entirely dependent upon receipt of the applicable regulatory approvals.
 
Manufacturing

We fabricate certain proprietary components of our products and assemble, inspect, test and package most into finished products. Designing and manufacturing our products from raw materials allows us to maintain greater control of quality, cost, and the ability to limit outside access to our proprietary technology. Cardima is certified to the exacting standards of the ISO 13485 Quality System Management requirement for Medical Devices.

We believe our custom-designed, proprietary processing equipment and lean tool techniques are important components of our manufacturing strategy.  Our technological expertise includes, but is not limited to, plastics extrusion, braiding, precision coil winding, materials surface preparation, electronics, machining, and hydrophilic coating applications.

 As we receive approval from regulatory agencies to market our products, we may need to expend significant capital resources and develop additional manufacturing capacity to establish large-scale manufacturing capabilities. Other challenges include supplier based management, inventory supplies, and an adequately trained employee pool, which could have a material adverse effect on our ability to manufacture products and therefore on our business, financial condition and ability to test or market our products on a timely basis.
 
Our manufacturing facilities and operations are subject to periodic inspection from various domestic and international regulatory authorities, and must meet various Quality Management System (QMS) compliance inspections, before we can market our products. We have obtained ISO 13485 Quality Systems certification from TUV Nord and have maintained the right to affix the CE Mark to certain electrophysiology mapping and ablation catheters and accessories as well as electrosurgical units. In 2008, we successfully passed various federal, state, and international Quality System inspections, including an ISO 13485 compliance inspection conducted by applicable regulatory agencies. Though successful in these inspections, there can be no assurance that our manufacturing facilities will continue to meet such compliance audits and maintain such compliance standards. See "Government Regulation."
 
 
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Patents and Proprietary Rights

Our success will depend in part on our ability to obtain patent and copyright protection for our products and processes, to preserve our trade secrets and to operate without infringing or violating the proprietary rights of third parties. Our strategy is to actively pursue patent protection in the United States and key foreign jurisdictions for technology we believe to be proprietary and which offers a potential competitive advantage for our products. We have filed and intend to continue to file patent applications, both in the United States and selected international markets, to seek protection for proprietary aspects of our technology. We also license intellectual property from commercial entities to obtain the rights to technology that is required for our research, development and commercialization activities.

As of December 31, 2009, we are the assignee to 26 issued United States patents and 8 pending United States patent applications. We also have 20 patents in major international markets that have been validated or granted, and 6 pending foreign applications.

One of our key patents was awarded to us in 2007 from the U.S. Patent and Trademark Office for the INTELLITEMP Energy Management Device.  This device is used to control the delivery of radiofrequency (RF) energy during ablation procedures in the EP and surgical markets.  The feedback system incorporates both temperature and impedance from CARDIMA’s full line of ablation microcatheters and surgical probes.  This patent reinforces the uniqueness of the INTELLITEMP’s modular architecture that controls RF energy delivery to any combination of up to 8 electrodes simultaneously along a linear ablation catheter or surgical probe.  In comparison to standard “drag and burn” ablation technologies, simultaneous ablation through multiple electrodes of our linear ablation catheter or surgical probe controlled by the INTELLITEMP shortens procedure time.  Furthermore, this process safely creates clean lesions that have penetrating depth, with no gaps along the linear trajectory.  The INTELLITEMP is marketed in the USA as part of the CARDIMA Surgical Ablation System, and CE Marked in the EU for both surgical and electrophysiology ablation applications.


In addition to patents and licenses, we also rely upon trade secrets, technical know-how and continuing technical innovation to develop and maintain our competitive position. We typically require our employees, consultants, and advisors to execute confidentiality and assignment of invention agreements in connection with their employment, consulting or advisory relationships with us. There can be no assurance, however, that the agreements will not be breached or that we will have adequate remedies for any breach. Furthermore, no assurance can be given that competitors will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary knowledge, or that we can meaningfully protect our rights in unpatented proprietary technology.

Competition

We believe our primary competitors to be large companies who are engaged in the development and marketing of existing catheter technology. Their treatments include drugs, external electrical cardioversion and defibrillation, implantable defibrillators, open-heart surgery and purposeful destruction of the atrio-ventricular node, followed by implantation of a pacemaker. Several competitors are also developing new approaches and new products for the mapping and ablation of AF and VT. These approaches include mapping systems using contact mapping, single-point spatial mapping and non-contact, multi-site electrical mapping technologies and ablation systems using ultrasound, microwave, laser and cryoablation technologies. In addition, companies are developing surgical procedures that could potentially be used by physicians to perform the surgical maze procedure in a minimally invasive manner. If any of these new approaches or new products proves to be safe and effective, our products could be rendered non-competitive or obsolete, which could have a material adverse effect on our business, financial condition and results of operations.

Many of our competitors have an established presence in the field of interventional cardiology and/or electrophysiology, including Boston Scientific, C.R. Bard, Inc., St. Jude Medical, Inc. (through its Daig Division), Johnson & Johnson/Biosense Webster, and Medtronic, Inc. These competitors have substantially greater financial and other resources than we do, including larger research and development staffs and more experience and greater capabilities in conducting research and development activities, testing products in clinical trials, obtaining regulatory approvals, and manufacturing, marketing and distributing products.
 
 
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Other companies are developing proprietary systems for the diagnosis of cardiac arrhythmias including Ablation Frontiers, Biosense Webster, Inc., a division of Johnson & Johnson; Cardiac Pathways, Inc. and EP Technologies, divisions of Boston Scientific; and Endocardial Solutions, Inc., a subsidiary of St. Jude Medical, Inc. Other companies develop, market and sell alternative approaches to the treatment of AF and VT, including Guidant, Medtronic, Inc., and St. Jude Medical, Inc., which manufacture implantable defibrillators. There can be no assurance that we will succeed in developing and marketing technologies and products that are more clinically effective and cost-effective than the current treatments, or the new approaches and products being developed and marketed by our competitors. Furthermore, there can be no assurance that we will succeed in developing new technologies and products that are available prior to our competitors' products. Our failure to demonstrate the competitive advantages of our products continues to have a material adverse effect on our business, financial condition and results of operations.

In the market for cardiac mapping and ablation devices, we believe that the primary competitive factors are safety, clinical effectiveness, ease of use and overall cost to the health care system. In addition, the length of time required for products to be developed and to receive regulatory and, in some cases, reimbursement approval is an important competitive factor. The medical device industry is characterized by rapid and significant technological change. Accordingly, our success will depend in part on our ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development involves a high degree of risk and there can be no assurance that our new product development efforts will result in any commercially successful products. We believe our products that have received regulatory approvals compete with respect to these factors, although there is no assurance that we will be able to continue to do so. Our other products’ competitiveness will depend on further regulatory approvals, which are inherently uncertain.

In the surgical market, we believe we have advanced technology above and beyond our competition.  However, because our competition has been available for a longer period of time, and has an advantage in sales & marketing resources, Cardima will need to overcome manpower and financial hurdles to penetrate the market.  In the surgical market, patient safety, time, and results are driving market approval/penetration.  We believe our competitors lack the technology to continue market penetration once Cardima has established centers of excellence, developed peer-to-peer training, and has post market data to present at key meetings and symposia.  The major competitors include Atricure, Boston Scientific, Medtronic and Estech. Again, whether they use RF, unipolar or bipolar, or laser energy, we believe they are unable to match the features and benefits of the Cardima Surgical Ablation System.
 
Government Regulation

The pre-clinical and clinical testing, manufacturing, labeling, marketing and distribution of our products are subject to extensive and rigorous government regulation in the United States and other countries. Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA or comparable foreign regulatory bodies including, among other things, fines, injunctions, civil penalties, recall or seizure of products, refusal to grant marketing clearances or approvals, withdrawal of marketing approvals and criminal prosecution.
 
U.S. Regulation

A medical device may be marketed in the United States only with prior authorization from the U.S. FDA. Devices classified by the FDA as posing less risk are placed either in Class I or II. All Class II and some Class I devices require 510(k) clearance from the FDA prior to marketing. Such clearance generally is granted when submitted information establishes that a proposed device is "substantially equivalent" in intended use and safety and effectiveness to a Class I or II device already legally on the market or to a "pre-amendment" Class III device (i.e., one that has been in commercial distribution since before May 28, 1976) for which the FDA has not required a premarket approval, or PMA, application. The FDA recently has been requiring a more rigorous demonstration of substantial equivalence than in the past, including in some cases requiring clinical trial data. During this process, the FDA may determine that it needs additional information or that a proposed device is precluded from receiving clearance because it is not “substantially equivalent” to a legally marketed Class I or II device. After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, of which constitutes a major change in its intended use, may require another 510(k) clearance or may be classified as a Class III device. We believe that generally it takes approximately 4 to 12 months from the date of submission to obtain 510(k) clearance. The process may, however, take substantially longer, depending on the circumstances, and there can be no assurance that 510(k) clearance will ever be obtained.

To date, we have received 510(k) clearances from the FDA for our PATHFINDER and PATHFINDER mini over-the-wire micro-catheter systems for mapping VT and REVELATION micro-catheter system for mapping AF. In addition, we have received 510(k) clearance for our line of VENAPORT, VUEPORT and NAVIPORT guiding catheters used to introduce electrophysiology catheters into the heart. We have also received 510(k) clearances for a surgical probe, based on REVELATION catheter technology, for the ablation of cardiac tissue during surgery, as well as for a longer version of the surgical probe with an integrated stabilization sheath.

A device that does not qualify for Class I or II is placed in Class III, which is reserved for devices classified by the FDA as posing greater risk, e.g., life-sustaining, life-supporting or implantable devices, or devices that are not substantially equivalent to a legally marketed Class I or Class II device. A Class III device generally must go through the PMA application process to receive FDA approval. This process requires that the manufacturer establish the safety and effectiveness of the device to the FDA's satisfaction. This requires the manufacturer to provide extensive pre-clinical and clinical data, information about the manufacture of the device and its components and information about the labeling and promotional material. As part of the PMA application process, the FDA may inspect the manufacturer's facilities for compliance with the Quality System Regulations, which includes an extensive review of design, manufacturing, and process controls, documentation and other quality assurance procedures.
 
 
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Upon submission of the PMA application, the FDA determines if the application is sufficiently complete to permit a substantive review, and, if so, the application is accepted for filing. The FDA then commences an in-depth review of the PMA application, which typically takes six months to a year, but may take longer. The review time is often significantly extended as a result of the FDA asking for more information or clarification of information already provided. The FDA also may respond with a "not approvable" determination based on deficiencies in the application and require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years. Recently, the FDA has heightened its scrutiny of clinical trial data submitted in support of PMA applications. In addition, the FDA may visit an applicant’s facilities and/or its investigator’s sites to audit the clinical data and/or the data collection process and procedures. Near the completion of the PMA application process, an FDA advisory committee, typically a panel of clinicians, will generally be convened to review the application and recommend to the FDA whether, or upon what conditions, the device should be approved. Although the FDA is not bound by the advisory panel decision, the panel's recommendation is important to the FDA's overall decision-making process and the panel’s recommendation is generally accepted.

If the FDA's evaluation of the PMA application is favorable, the FDA typically issues an "approvable letter" requiring the applicant's agreement to comply with specific conditions (e.g., changes in labeling) or to supply specific additional data (e.g., longer patient follow up) or information (e.g., submission of final labeling) in order to secure final approval of the PMA application. Once the approvable letter conditions are satisfied, the FDA will issue an Approval Order for the approved indications, which can be more limited than those originally sought by the manufacturer. The Approval Order can include post -approval conditions that the FDA believes necessary to ensure the safety and effectiveness of the device including, among other things, restrictions on labeling, promotion, sale and distribution. Failure to comply with the conditions of approval can result in enforcement action, including withdrawal of the approval. The PMA application process can be expensive and lengthy, and no assurance can be given that any of our PMA applications will ever be approved. Even after obtaining approval, a new PMA application or PMA supplement is generally required for any modification to the device, its labeling or its manufacturing process.

We have confirmed that our ablation products, including the REVELATION Tx, REVELATION T-Flex and REVELATION Helix for the treatment of certain arrhythmia conditions will be designated as Class III devices requiring PMA approval. There can be no assurance that a PMA application will be submitted for any such products or that, once submitted, the PMA application will be accepted for filing, found approvable, or, if found approvable, will not take longer than expected to obtain, or will not include unfavorable restrictions.

A clinical trial in support of a 510(k) submission or a PMA application often requires an Investigational Device Exemption (IDE) application approved in advance by the FDA to conduct a clinical trial .The IDE application must be supported by appropriate data, such as animal and laboratory testing results. Clinical trials may begin if the IDE application is approved by the FDA and by the appropriate institutional review boards at the clinical trial sites. During a clinical trial, we would be permitted to sell products used in the study for an amount that does not exceed recovery of the costs of manufacture, research, development and handling. Failure to adhere to regulatory requirements generally applicable to clinical trials and to the conditions of an IDE could result in a material adverse effect on us, including termination of the IDE and an inability to obtain marketing clearance or approval for our products.
 
We received FDA approval to conduct a pivotal Phase III clinical trial of our REVELATION Tx micro-catheter system for AF in August 2000. However, on May 28, 2004, we received a letter dated May 21, 2004, from the FDA, stating that our PMA for the REVELATION Tx linear ablation micro-catheter system was not approvable based on the requirements of applicable regulations. The FDA required additional clinical data using a randomized clinical trial design. Along with FDA dialogue, we are currently in the early stages of designing a new clinical study trial for use to seek FDA marketing approval.

Any devices manufactured or distributed by us pursuant to FDA clearances or approvals will be subject to pervasive and continuing regulation by the FDA and certain state agencies. We are subject to inspection by the FDA and the California Department of Health Services and have to comply with various other regulatory requirements that usually apply to medical devices marketed in the United States. These regulatory requirements include, among others, manufacturing and design control regulations, labeling, Medical Device Reporting regulations which require that a manufacturer report to the FDA certain types of adverse events involving its products, and the FDA's prohibitions against promoting approved products for unapproved, or "off-label," uses. In addition, Class II devices, such as our mapping products, can be subject to additional special controls (e.g., performance standards, post-market surveillance, patient registries, and FDA guidelines) that do not apply to Class I devices. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, which could have a material adverse effect on us.

Unanticipated changes in existing regulatory requirements, failure to comply with such requirements or adoption of new requirements could have a material adverse effect on us. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, good manufacturing practices, environmental protection, fire hazard control and hazardous material disposal. There can be no assurance we will not incur significant costs to comply with such laws and regulations in the future or that such laws or regulations will not have a material adverse effect upon our business, financial condition and results of operations.
 
 
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Foreign Regulation

In order for us to market our products in Europe and certain other foreign jurisdictions, we must comply with extensive regulations in those jurisdictions regarding safety, performance as well as product design and manufacturing processes. These regulations, including the requirements for regulatory approval and the time period required for regulatory review, vary from country to country. In addition, there may be foreign regulatory barriers other than pre-market approval. There can be no assurance we will obtain regulatory approvals or clearances in such countries or that we will not be required to incur significant costs in obtaining or maintaining our foreign regulatory approvals or clearances. Under certain circumstances, FDA approval is required for us to export our products. Delays in receipt of approvals to market our products, failure to receive these approvals or loss of previously received approvals could have a material adverse effect on our business, financial condition and results of operations.

The European Union has promulgated rules that require commercial medical products to bear the CE Mark. The CE Mark is recognized by the European Union as a symbol of adherence to strict quality systems requirements set forth in the ISO 13485 quality standards for medical devices, as well as compliance with 93/42/EEC, the Medical Device Directive. The CE Mark allows us to market our products throughout the European Economic Area. We received ISO 13485 Quality Systems certification for our manufacturing facility in Fremont, California, which was re-certified in January 2008. These certifications and repeated inspections are required in order to continue to affix the CE Mark to our approved products in Europe. In addition, ISO 13485 certification was obtained in March 2004 to include electrosurgical generators and associated equipment.

We have received regulatory approval to affix the CE Mark to our REVELATION, REVELATION Tx, REVELATION T-Flex and REVELATION Helix micro-catheters for treatment of AF as well as our PATHFINDER diagnostic family of micro-catheters. Failure to receive regulatory approval to affix the CE Mark would prohibit us from selling these products in member countries of the European Union.

In the first quarter of 2007, our Japanese distributor notified us of its failure to maintain the legal documentation standard required to sell our PATHFINDER in Japan. As a result, we had no sales in Japan during 2007 and 2008. In December 2009, we have received regulatory approval to re-enter the Japanese market with our family of guidewire-based, PATHFINDER diagnostic micro-mapping catheters. We believe that the Japanese market for diagnostic catheters is robust and we have been building inventory to meet anticipated demand. We have resumed shipment of our PATHFINDER products to Japan in December 2009.

In June 2008 we received regulatory approval from the SFDA and were granted a market access license for the INTELLITEMP and it is the first multichannel radiofrequency (RF) energy delivery device to receive approval for sale in China. The Company was previously awarded an INTELLITEMP patent by the State Intellectual Property Office in 2003.   Existing RF delivery systems currently marketed in China can deliver energy to only one ablation electrode at a time. The INTELLITEMP controls the delivery of RF energy for effective multi-electrode linear ablation in Cardima's systems, namely, the EP Ablation System and the Surgical Ablation System, both designed to treat atrial fibrillation ("AF"). Other Cardima products pending China SFDA approval are the EP ablation catheters and Surgical Ablation Probes.

A 2004 study from Peking University estimates that AF currently affects approximately 10 million patients in China. Published scientific literature in China shows that the percentage of hospital admissions for AF has increased at a faster rate than for cardiovascular admissions generally. As in other countries, the distribution of AF events in China progressively increases with age. China's population of people over the age of 50 will be 332 million in 2010 and will increase to 525 million by 2025, according to the International Institute for Applied Systems Analysis. Studies also show that the incidence of stroke among AF cases is high in China, yet it is difficult to enforce a drug regimen for preventing stroke in this patient population. Therefore, it will be a significant challenge for the public healthcare system in China to manage, control and treat the growing numbers of AF patients. China is one of the world's fastest growing medical markets and holds a high regard for medical products manufactured in the United States and Europe.

In August, 2008, we received approval from the Food and Drug Administration, Ministry of Public Health, in Thailand, to market its three main lines of products, including the diagnostic products, the EP therapeutic REVELATION line of products and the Surgical Ablation System.

Third-Party Reimbursement

In the United States, health care providers, including hospitals and physicians, that purchase medical products for treatment of their patients generally rely on third-party payers, principally federal Medicare, state Medicaid and private health insurance plans to reimburse all or a part of the costs and fees associated with the procedures performed using these products. Our success will be dependent upon, among other things, the ability of health care providers to obtain satisfactory reimbursement from third-party payers for medical procedures in which our products are used. Third-party payers may deny reimbursement if they determine that a prescribed device has not received appropriate regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payer, or is experimental, unnecessary, inappropriate or used for a non-approved indication. If FDA clearance or approval were received, third-party reimbursement would also depend upon decisions by the United States Centers for Medicare & Medicaid Services (CMS), as well as by individual health maintenance organizations, private insurers and other payers. Government agencies, private insurers and other payers determine whether to provide coverage for a particular procedure based on its medical necessity for the patient in question. The federal Medicare program, many state Medicaid programs and other payers reimburse health care providers for medical treatment at a fixed rate based on, or adapted from the diagnosis-related group established by the CMS. The fixed rate of reimbursement is typically based on the patient's diagnosis and the procedure performed, but may be related to the specific type or number of devices used in a procedure. There can be no assurance that reimbursement for our products will be available in sufficient amounts, if at all, or that future reimbursement policies of payers will not adversely affect our ability to sell products on a profitable basis.
 
 
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In addition, Medicare traditionally has considered items or services involving devices that have not been approved or cleared for marketing by FDA to be precluded from Medicare coverage. However, under a policy which has been in effect since November 1, 1995, Medicare coverage will not be precluded for items and related services involving devices that have been classified by FDA as "non-experimental / investigational" (Category B) devices and that are furnished in accordance with the FDA-approved IDE governing clinical trials. Even with items or services involving Category B devices, however, Medicare coverage may be denied if any other coverage requirements are not met, such as if the treatment is not medically needed for the specific patient. There can be no assurance that our products will be covered when they are used in clinical trials and, if covered, whether the payment amounts for their use will be considered to be adequate by hospitals and physicians. If the devices are not covered or the payments are considered to be inadequate, we may need to bear additional costs to sponsor such trials, and such costs could have a material adverse effect on our business, financial condition and results of operations.

There is also new federal legislation that changed the traditional Medicare payment system by creating a new visit-based payment system called ambulatory payment classification (APC) groups, that establishes fixed payments for specific medical procedures that are performed on an outpatient basis. If our products increase the cost per procedure above the fixed rate under the ambulatory payment classification groups system, market acceptance of such products could be impaired, which would have a material adverse effect on our business, financial condition and results of operations.

Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must be obtained on a country-by-country basis. Many international markets have government managed health care systems that control reimbursement for new products and procedures. In most markets, there are private insurance systems as well as government-managed systems. Market acceptance of our products will depend on the availability and level of reimbursement in international markets targeted by us. There can be no assurance that we will obtain reimbursement in any country within a particular time, for a particular time, for a particular amount, or at all.

Regardless of the type of reimbursement system, we believe that physician advocacy of our products will be required to obtain reimbursement. We believe that less invasive procedures generally provide less costly overall therapies as compared to conventional drug, surgery and other treatments. In addition, we believe that a patient's underlying arrhythmia should typically not recur after treatment with procedures using our products. We anticipate that hospital administrators and physicians would justify the use of our products by the attendant cost savings and clinical benefits derived from the use of our products. However, there can be no assurance this will be the case. There can be no assurance that reimbursement for our products will be available in the United States or in international markets under either government or private reimbursement systems, or that physicians will support and advocate reimbursement for procedures using our products. Failure by hospitals and other users of our products to obtain reimbursement from third-party payers, or changes in government and private third-party payers' policies toward reimbursement for procedures using our products, would have a material adverse effect on our business, financial condition and results of operations.
 
Product Liability and Insurance

The development, manufacture and sale of our micro-catheter systems expose us to an inherent risk of product liability claims. Although we currently have general liability insurance with coverage in the amount of $1.0 million per occurrence, subject to a $2.0 million annual limitation, and product liability insurance with coverage in the amount of $5.0 million per occurrence, subject to a $5.0 million annual limitation, there can be no assurance that such coverage will be available to us in the future on reasonable terms, if at all. In addition, there can be no assurance that all of the activities encompassed within our business are or will be covered under our policies. Although all our guiding, diagnostic and therapeutic products are labeled for single use only, we are aware that some physicians are re-sterilizing and reusing such products. Moreover, despite labeling our micro-catheters for diagnostic use only, we believe physicians are using such mapping micro-catheters for ablation. Multiple use or "off-label" use of our micro-catheters could subject us to increased exposure to product liability claims, which could have a material adverse effect on our business, financial condition and results of operations. We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our business, financial condition and results of operations.
 
 
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Employees

At March 15, 2010, we had 81 employees, of whom 78 were full-time employees and 3 were part-time employees. Out of the 78 full-time employees, 13 were engaged directly in research and new product development, 6 in regulatory affairs, quality assurance and clinical activities, 38 in manufacturing, 11 in sales and marketing and 10 in finance and administration. We maintain compensation, benefits, equity participation, and work environment policies intended to assist in attracting and retaining qualified personnel. We believe the success of our business will depend, in significant part, on our ability to attract and retain such personnel. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage. We consider our relations with our employees to be good.

Corporate History and Website Information

We were incorporated in Delaware in November 1992. Our principal executive offices are located at 47266 Benicia Street, Fremont, California, 94538, and our main telephone number is (510) 354-0300. Investors can obtain access to this annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to these reports, free of charge, on our website at http://www.cardima.com as soon as reasonably practicable after such filings are electronically filed with the Securities and Exchange Commission or SEC. The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.W., Washington, D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
 
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ITEM 1 A.    RISK FACTORS

You should carefully consider the following risk factors and the other information included herein as well as the information included in other reports and filings made with the SEC before investing in our common stock. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. The trading price of our common stock could decline due to any of these risks, and you may lose part or all of your investment.

RISKS RELATED TO OUR FINANCIAL RESULTS:
 
We do not have sufficient cash to fund our operations.
 
We anticipate that, based on our current operating plan, our existing cash and cash equivalents, together with expected revenues anticipated from direct sales of our products will be sufficient to fund our operations into the third quarter of 2010. Our current operating plan reflects reductions in personnel, and other operating expenses implemented during 2009, however, our marketing, personnel and working capital requirements are expected to increase through 2010 as we expand our sales and marketing efforts for our products. If we are unsuccessful with these efforts, we may have to significantly curtail or cease operations.
 
If we cannot generate revenues sufficient to sustain our operations we will need to raise additional capital to fund operations, conduct clinical trials, continue research and development projects, and commercialize our product candidates. The timing and amount of our need for additional financing will depend on a number of factors, including: our timetable and costs for the development of marketing operations and other activities related to the commercialization of our product candidates;  the progress of our research and development programs and expansion of such programs; the emergence of competing technologies and other adverse market developments; and the prosecution, defense and enforcement of potential patent claims and other intellectual property rights.

Additional equity or debt financing may not be available to us on acceptable terms, or at all. If we raise additional capital by issuing equity securities, substantial dilution to our existing stockholders may result which could decrease the market price of our common stock due to the sale of a large number of shares of our common stock in the market, or the perception that these sales could occur. These sales, or the perception of possible sales, could also impair our ability to raise capital in the future. In addition, the terms of any equity financing may adversely affect the rights of our existing stockholders. If we raise additional funds through strategic alliance or licensing arrangements, we may be required to relinquish rights to certain of our technologies or product candidates, or to grant licenses on terms that are unfavorable to us, which could substantially reduce the value of our business. In addition, we may be forced to liquidate assets at reduced levels due to our immediate liquidity requirements.
 
If we are unable to obtain sufficient additional financing, we would be unable to meet our obligations and we would be required to delay, reduce or eliminate some or all of our business operations, including the pursuit of licensing, strategic alliances and development of future products.

We have a history of substantial operating losses and we may continue to incur substantial losses in the future, which would negatively impact our ability to run our business.
 
We have a history of operating losses and we may to continue to incur significant losses in the future unless our sales efforts are successful. Historically, we have funded our operations primarily through the issuance of equity securities and we may not be able to generate positive cash flow in the future. If our efforts to increase revenues through sales of our products are not successful we will need to seek additional funds through the issuance of equity securities or other sources of financing. We have very limited cash resources and will need to raise additional capital in the immediate future through public or private financings or other arrangements in order to continue operations. If we are unable to do so, our business will fail. Even assuming no increase in our cash utilization rate from the third and fourth quarter of 2009, management estimates that our cash balance as of December 31, 2009 will be sufficient to fund planned expenditures only for a limited period of time (less than 12 months), although the actual level of expenditures cannot be predicted with certainty and it is possible that our cash balance may be exhausted sooner than currently anticipated. There can be no assurance that additional capital will be available to us when needed, if at all, or, if available, will be obtained on terms attractive to us.
 
As of December 31, 2009, we had approximately $524,000 in cash and cash equivalents and $6.4 million in short-term investments. Our cash balance, together with cash anticipated to be provided by customer sales will not be sufficient to satisfy our anticipated cash requirements for normal operations and capital expenditures for the year ending December 31, 2010 or later. To strengthen our financial position, we intend to seek additional funding to be used for general corporate purposes, as well as research and development activities, including advancing our current product development activities and FDA and PMA approval process. We intend to seek funding for our capital needs through the issuance of debt, preferred stock, equity, loan guarantees, or a combination of these types of instruments. We currently have no commitments or agreements for such funding, nor can there be any assurance that we will be able to successfully consummate any such funding transactions. We may also seek to obtain financing through private placement or a public offering, a consequence of which could include the sale or issuance of stock to third parties. We expect that we will be able to secure sufficient financing to satisfy our anticipated cash requirements for normal operations and capital expenditures through at least December 31, 2010, although we have no current commitments or agreements in place for funding and current economic and market conditions will make it challenging for us to do so.
 
 
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We cannot be certain that we will be able to obtain financing on terms acceptable to us or at all. If we are not able to raise additional capital, we will not have sufficient cash to fund our operations. In such case, we would be required to curtail or cease operations, liquidate or sell assets, modify our current plans for product development, and other research and development activities, or extend the time frame over which these activities will take place, or pursue other actions that would adversely affect future operations.

We had negative cash flow from operations for the twelve months ended December 31, 2009 of $12 million, and we expect to continue to incur substantial negative cash flow from operations for the foreseeable future. We may be required to expend greater than anticipated funds if unforeseen difficulties arise in the course of completing the development, approval and marketing of our products. Even if we raise capital in the near term, our future cash needs may, at a minimum, cause us to delay, scale back or eliminate some or all of our product research and development programs, to limit the marketing of our products, or to license or sell to third parties the rights to commercialize our products or technologies that we would otherwise develop and market ourselves. Our failure to raise capital when needed would likely cause us to cease our operations.
 
Although our management recognizes the need to raise funds in the immediate 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 require us to give investors valuable rights with respect to our products or technology, warrants or other valuable rights to purchase additional interests in our company, or be otherwise unfavorable to us. Any future financing that we enter into may include terms that could impede our ability to raise additional funds, such as terms requiring the consent of certain security holders before we issue or register additional securities and anti-dilution protection giving those holders the right to receive additional shares of our common stock depending on the terms of our later financings. We may be required to issue preferred stock, debt or other securities with rights and preferences senior to the rights of holders of our common stock. In addition, the issuance of additional securities will likely dilute the interests of existing common stockholders, and could impose additional restrictions on how we operate and finance our business.
 
We sustained losses during the period covered by this report and will continue to incur substantial losses for the foreseeable future.
 
Since our inception, we have experienced losses, and we expect to experience substantial net losses into the foreseeable future. To date, we have sold only a limited number of our micro-catheter and surgical products. We will continue to incur substantial losses into the foreseeable future because of research and product development, clinical trials, regulatory approval efforts and manufacturing, sales, marketing and other expenses as we seek to obtain necessary approvals and bring our micro-catheters and surgical products to market.

Our net losses were $13 million for the year ended December 31, 2009 and $13.7 million for the year ended December 31, 2008. As of December 31, 2009, our accumulated deficit was $203.3 million. Our limited sales history, and the fact that we have very limited cash resources, makes it difficult to assess or predict our future results. We cannot be certain that we will ever generate substantial revenue or achieve profitability. Our failure to generate substantial revenues would harm our business.

Our need to raise additional capital in the near future could have a dilutive effect on your investment.
 
In order to continue operations, we will need to raise additional capital. We may attempt to raise capital through the public or private sale of our common stock or securities convertible into or exercisable for our common stock.
 
If we sell additional shares of our common stock or warrants, such sales will further dilute the percentage of our equity that you own. In addition, our recent private placement financings have involved the issuance of securities at a price per share that represented a discount to the closing price of our common stock and any future private placements will likely involve the issuance of securities at a discount to prevailing market prices. Depending upon the price per share of securities that we sell in the future, if any, your interest in us could be further diluted by any adjustments to the number of shares and the applicable exercise price required pursuant to the terms of the agreements under which we previously issued securities. No assurance can be given that previous or future investors, finders or placement agents will not claim that they are entitled to additional anti-dilution adjustments or dispute the Company’s calculation of any such adjustments. Any such claim or dispute could require us to incur material costs and expenses regardless of the resolution and, if resolved unfavorably to us, to effect dilutive securities issuances or adjustments to previously issued securities. In addition, certain of our prior securities issuances have included, and future financings may also include, provisions requiring us to make additional payments to the investors if we fail to obtain or maintain the effectiveness of SEC registration statements by specified dates or take other specified action. Our ability to meet these requirements may depend on actions by regulators and other third parties, over which we will have no control. These provisions may require us to make payments or issue additional dilutive securities, or could lead to costly and disruptive disputes.
 
Healthcare policy changes, including legislation pending in Congress to reform the U.S. healthcare system, may have a material adverse effect on us.

In response to perceived increases in health care costs in recent years, there have been and continue to be proposals by the Obama administration, member of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Some of these proposals would limit the prices we are able to charge for our products or the amounts of reimbursement available for our products, and could limit the acceptance and availability of our products. We cannot predict whether legislation will be enacted by the current Congress, the final form any legislation might take or the effects of such legislation. If legislation is enacted and depending on the form it takes, it could change the way healthcare is developed and delivered, and may affect numerous aspects of our business.
 
 
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We must obtain governmental approvals or clearances before we can sell our products.
 
Our products are considered to be medical devices and are subject to regulation in the United States and internationally. These regulations are wide ranging and govern, among other things:

· Product design and development;
· Product testing;
· Product labeling;
· Product storage;
· Pre-market clearance and approval;
· Advertising and promotion; and
· Product sales and distribution
 
Before we can market any of our products in the United States or other countries, we must demonstrate that our products are safe and effective and obtain approval or clearance from the applicable governmental authorities. In the United States, we must obtain from the FDA 510(k) pre-market notification clearance for devices that are classified as Class II, or a PMA for devices classified as Class III, such as REVELATION T-Flex, in order to market a product. Currently, the FDA review process for 510(k) clearance requires approximately 120 days and PMA application review process requires approximately six to twelve months or longer. The PMA application review process is in addition to the time required to conduct clinical trials demonstrating safety and effectiveness. However, the timing of such processes can be uncertain and may involve significantly more time than we may anticipate. We cannot guarantee either the timing or receipt of regulatory approval or clearance for any of our products in development. The FDA may request extensive clinical data to support either 510(k) clearance or a PMA. The approval process, including any necessary clinical trials, can involve substantial expense. No assurance can be given that we will ever be able to obtain the necessary approvals for any of our products. Our failure to do so on a timely basis would have a material adverse effect on our business, financial condition and results of operations.
 
Even if regulatory approvals are obtained, the applicable regulatory agencies may limit the indications for which they approve or clear any of our products. Further, the FDA or regulatory agencies in other countries may restrict or withdraw approval or clearance of a product if additional information becomes available to support such action. Delays in the approval or clearance process, limitation of our labeling claims or denial of our applications or notifications would cause our business to be materially and adversely affected.

None of our ablation products for electrophysiology has received regulatory approval in the United States. Our failure to receive these approvals will harm our business.

To date, although we received 510(k) clearance for the use of the Surgical Ablation System (SAS) to ablate cardiac tissue, none of our electrophysiology products in development for the ablation of AF or VT has received regulatory approval in the United States. The SAS has received 510(k) clearance only for ablating cardiac tissue and not for any other purpose or any specified treatment. If we cannot gain U.S. regulatory approvals, our business will be materially harmed and we may be unable to secure the funding needed to continue operations. Even if we raise the funding necessary to continue operations, successfully develop our ablation products and obtain the required regulatory approvals, we cannot be certain that our ablation products and their associated procedures will ultimately gain market acceptance. Because our sole product focus is to design and market micro-catheter systems to map and ablate AF and VT, our failure to obtain regulatory approval for and successfully commercialize these systems would materially harm our business.
 
In the United States, we are required to seek a PMA for AF treatment claims using our ablation products, such as the REVELATION T-Flex micro-catheters, since they have been classified as Class III devices. The process of obtaining a PMA is expensive, lengthy and uncertain and requires clinical trials to demonstrate the safety and effectiveness of the product.
 
Pre-clinical and clinical trials are inherently unpredictable. If we do not successfully conduct these trials, we may be unable to market or sell our products.
 
Through pre-clinical studies and clinical trials, we must demonstrate that our products are safe and effective for their indicated uses. Results from pre-clinical studies and early clinical trials may not allow us to predict results in later-stage testing. No assurance can be given that, even if we are able to conduct future clinical trials, those trials will demonstrate the safety and effectiveness of any of our products or will result in regulatory approval to market our products. We may never meet our development schedule for any of our products in development. Even if a product is successfully developed and clinically tested, we cannot be certain that it will be approved by the FDA or other regulatory agency on a timely basis or at all. If the FDA does not approve our products for commercial sales, our business will be harmed.
 
Current or future clinical trials of our micro-catheter systems will require substantial financial and management resources. In addition, the clinical trials may identify significant technical or other obstacles that we will need to overcome before obtaining the necessary regulatory approvals or market acceptance. Our failure to complete our clinical trials, demonstrate product safety and clinical effectiveness, or obtain regulatory approval for the use of our micro-catheter system for the ablation of AF would have a material adverse effect on our business, financial condition and results of operations.
 
 
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Delays in enrolling patients in our clinical trials could increase our expenses and harm our business.
 
The rate at which we may complete our pre-clinical and clinical trials is dependent upon, among other things, the rate of patient enrollment. Patient enrollment depends on many factors, including the size of the patient population, the nature of the procedure, the proximity of patients’ residences to clinical sites, the eligibility criteria for the study and impact of other clinical studies competing for the same patient population and/or the same physicians’ time and research efforts. Delays in planned patient enrollment may result in increased costs and delays, which could cause our business results to suffer.
 
We have limited sales and limited experience in the sale, marketing and distribution of our products. Our failure to establish an effective direct or indirect sales and marketing force will cause our revenues to decline.

We have sold only a limited number of our micro-catheter and surgical products. We have a direct clinical sales team responsible for U.S. sales of our products, including the surgical ablation system for AF and the Pathfinder diagnostic catheters for mapping along with our series of guides.  We are focusing our efforts on expanding our domestic customer base by also working with a distribution network. Expanding our marketing and sales capability to support sales in commercial quantities adequately will require substantial effort and require significant management and financial resources. Our failure to establish an effective sales and marketing force will prevent us from being able to generate significant revenues from the sale of our products.

We distribute our products internationally through third-party distribution channels in key target markets. These on-going distributor relationships provide coverage in France, the Mediterranean area, the United Kingdom, Central and Eastern Europe, Thailand and Japan. Building and managing a larger remote sales force effectively, in Europe or elsewhere, would require additional resources, time and expense, which could have a material adverse effect on our business, financial condition and results of operations. We cannot be certain that we will be able to build a successful world-wide business. Failure to do so would harm our business.
 
Currently, international sales and marketing of our PATHFINDER, PATHFINDER mini, and REVELATION micro-catheter systems are conducted through an exclusive distributor in Europe and Japan.   In the first quarter of 2007, our former distributor in Japan notified us of its failure to maintain the legal documentation standard required to sell our PATHFINDER in Japan. As a result, we had no sales in Japan during 2007 and 2008. In October 2008, we appointed Japan Lifeline Co. Ltd. as our new distributor in Japan. Together with Japan Lifeline, we filed a “Shonin Application” to obtain the necessary regulatory approval to re-start PATHFINDER sales in the Japanese market.  In December 2009, we received the Shonin approval and have resumed shipment of our PATHFINDER products to Japan. However, we cannot be certain that our distributor will be able to effectively market and sell our products in Japan after an extended period of absence of our products in the market place. In the past, we have terminated several distribution arrangements in Europe because of the distributors’ failure to meet minimum sales levels under those agreements. Our failure to establish and maintain successful distribution relationships would harm our business.

We rely on multiple third parties to conduct and collect data for the clinical trials of our products. If we are unable to access this data or the FDA refuses to accept the data in a filing, the commercialization of our products will be delayed and our business will be harmed.
 
We often rely on multiple third parties, such as hospitals and universities, to conduct and collect data for our clinical trials. We depend on these third parties to provide access to data and cooperate with us in completing regulatory filings for the approval or clearance of our products. In order for the FDA and other regulatory agencies to accept and rely on the data of a filing, the data collection, analysis and summarization must meet certain standards. We cannot be certain that the clinical data collected by the third parties meet the standards of the FDA or other regulatory agencies. If we are unable to rely on the clinical data collected by third parties, or if these third parties do not perform their contractual obligations, the FDA or other regulatory agencies may require us to gather additional clinical data. This could significantly delay commercialization of our products, require us to spend additional capital on our clinical trials and harm our business.

We cannot assure the safety or effectiveness of our products.
 
To obtain and maintain required regulatory approvals and secure the confidence of physicians and others whose acceptance is needed for our products, we will need to demonstrate that our products are safe and effective. We cannot assure you that our products will be deemed safe and effective. Many of our products, such as our surgical ablation system, which has begun to be used by cardiac surgeons only recently, have not been used to a sufficient extent to permit us to predict their safety and effectiveness. In addition, our products include components and materials supplied by third parties, whose safety and reliability we cannot guarantee. We have occasionally experienced quality issues with some elements of our products, and we may face additional issues in the future. The perceived safety and effectiveness of our products can also depend on their manner of use by physicians and other third parties, which we cannot control. If safety and effectiveness issues arise with any of our products in the future, we may incur liabilities to third parties, lose any regulatory approvals for the applicable product, or be required to redesign the product. These issues will reduce our sales and increase our expenses, possibly substantially.
 
 
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Our products and their related procedures are novel to the market and will require the special training of physicians. If the market does not accept our products and procedures, our revenues will decline.
 
Our micro-catheter systems represent novel approaches to diagnosing and treating AF and VT and our SAS represents a novel approach to ablating cardiac tissue during surgery. Acceptance of our products and procedures by physicians, patients and health care payers will be necessary in order for us to be successful. If the market does not accept our products and the procedures involved in their use, our business would be harmed and our revenues would decline.

Our products must be safe, effective and cost efficient in order for them to effectively compete against more established treatments. If we cannot compete with these treatments, our revenues will decline.
 
The market for catheters to diagnose or treat AF and VT is highly competitive. Our micro-catheter systems for the mapping and ablation of AF and VT are new technologies. Safety, cost efficiency and effectiveness are the primary competitive factors in this market. Other competitive factors include the length of time required for products to be developed and receive regulatory approval and, in some cases, reimbursement approval. Existing treatments with which we must compete include:

·      Conventional catheters using the “drag and burn” or “dot to dot” technique;
·      Anti-arrhythmic and anti-coagulant drugs;
·      External electrical shock to restore normal heart rhythms and defibrillation;
·      Implantable defibrillators;
·      Purposeful destruction of the atrial-ventricular node followed by implantation of a pacemaker; and
·      Open-heart surgery known as the “maze” procedure
 
Physicians will not recommend the use of our systems unless they can conclude that our systems provide a safe, effective and cost-efficient alternative to current technologies for the mapping and ablation of AF or VT. If our clinical data and other studies do not show that our products are safe and effective, the FDA and other regulators will not approve our products for sale. If our products are not approved, we will not be able to enter the market and we will not be able to generate revenues from their sale.
 
If we do not comply with applicable domestic laws and regulations after obtaining approvals or clearances, our business results may suffer.
 
After initial regulatory approval or clearance of our products, we will continue to be subject to extensive domestic regulatory requirements. In the U.S., our failure to comply with applicable regulatory requirements can result in enforcement actions by the FDA, and other regulatory agencies, including, but not limited to:

·      Fines;
·      Injunctions;
·      Recall or seizure of products;
·      Withdrawal of marketing approvals or clearances;
·      Refusal by the FDA to grant clearances or approvals; and
·      Civil and criminal penalties
 
We are also required to demonstrate and maintain compliance with the FDA’s Quality Systems Requirements for all of our products. The FDA enforces the QSR through periodic inspections, including a pre-approval inspection for PMA products. The QSR relates to product testing and quality assurance, as well as the maintenance of records and documentation. If we do not, or any third-party manufacturer of our products does not, comply with the QSR and cannot be brought into compliance, we will be required to find alternative manufacturers. Identifying and qualifying alternative manufacturers would likely be a long and difficult process. We also are required to provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our medical devices, as well as product malfunctions that could contribute to death or serious injury. If we fail to comply with these applicable regulations, we may incur substantial business disruption, expenses, penalties, fines and other liabilities and our business results and financial condition could suffer.
 
If we do not comply with foreign regulatory requirements to market our products outside the United States, our business will be harmed.
 
Sales of medical devices outside the United States are subject to international regulatory requirements that vary from country to country. The time required for approval varies from country to country and may be longer or shorter than the time required in the United States. In order to market any of our products in the member countries of the European Union, we are required to obtain CE Mark certification. CE Mark certification is an international symbol of adherence to quality assurance standards and compliance with the European Medical Device Directives. We have received CE Mark certification to sell our PATHFINDER, PATHFINDER mini, REVELATION, REVELATION Tx, REVELATION Helix micro-catheters, VUEPORT and NAVIPORT guiding catheters for mapping in the European Union, and approval to sell some of our products in Canada. We received CE Mark Clearance for the INTELLITEMP radio frequency energy management devices during the first quarter of 2004. In June 2008, we have also received the SFDA approval to market the INTELLITEMP product in the People’s Republic of China.
 
 
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We intend to submit data in support of additional CE Mark applications. However, there can be no assurance we will be successful in obtaining or maintaining the CE Mark for any of our products, as the case may be. Failure to receive or maintain approval to affix the CE Mark would prohibit us from selling these products in member countries of the European Union, and would require significant delays in obtaining individual country approvals. No assurance can be given that we will ever obtain or maintain such approvals. If we do not receive or maintain these approvals, our business could be harmed.
 
In the first quarter of 2007, our former Japanese distributor notified us of its failure to maintain the legal documentation standard required to sell our PATHFINDER in Japan. As a result, we had no sales in Japan until December 2009. In October 2008, we appointed Japan Lifeline Co. Ltd. as our new distributor in Japan. Together with Japan Lifeline, we filed a “Shonin Application” to obtain the necessary regulatory approval to re-start PATHFINDER sales in the Japanese market.  In December 2009, we received the Shonin approval and have resumed sales of our PATHFINDER products in Japan. However, there can be no assurance that we will be able to penetrate the Japanese market with our products due to the extended period of absence of our products and brand name in that market place and our continued relationship with our Japanese distributor. In addition, we have a history of failure to maintain the legal documentation in a foreign country; we may not be able to sustain the legal documentation in the future.
 
Reuse of our single-use products could cause our revenues to decline.
 
Although we label all of our micro-catheter systems for single-use only, we are aware that some physicians potentially may reuse these products. Reuse of our micro-catheter systems could reduce revenues from product sales and could cause our revenues to decline. In addition, such misuse of our products could result in personal injury and death.
 
Difficulties presented by international factors could negatively affect our business.
 
A component of our strategy is to expand our international sales revenues. We believe that we will face risks in doing business abroad that we do not face domestically. Among the international risks we believe are most likely to affect us are:

· Export license requirements for our products;
· Exchange rate fluctuations or currency controls;
· Changes in the regulation of medical products by the European Union or other international regulatory agencies;
· The difficulty in managing a direct sales force from aboard;
· The financial condition, expertise and performance of our international distributors and any future international distributors;
· Domestic or international trade restrictions; and
· Changes in tariffs
 
Any of these factors could damage our business results.
 
We may be unable to successfully commercialize our micro-catheter or surgical products, as the industry for them is highly competitive.

The market for catheters to map and/or ablate AF and VT is highly competitive, as is the market for surgical ablation products. Several of our competitors are developing different approaches and products for these procedures. These approaches include mapping systems using contact mapping, single-point spatial mapping and non-contact, multi-site electrical mapping technologies, and ablation systems using radio frequency, ultrasound, microwave, laser and cryoblation technologies. Other companies are also developing surgical procedures that could allow physicians to perform the open-heart surgical maze procedure for the treatment of AF in a minimally invasive manner. If any of these new approaches or products proves to be safe, effective and cost effective, our products could be rendered non-competitive or obsolete, which would harm our business.
 
Many of our competitors have an established presence in the field of interventional cardiology and electrophysiology, or the study of the electrical system of the heart. These competitors include C.R. Bard, Inc., Medtronic, Inc., Boston Scientific, through its EP Technologies and Cardiac Pathways divisions, Johnson & Johnson, through its Biosense-Webster division and St. Jude Medical, Inc., through its Daig division. These competitors have substantially greater financial and other resources than we do, including larger research and development staffs and greater experience and capabilities in conducting clinical trials, obtaining regulatory approvals, and manufacturing, marketing and distributing products. In addition, other companies are developing proprietary systems for the diagnosis and treatment of cardiac arrhythmias, including Biosense-Webster, a division of Johnson & Johnson, and Endocardial Solutions, Inc. Other companies are also developing, marketing and selling alternative approaches for the treatment of AF and VT, including manufacturers of implantable defibrillators such as Medtronic, Inc. and St. Jude Medical, Inc. We cannot be certain that we will succeed in developing and marketing technologies and products that are safer, more clinically effective and cost-effective than the more established treatments or the new approaches and products being developed and marketed by our competitors. Furthermore, there can be no assurance that we will succeed in developing new technologies and products that will be available before those of our competitors, particularly because of our financial position. Our failure to demonstrate the competitive advantages and achieve market acceptance of our products would significantly harm our business.
 
 
23

 

We license portions of our product technology from potential competitors, and the termination of any of these licenses would harm our business.
 
We rely on license agreements for some of our product technology from potential competitors. A license from Target Therapeutics, Inc., a subsidiary of Boston Scientific Corporation, is the technological basis for our micro-catheter systems for mapping and ablation. Boston Scientific Corporation currently has research efforts in the field of electrophysiology that may compete with our products. Under the Target Therapeutics license agreement we have an exclusive license under specific issued United States patents. The exclusive license from Target Therapeutics covers the diagnosis and treatment of electrophysiological disorders in areas other than the central nervous system. In addition, we have obtained a non-exclusive license to use Target Therapeutics’ technology, provided we have made a substantial improvement of such technology, for the diagnosis or treatment of diseases of the heart, other than by balloon angioplasty. The license will terminate upon the expiration or invalidation of all claims under the underlying patents. In addition, Target Therapeutics has the right to terminate the license earlier if we fail to comply with various commercialization, sublicensing, insurance, royalty, product liability, indemnification, non-competition and other obligations. Furthermore, either party can terminate the license if a material breach remains uncured for thirty days or if either party ceases to be actively engaged in its present business for a period of twelve months. We may lose the licensed rights in the event of an assignment for the benefit of creditors or other bankruptcy or insolvency-related event. The loss of our exclusive rights to the Target Therapeutics-based micro-catheter technology would significantly harm our business.

In December 2000, we sold certain patents and related intellectual property pertaining to intravascular sensing and signal detection to Medtronic, Inc., which currently has research efforts in the field of electrophysiology that may compete with our products. We received a perpetual, worldwide license at no cost from Medtronic to use these patents and related intellectual property in our products for mapping and ablation of arrhythmia-causing tissue. In addition, Medtronic agreed not to sublicense the patents within our field of use to any non-affiliated party. We have also licensed a proprietary surface-coating material from another vendor used on certain of our micro-catheters.
 
We cannot be certain that these licenses will continue to be available to us or will be available to us on reasonable terms. The loss of or inability to maintain any of these licenses could result in delays in commercial shipments until we could internally develop or identify, license and integrate equivalent technology. These delays would have a material adverse effect on our business, financial condition and results of operations.
 
We may not be able to commercialize our products under development if they infringe existing patents or patents that have not yet issued.
 
We believe that our patent applications and products do not interfere with existing patents. However, we cannot be sure that relevant patents have not been issued that could block our ability to obtain patents or commercialize our products. Moreover, because U.S. patent applications are not a matter of public record, a patent application could currently be on file that would prevent us from obtaining a patent issuance. In addition, Congress recently amended the U.S. patent laws to exempt physicians, other health care professionals and affiliated entities from infringement liability for medical and surgical procedures performed on patients. The issuance of any potentially competing patent could harm our business.
 
We have received in the past and expect to continue to receive letters from others threatening to enforce patent or other intellectual rights against us. We cannot be certain that we will not become subject to patent or intellectual property infringement claims or litigation, interference proceedings in the U.S. Patent and Trademark Office to determine the priority of inventions, or oppositions to patent grants in foreign countries. Any such claim, litigation or proceeding, regardless of the outcome, would likely require us to expend substantial defense costs and would disrupt our business. An adverse determination in litigation, interference or opposition proceedings could subject us to significant liabilities to third parties, require us to cease using important technology invalidate our intellectual property rights, or require us to license disputed rights from third parties. However, we cannot be certain that any licenses will be available to us on commercially reasonable terms or at all. Our inability to obtain such a license could materially delay the commercialization of our products, require us to expend substantial resources to design and develop alternative to the disputed technology, and otherwise harm our business. Our license with Target Therapeutics does not provide us with indemnification against claims brought by third parties alleging infringement of patent rights. Consequently, we would bear the liability resulting from such claims. We cannot be certain that we will have the financial resources to protect and defend our intellectual property; as such defense is often costly and time-consuming. Our failure to protect our patent rights, trade secrets, know-how or other intellectual property would harm our business.

The United States patent laws exempt medical practitioners and related health care entities from infringement liability for medical and surgical procedures in certain circumstances. We cannot predict whether this exception might have a material adverse effect on our ability to protect our proprietary methods and procedures.
 
 
24

 

If healthcare providers do not receive adequate reimbursement for procedures using our products, the market may not accept our products and our revenues may decline.
 
U.S. healthcare providers, including hospitals and physicians, that purchase micro-catheter products generally rely on third-party payers, principally federal Medicare, state Medicaid and private health insurance plans, to reimburse all or a part of the costs and fees associated with the procedures performed using our products. The success of our products will depend upon the ability of healthcare providers to obtain satisfactory reimbursement for medical procedures in which our micro-catheter systems are used. If these healthcare providers are unable to obtain reimbursement from third-party payers, the market may not accept our products and our revenues may decline.
 
Third-party payers may deny reimbursement if they determine that a prescribed device:

· Has not received appropriate regulatory clearances or approvals;
· Is not used in accordance with cost-effective treatment methods as determined by the payor; or
· Is experimental, unnecessary or inappropriate

If we receive FDA clearance or approval, third-party reimbursement also would depend upon decisions by the United States Health Care Financing Administration for Medicare, as well as by individual health maintenance organizations, private insurers and other payors.

Reimbursement systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals may be obtained on a country-by-country basis. Many international markets have government-managed health care systems that control reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. There can be no assurance that:

· Reimbursement for our products will be available domestically or internationally;
· If available, that such reimbursement will be available in sufficient amounts in the United States or in international markets under either government or private reimbursement systems;
· Physicians will support and advocate reimbursement for procedures using our products

Failure by hospitals and other users of our products to obtain reimbursement from third-party payers or changes in government and private third-party payers’ policies toward reimbursement for procedures employing our products would harm our business. Moreover, we are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business.
 
We cannot be certain that we will be able to manufacture our products in high volumes at commercially reasonable costs.
 
We currently manufacture our micro-catheter systems in limited quantities for U.S. and international sales and for pre-clinical and clinical trials. However, we have limited experience manufacturing our products in the amounts necessary to achieve significant commercial sales. For example, we currently do not have the ability to manufacture one of the components of our SAS in substantial quantities. We expect that if U.S. sales of our PATHFINDER micro-catheter products, our REVELATION micro-catheter products, or our SAS increase or if we receive FDA clearance or approvals for other products, we will need to expend significant capital resources and develop additional manufacturing capacity to establish large-scale manufacturing capabilities. However, we could encounter problems related to:

· Capacity constraints;
· Production yields;
· Quality control; and
· Shortage of qualified personnel
 
Such problems could affect our ability to adequately scale-up production of our products and fulfill customer orders on a timely basis, which could harm our business.
 
Our manufacturing facilities and operations are subject to periodic inspection from various domestic and international regulatory authorities, and must meet various Quality Management System (QMS) compliance inspections, before we can market our products. We have obtained ISO 13485 Quality Systems certification from TUV Nord and have maintained the right to affix the CE Mark to certain electrophysiology mapping and ablation catheters and accessories as well as electrosurgical units. In 2008, we successfully passed various federal, state, and international Quality System inspections, including an ISO 13485 compliance inspection conducted by applicable regulatory agencies. Though successful in these inspections, there can be no assurance that our manufacturing facilities will continue to meet such compliance audits and maintain such compliance standards.
 
 
25

 
 
If our sole-source suppliers are unable to meet our demands, our business results will suffer.
 
We purchase certain key components for some of our products, from sole, single or limited source suppliers. For some of these components, there are relatively few alternative sources of supply. Establishing additional or replacement suppliers for any of the numerous components used in our products, if required, may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure to obtain alternative vendors for any of the numerous components used to manufacture our products would limit our ability to manufacture our products. Any such limitation on our ability to manufacture our products would cause our business results to suffer.

We may face product liability claims related to the use or misuse of our products.
 
We face an inherent business risk of product liability claims in the event that the use or misuse of our products results in personal injury or death. We have received claims of this type in the past and may receive additional claims in the future. We cannot be certain, in particular after commercial introduction of our products, that we will not experience losses due to product liability claims. Although we currently have general liability and product liability insurance coverage, this coverage is subject to per-occurrence and annual limitations, as well as substantial deductibles. We cannot be certain that such coverage will be adequate or continue to be available to us on reasonable terms, if at all. In addition, there can be no assurance that all of the activities encompassed within our business are or will be covered under our policies. Although we label our micro-catheter products for single-use only, we are aware that some physicians are re-using such products. Moreover, despite labeling our micro-catheters for diagnostic use only, we believe that physicians are using such mapping micro-catheters for ablation. Multiple use or “off-label” use of our micro-catheters could subject us to increased exposure to product liability claims, which could have a material adverse effect on our business, financial condition and results of operations. We may require additional product liability coverage if we significantly expand commercialization of our products. Such additional coverage is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Any claims or series of claims against us, regardless of their merit or eventual outcome, could have a material adverse effect on our business, financial condition and results of operations.

Technology in the medical device industry changes rapidly

Rapid technology changes, changing customer needs and frequent new product introductions are all characteristics of the medical device industry. We face intense competition from other device manufacturers that may have access to greater resources. Our products may be rendered obsolete as a result of future innovations. Our competitors may succeed in obtaining regulatory approval and introducing products before we do. Any of these developments could have a significant negative impact on our business and results of operations.

The success of many of our products depends upon strong relationships with physicians.

If we fail to maintain our working relationships with physicians, many of our products may not be developed and marketed in line with the needs and expectations of the professionals who use and support our products. The research, development, marketing and sales of many of our new and improved products is dependent upon our maintaining working relationships with physicians. We rely on these professionals to provide us with considerable knowledge and experience regarding our products and the marketing of our products. Physicians assist us as researchers, marketing consultants, product consultants, inventors and as public speakers. If we are unable to maintain our strong relationships with these professionals and continue to receive their advice and input, the development and marketing of our products could suffer, which could have a material adverse effect on our financial condition and results of operations.

The issuance of shares of common stock in connection with the exercise of certain stock options issued under our 2007 Employee Stock Option Plan may not have been in compliance with certain state and federal securities laws and any damages that we may have to pay as a result of such issuance  could have a material  adverse effect on our profits, results of operations, financial condition and future prospects.

Commencing October 2008 through February 2010, we issued an aggregate of 531,944 shares of common stock to approximately 25 employees upon exercise of options granted pursuant to the Company’s 2007 Employee Option Plan (the “Option Plan”) from which we received an aggregate of approximately $250,000 of proceeds. The number of shares issued constitute 0.3% of our issued and outstanding share total a December 31, 2009. Such shares were inadvertently issued without restriction. At the time of the issuance of such shares, we had not sought to register or qualify these shares or options under federal or state securities laws. Accordingly, the shares purchased pursuant to the exercise of these options may have been issued in violation of federal and state securities laws, and may be subject to rescission. We plan to take immediate action to file a Form S-8 Registration Statement to register shares issuable under the Option Plan and will include shares issued to employees who continue to hold shares of common stock of the Company that were issued upon exercise of options granted under the Option Plan. We may be subject to liabilities for violation of applicable federal or state securities state laws. We are currently unable to determine the amount of any fines or any action that may be taken against the Company as a result of these issuances. The assessment of any fines and/or penalties could have a material adverse effect on our profits, results of operations, financial condition and future prospects.
 
 
26

 

We are dependent upon our key personnel.
 
Our ability to operate successfully depends in significant part upon the continued service of certain key scientific, technical, clinical, regulatory and managerial personnel, and our continuing ability to attract and retain additional highly qualified personnel in these areas. Competition for such personnel is intense, especially in the San Francisco Bay Area. We cannot be certain that we can retain such personnel or that, if we are able to raise additional capital in amounts sufficient to maintain and expand our operations, we will be able to attract or retain other highly qualified scientific, technical, clinical, regulatory and managerial personnel in the future.
 
The general economic downturn both in the US and worldwide may have a significant impact on our financial condition and operating results.

In recent years, worldwide economic conditions have deteriorated significantly in the United States and other countries, and may remain depressed for the foreseeable future. These conditions make it difficult for us to accurately forecast and plan future business activities, and could cause us to slow or reduce spending on our research and development activities. Furthermore, during challenging economic times, we may face issues gaining timely access to financings or capital infusion, which could result in an impairment of our ability to continue our business activities. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the United States, or in our industry. These and other economic factors could have a material adverse effect on our financial condition and operating results. In addition, our vendors and customers may also be negatively affected by the worldwide economy, which may have a ripple effect on our business and results of operations.

We do not intend to pay cash dividends on our stock.
 
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. Instead, we intend to retain future earnings for reinvestment in our business.

We may be adversely affected by regulatory requirements, tax requirements and The Sarbanes-Oxley Act. We may not be able to implement Section 404(a) of the Sarbanes-Oxley Act of 2002 on a timely basis and we have identified a material weakness in our system of internal controls.

We are subject to numerous rules and regulations, including, but not limited to, environmental and health and welfare benefit regulations as well as those associated with being a public company as well as numerous federal, state, and local tax rules and regulations. These rules and regulations and associated interpretations may be changed by local, state or federal governments or agencies. Changes in these regulations may result in a significant increase in our compliance costs. Compliance with changes in rules and regulations could require increases to our workforce, increased cost for services, compensation and benefits, or investments in new or upgraded equipment. In addition, audits and examinations of prior years may result in liabilities and additional financial burdens.

We will be subject to reporting on internal controls in accordance with Section 404(b) of The Sarbanes-Oxley Act for auditors’ attestation for fiscal years ending on or after June 15, 2010. The Company is currently unable to predict the cost or difficulties required to complete such certifications. We expect that we may need to hire and/or engage additional personnel and incur incremental costs in order to complete the work required by Section 404(b). We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. We may not be able to remediate these problems on a timely basis. Additionally, upon completion of a Section 404(b) plan, we may not be able to conclude that our internal controls are effective, or in the event that we conclude that our internal controls are effective, our independent accountants may disagree with our assessment and may issue a report that is qualified. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

Substantial future sales of our common stock in the public market could cause our stock price to fall.
 
Among other factors contributing to the potential volatility of our stock price, additional sales of our common stock in the public market or the perception that such sales could occur could cause the market price of our common stock to decline.
 
Delaware law, our corporate charter and bylaws and our stockholder rights plan could delay or discourage takeover attempts that stockholders may consider favorable.
 
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control of our company. These provisions include:
 

 
   ·   The ability of the Board of Directors to alter our bylaws without stockholders’ approval;  
   ·   The ability of the Board of Directors to issue, without stockholders’ approval, up to five million shares of preferred stock with rights set by the Board of Directors, which rights could be senior to those   of our common stock; and  
   ·   The elimination of the rights of stockholders to act by written consent  
         
 
     
Each of these provisions could discourage potential takeover attempts.

 
The Stockholders’ Rights Plan enacted in 2002 may discourage third parties from attempting to acquire control of our company, which may have an adverse effect on the price of our common stock.
 
In May 2002, we adopted a stockholder rights plan (“the Rights Plan”) and declared a dividend distribution of one right for each outstanding share of common stock as of the record date on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of a new series of Series A Participating Preferred Stock on the terms stated in our Rights Plan. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our Rights Plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.
 
These provisions in our charter, bylaws and Rights Plan and under Delaware law could discourage takeover attempts that our stockholders would otherwise favor, or otherwise reduce the price that investors might be willing to pay for our common stock in the future.
 
 
27

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.      DESCRIPTION OF PROPERTY

We lease a 29,000 square feet facility in Fremont, California. Our facility includes a 4,000 square feet clean-room, a machine shop for prototyping and tooling, extrusion and braiding capability, wire grinding operations, general assembly, test and inspection areas, and a materials area. On May 12, 2009, we extended the lease for sixty two months from June 2009 through July 2014. Under the terms of the extension, we have one option to renew the lease for a term of five more years at the then current fair market rental for comparable space.  The monthly rent for these facilities is approximately $17,000.  The property covered by the lease is well maintained and in good condition.

ITEM 3.      LEGAL PROCEEDINGS
 
On August 31, 2007, our Board of Directors terminated the employment of our Chief Executive Officer and Acting Chief Financial Officer, Mr. Gabriel Vegh.  Mr. Vegh remained as a member of the Board of Directors until September 8, 2008.  On March 3, 2008, we received a letter from the law firm representing Mr. Vegh, who claimed for damages for wrongful termination in violation of statutes, breach of contract and related claims. We determined that Mr. Vegh’s termination was “with cause” thus the severance provision of his employment agreement did not apply. In April 2009, we reached an agreement with Mr. Vegh to settle all disputes and release all claims against each other.

On October 31, 2007, we received a letter from the law firm representing our former Director of Operations, Larry Stevens in which claims were made against us for damages due to wrongful termination in violation of public policy, breach of contract and other related claims. We determined that Mr. Stevens’ termination was “with cause” thus the severance provision of his employment agreement did not apply. In February 2009, we reached an agreement with Mr. Stevens to settle all disputes and release all claims against each other.

ITEM 4.      RESERVED
 
This item was removed and reserved pursuant to SEC Release No. 33-9089A issued on February 23, 2010.
 
 
 
28

 
 
PART II

ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Equity

Our common stock is traded on the Over-the-Counter Bulletin Board under the symbol CADM.OB. The following table sets forth for the periods indicated the high and low sales closing prices of our common stock.
 
YEAR ENDED DECEMBER 31, 2009
 
High
   
Low
First Quarter
 
$
1.60
   
$
1.05
Second Quarter
   
1.23
     
0.95
Third Quarter
   
1.01
     
0.65
Fourth Quarter
   
1.35
     
0.90
           
YEAR ENDED DECEMBER 31, 2008
         
First Quarter
 
$
0.71
   
$
0.39
Second Quarter
   
2.14
     
0.58
Third Quarter
   
1.88
     
1.12
Fourth Quarter
   
1.73
     
1.30

Preferred stock
 
We are authorized to issue ten million shares of blank check preferred. We have designated 5,000,000 shares of preferred stock as Series A Convertible Preferred Stock and 750,000 shares of preferred stock as Series A Participating Preferred Stock. In 2007, we issued five million shares of Series A Convertible Preferred stock to APIX Corporation.  APIX, at its sole discretion, may convert the five million Preferred Shares it owns into 1 million shares of our common stock.  The Series A Preferred votes together with the common stock will continue to carry 28 votes for each share of Series A Preferred Stock. 

In May 2002, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of Series A Participating Preferred Stock on the terms stated in our Rights Plan. We are authorized to issue up to 750,000 shares of the Series A Participating Preferred Stock. As of December 31, 2009, no shares have been issued under the Rights Plan. Since adoption, no triggering events have occurred. The Rights Plan will expire on May 20, 2012.
 
Dividends

We have not declared or paid any cash dividends on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant.  As of December 31, 2009, we had 5 million shares of preferred stock outstanding. The holders of the Series A Convertible Preferred Stock are only entitled to a liquidation preference of $0.10 per share.
 
Holders

As of December 31, 2009, we had approximately 244 shareholders of record, not including persons who hold their shares through a nominee.

Recent Sales of Unregistered Securities

In May 2008, we entered into a series of Subscription Agreements with certain accredited investors providing for the sale of (i) 8,474,992 shares of our common stock in the aggregate principal amount of $5.1 million and (ii) warrants to purchase an aggregate of 1,271,247 shares of our at an exercise price of $0.65 per share. At our option, we may force the investors to exercise the warrant at a price of $0.65 per share, provided that (i) our common stock is trading at a price equal to or greater than $1.00 per share for a period of fifteen (15) consecutive trading days and (ii) a registration statement is in effect with respect to the warrant shares. We also issued 1,500,000 warrants to purchase shares of our common stock to Apix International, Limited (“APIX”) at an exercise price of $0.60 per share. The warrants expire 5 years from the date of issuance.
 
On February 28, 2009, we entered into a subscription agreement with an accredited investor providing for the sale of (i) 18,518,518 shares of our common stock at a price equal to $1.08 per share, for an aggregate principal amount of $20 million and (ii) warrants to purchase an aggregate of 5,555,555 shares of our common stock at an exercise price of $1.25 per share. At our option, we may force the investor to exercise the warrant at a price per share equal to $1.08, provided that (i) our common stock is trading at a price equal to or greater than $1.58 per share for a period of fifteen (15) consecutive trading days and (ii) a registration statement is in effect with respect to the warrant shares. The warrants expire 5 years from the date of issuance.
 
 
 
29

 
 

 
All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) and/or Regulation S of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.  Pursuant to the Subscription Agreements of the above offerings, we have agreed to use our best efforts to secure effectiveness of, as soon as reasonably practicable after the issuance and delivery of the shares and warrants, a registration statement on Form SB-2, now S-1.
 
Apix International Limited

APIX is an entity that is solely owned by Robert Cheney who is also the CEO, CFO and a Director of our Company. Mr. Cheney was appointed as the CEO in June 2007. APIX acted as agent for all of our recent financing activities.

Equity Compensation Plans
 
The following table summarizes information about our equity compensation plans as of December 31, 2009.
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options
   
Weighted-average exercise price of outstanding options
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in second column)
 
Equity compensation plans approved by Cardima stockholders
    7,931,444     $ 0.94       22,434,418  
Total
    7,931,444     $ 0.94       22,434,418  

Equity compensation plans approved by our shareholders include our 1993, 1997, 2003 and 2007 Stock Option Plans.  Additional information regarding our equity compensation plans is provided in Note 10 to our financial statements in this annual report.
 

 
30

 
 
ITEM 6.              SELECTED FINANCIAL DATA
 
In the table below, we have presented certain selected financial data as of and for each of the years in the five-year period ended December 31, 2009. The financial data has been derived from our audited financial statements. This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis and Results of Operations” and Item 8, Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
 
   
Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(in thousands, except per share data)
 
Statement of Operations Data:
                             
Sales
  $ 2,247     $ 1,456     $ 1,157     $ 1,541     $ 1,859  
Cost of sales
    3,114       2,604       1,613       2,023       1,999  
Gross margin deficiency
    (867 )     (1,148 )     (456 )     (482 )     (140 )
Operating expenses
    12,224       12,570       8,294       4,774       6,891  
Operating loss
    (13,091 )     (13,718 )     (8,750 )     (5,256 )     (7,031 )
Interest income (expense)
    65       115       (865 )     (1,753 )     (1,297 )
Other income (expenses)
    1       (121 )     17       -       -  
Loss on debt extinguishment
    -       -       (15,182 )     (2,256 )     -  
Loss on excess shares over authorized
    -       -       (7,737 )     (2,886 )     -  
Loss on debt settlement
    -       -       (10,129 )     -       -  
Income tax
    (1 )     (1 )     -       -       -  
Net loss
  $ (13,026 )   $ (13,725 )   $ (42,646 )   $ (12,151 )   $ (8,328 )
Basic and diluted net loss per share
  $ (0.09 )   $ (0.11 )   $ (1.31 )   $ (1.19 )   $ (0.08 )
Weighted average shares outstanding
    140,807       121,945       32,442       10,170       101,408  
                                         
Balance Sheet Data:
                                       
Cash, cash equivalents and short-term investments
  $ 6,970     $ 5,375     $ 6,819     $ 942     $ 124  
Working capital (deficit)
  $ 8,444     $ (331 )   $ 6,018     $ (12,986 )   $ (4,088 )
Total assets
  $ 10,854     $ 8,791     $ 8,004     $ 2,217     $ 1,746  
Total current liabilities
  $ 956     $ 8,137     $ 1,563     $ 14,852     $ 5,481  
Total liabilities
  $ 1,037     $ 8,230     $ 1,623     $ 14,936     $ 5,509  
Total shareholders’ equity (deficit)
  $ 9,817     $ 561     $ 6,381     $ (12,719 )   $ (3,763 )

ITEM 7.               MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes, and the other financial information included in Form 10-K. With respect to this discussion, the terms “Cardima,” “Company,” “we,” “us,” and “our” refer to Cardima, Inc. This discussion and analysis may contain forward-looking statements as a result of many factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this Form 10-K.
 
OVERVIEW

Since 2001, our efforts have primarily focused on developing differentiated products that diagnose and treat AF, including our REVELATION Tx micro-catheter for use in the electrophysiology (EP) market, and our Surgical Ablation System (SAS) for use in the surgical market. Our EP products allow for the mapping (diagnosis) and ablation (treatment) of the two most common forms of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia.

We have experienced significant operating losses since inception.  We expect that our operating losses will continue for the foreseeable future as we continue to invest substantial resources in product development, pre-clinical and clinical trials, seeking regulatory approval, sales and marketing and manufacturing. Because our cash resources are extremely limited, we must raise additional capital in the immediate future in order to continue to pursue FDA approval for our REVELATION Tx micro-catheter system, or seek to sell or otherwise consummate a strategic transaction involving our SAS or other operations.
 
 
 
 
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On April 19, 2007, the FDA’s Medical Devices Dispute Resolution Panel (MDDRP) recommended to not approve our REVELATION Tx Microcatheter System’s PMA.  We will consider our options regarding this decision in the U.S. In addition, we will continue to market our next generation ablation EP systems, which include the REVELATION T-Flex and the INTELLITEMP in the European Union and the rest of the world where we are licensed to promote and sell these products. We are currently developing our next generation of EP products, the Cardima Cadence EPL, which we plan to initiate small trials in late 2010.

Currently our primary focus is to execute our business plan to generate revenue from our surgical devices, which have FDA- approval in the United States and to increase diagnostic product sales world-wide.  Moreover, we have signed up new distributors in the United States to sell our surgical products. We will need to raise additional capital to implement our marketing strategy relating to the sale of these devices.
 
In May 2008, we raised an aggregate principal amount of $5.1 million through the sale of 8,474,992 shares of our common stock to certain accredited investors. We also issued warrants to the investors to purchase shares of our common stock.

On February 28, 2009, we raised an aggregate principal amount of $20.0 million through the sale of 18,518,518 shares of our common stock to an accredited investor. We also issued warrants to purchase shares of our common stock.

We intend to use the net proceeds of the offerings for general corporate purposes, including working capital and equipment purchase.

As of December 31, 2009, we had stockholders’ equity of approximately $9.8 million and approximately $524,000 in cash and cash equivalents and $6.4 million in short-term investments. Our cash balance, together with cash anticipated to be provided by customer sales will not be sufficient to satisfy our anticipated cash requirements for normal operations and capital expenditures for the year ending December 31, 2010 or later. To strengthen our financial position, we intend to seek additional funding to be used for general corporate purposes, as well as research and development activities, including advancing our current product development activities and FDA and PMA approval process. We intend to seek funding for our capital needs through the issuance of debt, preferred stock, equity, loan guarantees, or a combination of these types of instruments. We may also seek to obtain financing through private placement or a public offering, a consequence of which could include the sale or issuance of stock to third parties. We expect that we will be able to secure sufficient financing to satisfy our anticipated cash requirements for normal operations and capital expenditures through at least December 31, 2010, although current economic and market conditions will make it challenging for us to do so.
 
We cannot be certain that we will be able to obtain financing on terms acceptable to us or at all. If we are not able to raise additional capital, we will not have sufficient cash to fund our operations. In such case, we would be required to curtail or cease operations, liquidate or sell assets, modify our current plans for product development, and other research and development activities, or extend the time frame over which these activities will take place, or pursue other actions that would adversely affect future operations.
 
 
 
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Results of Operations - Years Ended December 31, 2009 and 2008

The following table set forth, for the periods indicated, our results of operations expressed in dollar amounts and as percentage of total sales:

   
Years ended December 31,
 
   
2009
   
2008
 
   
Amount
   
% of Sales
   
Amount
   
% of Sales
 
   
(In thousands)
 
Sales
  $ 2,247       100.0 %   $ 1,456       100.0 %
Cost of goods sold
    3,114       138.6 %     2,604       178.9 %
Gross margin deficiency
    (867 )     -38.6 %     (1,148 )     -78.9 %
                                 
Operating expenses:
                               
Research and development
    5,429       241.6 %     5,145       353.4 %
Selling, general and administrative
    6,795       302.4 %     7,425       510.0 %
Total operating expenses
    12,224       544.0 %     12,570       863.3 %
                                 
Operating loss
    (13,091 )     -582.6 %     (13,718 )     -942.2 %
                                 
Other income (expense)
                               
Interest income
    65       2.9 %     115       7.9 %
Other income (expense)
    1       -       (121 )     -8.3 %
Total other income (expense)
    66       2.9 %     (6 )     -0.4 %
                                 
Loss before income taxes
    (13,025 )     -579.7 %     (13,724 )     -942.6 %
                                 
Income taxes
    1       -       1       0.1 %
                                 
Net loss
  $ (13,026 )     -579.7 %   $ (13,725 )     -942.7 %

The 2008 statement of operations has been reclassified to reflect stock-based compensation expenses according to their natural classifications in order to conform to the current year presentation (See Note 1). Stock-based compensation expenses reclassified in 2008 are as follows:

   
Year ended
December 31, 2008
(In thousands)
 
Cost of goods sold
  $ 123  
Research and development
    764  
General and administrative
    (887 )
Total
  $ -  
 
Net Sales
 

   
Year ended December 31,
 
   
2009
   
2008
 
Net sales
   (In thousands)  
  United States
  $ 1,092     $ 1,101  
  Europe
    342       354  
  Asia/Pacific
    812       1  
Other
    1       -  
   Total net sales
  $ 2,247     $ 1,456  
                 

Sales were $2.2 million in 2009 as compared to $1.5 million in 2008, an increase of $791,000, mostly due to increased sales of our PATHFINDER diagnostic micro-mapping catheters to Japan. Sales of other products in 2009 remained relatively the same as compared to 2008. Domestic sales of $1.1 million in both 2009 and 2008 represented 48.6% and 75.6% of total sales, respectively, in 2009 and 2008. There have been no significant changes in the selling price of our products.
 
 
 
 
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We had no sales to Japan during 2008, as our former Japanese distributor failed to maintain the legal documentation standard required to sell our PATHFINDER products in Japan. In December 2009, we received regulatory approval to re-enter the Japanese market and resumed sales of our PATHFINDER products. Even though we have resumed sales of our PATHFINDER products to Japan, there can be no assurance that we will be able to maintain sales or achieve the levels reached prior to suspension of sales in the first quarter of 2007.

Cost of goods sold; gross margin (deficiency)

   
Year ended December 31,
 
   
2009
   
2008
 
   
(dollar in thousands)
 
Sales
  $ 2,247     $ 1,456  
Cost of goods sold
    3,114       2,604  
Gross margin (deficiency)
  $ (867 )   $ (1,148 )
    Gross margin (deficiency) % of sales
    -38.6 %     -78.9 %

Cost of goods sold primarily includes raw material costs, catheter fabrication costs, system assembly and testing costs, and manufacturing labor and overhead costs for the units sold in the period. Cost of goods sold for 2009 were $3.1 million, or 138.6% of sales, as compared to $2.6 million, or 178.9% of sales, in 2008. The improved cost of goods sold percentage was mainly due to cost controls, better utilization of labor and higher output of our PATHFINDER line of diagnostic catheters to support the Japanese market. We expect the cost of goods sold as a percentage of sales to improve as sales volume increases. In the fourth quarter of 2008, we had identified and excluded from cost of goods sold $261,000 of idle facility costs which were included as a component of operating costs.  These idle facility costs were caused by the extended period of production down-time for the maintenance of our manufacturing equipment and the internal utilization of production resources in support of regulatory audits. We had no similar idle facility costs in 2009.

Research and Development Expenses

   
Year ended December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Research and development
  $ 5,429     $ 5,145  
% of sales
    241.6 %     353.4 %

Research and development expenses include product development, clinical testing and regulatory expenses. Research and development expenses in 2009 of $5.4 million increased by $284,000 as compared 2008 primarily due to higher compensation expense of $599,000 from increased headcount of seven additional employees and cost of products used for testing of $179,000, offset in part by lower outside consulting expenses of $491,000.

Selling, General and Administrative Expenses

   
Year ended December 31,
 
   
2009
   
2008
 
   
(dollar in thousands)
 
Selling, general and administrative expenses
  $ 6,795     $ 7,425  
% of sales
    302.4 %     510.0 %

Selling, general and administrative expenses in 2009 of $6.8 million were lower by $630,000 as compared to 2008. Selling expenses in 2009 increased by $450,000 mostly attributable to an increase in compensation expenses of $372,000 due to the hiring of three key account representatives in the Sales department. General and administrative expenses in 2009 decreased by $1.1 million as compared to 2008 mainly due to (i) a $948,000 consideration provided to APIX, which included a one-time non-cash compensation cost of $868,000 in connection with warrants granted to APIX for their services provided in the arrangement of the funding during 2008, (ii) higher professional fees of $546,000 in 2008, and (iii) higher travel expenses of $140,000 in 2008, offset in part by higher compensation and stock-based compensation expenses of $761,000 in 2009.
 
 
 
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Other income (expense)

Other income, net of expense, in 2009 was $66,000 as compared to expenses of $6,000 in 2008, which included $83,000 of interest expense in relation to the $6M loan in November 2008.

LIQUIDITY AND CAPITAL RESOURCES
 
We had cash and cash equivalents of $524,000 and $5.3 million as of December 31, 2009 and 2008, respectively. We also had $6.4 million in short-term investments as of December 31, 2009. Our working capital was $8.4 million as of December 31, 2009 as compared to a negative working capital of $331,000 as of December 31, 2008 due to a $6.0 million note payable, which was executed in November 2008 and converted to equity in February 2009.  Additional $14 million were received in February 2009 as part of an equity capital financing arrangement.

The cash used in operating activities in 2009 was $12.0 million, which reflected primarily a net loss of $13.0 million, non-cash charges of $2.4 million consisting primarily of depreciation expense and stock-based compensation, a decrease in accounts payable, and accrued liabilities of $1.1 million due to an increase in inventory of $648,000 in anticipation of the regulatory approval to re-enter the Japanese market with our PATHFINDER line of diagnostic catheters. The cash used in operating activities in 2008 was $11.9 million, which was primarily due to a net loss of $13.7 million, non-cash charges of $2.0 million consisting primarily of depreciation expense and stock-based compensation, an increase in inventory of $1.2 and prepaid expenses of $519,000, offset in part by an increase in accounts payable of $458,000, and the recognition of a non-cash compensation expense of $868,000 from the issuance of warrants for the sale of our common stock in May 2008.
 
Net cash used in investing activities of $6.8 million in 2009 was primarily for the purchase of short-term investments of $6.4 million consisting of certificates of deposit and our investment in capital expenditures of $383,000. This compares to capital expenditures of $686,000 in the same period of 2008 and a maturity of short-term investment of $2.0 million, which was liquidated to support our operating needs. We continue to invest in capital expenditures mainly to acquire lab equipment, computer hardware and software to support the growth of our business.
 

The table below summarizes our operating lease obligations pursuant to our non-cancelable leases, our long-term debt and our executed purchase obligations as of December 31, 2009:

   
Payments due by period
 
   
Total
   
< 1 year
   
1 - 3 years
   
3 - 5 years
   
> 5 years
 
Operating Lease Obligations
  $ 953     $ 208     $ 416     $ 329     $ -  
Long Term Debt (principal and interest)
    -       -       -       -       -  
Capital Lease Obligations
    49       31       18       -       -  
    $ 1,002     $ 239     $ 434     $ 329     $ -  

The contractual purchase obligations set forth above are not recorded as liabilities in our financial statements.  Our equipment purchase obligations are recorded as liabilities when the equipment is received by us or the risk of loss has been legally transferred to us.  Amounts payable pursuant to our operating leases are expensed during the reporting period in which the amounts are due and payable.  The operating lease obligations include operating leases for our corporate headquarters and our testing facility.

We have employment commitments with our Chief Executive Officer and Chairman of the Board.  However, amounts due under these employment contracts are not reflected in the table above.

Recent Financing Transactions

Net cash provided by financing activities was $14.0 million in 2009 as compared to 11.1 million 2008. We have funded our operations primarily with proceeds from issuances of common stock, debt financing, and lease financing. We intend to use the net proceeds for general corporate purposes, including working capital and equipment purchase.

In May 2008, we raised an aggregate principal amount of $5.1 million through the sale of 8,474,992 shares of our common stock to certain accredited investors. We also issued warrants to the investors to purchase 1,271,247 shares of our common stock.

On November 11, 2008, we executed a Loan Term Sheet and Loan Commitment letter with an accredited investor and shareholder of our company (the “Note Holder”) pursuant to which we issued a secured promissory note (the "Note") in the principal amount of $6 million (the “Advance”).  The Note provided for interest at a rate of 10% per year and a maturity date of November 10, 2009.  We agreed to grant the Note Holder a general charge on all of our assets.

 
 
 
 
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On February 28, 2009, we raised an aggregate principal amount of $20.0 million through the sale of 18,518,518 shares of our common stock to the Note Holder. The Note Holder agreed to convert the Advance into shares and waive all accrued interest.  We also issued 5,555,555 warrants to purchase shares of our common stock. (See discussion of this transaction in “Recent Sales of Unregistered Securities in Item 5 of Part II).

While we obtained additional equity financing in May 2008 and February 2009, our viability as a going concern is dependent upon our ability to obtain additional financing and to maintain and increase profitable operations through increased sales and the higher profit margins received from product sales. Historically, we have experienced significant operating losses with corresponding reductions in working capital and shareholders' equity. We do not currently have any external financing in place to support operating cash flow requirements. However, we are regularly working with potential investors through public or private financings or other arrangements to raise additional capital in order to continue operations. Historically, we have been able to raise capital through the issuance of debt or equity to meet working capital needs.  We obtained $5 million and $20 million in additional capital through an equity offering in May 2008 and February 2009, respectively. To date, we have no definitive agreements in place to raise additional capital and there can be no assurance that any definitive agreement will ever materialize. If we are unable to raise additional capital, our business may fail.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 1 to our financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Revenue Recognition. We recognize revenue from two types of customers, end users and distributors in accordance with Accounting Standard Codification “ASC” 605, “Revenue Recognition”. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of the product has occurred and title of products transferred at the point of shipment, payment of the product is reasonably assured and no substantive obligations to the customer remain. Revenue is presented net of discounts, allowances, and returns. Customers are not entitled to any rights of product return. Payment terms are either open trade credit or cash. We have distributors in Asia and Europe and we record as revenue the wholesale price we charge our distributors. The distributors assume the title and risk of loss at the shipping point.

We typically do not receive advance payments from our customers in connection with the sale of our products. We occasionally enter into an arrangement under which a customer agrees to purchase a large quantity of product that is to be delivered over a period of time. Depending on the size of these arrangements, we may negotiate an advance payment from these customers. Advance payments from a customer aggregating $108,000 as of December 31, 2009 is included in deferred revenue on our balance sheets. Revenue recognition for customer orders that include advance payments is consistent with our revenue recognition policy described above.
 
Research and Development. Research and development costs, which include clinical and regulatory costs, are charged to expenses as incurred.
 
Allowance for Notes Receivable Loss. The reserve for doubtful notes represents management’s estimate of principal and accrued interest losses as of the balance sheet date. Determination of the reserve is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows. Also, specific reserves are established in cases where management has identified significant conditions or circumstances related to an individual’s credit that we believe indicates the note is uncollectible. Note losses are charged off against the reserve. Evaluations of the reserve balance are conducted quarterly.

Allowance for Doubtful Accounts. We use the allowance method to account for uncollectible accounts receivable. Our estimate is based on historical collection experience and a review of the current status of accounts receivable. We review our accounts receivable balances by customer for accounts greater than 90 days old and make a determination regarding the collectability of the accounts based on specific circumstances and the payment history that exists with such customers. We also take into account our prior experience, the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value of our receivables. We also review our allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, we believe that our allowances for doubtful accounts fairly represent the underlying collectability risks associated with our accounts receivable.

Inventories. Inventory consists of raw materials, work in progress, and finished goods. Inventory is stated at the lower of cost or market using the first-in, first-out (“FIFO”) method. Cost includes the acquisition cost of raw materials and components, direct labor, and manufacturing overhead. We periodically review our inventory for excess, obsolescence or quality issues. Should we conclude that we have inventory for which we cannot recover our costs as a result of such review, we would record a charge to cost of goods sold. We record write downs for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based on assumptions about future product life-cycles, product demand and market conditions.  If actual product life cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.  At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
 
 
 
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Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized, and have been provided for all periods presented.
 
Valuation of Derivative Financial Instruments. We adopted ASC 815, “Derivatives and Hedging”, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. All changes in fair value are reported in other income or expense.
 
Stock-Based Compensation. We adopted ASC 718, “Compensation - Stock Compensation”. Assumptions used for 2009 and 2008 and the resulting estimates of weighted-average fair value per share of options granted and shares purchased during these periods were as follows:

   
2009
   
2008
 
Stock options:
           
Dividend yield
    0.0%       0.0%  
Volatility factor
    155.2%       159.6%  
Risk-free interest rate
    2.8%       3.6%  
Expected term (years)
    7       7  
Weighted-average fair value
of options granted during the
periods
    $0.99       $1.36  

In estimating the expected term, we considered our historical stock option exercise experience including forfeitures, our post vesting termination pattern and the term of the options outstanding. The annual risk free rate of return was based on the U.S. Treasury constant maturity rates with similar terms to the expected term of the stock option awards. We based our determination of expected volatility on our historical stock price volatility over the expected term. Forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested. We estimate the forfeiture rate based on past turnover data and is expected to be minimal.

RECENTLY ISSUED ACCOUNTING STANDARDS

In April 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.  In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value.  The guidance is effective for interim or annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  We adopted this guidance effective for the quarter ending June 30, 2009.  There is no impact of the adoption on our financial statements as of December 31, 2009.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments. The guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the guidance as of June 30, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.
 
 
 
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In May 2009, the FASB issued ASC 855, “Subsequent Events”.  ASC 855 requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. ASC 855 defines two types of subsequent events, as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. ASC 855 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively.  We adopted the provisions of ASC 855 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our condensed financial statements.  In February 2010, the FASB issued amended guidance on subsequent events. The amended guidance removes the requirement for United States Securities and Exchange Commission filers to disclose the date through which subsequent events have been evaluated. The amended guidance is effective upon issuance, except for the use of the issued date for conduit debt obligors. We adopted the amended guidance upon issuance, as required. The adoption of the amended guidance did not have a material impact on our financial statements.
 
In June 2009, the FASB issued ASC 860, “Transfers and Servicing”.  ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods that begin after November 15, 2009. We will adopt this standard in fiscal 2010 and are evaluating the impact it will have on our financial statements.

In June 2009, the FASB issued ASC 810, “Consolidation”, regarding the consolidation of variable interest entities.  ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. We will adopt this standard in fiscal 2010 and are evaluating the impact it will have on our financial statements.

In June of 2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on our financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05).  ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification by providing additional guidance clarifying the measurement of liabilities at fair value.  ASU 2009-05 is effective for us for the reporting period ending December 31, 2009.  We do not expect the adoption of ASU 2009-05 to have a material impact on our financial statements.

In September 2009, the FASB issued guidance concerning fair value measurements of investments in certain entities that calculate net asset value per share (or its equivalent). The guidance creates a practical expedient to measure the fair value of an investment that is within the scope of the guidance on the basis of the net asset value per share of the investment (or its equivalent) determined as of the reporting entity's measurement date. Therefore, the guidance allows certain attributes of the investment, which in the past may have indicated that it was necessary to make adjustments to the net asset value per share (or its equivalent) to estimate the fair value of the investment, to not be considered if the practical expedient is used. Additional disclosures are also required under the guidance. The guidance is effective for interim and annual periods ending after December 15, 2009, with early application permitted. We do not expect that the adoption of this guidance will have a material impact on our financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance is effective for our Company in 2011. We are currently evaluating the impact of adopting this update our financial statements.

In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance provides amendments to require new disclosures regarding transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and activity in Level 3, and to clarify existing disclosures regarding the level of disaggregation, inputs and valuation techniques. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the guidance, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, as of January 1, 2010, as required. We do not expect that the January 1, 2010 adoption of the guidance will have a material impact on our consolidated financial statements. We are currently determining the impact of the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements on our financial statements.
 
 
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In January 2010, the FASB issued guidance to address implementation issues related to the changes in ownership provisions in ASC 810, "Consolidation," ("ASC 810"). The guidance clarifies the scope of the decrease in ownership provisions in ASC 810 and expands the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of ASC 810. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009, and should be applied retrospectively to the first period that ASC 810 was adopted by us. We do not expect that the adoption of this guidance will have a material impact on our financial statements.

STOCKHOLDER RIGHTS PLAN

In May 2002, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of a new series of preferred stock on the terms stated in our Rights Plan. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our stockholder rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. Since adoption, no triggering events have occurred. The Rights Plan will expire on May 20, 2012.

ITEM 7 A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, which include potential losses arising from adverse changes in market rates and prices, such as foreign exchange fluctuations and changes in interest rates. Since our distributors in the Netherlands and England who distribute our products to the respective countries and invoice in Euros and British Pounds, we have exposure to exchange rate fluctuations between the Euro, British Pounds and the U.S. Dollar. Our foreign-currency-based sales to these countries have been insignificant in 2009 and 2008; as a result, the effect of the foreign exchange fluctuations on our financial results has not been significant.

ITEM 8.              FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 
Page
Financial Statements:
 
Report of Independent Registered Public Accounting Firm
40
Balance Sheets as of December 31, 2009 and 2008
41
Statements of Operations for the years ended December 31, 2009 and 2008
42
Statements of Shareholders’ Equity  for the years ended December 31, 2009 and 2008
43
Statements of Cash Flows for the years ended December 31, 2009 and 2008
44
Notes to Financial Statements
45
   

 
39

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of Directors and Stockholders
Cardima, Inc.
 
We have audited the accompanying balance sheets of Cardima, Inc. (“Cardima or the Company”) as of December 31, 2009 and 2008, and the related statements of operations, shareholders’ equity, and cash flows for the years then ended. Cardima’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cardima, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 
/s/ PMB Helin Donovan 
San Francisco, California
 
March 29, 2010
 
 
 
 
40

 
 

 
CARDIMA, INC.
BALANCE SHEETS
(In thousands, except share amounts)

   
December 31,
 
   
2009
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 524     $ 5,325  
Short term investment
    6,446       50  
Accounts receivable, net of allowances for doubtful accounts of $183 and $187, as of December 31, 2009 and 2008, respectively
    136       169  
Inventories
    1,969       1,566  
Prepaid expenses
    306       687  
Other current assets
    19       9  
Total current assets
    9,400       7,806  
                 
Property and equipment, net of accumulated depreciation of $3,173 and $2,988 at December 31, 2009 and 2008, respectively
    1,393       924  
Other assets
    61       61  
TOTAL ASSETS
  $ 10,854     $ 8,791  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 187     $ 418  
Accrued liabilities
    619       1,470  
Deferred revenue
    108       112  
Loans payable
    15       12  
Capital leases – current portion
    27       25  
Notes payable to related-party – current portion
    -       6,100  
Total current liabilities
    956       8,137  
                 
Deferred rent
    37       7  
Loans payable – net of current portion
    26       41  
Capital leases – net of current portion
    18       45  
TOTAL LIABILITIES
    1,037       8,230  
                 
Shareholders’ Equity:
               
Preferred stock – Series A Participating Preferred Stock of the Stockholder Rights Plan, $0.001 par value, 750,000 shares authorized, none issued.
    -       -  
Preferred stock-Series A, $0.001 par value, liquidation preference of $0.10, 10,000,000 shares authorized, 5,000,000 issued and outstanding
    500       500  
Common stock, $0.001 par value, 300,000,000 shares authorized, 143,951,034 and 125,134,721 shares issued and outstanding at December 31, 2009 and 2008, respectively
    144       125  
Additional paid-in-capital
    212,483       190,220  
Accumulated deficit
    (203,310 )     (190,284 )
Total shareholders’ equity
    9,817       561  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 10,854     $ 8,791  
                 


The accompanying notes are an integral part of these financial statements
 
 
 
41

 
 
 
 
CARDIMA, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

   
Year Ended December 31,
 
   
2009
   
2008
 
Net sales
  $ 2,247     $ 1,456  
Cost of goods sold
    3,114       2,604  
Gross margin deficiency
    (867 )     (1,148 )
                 
Operating expenses
               
Research and development
    5,429       5,145  
Selling, general and administrative
    6,795       7,425  
Total operating expenses
    12,224       12,570  
                 
Operating loss
    (13,091 )     (13,718 )
                 
Other income (expense)
               
Interest income
    65       115  
Other income / (expense)
    1       (121 )
Total other income / (expense)
    66       (6 )
                 
Loss before income taxes
    (13,025 )     (13,724 )
                 
Income taxes
    1       1  
Net loss
  $ (13,026 )   $ (13,725 )
                 
Basic and diluted net loss per share
  $ (0.09 )   $ (0.11 )
                 
Shares used in computing basic and diluted net loss per share
    140,807       121,945  
                 


The accompanying notes are an integral part of these financial statements
 
 
 
 
42

 

CARDIMA, INC.
 
Statement of Shareholders' Equity (deficit)
 
For the years ended December 31, 2009 and 2008
 
(In thousands)
 
   
Convertible Preferred Stock Series A
   
Common Stock
               
Total Stockholders’ Equity (deficit)
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Paid-In-Capital
   
Accumulated Deficit
 
Balance at December 31, 2007
    5,000     $ 500       116,316     $ 116     $ 182,324     $ (176,559 )   $ 6,381  
Common stock issued under employee stock options plans
            -       343       2       160       -       162  
Expense for vesting of stock options granted to employees
            -                       1,791       -       1,791  
Warrants issued as compensation expense
            -                       868       -       868  
Sale of common stock
            -       8,475       7       5,077       -       5,084  
Net Loss
            -                               (13,725 )     (13,725 )
Balance at December 31, 2008
    5,000     $ 500       125,134     $ 125     $ 190,220     $ (190,284 )   $ 561  
Common stock issued under employee stock options plans
            -       298       1       141       -       142  
Expense for vesting of stock options granted to employees
            -                       1,957       -       1,957  
Conversion of note payable and accrued interest into common stock
            -       5,725       5       6,178       -       6,183  
Sale of common stock
            -       12,794       13       13,987       -       14,000  
Net Loss
            -                               (13,026 )     (13,026 )
Balance at December 31, 2009
    5,000     $ 500       143,951     $ 144     $ 212,483     $ (203,310 )   $ 9,817  

Series A Participating Preferred Stock of the Stockholder Rights Plan is not shown because none is issued or outstanding.


The accompanying notes are an integral part of these financial statements
 
 
43

 

 
CARDIMA, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
   
For the Years Ended December 31,
 
   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
     
Net loss
  $ (13,026 )   $ (13,725 )
Adjustments to reconcile net loss to net cash used in operating activities
provided by operations:
               
Depreciation and amortization
    399       190  
Non-cash stock-based compensation
    1,957       1,791  
        Non-cash compensation
    -       868  
Excess and obsolete inventory
    68       -  
Allowance for doubtful accounts
    (4 )     110  
  Changes in operating assets and liabilities:
               
Accounts receivable
    37       (96 )
Inventories
    (716 )     (1,164 )
Prepaid and other assets
    131       (519 )
Accounts payable, accrued compensation and other liabilities
    (1,052 )     458  
Deferred revenue
    (4 )     112  
Accrued interest and fees
    183       83  
Net cash used in operating activities
    (12,027 )     (11,892 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of short-term investment
    (6,396 )     (50 )
Maturity of short-term investment
    -       2,008  
Purchase of property and equipment
    (383 )     (686 )
Net cash provided by/(used in) investing activities
    (6,779 )     1,272  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Principal payments under capital leases and credit facility
    (25 )     (27 )
Payments on notes payable
    (12 )     (10 )
Payments on notes payable to related party
    (100 )     (75 )
Net proceeds from loan financing
    -       6,000  
Proceeds from exercise of stock options
    142       105  
Net proceeds from sale of common stock
    14,000       5,141  
Net cash provided by financing activities
    14,005       11,134  
                 
Change in cash and cash equivalents
    (4,801 )     514  
Beginning cash and cash equivalents
    5,325       4,811  
Ending cash and cash equivalents
  $ 524     $ 5,325  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
               
Cash paid for income taxes
  $ 1     $ 1  
Cash paid for interest
  $ 10     $ 28  
                 
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
               
Equipment acquired under capital lease arrangements
  $ -     $ 79  
    Conversion of accrued interest into common stock
  $ 183     $ -  
Conversion of $6 million note into common stock
  $ 6,000     $ -  
    Reclassification of INTELLITEMP products from operating to investing activities
  $ 485     $ -  

The accompanying notes are an integral part of these financial statements.
 
 
 
44

 
 
CARDIMA, INC.
Notes to Financial Statements

 
1. Nature of Business and Summary of Significant Accounting Policies
 
Nature of Business
 
Cardima, Inc., (“The Company”) was incorporated in the State of Delaware on November 12, 1992. We are a medical device company focused on the diagnosis and treatment of cardiac arrhythmias. Arrhythmias develop from abnormal electrical currents within the heart, and can be associated with fast, slow and/or irregular heartbeats. Most arrhythmias are symptomatic, and some are associated with significant morbidity and even mortality. Our products have been developed for the diagnosis and treatment of the two most common forms of arrhythmias, atrial fibrillation (AF) and ventricular tachycardia (VT), with AF being the focus of our clinical and commercial efforts. We sell our products worldwide through distribution channels.

Basis of Presentation

The accompanying audited financial statements in this report have been presented on the going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. While we have obtained additional equity financing in May and November 2008, and February 2009, our viability as a going concern is dependent upon our ability to obtain additional financing and to maintain and increase profitable operations through increased sales and the higher profit margins received from product sales. Historically, we have experienced significant operating losses with corresponding reductions in working capital and shareholders' equity. We do not currently have any external financing in place to support operating cash flow requirements. However, we are regularly working with investors through public or private financings or other arrangements to raise additional capital in order to continue operations. In the past years, we have been able to raise capital through the issuance of debt or equity to meet working capital needs.  We obtained $5 million and $20 million in additional capital through an equity offering in May 2008 and February 2009, respectively. During the year 2010, management intends to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs.

We implemented financial and operational plans to improve operating efficiencies, reduce overhead, and redesign certain product lines to position ourselves for future profitable operations.
 
Liquidity

Historically, the Company has experienced and continues to experience significant operating losses and negative cash flows from operations, with corresponding reductions in working capital and shareholders' equity. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In 2009, the Company used approximately $12 million for operations. Over the past years, the Company’s working capital needs have been funded through a combination of private equity, debt, and lease financing. During the year 2010, management intends to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs. Management has implemented certain cost reduction initiatives, redesigned certain product lines, obtained more favorable material costs, and instituted more efficient management techniques. The accompanying financial statements for the year ended December 31, 2009 have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.

Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates and such differences could affect the results of operations reported in future periods.

We make estimates that affect reserves for allowance for doubtful accounts, inventory reserves, deferred income tax assets, estimated useful lives of property and equipment, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies.  Any adjustments applied to estimates are recognized in the period in which such adjustments are determined.

Revenue Recognition
 
We recognize revenue from two types of customers, end users and distributors in accordance with Accounting Standard Codification “ASC” 605, “Revenue Recognition”. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of the product has occurred and title of products transferred at the point of shipment, payment of the product is reasonably assured and no substantive obligations to the customer remain. Revenue is presented net of discounts, allowances, and returns. Customers are not entitled to any rights of product return. Payment terms are either open trade credit or cash. We have distributors in Asia and Europe and we record as revenue the wholesale price we charge our distributors. The distributors assume the title and risk of loss at the shipping point.
 
 
 
45

 
 

 
We typically do not receive advance payments from our customers in connection with the sale of our products. We occasionally enter into an arrangement under which a customer agrees to purchase a large quantity of product that is to be delivered over a period of time. Depending on the size of these arrangements, we may negotiate an advance payment from these customers. Advance payments from a customer aggregating $108,000 as of December 31, 2009 is included in deferred revenue on our balance sheets. Revenue recognition for customer orders that include advance payments is consistent with our revenue recognition policy described above.

Comprehensive Income
 
We recognize comprehensive income based on ASC 220, Comprehensive Income. This statement establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale securities. Comprehensive income is not presented in our financial statements since we did not have any changes in equity from non-owner sources.

Inventories
 
Inventories are stated at the lower of cost or market value.  Cost is determined by the first-in, first-out method and market represents the estimated net realizable value. We base our provisions for excess, obsolete or expired inventory primarily on a percentage based on our aged category and on our production levels. A significant change in the timing or level of demand for our products as compared to forecasted amounts may result in recording additional provisions for excess, obsolete or expired inventory in the future. The industry in which we participate is characterized by rapid product development and frequent new product introductions. Uncertain timing of next-generation product approvals, variability in product launch strategies, product recalls and variation in product utilization all affect the estimates related to excess and obsolete inventory. If actual product life cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.  At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
 
Assets Held as Leasehold Improvements
 
Assets held as leasehold improvements are recorded at cost and included with property and equipment. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the period of the related lease.

Cost of Goods Sold

Cost of goods sold primarily includes raw material costs, catheter fabrication costs, system assembly, shipping and handling charges, testing costs and manufacturing overhead.

Research and Development
 
Research and development costs, which include clinical and regulatory costs, are charged to expense as incurred.
 
Impairment of Long-Lived Assets
 
We assess the impairment of our long-lived assets periodically in accordance with the provisions of FASB ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets”.
 
We review the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors. During the year ended December 31, 2009, we believe that there has been no indicator of impairment.
 
 
 
 
46

 

 
Reclassification

Certain reclassifications have been made to the 2008 amounts to conform to the current year presentation.  Since January 2009, we have recognized stock-based compensation expense in our statement of operations in the respective cost centers and natural classifications. Prior to 2009 we only recognized stock-based compensation expense under the caption “Selling, General, and Administrative”. The Company believes that this change in presentation provides a more meaningful measure of its cost of sales, selling and administrative expenses, and research and development expenses. These 2009 reclassifications did not have any effect on our previously reported financial results or accumulated deficit in 2008.
 
Income Taxes
 
We utilize ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

This standard addresses the accounting for uncertainties in income taxes recognized in an entity’s financial statements and prescribes a threshold of “more likely than not” for recognition and derecognition of tax positions taken or expected to be taken in the tax returns.  ASC 740 also provides related guidance on measurement, classification, interest and penalties, and disclosure.  The adoption of this standard did not have a material impact on our financial statements.
 
Stock Based Compensation

The accounting principles require measurement of compensation cost for stock-based awards classified as equity at their fair value on the date of grant and the recognition of compensation expense over the service period for awards expected to vest. Such grants are recognized as expense over the service period, net of estimated forfeitures. 

Our determination of estimated fair value of share-based awards utilizes the Black-Scholes option-pricing model. The Black-Scholes model is affected by our stock price as well as assumptions regarding certain highly complex and subjective variables. These variables include, but are not limited to; our expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors.

Net Loss per Share
 
The Company utilizes ASC 260, Earnings Per Share.  Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive. Our common share equivalents consist of stock options, warrants, and convertible preferred shares.

The following outstanding anti-dilutive securities are not included in the calculation of diluted net loss per share attributable to common stockholders:

   
2009
   
2008
 
Options to purchase shares of common stock
    7,931,444       9,301,636  
Warrants to purchase shares of common stock
    14,026,802       9,228,656  
Convertible preferred shares
    1,000,000       1,000,000  
Total
    22,958,246       19,530,292  

The following table presents the calculation of basic and diluted net loss per share: (in thousands, except per share amounts)
 
   
2009
   
2008
 
Net loss available to common shareholders
  $ (13,026 )   $ (13,725 )
Weighted average common shares outstanding
    140,807       121,945  
Basic and diluted net loss per share available to common shareholders
  $ (0.09 )   $ (0.11 )
 
 
 
47

 
 

 

Cash and Cash Equivalents
 
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. In October 2008, the Federal Deposit Insurance Corporation announced the Term Policy Liquidity Guarantee Program which provides deposit insurance for funds in non-interest bearing transaction deposit accounts. As of December 31, 2009, we had cash and cash equivalents of $524,000 and $6.4 million in short term certificates of deposits.

Accounts Receivables and Allowance for Doubtful Accounts
 
Trade accounts receivable are stated at the amount we expect to collect. We recognize allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We use the allowance method to account for uncollectible accounts receivable. Our estimate is based on historical collection experience and a review of the current status of accounts receivable. We review our accounts receivable balances by customer for accounts greater than 90 days old and make a determination regarding the collectability of the accounts based on specific circumstances and the payment history that exists with such customers. We also take into account our prior experience, the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value of our receivables. We also review allowance for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, we believe that our allowance for doubtful accounts fairly represent the underlying collectability risks associated with our accounts receivable. For the period ended December 31, 2009 and 2008, we established an allowance for doubtful accounts of $183,000 and $187,000, respectively.

Short-Term Investments

Short-term investments consist of certificates of deposit with maturities of less than a year.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases is classified as capital assets and amortized using the straight line method over the term of the lease or the estimated useful life, whichever is shorter. Minor replacements, maintenance, and repairs that do not increase the useful life of the assets are expensed as incurred.  (see Note 4)
 
Comprehensive Loss

Comprehensive loss consists of net loss and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net loss in accordance with ASC 220, Comprehensive Income.  We, however, do not have any components of other comprehensive loss as defined by ASC 220 and therefore, for the years ended December 31, 2009 and 2008, comprehensive loss is equivalent to our reported net loss.  Accordingly, a statement of comprehensive loss is not presented.

Classification of Financial Instruments

In accordance to ASC 480, “Distinguishing Liabilities from Equity”, financial instruments with mandatory redemption rights are to be recorded as liabilities unless the redemption is to occur upon the liquidation or termination of the issuer. ASC 480 also specifies that a financial instrument that embodies a conditional obligation is based solely or predominantly on variations inversely related to changes in the fair value of the issuer's equity shares. Based on these characteristics, we have recorded the value of warrants issued and the outstanding shares of Preferred Stock Series A as a component of equity on the balance sheet.

Stock Warrants Issued to Third Parties

We account for stock warrants issued to third parties, including customers, in accordance with the provisions of ASC 505-50, “Equity-Based Payments To Non-Employees”, and ASC 605-50, “Revenue Recognition – Customer Payments and Incentives”. Under the provisions of ASC 505-50, because none of our agreements have a disincentive for nonperformance, we record a charge for the fair value of the portion of the warrants earned from the point in time when vesting of the warrants becomes probable. Final determination of fair value of the warrants occurs upon actual vesting. ASC 605-50 requires that the fair value of certain types of warrants issued to customers be recorded as a reduction of revenue to the extent of cumulative revenue recorded from that customer. We have not issued any warrants to customers in 2009 or 2008.
 
Segment Reporting
 
We identify our operating segments based on how we evaluate separate financial information (if available), business activities and management responsibilities. We have determined that we operate in a single business segment, the manufacturing and sale of device-based medical therapies. All of our revenues have been derived from this business segment.
 
 
 
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Fair Value of Financial Instruments
 
Our financial instruments at December 31, 2009 consist of cash, a short term investment, accounts receivable, inventory, account payables, other current liabilities, loan payable and capital lease obligation. The carrying values of these financial instruments approximate their fair values.
 
Effective January 1, 2008, the Company adopted FASB ASC 820 “Fair Value Measurement”, which relates to the measurement and disclosure of financial assets and liabilities.  This guidance established a framework for measuring fair value in GAAP and clarified the definition of fair value within that framework. The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.. This guidance also established a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:
 
·  
Level 1—quoted prices in active markets for identical assets and liabilities.

·  
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities.

·  
Level 3—unobservable inputs.
 
The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.
 
Off-Balance-Sheet Arrangements

As of December 31, 2009 and 2008, we had no off-balance sheet arrangements as defined by item 303(a)(4)(II) of the SEC Regulation S-K.

Commitments and Contingencies
 
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. Our management and our legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, our legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in our financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed.

Concentration of Credit Risk
 
Financial instruments which potentially subject us to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with high credit, quality financial institutions. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash and cash equivalents. With respect to accounts receivable, we routinely assesses the financial strength of our customers and, as a consequence, believe that the receivable credit risk exposure is limited.
 
Recent Accounting Pronouncements

In April 2009, the FASB issued guidance in the Fair Value Measurements and Disclosures Topic of the Codification on determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly.  The guidance emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants.  The guidance provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity.  In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value.  The guidance is effective for interim or annual reporting periods ending after June 15, 2009, and shall be applied prospectively.  We adopted this guidance effective for the quarter ending June 30, 2009.  There is no impact of the adoption on our financial statements as of December 31, 2009.
 
 
 
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In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments. The guidance amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The guidance is effective for interim and annual reporting periods ending after June 15, 2009. We adopted the guidance as of June 30, 2009, as required. The adoption of the guidance did not have a material impact on our financial statements.
 
In May 2009, the FASB issued ASC 855, “Subsequent Events”, ASC 855 requires all public entities to evaluate subsequent events through the date that the financial statements are available to be issued and disclose in the notes the date through which the Company has evaluated subsequent events and whether the financial statements were issued or were available to be issued on the disclosed date. ASC 855 defines two types of subsequent events, as follows: the first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet and the second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. ASC 855 is effective for interim and annual periods ending after June 15, 2009 and must be applied prospectively.  We adopted the provisions of ASC 855 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our condensed financial statements. In February 2010, the FASB issued amended guidance on subsequent events. The amended guidance removes the requirement for United States Securities and Exchange Commission filers to disclose the date through which subsequent events have been evaluated. The amended guidance is effective upon issuance, except for the use of the issued date for conduit debt obligors. We adopted the amended guidance upon issuance, as required. The adoption of the amended guidance did not have a material impact on our financial statements.
 
In June 2009, the FASB issued ASC 860, “Transfers and Servicing”, ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods that begin after November 15, 2009. We will adopt this standard in fiscal 2010 and are evaluating the impact it will have on our financial statements.

In June 2009, the FASB issued ASC 810, “Consolidation”, regarding the consolidation of variable interest entities.  ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods that begin after November 15, 2009. We will adopt this standard in fiscal 2010 and are evaluating the impact it will have on our financial statements.

In June of 2009, the FASB issued guidance now codified as FASB ASC Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. These provisions of FASB ASC Topic 105 are effective for interim and annual periods ending after September 15, 2009 and, accordingly, are effective for the Company for the current fiscal reporting period. The adoption of this pronouncement did not have an impact on our financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On its effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (ASU 2009-05).  ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification by providing additional guidance clarifying the measurement of liabilities at fair value.  ASU 2009-05 is effective for us for the reporting period ending December 31, 2009.  We do not expect the adoption of ASU 2009-05 to have a material impact on our financial statements.

In September 2009, the FASB issued guidance concerning fair value measurements of investments in certain entities that calculate net asset value per share (or its equivalent). The guidance creates a practical expedient to measure the fair value of an investment that is within the scope of the guidance on the basis of the net asset value per share of the investment (or its equivalent) determined as of the reporting entity's measurement date. Therefore, the guidance allows certain attributes of the investment, which in the past may have indicated that it was necessary to make adjustments to the net asset value per share (or its equivalent) to estimate the fair value of the investment, to not be considered if the practical expedient is used. Additional disclosures are also required under the guidance. The guidance is effective for interim and annual periods ending after December 15, 2009, with early application permitted. We do not expect that the adoption of this guidance will have a material impact on our financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) - Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance is effective for our Company in 2011. We are currently evaluating the impact of adopting this update on our financial statements.
 
 
 
 
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In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance provides amendments to require new disclosures regarding transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and activity in Level 3, and to clarify existing disclosures regarding the level of disaggregation, inputs and valuation techniques. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the guidance, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, as of January 1, 2010, as required. We do not expect that the January 1, 2010 adoption of the guidance will have a material impact on our consolidated financial statements. We are currently determining the impact of the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements on our financial statements.

In January 2010, the FASB issued guidance to address implementation issues related to the changes in ownership provisions in ASC 810, "Consolidation," ("ASC 810"). The guidance clarifies the scope of the decrease in ownership provisions in ASC 810 and expands the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of ASC 810. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009, and should be applied retrospectively to the first period that ASC 810 was adopted by us. We do not expect that the adoption of this guidance will have a material impact on our financial statements.

2. Short term investment

As of December 31, 2009, and 2008, we had $6.4 million and 50,000, respectively, in a certificate of deposit with maturity periods of less than twelve-months. The $50,000 certificate-of-deposit is used as collateral for our corporate credit card.

3. Inventories

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, net of reserves, consist of the following (in thousands):
 
   
December 31,
 
   
2009
   
2008
 
Raw Materials
  $ 775     $ 736  
Work-In-Process
    737       34  
Finished Goods
    753       1,024  
Reserve for obsolescence
    (296 )     (228 )
   Inventories
  $ 1,969     $ 1,566  

Inventories shown above are valued using FIFO and are adjusted to the lower of cost or market.  The Company had allowances for excess and obsolete inventory of approximately $296,000 and $228,000 at December 31, 2009 and 2008, respectively.  The Company had inventories located in foreign countries, and held by our local distributors, of approximately $52,000 and $50,000 as of December 31, 2009 and 2008, respectively.

Prior to 2009, we have included our current version of INTELLITEMP products, which is a radiofrequency energy management device, in inventory. In the first quarter of 2009, we have reclassified our INTELLITEMP products from inventory into capital assets as a result of a change in our sales strategy to facilitate sales of our line of disposable surgical products. This change in sales strategy is warranted as a result of our customers’ general practice of purchasing only disposable products and is consistent with how similar disposable products are usually sold by some of our competitors. As a result of this change, we loan our INTELLITEMP products to our customers when they purchase our surgical ablation probes, which together, comprise our surgical ablation system for use in the treatment of atrial fibrillation. Depreciation for these capitalized assets will be included in cost of goods sold as the INTELLITEMPs are shipped to our customers for use. During the first quarter of 2009, we have reclassified $245,000 worth of the current version of INTELLITEMP products from inventory to property and equipment.

Inventories are reduced for excess and obsolete inventories. These write-downs are based on our review of inventories on hand on a quarterly basis, compared to our assumptions about future demand, market conditions and anticipated timing of the release of next generation products. If actual conditions for future demand are less favorable than those projected by us or if next generation products are released earlier than anticipated, additional inventory write-downs may be required. Obsolete products removed from gross inventory are physically scrapped.
 
 
 
 
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Pursuant to ASC 330-10-30 “Inventory-Initial Measurement”, items such as idle facility expense, excessive spoilage, double freight and re-handling costs should be recognized as current-period charges. In addition, this standard requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. In 2009, we have identified $30,000 of idle facility costs due to the extended period of production down-time related to facilities maintenance. These costs were included in general and administrative expenses on our statement of operations for 2009. In 2008, we had identified $261,000 of idle facility costs due to the extended period of production down-time for the maintenance of our manufacturing equipment and the utilization of internal resources in support of FDA audits. These costs were included in our research and development and general and administrative expenses on our statement of operations for 2008.

4. Property and Equipment
 
Property and equipment, including equipment under capital leases, are carried at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives, generally three to five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the remaining term of the lease. Depreciation expense includes amortization of capital leases and leasehold improvements. Depreciation expense was approximately $399,000 and $190,000 for fiscal years 2009 and 2008, respectively.

Included in property and equipment are our INTELLITEMP radiofrequency energy management devices, which we reclassified from inventory in the first quarter of 2009. These units will be loaned at no cost to our direct customers that purchase our disposable products. INTELLITEMP units are carried at cost less accumulated depreciation. The units are depreciated over a three year period and such depreciation is included in cost of goods sold. Depreciation expense for INTELLITEMP units used for demonstration, evaluation, training and internal use is included as operating expenses. Total depreciation expense for the INTELLITEMP units included in cost of goods sold and operating expenses in 2009 has not been significant. Depreciation expense attributable to INTELLITEMP units used for demonstration or clinical trial purposes is included as a component of operating expenses.

Property and equipment consist of the following (in thousands):
 
   
December 31, 2009
   
December 31, 2008
 
Equipment
  $ 4,181     $ 3,554  
Leasehold improvements
    385       358  
      4,566       3,912  
Less accumulated depreciation and amortization
    (3,173 )     (2,988 )
Property and equipment, net
  $ 1,393     $ 924  

Equipment includes property and equipment financed under capital leases, which amounts to approximately $79,000 at December 31, 2009. Accumulated amortization related to the leased assets is $26,000.
 
5. Loans Payable

As previously disclosed, a settlement agreement was reached with our former President and Chief Operating Officer, William K. Wheeler, in which we agreed to pay Mr. Wheeler $295,000 and he agreed to reimburse the Company $192,500 for a loan he received from Cardima in June 2000 and May 2001.  The original discounted value of the note payable and note receivable were $232,287 and $162,022, respectively.  The net of these two notes of $41,000 is reported as $15,000 and $26,000 under current and non-current loans payable, respectively as of December 31, 2009.

6.  
Notes Payable to Related Party

In December 2007, we entered into a series of Subscription Agreements with certain accredited investors providing for the sale of 18 million shares of our common stock in the aggregate principal amount of $9 million. Per the Amended Funding Agreement, APIX waived its five-percent common share placement fee and accepted for its services rendered; (i) an additional one million warrants (total three million warrants) to purchase shares of our common stock at an exercise price of $0.55 per share; and (ii) all rights, title and interest in a loan totaling $360,000, including accrued interest, owed to us by Phil Radlick, a Director of our Company, with a guaranteed minimum recoverable value of not less than $100,000. We have extinguished all of our obligations under this Amended Funding Agreement in the first quarter of 2009.

On November 11, 2008, we executed a Loan Term Sheet and Loan Commitment letter with an accredited investor and our largest individual shareholder of our company (the “Note Holder”) pursuant to which we issued a secured promissory note (the "Note") in the principal amount of $6 million.  The Note provided for interest at a rate of 10% per year and a maturity date of November 10, 2009.  We agreed to grant the Note Holder a general charge on all of our assets. APIX acted as placement agent for the transaction. On February 28, 2009, we raised an aggregate principal amount of $20 million through the sale of 18,518,518 shares of our common stock to the Note Holder. The Note Holder agreed to convert the $6 million into shares of common stock, in accordance with the same terms of the subscription agreement and waive all accrued interest.
 
 
 
 
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7. Commitments and Contingencies
 
Commitments
 
We lease a facility under an operating lease, which has been extended through July 2014. We also lease certain equipment under non-cancelable capital lease agreements, which bear interest at the rate of 10% per annum. Following is a schedule of future minimum lease payments under both operating and capital leases (in thousands):
 
Fiscal Year
 
Operating Leases
   
Capital Leases
 
2010
  $ 208     $ 31  
2011
    208       18  
2012
    208       -  
2013
    208       -  
2014
    121       -  
Total minimum lease payments
  $ 953     $ 49  
Less amounts representing interest
    -       4  
Present value of net minimum lease payments
  $ 953     $ 45  
                 
Short-Term
  $ -     $ (27 )
Long-Term
  $ -     $ 18  
 
 For the years ended December 31, 2009, and 2008, building rent expense under operating leases totaled $226,000 and $268,000, respectively.
 
Contingencies

 On August 31, 2007, our Board of Directors terminated the employment of our Chief Executive Officer and Acting Chief Financial Officer, Mr. Gabriel Vegh.  Mr. Vegh remained as a member of the Board of Directors until September 8, 2008.  On March 3, 2008, we received a letter from the law firm representing Mr. Vegh, who claimed for damages for wrongful termination in violation of statutes, breach of contract and related claims.  We determined that Mr. Vegh’s termination was “with cause” thus the severance provision of his employment agreement did not apply. In April 2009, we reached an agreement with Mr. Vegh to settle all disputes and release all claims against each other.

On October 31, 2007, we received a letter from the law firm representing our former Director of Operations, Mr. Larry Stevens. Mr. Stevens claimed for damages for wrongful termination in violation of public policy, breach of contract and related claims.  We determined that Mr. Stevens’ termination was “with cause” thus the severance provision of his employment agreement did not apply. In February 2009, we reached an agreement with Mr. Stevens to settle all disputes and release all claims against each other.

In addition, we are subject to numerous risks and uncertainties because of the nature and status of our operations and could be subject to claims and legal actions arising in the ordinary course of business. We maintain insurance coverage for events in amounts that are deemed appropriate. We believe that uninsured losses, if any, will not be materially adverse to our financial position or results of operations.
 
Commencing October 2008 through February 2010, we issued an aggregate of 531,944 shares of common stock to approximately 25 employees upon exercise of options granted pursuant to the Company’s 2007 Employee Option Plan (the “Option Plan”) from which we received an aggregate of approximately $250,000 of proceeds. The number of shares issued constitute 0.3% of our issued an outstanding share total at December 31, 2009. Such shares were inadvertently issued without restriction. At the time of the issuance of such shares, we had not sought to register or qualify these shares or options under federal or state securities laws. Accordingly, the shares purchased pursuant to the exercise of these options may have been issued in violation of federal and state securities laws, and may be subject to rescission. We plan to take immediate action to file a Form S-8 Registration Statement to register shares issuable under the Option Plan and will include shares issued to employees who continue to hold shares of common stock of the Company that were issued upon exercise of options granted under the Option Plan. We may be subject to liabilities for violation of applicable federal or state securities state laws. We are currently unable to determine the amount of any fines or any action that may be taken against the Company as a result of these issuances. The assessment of any fines and/or penalties could have a material adverse effect on our profits, results of operations, financial condition and future prospects.


 
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8. Concentrations of Risk
 
To date, product sales have been direct to customers in the United States and to distributors primarily in Europe and Asia. The geographic distribution of net sales was as follows (in thousands): 
 
 
Years Ended December 31,
 
 
2009
 
2008
 
                     
United States
  $ 1,092       49 %   $ 1,101       76 %
Europe
    342       15 %     354       24 %
Asia/Pacific
    812       36 %     1       - %
Others
    1       -       -       - %
       Total Net Sales
  $ 2,247       100 %   $ 1,456       100 %

In 2007, our former Japanese distributor notified us of their failure to maintain the legal documentation standard required to sell our PATHFINDER in Japan.  As a result, we had no sales in Japan in 2008 and 2007. We filed a “Shonin Application” together with our new Japanese distributor to obtain the necessary regulatory approval to re-start PATHFINDER sales in the Japanese market. In December 2009, we have received regulatory approval to re-enter the Japanese market, and have resumed shipment of our PATHFINDER products to Japan.

Our diagnostic product group, namely the Pathfinder family of micro-catheter systems, accounted for 72% and 60% of net sales for the years ended December 31, 2009 and 2008, respectively.

We purchase certain key components of our products for which there are relatively few alternative sources of supply including the hydrophilic coating for certain of our micro-catheters, from sole or limited source supplies. Establishing additional or replacement suppliers for any of the numerous components used in our products, if required, may not be accomplished quickly and could involve significant additional costs. Any supply interruption from vendors or failure of our products would limit our ability to manufacture our products and would have a material adverse effect on our business, financial condition and results of operations.

9. Stockholders’ Equity

We are authorized to have two classes of capital stock: Preferred Stock and Common Stock. We have designated five million shares of our preferred stock as Series A Convertible Preferred Stock and seven hundred and fifty thousand shares as Series A Participating Preferred Stock. Holders of common stock are entitled to one vote for each share held. Holders of Series A Convertible Preferred Stock and Series A Participating Preferred Stock are entitled to vote as a single class with holders of common stock on all matters upon which shareholders are entitled to vote.
 
Preferred stock
 
In May 2002, we adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock for shareholders of record on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of Series A Participating Preferred Stock on the terms stated in our Rights Plan. As of December 31, 2009, no shares have been issued under the Rights Plan. Since adoption, no triggering events have occurred. The Rights Plan will expire on May 20, 2012.

In 2007 we issued five million shares of Series A Convertible Preferred stock to APIX Corporation.  APIX, at its sole discretion, may convert the five million Preferred Shares it owns into 1 million shares of our common stock.  The Series A Convertible Preferred votes together with the common stock will continue to carry 28 votes for each share of Series A Preferred Stock. 
 
Common Stock
 
We are authorized to issue 300,000,000 shares of common stock. Holders of common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. No dividends have been declared to date.

In May 2008, we entered into a series of Subscription Agreements with certain accredited investors providing for the sale of (i) 8,474,992 shares of our common stock in the aggregate principal amount of $5.1 million and (ii) warrants to purchase an aggregate of 1,271,247 shares of our common stock at an exercise price of $0.65 per share. At our option, we may force the investors to exercise the warrant at a price of $0.65 per share, provided that (i) our common stock is trading at a price equal to or greater than $1.00 per share for a period of fifteen (15) consecutive trading days and (ii) a registration statement is in effect with respect to the warrant shares. We also issued 1,500,000 warrants to purchase shares of our common stock to APIX at an exercise price of $0.60 per share. The warrants expire 5 years from the date of issuance and are still outstanding as of December 31, 2009.
 
 
 
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On February 28, 2009, we entered into a subscription agreement with an accredited investor providing for the sale of (i) 18,518,518 shares of our common stock at a price equal to $1.08 per share, for an aggregate principal amount of $20 million and (ii) warrants to purchase an aggregate of 5,555,555 shares of our common stock at an exercise price of $1.25 per share. At our option, we may force the Holder to exercise the warrant at a price per share equal to $1.08, provided that (i) our common stock is trading at a price equal to or greater than $1.58 per share for a period of fifteen (15) consecutive trading days and (ii) a registration statement is in effect with respect to the warrant shares. The warrants expire 5 years from the date of issuance and are still outstanding as of December 31, 2009.

All of the above offerings and sales were deemed to be exempt under rule 506 of Regulation D and Section 4(2) and/or Regulation S of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of the Company or executive officers of the Company, and transfer was restricted by the Company in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our Securities and Exchange Commission filings.  Pursuant to the Subscription Agreement, we have agreed to use our best efforts to secure effectiveness of, as soon as reasonably practicable after the issuance and delivery of the Shares and Warrants, a registration statement on Form SB-2, now S-1.

During 2009, we issued 297,795 of common stock and received an aggregate principal amount of approximately $142,000 upon exercises of stock option grants issued under our Stock Option Plans by employees and consultants of the Company.

10. Stock Based Compensation
 
We adopted ASC 718, “Compensation - Stock Compensation”.  ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of operations. The standard requires the measurement and recognition of compensation expense for all share-based awards made to employees, consultants, directors, including employee non-qualified and incentive stock options, and employee purchase rights under our Employee Stock Purchase Plan based on estimated fair values. We use the Black-Scholes method to determine fair value of stock options granted.
 
The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of share-based awards, including the option’s expected term and the price volatility of the underlying stock. Stock-based compensation expense is calculated based on the fair market value of our stock on the date of grant. For the years ended December 31, 2009 and 2008, the weighted average grant date fair value per option share was $0.99, and $1.24, respectively.
 
The total stock-based compensation expense for employee and non-employee options under FAS 123R was approximately $1,957,000 and $1,791,000 for the years ended December 31, 2009 and 2008, respectively. This expense reduced our basic and diluted earnings per share by $0.01 and by $0.01 for each of the years ended December 31, 2009 and 2008, respectively.  As of December 31, 2009, there was approximately $3,049,000 of total future compensation costs related to unvested stock options to be recognized over a weighted average period of 1.6 years. In 2009, total options vested were approximately 2.2 million shares.
 
2007 Stock Option Plan
 
On September 14, 2007, our Board of Directors adopted the 2007 Stock Option Plan (the “2007 Stock Plan”). The 2007 Stock Plan authorizes the Board of Directors or one or more of its members to grant options to purchase shares of the Company to eligible individuals.  Eligible individuals may be employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary, and consultants who provide valuable service to us. Options to purchase shares of our common stock granted under the plan may be incentive stock options or non-statutory stock options as determined by our Board of Directors or its delegate. 30,000,000 shares of common stock were reserved for issuance over the term of the 2007 Stock Plan.
 
Under the plan in no event shall the option price per share be less than 85% of the fair market value of a share of common stock on the date of the grant. In case of incentive stock option, except options to 10% stockholders, the exercise price of the option will not be less than 100% of the fair value of the common stock at the grant date. Each option agreement specifies the term as to when the option is to become exercisable. Standard options vest at a rate of at least 20% of the underlying shares per year over 5 years and have a maximum term of 10 years. However, in no event shall an incentive stock option granted to a 10% stockholder under the plan shall have a maximum term in excess of more than 5 years from the date of the grant. Any optionee (as determined under Section 424 (d) of the Internal Revenue Code) who owns more than 10% of the combined voting power of all classes of outstanding stock of the Company, its Parent or Subsidiary is not eligible for the grant unless the exercise price of the option is at least 110% of the fair market value of the common stock on the date of the grant.
 
 
 
 
55

 

 
Assumptions used for 2009 and 2008 and the resulting estimates of weighted-average fair value per share of options granted and shares purchased during these periods were as follows:

   
2009
   
2008
 
Stock options:
           
Dividend yield
    0.0 %     0.0 %
Volatility factor
    155.2 %     159.6 %
Risk-free interest rate
    2.8 %     3.6 %
Expected term (years)
    7       7  
Weighted-average fair value
of options granted during the
periods
  $ 0.99     $ 1.36  

The following table summarizes activities under the 2007 Stock Option Plan:

   
Outstanding Options
 
   
Shares Available
   
Number of Shares
   
Exercise Price Per Share
   
Weighted-Average Exercise Price
 
                         
Balance as of 12/31/2007
    24,185,000       5,815,000     $ 0.44 - $0.55     $ 0.44  
Options Granted in 2008
    (4,960,000 )     4,960,000     $ 0.42 - $1.85     $ 1.24  
Options Cancelled in 2008
    1,393,333       (1,393,333 )   $ 0.41 - $1.65     $ 0.52  
Options Exercised in 2008
    --       (214,445 )   $ 0.44 - $0.62     $ 0.48  
Balance as of 12/31/2008
    20,618,333       9,167,222     $ 0.41 - $1.85     $ 0.86  
Options Granted in 2009
    (450,000 )     450,000     $ 0.71 - $1.25     $ 1.03  
Options Cancelled in 2009
    1,509,922       (1,509,922 )   $ 0.41 - $1.65     $ 0.62  
Options Exercised in 2009
    ---       (297,499 )   $ 0.80 - $1.50     $ 1.14  
Balance as of 12/31/2009
    21,678,255       7,809,801     $ 0.41 - $1.85     $ 0.93  
 
Total options outstanding at December 31, 2009, and 2008, were 7,809,801 and 9,167,222, respectively, under the 2007 Stock Plan. All options granted in 2009 and 2008 were granted at exercise price equal to or greater than the common stock’s fair value on the date of grant. The weighted average fair value of options granted in 2009 under the 2007 Stock Plan was $1.03 per share.

The following table summarizes stock-based compensation expense related to employee and non-employee stock options for the years ended December 31, 2009 and 2008 (in thousands):

   
Twelve Months ended December 31,
 
   
2009
   
2008
 
Stock-based compensation expense by caption:
           
Cost of sales
  $ 211     $ 123  
Research and development
    405       764  
Selling, general and administrative
    1,341       904  
Total stock-based compensation expense
  $ 1,957     $ 1,791  

There was no capitalized share-based compensation cost as of December 31, 2009 and there were no recognized tax benefits during the years ended December 31, 2009 and 2008.
 
 
 
 
56

 

 
The following table summarizes information about stock options outstanding under the 2007 Stock Plan at December 31, 2009:

         
Options Outstanding
   
Options Exercisable
 
Option Plan
 
Range of exercise prices
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
 
                                           
2007
  $ 0.41-$0.71       4,698,134       7.94     $ 0.48       3,106,484       7.88     $ 0.47  
    $ 1.10-$1.57       660,000       8.95       1.29       126,672       8.79       1.36  
    $ 1.60-$1.85       2,451,667       8.65       1.70       721,674       8.65       1.70  
   
Total
      7,809,801       8.25     $ 0.93       3,954,830       8.05     $ 0.73  


As of December 31, 2009, vested options of 3,954,830 and non-vested options of 3,854,971 had an aggregate intrinsic value of approximately $1.6 million and $812,000, respectively.

2003 Stock Option Plan
 
On April 17, 2003, our Board of Directors adopted the 2003 Stock Option Plan (the “Stock Plan”). The Stock Plan authorizes the Board of Directors or one or more of its members to grant to employees, consultants and non-employee directors options to purchase common stock of the Company. Options granted under the Stock Plan may be incentive stock options or non-statutory stock options as determined by the Board of Directors or its delegate.
 
Under the Stock Plan, 820,000 shares of common stock were reserved for issuance. Under the plan, any optionee who owns more than 10% of the combined voting power of all classes of outstanding stock is not eligible for the grant of an incentive stock option unless the exercise price of the option is at least 110% of the fair market value of the common stock on the date of the grant.
 
Under the Stock Plan, except 10% stockholders, the exercise price of incentive stock option will not be less than 100% of the fair value of the common stock at the grant date. Each option agreement specifies the term as to when the option is to become exercisable. Standard option issuances are for grants with vesting periods of four years with six months 12.5% cliff vesting and ratable monthly vesting thereafter. However, in no event shall an incentive stock option granted under the Stock Plan be exercisable more than 10 years from the date of the grant, and in the case of 10% stockholders, no more than 5 years from the date of the grant.
 
The following table summarizes activities under the 2003 Stock Option Plan:

 
 
Outstanding Options
 
Shares Available
 
Number of Shares
 
Exercise Price Per Share
 
Weighted-Average Exercise Price
               
Balance as of 12/31/2007
738,575
 
81,425
  $
0.55 - $12.40
 
$3.17
Options Granted in 2008
-
 
-
   
-
 
-
Options Cancelled in 2008
9,063
 
(9,063)
  $
0.55 - $2.50
 
$0.65
Options Exercised in 2008
-
 
(4,791)
  $
0.55 - $0.60
 
$0.60
Balance as of 12/31/2008
747,638
 
67,571
  $
0.55 - $12.40
 
$3.69
Options Granted in 2009
-
 
-
   
-
 
-
Options Cancelled in 2009
8,525
 
(8,525)
  $
0.55 - $12.40
 
$2.55
Options Exercised in 2009
-
 
(296)
  $
0.55
 
$0.55
Balance as of 12/31/2009
756,163
 
58,750
  $
0.55 - $10.40
 
$3.88
 
 
 
 
57

 

 
 
At December 31, 2009 and 2008, 58,750 and 67,571 options were outstanding under the 2003 Stock Plan, respectively.  There were no options granted in 2009 under the 2003 Plan.

The following table summarizes information about stock options outstanding under the 2003 Stock Plan at December 31, 2009:
 
         
Options Outstanding
   
Options Exercisable
 
Option Plan
 
Range of exercise prices
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
 
                                           
2003
  $ 0.55-$2.50       37,975       5.89     $ 0.62       37,661       5.88     $ 0.62  
    $ 3.80-$10.40       20,775       4.19       9.83       20,775       4.19       9.83  
   
Total
      58,750       5.29     $ 3.88       58,436       5.28     $ 3.89  
 
As of December 31, 2009, vested options of 58,436 and non-vested options of 314 had an aggregate intrinsic value of approximately $14,880 and $127, respectively.

1993 Stock Option Plan
 
During 1993, the Board of Directors adopted the 1993 Stock Option Plan, as amended, and reserved 765,069 shares of common stock for issuance under the plan. The plan provides for both incentive and non-statutory stock options to be granted to employees, directors and consultants. Exercisability, option price, fair value and other terms are determined by the Board of Directors; however, the exercise price of each incentive stock option shall be not less than 100% of the fair market value of the stock issuable upon exercise of the option on the date the option is granted. The exercise price of each non-statutory stock option shall not be less than 85% of the fair market value of the stock subject to the option on the date the option is granted. All options granted prior to the initial public offering of shares were generally exercisable upon grant, but shares received upon exercise prior to vesting are subject to repurchase upon the stockholder’s termination of service to the Company. Subsequent to the Company’s initial public offering, only fully vested shares are exercisable. Shares purchased upon exercise of options generally vest at the rate of 12.5% after six months from the date of grant, and monthly thereafter over the following 42 months. No option shall have a maximum term in excess of ten years from the grant date and no option granted to a 10% stockholder shall have a maximum term in excess of five years from the grant date. The 1993 plan expired on June 10, 2003, and no additional grants were made under this plan.

The following table summarizes activities under the 1993 Stock Option Plan:
 
 
 
Outstanding Options
 
Shares Available
 
Number of Shares
 
Exercise Price Per Share
 
Weighted-Average Exercise Price
               
Balance as of 12/31/2007
-
 
60,271
  $
3.40 - $46.30
 
$11.24
Options Expired in 2008
(19,028)
 
-
       
 
Options Cancelled in 2008
19,028
 
(19,028)
  $
3.40 - $46.30
 
$9.54
Balance as of 12/31/2008
-
 
41,243
  $
3.40 - $25.60
 
$12.03
Options Expired in 2009
   
-
       
 
Options Cancelled in 2009
   
(3,950)
  $
3.40 - $25.60
 
$12.64
Balance as of 12/31/2009
-
 
37,293
  $
3.40 - $15.00
 
$11.96

At December 31, 2009 and 2008, 37,293 and 41,243 options were outstanding under the 1993 Stock Plan, respectively. There were no options granted in 2008 and in 2007 under the 1993 Stock Option Plan.
 
 
 
 
58

 

 
The following table summarizes information about stock options outstanding under the 1993 Stock Option Plan at December 31, 2009:

         
Options Outstanding
   
Options Exercisable
 
Option Plan
 
Range of exercise prices
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
 
                                           
1993
  $ 3.40-$8.60       3,150       1.39     $ 3.68       3,150       1.39     $ 3.68  
    $ 10.30-$15.00       34,143       2.47       12.73       34,143       2.47       12.73  
   
Total
      37,293       2.38     $ 11.96       37,293       2.38     $ 11.96  
 
As of December 31, 2009, outstanding stock options under the 1993 Stock Plan did not have any intrinsic value.

1997 Directors' Stock Option Plan
 
In March 1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan and reserved 90,000 shares of common stock for issuance. The plan provides for the grant of non-statutory stock options to non-employee directors of the Company.  The 1997 plan expired in 2007, and no additional grants were made under this plan.
 
The following table summarizes activity under the 1997 Director’s Stock Option Plan:
 
 
Outstanding Options
 
Shares Available
 
Number of Shares
 
Exercise Price Per Share
 
Weighted-Average Exercise Price
               
Balance as of 12/31/2007
57,800
 
31,800
  $
0.30 - $14.50
 
$0.90
Options Expired in 2008
(64,000)
 
-
       
 
Options Cancelled in 2008
6,200
 
(6,200)
  $
0.30 - $0.70
 
$0.67
Balance as of 12/31/2008
-
 
25,600
  $
0.50 - $14.50
 
$1.02
Options Expired in 2009
-
 
-
       
 
Options Cancelled in 2009
-
 
-
         
Balance as of 12/31/2009
-
 
25,600
  $
0.50 - $14.50
 
$1.02

At December 31, 2009 and 2008, 25,600 options were outstanding under the 1997 Directors’ Stock Plan.  No stock options were granted in 2009 and 2008.
 
The following table summarizes information about stock options outstanding under the 1997 Directors’ Stock Option Plan at December 31, 2009:
 
         
Options Outstanding
   
Options Exercisable
 
Option Plan
 
Range of exercise prices
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
   
As of December 31, 2009
   
Weighted avg. remaining contractual life
   
Weighted avg. exercise price
 
                                           
1997 Director's Plan
  $ 0.50-$1.00       24,800       6.27     $ 0.73       23,800       6.27     $ 0.74  
    $ 8.40-$14.50       800       2.92       10.10       800       2.92       10.10  
   
Total
      25,600       6.16     $ 1.02       24,600       6.16     $ 1.04  
 
As of December 31, 2009, vested options of 24,600 and non-vested options of 1,000 had an aggregate intrinsic value of approximately $6,000 and $500, respectively.
 
 
 
 
59

 

 
1997 Employee Stock Purchase Plan
 
In March 1997, the Board of Directors adopted the 1997 Employee Stock Purchase Plan (the “Plan”), as amended, and reserved 2.5 million shares of common stock for issuance. On June 28, 2007, the shareholders authorized an increase in the number of authorized shares of common stock issuable under the Plan to 3.5 million. In August 2008, our Board of Directors reviewed our stock-based compensation plans and decided to terminate the 1997 Employee Stock Purchase Plan. As of December 31, 2008, there were 420,958 shares issued under the Plan.

Share-Based Compensation to Non-Employees

We account for options issued to non-employees under ASC 718, using the Black-Scholes option pricing model. The value of such non-employee options is periodically re-measured over their vesting terms. The fair value of options was re-measured at period-end using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.87% to 4.1%, using applicable United States Treasury rates; a dividend yield of 0.0%; an annual volatility factor of 159.1% to 163.7%; and an average expected life based on the terms of the option grant or contractual term of the warrant of 5 to 10 years.  We did not grant any shares to non-employees during 2009.  During year ended December 31, 2008, we granted 1,060,000 shares to non-employees.  During the first three months of 2009, we reversed $164,000 of accrued stock compensation expense for an option granted in 2008 to a consultant.  The option had a performance based vesting which was not met.  Expense recognized related to options issued to non-employees was approximately $18,000 and $422,000 during the years ended December 31, 2009, and 2008, respectively.

11. Related-party Transactions
 
We have entered into employment agreements with key employees. The agreements specify various employment-related matters, including confidentiality requirements, competitive restrictions, assignment of inventions, annual compensation, and severance benefits in the event of termination without cause.
 
Apix International Limited (“APIX”) is an entity that is solely owned by Robert Cheney who is also the CEO, CFO and a Director of our Company. Mr. Cheney was appointed as the CEO in June 2007. APIX acted as agent for all of our recent financing activities.

In December 2007, we entered into a series of Subscription Agreements with certain accredited investors providing for the sale of (i) a total of 18 million shares of our common stock in the aggregate principal amount of $9 million and (ii) warrants to purchase 2.7 million shares of our common stock at an exercise price of $0.55 per share. We provided for $75,000 in expense reimbursements. Pursuant to the terms of the Amended Funding Agreement, APIX waived its five-percent common share placement fee and  accepted for its services rendered; (i) an additional one million warrants (total three million warrants) to purchase shares of our common stock at an exercise price of $0.55 per share; and (ii) all rights, title and interest in a loan totaling $360,000, including accrued interest, owed to us by Phil Radlick, a Director of our Company, with a guaranteed minimum recoverable value of not less than $100,000. We have extinguished all of our obligations under this Amended Funding Agreement in the first quarter of 2009.
 
In May 2008, we entered into a series of Subscription Agreements with certain accredited investors providing for the sale of (i) 8,474,992 shares of our common stock in the principal amount of $5.1 million and (ii) warrants to purchase 1,271,247 shares of our common stock at an exercise price of $0.65 per share. We also issued 1,500,000 warrants to purchase shares of our common stock to APIX at an exercise price of $0.60 per share. We provided for $80,000 in expense reimbursements.
 
On November 11, 2008, we executed a Loan Term Sheet and Loan Commitment letter with an accredited investor and our largest individual shareholder (the “Note Holder”) pursuant to which we issued a secured promissory note (the "Note") in the principal amount of $6 million (the “Advance”).  The Note provided for interest at a rate of 10% per year and a maturity date of November 10, 2009.  We agreed to grant the Holder a general charge on all of our assets. APIX acted as placement agent for the transaction. We provided for $80,000 in expense reimbursements.

On February 28, 2009, we entered into a subscription agreement with the Note Holder providing for the sale of (i) 18,518,518 shares of our common stock in principal amount of $20 million, and (ii) warrants to purchase 5,555,555 shares of our common stock at an exercise price of $1.25 per share. APIX acted as placement agent. The Advance was converted into subscription of the shares. The Note Holder agreed to waive all interests accrued on the Advance. The Financing Documents were also terminated. As of December 31, 2009, the Note Holder owns approximately 45% of our Company’s common stock.

In February 2008, we entered into a consulting agreement with Richard Gaston Associates, LLC, an entity owned by Richard Gaston who is a member of our Board of Directors.  The agreement was approved by the Compensation Committee of our Board of Directors and extended through February 2011.  Pursuant to the terms of the agreement, Dr. Gaston was paid $96,000 in 2009 and $88,000 in 2008 in exchange for advisory services to our Sales and Marketing departments.
 
 
 
60

 

 
In November 2007, we entered into a consulting agreement with Dr. Sung Chun, who is a member of our Board of Directors. The agreement was approved by the Compensation Committee of our Board of Directors and extended through September 2010. Dr. Chun was paid $120,000 in 2009 and $104,000 in 2008 in exchange for the services he provides as our Chief Medical Officer.

In April 2009, we entered into a one-year consulting agreement with Eric Chan, who resigned as our Chief Technology Officer, but remained as a member of our Board of Directors until February 2010. Per the agreement, Eric Chan was paid $100,000 in 2009 and will be paid the remaining $20,000 by the end of the contract term.

12. Income Taxes  
 
The components of the provision for income taxes are as follows (in thousands):
 
         
   
December 31,
 
   
2009
 
2008
 
Current:
         
Federal
 
$
-
 
 $
-
 
State
   
1
   
1
 
     
1
   
1
 
               
Deferred:
             
Federal
   
-
   
-
 
State
   
-
   
-
 
     
-
   
-
 
               
Total provision for income taxes
 
 $
1
 
 $
1
 
               
               
A reconciliation of income taxes at the statutory federal income tax rate to net income taxes included in the accompanying statement of operations is as follows:
   
 
 
   
December 31,
 
     
2009
   
2008
 
               
Tax Benefit at expected federal rate
   
-34.0
%
 
-34.0
%
State, Net of Federal Benefit
   
-4.4
%
 
-5.1
%
Research and development credits
   
-2.1
%
 
-1.5
%
Non-deductible expenses
   
7.1
%
 
2.4
%
Net operating benefit
   
32.6
%
 
38.0
%
Other, net
   
0.8
%
 
0.2
%
     
0.0
%
 
0.0
%
 
At December 31, 2009, we had federal and state net operating loss carry forwards of approximately $71.9 million and $57.5 million, respectively.  The federal and state net operating loss carry forwards expire at various dates beginning in 2010 through 2030, if not utilized.
 
We also had federal and state research and development tax credit carry forwards of approximately $330,000 and $1.4 million, respectively. The federal research and development tax credits begin to expire in 2027. The state research and development tax credits carry forward indefinitely.
 
Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
 
 
 
 
61

 
 
Significant components of our deferred tax assets for federal and state income taxes as follows (in thousands):
 
   
December 31,
 
   
2009
   
2008
 
Net operating loss carry forwards
 
$
27,818
   
$
26,127
 
Research credits carry forwards (federal and state)
 
$
1,229
   
$
954
 
Manufacturing investment credit carry forwards
 
$
14
   
$
78
 
Capitalized research and development
 
$
3,072
   
$
2,048
 
Other, net
 
$
1,584
   
$
1,927
 
                 
Total deferred tax assets
 
$
33,717
   
$
31,134
 
Valuation Allowance for deferred tax assets
 
$
(33,717
)
 
$
(31,134
)
   
$
-
   
$
-
 
 
As of December 31, 2009 and 2008, we had deferred tax assets of approximately $33.7 million and $31.1 million, respectively.  Realization of the deferred tax assets is dependent upon future taxable income, if any, the amount and timing of which are uncertain.  Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.  The net valuation allowance increased by approximately $2.6 million and increased $4.3 million during the years ended December 31, 2009 and 2008, respectively.  Deferred tax assets primarily relate to net operating loss and tax credit carry forwards.
 
We realize tax benefits as a result of the exercise of non-qualified stock options and the exercise and subsequent sale of certain incentive stock options (disqualified dispositions).  For financial reporting purposes, any reduction in income tax obligations as a result of these tax benefits will be credited to additional paid-in capital upon utilization of the NOLs including these benefits.
 
On January 1, 2007, we adopted ASC 740, “Income Taxes”. ASC 740 clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold, measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. Under ASC 740, we are required to recognize in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense.
 
The implementation of ASC 740 did not have a material impact on the Company's financial statements.  At January 1, 2009, we have not accrued an amount for tax liability from unrecognized tax benefits.  There were no unrecognized tax benefits recorded as of December 31, 2009 and 2008.

A reconciliation of the beginning and ending unrecognized tax benefit amounts for 2009 are as follows:

Balance at January 1, 2009
  $ -  
Increases related to current year tax positions
    -  
Expiration of the statute of limitations
    -  
Balance at December 31, 2009
  $ -  

We do not believe the total amount of unrecognized benefit as of December 31, 2009 will increase or decrease significantly in the next twelve months.  Our Federal, California, Illinois and Wisconsin tax returns are subject to examination by the tax authorities.

13. License Rights
 
We have an exclusive royalty-free worldwide license to use Target Therapeutics’ technology and to make, use and sell or otherwise distribute products for the diagnosis and treatment of electrophysiological diseases in the body, other than in the central nervous system, including the brain. The exclusive license grant applied to any Target Therapeutics’ technology developed through May 1996 and will expire upon the expiration of the last of the patents relating to Target Therapeutics’ technology. We also have a royalty agreement with SurModics, Inc. for the non-exclusive use of licensed products and patents for products treated with photoreactive polyvinylpyrrolidone copolymer and non-photoreactive polyvinylpyrrolidone.
 
14. Retirement Benefit Plan

We have a 401(k) plan (“the 401(k) Plan”) whereby eligible employees may contribute a percentage of eligible compensation but not greater than 60% of their earnings up to the maximum as required by law. Company contributions are discretionary. No Company contributions have been made since inception of the 401(k) Plan.
 
 
 
 
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15. Warrant Activity

The following table summarizes warrant activities for years 2009 and 2008:
 
   
Outstanding Warrants
   
Warrant Shares Available
 
Number of Warrant Shares
 
Exercise Price Per Warrant Share
Weighted-Average Exercise Price
               
Balance as of 12/31/2007
   
6,561,994
 
6,561,994
 
$0.55 - $14.00
$1.30
Warrant Shares Granted in 2008
   
2,771,247
 
2,771,247
 
$0.60 - $0.65
$0.62
Warrant Shares Cancelled  in 2008
   
(104,585)
 
(104,585)
 
$7.79 - $12.38
$0.88
Warrant Shares Exercised in 2008
   
-
 
-
 
-
-
Balance as of 12/31/2008
   
9,228,656
 
9,228,656
 
$0.55 - $4.30
$0.88
Warrant Shares Granted in 2009
   
5,555,555
 
5,555,555
 
$1.25
$1.25
Warrant Shares Cancelled in 2009
   
(757,409)
 
(757,409)
 
$4.30
$4.30
Warrant Shares Exercised in 2009
   
-
 
-
 
-
-
Balance as of 12/31/2009
   
14,026,802
 
14,026,802
 
$0.55 - $1.25
$0.84
 
The following table summarizes information about warrants outstanding at December 31, 2009:

     
Warrants Outstanding
   
Warrants Exercisable
 
Range of Exercise Prices
   
Number of Warrant Shares Outstanding
   
Weighted-Average Remaining Contractual Life
   
Weighted-Average Exercise Price
   
Number of Warrant Shares Exercisable
   
Weighted-Average Exercise Price
 
$
0.55 - $0.65
     
8,471,247
     
3.1
    $
0.57
     
8,471,247
    $
0.57
 
$
1.25
     
5,555,555
     
4.2
    $
1.25
     
5,555,555
    $
1.25