UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 
 FORM
10-Q
 
 (Mark
One)
 
 X
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
 
 OR
 
 
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 FOR THE
TRANSITION PERIOD FROM ____________ TO ____________
 
 COMMISSION
FILE NUMBER: 000-22419
 
 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,
      CA  94538-7330(Address
      of principal executive offices) (Zip
Code)
 
 
 Registrant’s
telephone number, including area code: (510) 354-0300
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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 Website, 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 for such shorter period that the registrant was required to submit
and post such files). Yes   No  
 
 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 “accelerated filer”, “large accelerated
filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
 
 Large
      accelerated filer 
              Accelerated
      filer 
              Non-accelerated
      filer 
              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
 
 There
were 143,835,205 shares of the registrant's common stock, par value $0.001,
issued and outstanding as of October 30, 2009.
 
 
  1
  
 CARDIMA, INC.
 
 TABLE
OF CONTENTS
 
 PART
I.  Financial Information
 
 
 Description
              PageItem
      1.
              Financial
      Statements (unaudited)
              3Condensed
      Balance Sheets as of September 30, 2009 and December 31,
      2008
              3Condensed
      Statements of Operations for the Three and Nine Months ended September 30,
      2009 and 2008
              4Condensed
      Statements of Cash Flows for the Nine Months ended September 30, 2009 and
      2008
              5Notes
      to Condensed Financial Statements
              6Item
      2.
              Management’s
      Discussion and Analysis and Results of Operations
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              22Item
      4.
              Controls
      and Procedures
              22
 
 PART
II.  Other Information
 
 Description
              PageItem
      1.
              Legal
      Proceedings
              23Item
      1A.
              Risk
      Factors
              23Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              23Item
      3.
              Defaults
      Upon Senior Securities
              23Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              23Item
      5.
              Other
      Information
              23Item
      6.
              Exhibits
              24Signatures
              
              24
 
 2
 PART I – FINANCIAL
INFORMATION
 
 ITEM 1.  Financial
Statements
 
 CARDIMA,
      INC.CONDENSED
      BALANCE SHEETS(In
      thousands, except share amounts)(Unaudited)ASSETS
              
              September
      30, 2009
              
              
              December
      31, 2008Current
      assets:Cash
      and cash equivalents
              
              $
              580
              
              
              $
              5,325Accounts
      receivable, net of allowances for doubtful accounts of
                $191
      and $187, as of September 30, 2009 and December 31,
                2008,
      respectively
              
              
              211
              
              
              
              169Short
      term investment
              
              
              9,095
              
              
              
              50Inventories
              
              
              2,499
              
              
              
              1,566Prepaid
      expenses
              
              
              316
              
              
              
              687Other
      current assets
              
              
              61
              
              
              
              9Total
      current assets
              
              
              12,762
              
              
              
              7,806Property
      and equipment, net of accumulated depreciation of
                $3,221
      and $2,988 as of September 30, 2009 and December 31,
                2008,
      respectively
              
              
              1,401
              
              
              
              924Other
      assets
              
              
              61
              
              
              
              61TOTAL
      ASSETS
              
              $
              14,224
              
              
              $
              8,791LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              303
              
              
              $
              418Accrued
      liabilities
              
              
              955
              
              
              
              1,477Deferred
      revenue
              
              
              768
              
              
              
              112Loans
      payable
              
              
              14
              
              
              
              6,012Capital
      leases - current portion
              
              
              27
              
              
              
              25Notes
      payable to related-party - current portion
              
              
              -
              
              
              
              100Total
      current liabilities
              
              
              2,067
              
              
              
              8,144Loans
      payable - net of current portion
              
              
              30
              
              
              
              41Capital
      leases - net of current portion
              
              
              25
              
              
              
              45TOTAL
      LIABILITIES
              
              
              2,122
              
              
              
              8,230Shareholders'
      Equity:Preferred
      stock, $0.001 par value, liquidation preference of
                $0.10,
      10,000,000 shares authorized, 5,000,000 issued and
                outstanding
              
              
              500
              
              
              
              500Common
      stock, $0.001 par value, 300,000,000 shares authorized,
                143,828,388
      and 125,134,721 shares issued and outstanding at
                September
      30, 2009 and December 31, 2008, respectively
              
              
              144
              
              
              
              125Additional
      paid-in-capital
              
              
              211,891
              
              
              
              190,220Accumulated
      deficit
              
              
              (200,433
              )
              
              
              (190,284
              )Total
      Shareholders' Equity
              
              
              12,102
              
              
              
              561TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              14,224
              
              
              $
              8,791
 
 See
accompanying notes to these condensed financial statements
  3
  
 
 
 CARDIMA,
      INC.CONDENSED
      STATEMENTS OF OPERATIONS(In
      thousands, except per share amounts)(Unaudited)For
      The Three Months Ended September 30,
              
              
              For
      The Nine months ended September 30,2009
              
              
              
              2008
              
              
              
              2009
              
              
              
              2008Net
      sales
              
              $
              333
              
              
              $
              391
              
              
              $
              1,109
              
              
              $
              1,088Cost
      of goods sold
              
              
              447
              
              
              
              875
              
              
              
              1,778
              
              
              
              2,209Gross
      margin deficiency
              
              
              (114
              )
              
              
              (484
              )
              
              
              (669
              )
              
              
              (1,121
              )Operating
      expenses:Research
      and development
              
              
              1,076
              
              
              
              1,478
              
              
              
              4,255
              
              
              
              3,895Selling,
      general and administrative
              
              
              1,697
              
              
              
              1,440
              
              
              
              5,271
              
              
              
              4,968Total
      operating expenses
              
              
              2,773
              
              
              
              2,918
              
              
              
              9,526
              
              
              
              8,863Operating
      loss
              
              
              (2,887
              )
              
              
              (3,402
              )
              
              
              (10,195
              )
              
              
              (9,984
              )Interest
      income
              
              
              38
              
              
              
              20
              
              
              
              46
              
              
              
              104Other
      income / (expense)
              
              
              -
              
              
              
              (5
              )
              
              
              1
              
              
              
              (11
              )Total
      other income
              
              
              38
              
              
              
              15
              
              
              
              47
              
              
              
              93Loss
      before income taxes
              
              
              (2,849
              )
              
              
              (3,387
              )
              
              
              (10,148
              )
              
              
              (9,891
              )Income
      taxes
              
              
              -
              
              
              
              -
              
              
              
              1
              
              
              
              1Net
      loss
              
              $
              (2,849
              )
              
              $
              (3,387
              )
              
              $
              (10,149
              )
              
              $
              (9,892
              )Basic
      and diluted net loss per share
              
              $
              (0.02
              )
              
              $
              (0.03
              )
              
              $
              (0.07
              )
              
              $
              (0.08
              )Shares
      used in computing basic and diluted net loss per share
              
              
              143,821
              
              
              
              124,902
              
              
              
              139,776
              
              
              
              120,910
 
 
 
 See
accompanying notes to these condensed financial statements
  4
  
 CARDIMA,
      INC.CONDENSED
      STATEMENTS OF CASH FLOWS(In
      thousands)(Unaudited)For
      the Nine Months Ended September 30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (10,149
              )
              
              $
              (9,892
              )Adjustments
      to reconcile net loss to net cash used in operating activities provided by
      operations:Depreciation
      and amortization
              
              
              284
              
              
              
              111Non-cash
      stock-based compensation
              
              
              1,426
              
              
              
              989Non-cash
      compensation
              
              
              -
              
              
              
              868Excess
      and obsolete inventory
              
              
              132
              
              
              
              -Allowance
      for doubtful accounts
              
              
              3
              
              
              
              108Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (45
              )
              
              
              (177
              )Inventories
              
              
              (1,310
              )
              
              
              (687
              )Prepaid
      and other assets
              
              
              90
              
              
              
              (855
              )Accounts
      payable, accrued compensation and other liabilities
              
              
              (717
              )
              
              
              467Deferred
      revenue
              
              
              656
              
              
              
              -Accrued
      interest and fees
              
              
              263
              
              
              
              -Net
      cash used in operating activities
              
              
              (9,367
              )
              
              
              (9,068
              )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of short-term investment
              
              
              (9,045
              )
              
              
              (50
              )Maturity
      of short-term investment
              
              
              -
              
              
              
              2,008Purchase
      of property and equipment
              
              
              (287
              )
              
              
              (500
              )Net
      cash provided by/(used in) investing activities
              
              
              (9,332
              )
              
              
              1,458CASH
      FLOWS FROM FINANCING ACTIVITIESPrincipal
      payments under capital leases and credit facility
              
              
              (18
              )
              
              
              (21
              )Payment
      on notes payable
              
              
              (9
              )
              
              
              -Payments
      on notes payable to related party
              
              
              (100
              )
              
              
              (82
              )Net
      proceeds from sale of common stock
              
              
              14,081
              
              
              
              5,143Net
      cash provided by financing activities
              
              
              13,954
              
              
              
              5,040Change
      in cash and cash equivalents
              
              
              (4,745
              )
              
              
              (2,570
              )Beginning
      cash and cash equivalents
              
              
              5,325
              
              
              
              4,811Ending
      cash and cash equivalents
              
              $
              580
              
              
              $
              2,241SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWS INFORMATIONCash
      paid for income taxes
              
              $
              1
              
              
              $
              1Cash
      paid for interest
              
              $
              8
              
              
              $
              21SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESEquipment
      acquired under capital lease arrangements
              
              $
              -
              
              
              $
              79Conversion
      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
              
              $
              245
              
              
              $
              -
 
 
 See
accompanying notes to these condensed financial statements
  5
  
  CARDIMA,
INC.
  NOTES
TO CONDENSED FINANCIAL STATEMENTS
 September
30, 2009
 (Unaudited)
 
 1.
              NATURE
      OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES
 
 Cardima,
Inc., (“we”, “us”, “our”) was incorporated in the State of Delaware on November
12, 1992. We design, develop, manufacture and market minimally invasive,
single-use, micro-catheter systems for the mapping and ablation of the two most
common forms of cardiac arrhythmias: atrial fibrillation and ventricular
tachycardia. We have developed the PATHFINDER®,
TRACER® and
VUEPORT®
Series of diagnostic catheters, the NAVIPORT®
Series of guiding catheters, the REVELATION®
Series of ablation catheters, the Surgical Ablation System with its series of
ablation probes, and the INTELLITEMP®
Energy Management Device Series for RF (radiofrequency) energy management. These
devices are CE marked and/or received United States FDA 510(k)
clearance.  The REVELATION Series of ablation catheters with the
INTELLITEMP EP Energy Management Device was developed and marketed for the
treatment of atrial fibrillation (“AF”) with CE mark approval in Europe; is not
yet commercially approved in the United States. We have licensed our
micro-catheter technology for use in the treatment of electrophysiological
diseases affecting areas other than the central nervous system. We sell our
products worldwide through both direct sales and distribution channels, with a
substantial portion of our sales to international customers.
 
 2.
              BASIS
      OF PRESENTATION - INTERIM FINANCIAL
INFORMATION
 
 The
accompanying unaudited interim financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The financial statements and notes are
presented as permitted on Form 10-Q and do not contain all of the information
included in our annual statements and notes. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations, although
we believe that the disclosures are adequate to make the information presented
not misleading.
 
 The
balance sheet at December 31, 2008 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. It is suggested that these condensed financial statements
be read in conjunction with the December 31, 2008 audited financial statements
and the accompanying notes thereto filed on our annual report on Form-10K with
the SEC on March 19, 2009. While we believe the procedures followed in
preparing these financial statements are reasonable, the accuracy of the amounts
are in some respects dependent upon the facts that will exist, and procedures
that will be accomplished by us later in the year. These results are not
necessarily indicative of the results to be expected for the full
year.
 
 These
unaudited financial statements reflect all adjustments, including normal
recurring adjustments, which, in the opinion of management, are necessary to
present fairly the operations and cash flows for the periods
presented.
 
  In June
2009, the FASB issued guidance now codified as ASC Topic 105, “Generally Accepted Accounting
Principles” (“ASC Topic 105”) as the single source of authoritative
non-governmental U.S. GAAP. 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 (the
“Codification”). On the effective date of this Statement, 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. The provisions of ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009. We
adopted ASC Topic 105 in the third quarter of 2009. This pronouncement had no
effect on our consolidated financial position, results of operations or cash
flows, but impacted our financial reporting process by replacing all references
to pre-Codification standards with references to the applicable Codification
topic.
 
 3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
 
 There
have been no significant changes in our significant accounting policies during
the nine months ended September 30, 2009, compared to what was previously
disclosed in our Annual Report on 10-K for the year ended December 31,
2008.
 
 REVENUE
RECOGNITION
 
 We
recognize revenue from two types of customers, end users and distributors in
accordance with Accounting Standard Codification “ASC” 605, “Revenue
Recognition” (formerly Staff Accounting Bulletin 104, “Revenue Recognition in Financial
Statements”). 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.
  6
 
 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 $768,000 as of September 30, 2009 is included in deferred
income on our consolidated balance sheets. Revenue recognition for customer
orders that include advance payments is consistent with our revenue recognition
policy described above.
 
 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.
 
 USE OF
ESTIMATES
 
 The
preparation of financial statements in conformity with GAAP requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Significant estimates include the fair value of
stock-based compensation, the allowance for doubtful accounts inventory
reserves, and valuation allowance for deferred tax assets.  We base
our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results may differ
significantly from our estimates. In addition, any significant unanticipated
changes in any of our assumptions could have a material adverse effect on its
business, financial condition, and results of operations.
 
 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”, (formerly Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income).  We, however, do not have any components of other
comprehensive loss as defined by ASC 220 and therefore, for the three and nine
months ended September 30, 2009 and 2008, comprehensive loss is equivalent to
our reported net loss.  Accordingly, a statement of comprehensive loss
is not presented.
 
 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.
 
 Since
January 2009, we have recognized stock-based compensation expense in our
statement of operations in their respective cost centers as compared to
recognizing all the compensation costs in general and administrative expense
prior to 2009. The table below shows the compensation costs included in the
statement of operations for the three and nine months ended September 30, 2009
and 2008 by line item. The 2008 statement of operations have been reclassified
to reflect the below changes to conform to the current year presentation.
(unaudited, in thousands):
  7
  
 Three
      Months ended September 30,
              
              
              Nine
      Months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Stock-based
      compensation expense by caption:Cost
      of sales
              
              $
              48
              
              
              $
              37
              
              
              $
              158
              
              
              $
              74Research
      and development
              
              
              (45
              )
              
              
              149
              
              
              
              334
              
              
              
              455Selling,
      general and administrative
              
              
              390
              
              
              
              236
              
              
              
              934
              
              
              
              461Total
      stock-based compensation expense
              
              $
              393
              
              
              $
              422
              
              
              $
              1,426
              
              
              $
              990
 
 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”, (formerly EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling Goods or Services), and ASC 605-50, “Revenue Recognition –
Customer Payments and Incentives”, (formerly EITF 01-9, Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products)). 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 the three
and nine months ended September 30, 2009 or 2008.
 
 NET LOSS
PER COMMON SHARE
 
 Net loss
per share has been computed using the weighted average number of shares of
common stock outstanding during the period.  We have excluded all
warrants and stock options from the computation of basic and diluted net loss
per share because all such securities are anti-dilutive for the periods
presented. Excluded common stock equivalent shares included the
following:
 
 September
      30,2009
              
              
              2008Warrants
              
              
              14,784,211
              
              
              
              9,261,086Stock
      Options
              
              
              7,802,644
              
              
              
              9,616,193Preferred
      Shares, common stock equivalent
              
              
              1,000,000
              
              
              
              1,000,000Total
      Warrants, Options and Preferred Shares
              
              
              23,586,855
              
              
              
              19,877,279
 
 RECLASSIFICATIONS
 
 Certain
prior year financial statement amounts have been reclassified to conform to the
current year presentation.  The reclassifications did not impact net
loss or stockholder’s equity.
 
 SUBSEQUENT
EVENTS
 
 In
June 2009 the Financial Accounting Standards Board (FASB) amended the
existing guidance relating to the disclosure of subsequent events. The adoption
of the amended guidance did not impact the Company’s financial position or
results of operations.  Events or transactions that occurred between
September 30, 2009 and November 13, 2009, the date the Company’s
financial statements were filed with the SEC, were reviewed for subsequent event
accounting and disclosure.  During this period the Company did not have any
material recognizable subsequent events.
 
  8
  4.
              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
condensed financial statements as of September 30, 2009.
 
 During
May 2009, the FASB issued ASC 855, “Subsequent Events”, (formerly SFAS No. 165,
“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
June 2009, the FASB issued ASC 860, “Transfers and Servicing”, (formerly
SFAS No. 166, “Accounting
for Transfers of Financial Assets).  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 ending
after November 15, 2009. We will adopt this standard in fiscal 2010 and are
evaluating the impact it will have on our condensed financial
statements.
 
 In June
2009, the FASB issued ASC 810, “Consolidation”, regarding the consolidation of
variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R))”.  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 ending after November 15, 2009. We will adopt
this standard in fiscal 2010 and are evaluating the impact it will have on our
condensed financial statements.
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standard Codification (“ASC”) 105, “Generally Accepted Accounting Principles”
(formerly SFAS No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles”).ASC 105 establishes the FASB ASC as the single
source of authoritative nongovernmental U.S. GAAP.  The standard is
effective for interim and annual periods ending after September 15,
2009.  All other literature will be considered non-authoritative after
the effective date of the Codification. The Codification does not change US
GAAP; instead, it introduces a new structure that is organized in an easily
accessible, user-friendly online research system.  We have adopted the
new Codification when referring to GAAP in our quarterly report on Form 10-Q for
the fiscal quarter ending September 30, 2009. The adoption of the codification
did not have a material impact on the condensed financial
statements.
 
 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 condensed 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
Arrangementsby 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 the Company in 2011. The
Company is currently evaluating the impact of adopting this update on its
condensed financial statements.
  9
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force ("EITF"), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by us to have a
material impact on our present or future financial statements.
  5.
              CASH
      AND CASH EQUIVALENTS
 
 We
receive payments from our customers and deposit them in federally insured
financial institutions during our normal course of business.  As of
September 30, 2009, we had cash and cash equivalents of $580,000.  At
times we may exceed the federally insured limits.
 
 6.
              SHORT
      TERM INVESTMENTS
 
 Short-term
investments consist of certificates of deposit with maturities of less than a
year.  As of September 30, 2009, we had short-term investments of
approximately $9.1 million.
 
 7.
              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 consist of
the following (in thousands):
 
 September
      30,
                2009
              
              
              December
      31,
                2008Raw
      Materials
              
              $
              854
              
              
              $
              736Work-In-Process
              
              
              969
              
              
              
              34Finished
      Goods
              
              
              1,036
              
              
              
              1,024Reserve
      for obsolescence
              
              
              (360
              )
              
              
              (228
              )$
              2,499
              
              
              $
              1,566
 
 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. This sales strategy 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.
 
 Pursuant
to ASC 330, (formerly SFAS No. 151, “Inventory Costs – an amendment of
ARB No. 43, Chapter 4) items such as idle facility expense, excessive
spoilage, double freight and re-handling costs should be recognized as
current-period charges. In addition, ASC 330 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. In the first nine months of 2009, we have
identified $30,000 of idle facility costs as certain plant operating costs as a
result of an extended period of production down-time due to facilities
maintenance. This was included in general and administrative expenses on our
statement of operations.
 
 8.
              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 $109,000 and $282,000 for the three and nine months ended September 30,
2009, respectively, as compared to $45,000 and $111,000 for the same periods in
2008, respectively.
  10
 
 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. The total of such depreciation included
in cost of goods sold and operating expenses for the nine months ended
September 30, 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):
  September
      30, 2009
              
              
              December
      31, 2008Equipment
              
              $
              4,229
              
              
              $
              3,554Leasehold
      improvements
              
              
              393
              
              
              
              3584,622
              
              
              
              3,912Less
      accumulated depreciation and amortization
              
              
              (3,221
              )
              
              
              (2,988
              )Property
      and equipment, net
              
              $
              1,401
              
              
              $
              924
 
 9.
              RELATED
      PARTY TRANSACTIONS
 
 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 extended in February 2009 through February
2010.  Per the agreement, Dr. Gaston is paid a monthly fee in exchange for
advisory services to our Sales and Marketing departments.  During the nine
months ended September 30, 2009 and 2008, total fees earned under the agreement
were $72,000 and $64,000, respectively.
 
 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 extended in September 2008
through September 2009. Dr. Chun is paid a monthly fee in exchange for the
services he provides as our Chief Medical Officer. During the nine months ended
September 30, 2009 and 2008, total fees earned under the agreement were $90,000
and $74,000, respectively.
 
 10.
              LOANS
      PAYABLE
 
 As
previously disclosed, in December 2006, 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.  We have netted the notes receivable and payable in accordance
with ASC 210-20, “Balance Sheet-offsetting”.  The short-term and
long-term payable balance amounted to $14,000 and $30,000, as of September 30,
2009, respectively.  The short-term and long-term payable balance
amounted to $12,000 and $41,000, as of December 31, 2008,
respectively.
 
 11.
              COMMITMENTS
      AND CONTINGENCIES
 
 Commitments
 
 We lease
a 29,000 square feet facility in Fremont, California under an operating lease.
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 an option to renew
the lease for a term of five more years at the then current fair market rental
for comparable space.  We also lease certain equipment under
non-cancelable capital leases, 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 at September 30, 2009 (in thousands):
 
 Fiscal
      Year
              
              Operating
      Leases
              
              
              Capital
      Leases2009
              
              $
              52
              
              
              $
              82010
              
              
              208
              
              
              
              312011
              
              
              208
              
              
              
              182012
              
              
              208
              
              
              
              -2013
              
              
              208
              
              
              
              -2014
              
              
              121
              
              
              
              -Total
      minimum lease payments
              
              $
              1,005
              
              
              $
              57Less
      amounts representing interest
              
              
              -
              
              
              
              (5
              )Present
      value of net minimum lease payments
              
              $
              1,005
              
              
              $
              52Short-Term
              
              $
              -
              
              
              $
              (27
              )Long-Term
              
              $
              -
              
              
              $
              25
 
 11
 
 Royalty
Agreement
 
 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.
 
 Consultant
Agreement
 
 We have
entered into consulting agreements with several individuals.  The
agreements are typically for a term of one year and define the scope of services
to be provided by the individuals.  The method of compensation for the
consultants is cash, stock options, or a combination of both.
 
 Contingencies
 
 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 are not currently involved in any litigation
which, in our opinion, would have a material adverse effect on our business,
operating results, cash flow or financial condition. However, there can be no
assurance that any such proceeding will not escalate or otherwise become
material to our business in the future. We maintain insurance coverage for
events in amounts that we deem appropriate. We believe that uninsured losses, if
any, will not be materially adverse to our financial position or results of
operations.
 
 12.
              INCOME
      TAXES
 
 Historically,
we have incurred net operating losses, or NOLs. Because of this history of net
operating losses, we do not currently believe that the future realization of the
tax benefit associated with these NOL carryforwards is more likely than not;
therefore, we have recorded a valuation allowance for the full amount of its net
deferred tax assets.  We will continue to evaluate the likelihood that
these tax benefits may be realized, and may reverse all or a portion of its
valuation allowance in the future if it is determined that realization of these
benefits is more likely than not.
 
 Utilization
of the NOL carry forwards to offset future taxable income and tax, respectively,
may be subject to a substantial annual limitation due to ownership change
limitations that may have occurred previously or that could occur in the future
provided by Section 382 of the Internal Revenue Code of 1986, as amended (the
“Code”). In general, an ownership change, as defined by Section 382 of the Code,
results from transactions increasing the ownership of certain stockholders or
public groups in the stock of a corporation by more than 50 percentage points
over a three-year period. We have
considered these factors in reaching our conclusion as to the valuation
allowance for financial reporting purposes. Accordingly, no benefit has been
recognized on the net loss as the realization of the net operating loss
carryforward cannot be assured.
  13.  CONCENTRATIONS
OF RISK
  To date,
product sales have been direct to customers in the United States and to
distributors primarily in Europe. The geographic distribution of net sales was
as follows (in thousands):
 
 Three
      Months Ended September 30,
              
              
              Nine
      Months Ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008United
      States
              
              $
              254
              
              
              
              76
              %
              
              $
              343
              
              
              
              88
              %
              
              $
              850
              
              
              
              77
              %
              
              $
              805
              
              
              
              74
              %Europe
              
              
              78
              
              
              
              24
              %
              
              
              48
              
              
              
              12
              %
              
              
              255
              
              
              
              23
              %
              
              
              282
              
              
              
              26
              %Asia/Pacific
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              1
              
              
              
              -Total
      Net Sales
              
              $
              333
              
              
              
              100
              %
              
              $
              391
              
              
              
              100
              %
              
              $
              1,109
              
              
              
              100
              %
              
              $
              1,088
              
              
              
              100
              %
 
 Our
diagnostic product group, namely the PATHFINDER family of micro-catheter
systems, accounted for 72% and 62% of net sales for the three and nine
months ended September 30, 2009, respectively, as compared to 51% and 61% for
the same periods in 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.
  12
 
 14.
              STOCK-BASED
      COMPENSATION
 
 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 our 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 or our Parent or
Subsidiary. Options to purchase Common Stock granted under the plan may be
incentive stock options or non-statutory stock options as determined by the
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 33%
of the underlying shares per year over 3 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.
 
 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
2003 Stock Option 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.
 
 1993
Stock Option Plan
 
 During
1993, our 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 our 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 would be made under this plan.
 
 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 March 2007 and no additional grants would be made under
this plan.
  13
 
 Valuation
Assumptions
 
 We
estimate the forfeiture rate based on past turnover data.  The rate
used in the three and nine months ended September 30, 2009 and 2008 was
minimal.  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.
 
 The
assumptions used for the three and nine months ended September 30, 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:
 
 Three months ended
                September 30,
              
              Nine months ended
                September 30,2009
              
              2008
              
              2009
              
              2008Employee
      stock options:Dividend
      yield
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%Volatility
      factor
              155.6%
              
              158.0%
              
              155.2%
              
              160.2%Risk-free
      interest rate
              3.4%
              
              3.8%
              
              2.8%
              
              3.7%Expected
      term (years)
              7
              
              7
              
              7
              
              7Weighted-average
      fair value
                of
      options granted during the
                periods
              $0.69
              
              $1.61
              
              $0.99
              
              $1.29
 
 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.
  The stock
based compensation expense under ASC 718 that has been reported in the
statements of operations is as follow:
 
 Three
      Months ended
                September
      30,
              
              
              Nine
      Months ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Stock-based
      compensation expense by caption:Cost
      of sales
              
              $
              48
              
              
              $
              37
              
              
              $
              158
              
              
              $
              74Research
      and development
              
              
              (45
              )
              
              
              149
              
              
              
              334
              
              
              
              455Selling,
      general and administrative
              
              
              390
              
              
              
              236
              
              
              
              934
              
              
              
              461Total
      stock-based compensation expense
              
              $
              393
              
              
              $
              422
              
              
              $
              1,426
              
              
              $
              990
 
 For stock
subject to graded vesting, we have utilized the “straight-line” method for
allocating compensation cost by period. As of September 30, 2009, there was
$3.6 million of total unrecognized compensation cost related to non-vested stock
option awards which is expected to be recognized over a weighted-average period
of 1.9 years.  There were approximately 2,005,000 and 1,294,000
options that became vested during the nine months ended September 30, 2009 and
2008, respectively.
 
 Since we
have a full valuation allowance for our deferred tax assets, there was no impact
to our cash flows related to excess tax benefits associated with the provisions
of the Accounting Standard Codification 718, or former SFAS, No. 123R, Share-Based
Payment.
  14
  The
following is a summary of stock option activity under all plans:
 
 Shares
      Available
              
              
              Options
      Outstanding
              
              
              Average
      Exercise Price
              
              
              Intrinsic
      ValueOption
      Plan
              Status2007
              Outstanding
      December 31, 2008
              
              
              20,618,333
              
              
              
              9,167,222
              
              
              $
              0.86
              
              
              $
              7,034,211Granted
              
              
              (450,000
              )
              
              
              450,000Exercised
              
              
              -
              
              
              
              (175,003
              )Cancelled/expired
              
              
              1,768,331
              
              
              
              (1,768,331
              )Outstanding
      September 30, 2009
              
              
              21,936,664
              
              
              
              7,673,888
              
              
              $
              0.89
              
              
              $
              2,519,1612003
              Outstanding
      December 31, 2008
              
              
              747,638
              
              
              
              67,571
              
              
              $
              3.69
              
              
              $
              43,191Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              (146
              )Cancelled/expired
              
              
              4,387
              
              
              
              (4,387
              )Outstanding
      September 30, 2009
              
              
              752,025
              
              
              
              63,038
              
              
              $
              3.92
              
              
              $
              15,450-1993
              Outstanding
      December 31, 2008
              
              
              -
              
              
              
              41,243
              
              
              $
              12.03
              
              
              $
              -Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              -
              
              
              
              (1,125
              )Outstanding
      September 30, 2009
              
              
              -
              
              
              
              40,118
              
              
              $
              11.86
              
              
              $
              -1997
      Director's Plan
              Outstanding
      December 31, 2008
              
              
              -
              
              
              
              25,600
              
              
              $
              1.02
              
              
              $
              21,560Granted
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -Cancelled/expired
              
              
              -
              
              
              
              -Outstanding
      September 30, 2009
              
              
              -
              
              
              
              25,600
              
              
              $
              1.02
              
              
              $
              6,680
 
 
 As of
September 30, 2009, there were 4,002,592 vested and exercisable shares and
3,800,052 unvested and expected to vest shares.
 
 There
were 13,480 and 4,687 options to purchase common stock exercised during the
three months ended September 30, 2009 and 2008, respectively.
 
  15
  The
following is a summary of information relating to stock options outstanding and
exercisable by price range as of September 30, 2009:
 
 Options
      Outstanding
              
              
              Options
      ExercisableOption
      Plan
              
              Range
      of exercise prices
              
              
              As
      of September 30, 2009
              
              
              Weighted
      avg. remaining contractual life
              
              
              Weighted
      avg. exercise price
              
              
              As
      of September 30, 2009
              
              
              Weighted
      avg. remaining contractual life
              
              
              Weighted
      avg. exercise price2007
              
              $
              0.41-$0.71
              
              
              
              4,848,888
              
              
              
              8.19
              
              
              $
              0.48
              
              
              
              3,112,240
              
              
              
              8.13
              
              
              $
              0.47$
              1.10-$1.57
              
              
              
              660,000
              
              
              
              9.20
              
              
              $
              1.29
              
              
              
              81,670
              
              
              
              8.95
              
              
              $
              1.25$
              1.60-$1.85
              
              
              
              2,165,000
              
              
              
              8.90
              
              
              $
              1.70
              
              
              
              681,670
              
              
              
              8.89
              
              
              $
              1.70Total
              
              
              
              7,673,888
              
              
              
              8.48
              
              
              $
              0.89
              
              
              
              3,875,580
              
              
              
              8.28
              
              
              $
              0.712003
              
              $
              0.55-$2.50
              
              
              
              39,063
              
              
              
              6.15
              
              
              $
              0.62
              
              
              
              38,319
              
              
              
              6.14
              
              
              $
              0.62$
              3.50-$12.40
              
              
              
              23,975
              
              
              
              4.52
              
              
              $
              9.29
              
              
              
              23,975
              
              
              
              4.52
              
              
              $
              9.29Total
              
              
              
              63,038
              
              
              
              5.53
              
              
              $
              3.92
              
              
              
              62,294
              
              
              
              5.51
              
              
              $
              3.961993
              
              $
              3.40-$8.60
              
              
              
              4,650
              
              
              
              1.90
              
              
              $
              4.60
              
              
              
              4,650
              
              
              
              1.90
              
              
              $
              4.60$
              10.30-$19.40
              
              
              
              35,468
              
              
              
              2.71
              
              
              $
              12.82
              
              
              
              35,468
              
              
              
              2.71
              
              
              $
              12.82Total
              
              
              
              40,118
              
              
              
              2.62
              
              
              $
              11.86
              
              
              
              40,118
              
              
              
              2.62
              
              
              $
              11.861997
      Director's Plan
              
              $
              0.50-$1.00
              
              
              
              24,800
              
              
              
              6.52
              
              
              $
              0.73
              
              
              
              23,800
              
              
              
              6.52
              
              
              $
              0.74$
              8.40-$14.50
              
              
              
              800
              
              
              
              3.17
              
              
              $
              10.10
              
              
              
              800
              
              
              
              3.17
              
              
              $
              10.10Total
              
              
              
              25,600
              
              
              
              6.41
              
              
              $
              1.02
              
              
              
              24,600
              
              
              
              6.42
              
              
              $
              1.04
 
 
 Non-employee
Compensation
 
 The
Company accounts for options and warrants issued to non-employees under ASC
505-50, “Equity-Based Payments To Non-Employees”, (formerly SFAS 123 and
EITF 96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services),using the
Black-Scholes option-pricing model. The value of such non-employee options and
warrants are periodically re-measured over their vesting terms and the Company
must recognize compensation as the option vests.  During the first
nine 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.  During the first nine
months of 2009, we did not grant options to purchase shares of our common stock
to non-employees.
 
  16
  15.
              WARRANTS
 
 The
following table summarizes warrants for the years 2009 and 2008:
 
 Number
      of Warrant Shares
              
              
              Exercise
      Price Per Warrant Share
              
              
              Weighted-Average
      Exercise PriceBalance
      as of 12/31/2008
              
              
              9,228,656
              
              
              $
              0.55
      - $4.30
              
              
              $
              0.88Warrant
      Shares Granted
              
              
              5,555,555
              
              
              $
              1.25
              
              
              $
              1.25Warrant
      Shares Cancelled
              
              
              -
              
              
              
              -
              
              
              
              -Warrant
      Shares Exercised
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of 3/31/2009
              
              
              14,784,211
              
              
              $
              0.55
      - $4.30
              
              
              $
              1.02Warrant
      Shares Granted
              
              
              -
              
              
              
              -
              
              
              
              -Warrant
      Shares Cancelled
              
              
              -
              
              
              
              -
              
              
              
              -Warrant
      Shares Exercised
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of 6/30/2009
              
              
              14,784,211
              
              
              $
              0.55
      - $4.30
              
              
              $
              1.02Warrant
      Shares Granted
              
              
              -
              
              
              
              -
              
              
              
              -Warrant
      Shares Cancelled
              
              
              -
              
              
              
              -
              
              
              
              -Warrant
      Shares Exercised
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of 9/30/2009
              
              
              14,784,211
              
              
              $
              0.55
      - $4.30
              
              
              $
              1.02
  The
following table summarizes information about warrants outstanding and
exercisable at September 30, 2009:
 
 Range
      of Exercise Price
              
              
              Number
      of Warrants Outstanding and Exercisable
              
              
              Weighted
      Avg. Remaining Contractual Life (Yrs.)
              
              
              Weighted
      Avg. Exercise Price$
              4.30
              
              
              
              757,409
              
              
              
              0.1
              
              
              $
              4.30$
              0.55
      - $1.25
              
              
              
              14,026,802
              
              
              
              3.8
              
              
              $
              0.8414,784,211
              
              
              
              3.6
              
              
              $
              1.02
 
 No
warrants were exercised during the nine months ended September 30, 2009 and
2008.
 
 16.
              PREFERRED
      SHARES
 
 In 2007
we issued five million shares of convertible preferred stock to APIX
International.  APIX, at its sole discretion, may convert the
five million Preferred Shares it owns into 1 million shares of our
common stock.  Holders of the Series A Preferred stock votes
together with the Common Stock and carry 28 votes for each share of Series A
Preferred stock. APIX International is an entity that is solely owned by
Robert Cheney, who is also our CEO, CFO and a Director.
  17
  ITEM
2. Management’s Discussion and Analysis and Results of Operations
 
 Cautionary
Statement Regarding Forward-Looking Statements
 
 The
information in this discussion may contain 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. These forward-looking statements involve risks and uncertainties,
including statements regarding our capital needs, business strategy and
expectations. Any statements that are not of historical fact may be deemed
to be forward-looking statements. These forward-looking statements involve
substantial risks and uncertainties. In some cases you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” or “continue”, the negative of the terms or other comparable
terminology. Unless the context otherwise requires, references in this Form 10-Q
to “we,” “us,” “our,” or the “Company” refer to Cardima, Inc. Forward-looking
statements in this Report may also include references to anticipated sales
volume and product margins, efforts aimed at establishing new or improving
existing relationships with customers, other business development activities,
anticipated financial performance, business prospects and similar matters.
Actual events or results may differ materially from the anticipated results
or other expectations expressed in the forward-looking statements. In evaluating
these statements, you should consider various factors, including the risks
included from time to time in other reports or registration statements filed
with the United States Securities and Exchange Commission. These factors
may cause our actual results to differ materially from any forward-looking
statements. We disclaim any obligation to publicly update these statements, or
disclose any difference between actual results and those reflected in these
statements.
 
 Overview
 
 We
design, develop, manufacture and market minimally invasive, single-use,
micro-catheter systems for the mapping and ablation of the two most common forms
of cardiac arrhythmias: atrial fibrillation and ventricular tachycardia. We have
developed the PATHFINDER®,
TRACER® and
VUEPORT®
Series of diagnostic catheters, the NAVIPORT®
Series of guiding catheters, the REVELATION®
Series of ablation catheters, the Surgical Ablation System with its series of
ablation probes, and the INTELLITEMP®
Energy Management Device Series for RF (radiofrequency) energy management. These
devices are CE marked and/or received United States FDA 510(k)
clearance.  The REVELATION Series of ablation catheters with the
INTELLITEMP EP Energy Management Device was developed and marketed for the
treatment of atrial fibrillation (AF) with CE mark approval in Europe; is not
yet commercially approved in the United States. We have licensed our
micro-catheter technology for use in the treatment of electrophysiological
diseases affecting areas other than the central nervous system. We sell our
products worldwide through both direct sales and distribution channels, with a
substantial portion of our sales to international customers.
 
 Japanese
Diagnostic Market
 
 We expect
to receive regulatory approval in the near term to re-enter the Japanese market
with our family of guidewire-based, PATHFINDER®
diagnostic micro-mapping catheters.  Upon approval, 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 been building
inventory to meet anticipated demand.  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 entry into the Japanese diagnostic market is entirely
dependent upon receipt of regulatory approval and in the event marketing
approval is significantly delayed or denied, marketing efforts will be
materially affected.
 
 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 will
be launching 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 will
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.
  18
 
 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 the fourth quarter of 2009.
 
 Surgical Ablation System –
China
 
 We expect
to receive marketing approval for our Surgical Ablation System in China in early
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, India, 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
(“PMA”) application with the U.S. Food and Drug Administration
(“FDA”).
 
 We have
made significant advances and are currently validating and clinically evaluating
the new EP Ablation System.  We expect that EPs will benefit from the
new EP Ablation System’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 EP Ablation System 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 EP Ablation System in the
European Union, a PMA filing with the FDA for the treatment of AF and
potentially other indications, an updated filing for China that incorporates
product modifications, and potentially seeking approvals in additional global
markets.
 
 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 2010 and, following
clinical evaluation, the new unit will be validated for sale in Europe and the
U.S.  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.
 
  19
  Results
of Operations
 
 NetSales
 
 (unaudited,
      in thousands)Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,Net
      sales
              
              2009
              
              
              2008
              
              
              2009
              
              
              2008United
      States
              
              $
              254
              
              
              $
              343
              
              
              $
              850
              
              
              $
              805Europe
              
              
              78
              
              
              
              48
              
              
              
              255
              
              
              
              282Asia/Pacific
              
              
              1
              
              
              
              -
              
              
              
              4
              
              
              
              1Total
      net sales
              
              $
              333
              
              
              $
              391
              
              
              $
              1,109
              
              
              $
              1,088
 
 Sales for
the three months ended September 30, 2009 were $333,000 as compared to $391,000
for the same period in 2008.  For the nine months ended September 30,
2009, net sales were $1.1 million, which was similar to net sales in the same
period in 2008. There have been no significant changes in the selling price of
our products and the volume of sales has remained substantially the same from
period to period. However, we did have a small drop in sales for the three month
ended September 30, 2009 as compared to the three months ended September 30,
2008.
 
 Domestic
sales of $254,000 and $850,000, for the three and nine months ended September
30, 2009, respectively, represent 76% and 77% of total
sales.  Domestic sales of $343,000 and $805,000, for the three and
nine months ended September 30, 2008, respectively, represent 88% and 74% of
total sales. Our domestic sales as percentage of total sales have remained
relatively consistent for the nine months ended September 30, 2009 as compared
to the similar period in 2008.
 
 We had no
sales to Japan during 2008 and in the first nine months of 2009, as our former
Japanese distributor failed to maintain the legal documentation standard
required to sell our PATHFINDER products in Japan. Together with our new
Japanese distributor, we have filed a “Shonin Application” to obtain the
necessary regulatory approval to re-start PATHFINDER sales in the Japanese
market. We anticipate resuming commercial sales in Japan in the fourth quarter
of 2009. Our entry into the Japanese diagnostic market is entirely dependent
upon the written receipt of regulatory approval and in the event that this
approval is further delayed or denied, our marketing efforts will be materially
affected.
 
 Cost
of goods sold; gross margin (deficiency)
 
 (unaudited,
      in thousands)Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Sales
              
              $
              333
              
              
              $
              391
              
              
              $
              1,109
              
              
              $
              1,088Cost
      of sales
              
              
              447
              
              
              
              875
              
              
              
              1,778
              
              
              
              2,209Gross
      margin (deficiency)
              
              $
              (114
              )
              
              $
              (484
              )
              
              $
              (669
              )
              
              $
              (1,121
              )
 
 Cost of
goods sold for the three months ended September 30, 2009 were $447,000, or 134%
of sales, as compared to $875,000, or 223% of sales for the same period in 2008.
For the nine months ended September 30, 2009, costs of goods sold were $1.8
million, or 160% of sales, as compared to $2.2 million, or 203% of sales. Cost
of goods sold for the nine months ended September 30, 2009 also included
$145,000 of materials scrapped during the second quarter. 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 in
anticipation of the regulatory approval from Japan to re-enter the Japanese
market.
 
 Research
and Development Expenses
 
 (unaudited,
      in thousands)Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Research
      and development
              
              $
              1,076
              
              
              $
              1,478
              
              
              $
              4,255
              
              
              $
              3,895
 
 Research
and development expenses for the three months ended September 30, 2009 were $1.1
million, or 323% of sales, as compared to $1.5 million, or 378% of sales, for
the same period in 2008. The decrease in research and development expenses of
$402,000 was primarily related to lower consulting expenses of $228,000. For the
nine months ended September 30, 2009, research and development expenses were
$4.3 million, or 384% of sales, as compared to $3.9 million, or 358% of sales,
in the same period of 2008. The higher expenses of $360,000 were largely
attributable to increased compensation expenses of $274,000 due to increased
headcount of seven additional employees to support our new product
commercialization initiative and higher product testing related expenses of
$216,000.
  20
 
 Selling,
Marketing, General and Administrative Expenses
 
 (unaudited,
      in thousands)Three
      months ended
                September
      30,
              
              
              Nine
      months ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008Selling,
      general and administrative
              
              $
              1,697
              
              
              $
              1,440
              
              
              $
              5,271
              
              
              $
              4,968
 
 Selling,
marketing, general and administrative expenses for the three months ended
September 30, 2009 were $1.7 million, or 510% of sales, as compared to $1.4
million, or 368% of sales, for the same period in 2008. Selling and marketing
expenses for the three months ended September 30, 2009 increased by $193,000 as
compared to the same period in 2008 primarily due to higher compensation
expenses of $150,000 due to the hiring of two key account representatives in the
Sales department and higher clinical development expenses. General and
administrative expenses in the third quarter of 2009 were flat as compared to
the same period in 2008.
 
 Selling,
marketing, general and administrative expenses for the nine months ended
September 30, 2009 were $5.3 million, or 475% of sales, as compared to $5.0
million, or 457% of sales, for the same period in 2008. Selling and marketing
expenses for the nine months ended September 30, 2009 increased by $237,000
primarily due to higher compensation from the hiring of two key account
representatives. General and administrative expenses for the nine months ended
September 30, 2009 were flat as compared to the same period in 2008, with higher
compensation expenses of $230,000, higher consulting expenses of $342,000 and
legal fees of $200,000 in the first nine months of 2009, offset by lower
non-cash compensation cost of $868,000, which was incurred in the second quarter
of 2008.
 
 Total
other income/(expense)
 
 Total
other income for the three months ended September 30, 2009 was $38,000 as
compared to an income of $15,000 for the same period in 2008 mainly due to
interest income from our $9.1 million short-term investment. Total other income
for the nine months ended September 30, 2009 was $47,000, as compared to $93,000
for the same period in 2008 due mostly to interest income of $151,000 from
short-term investment, offset in part by $100,000 of interest expense recorded
in the first quarter of 2009 on the November 2008 $6 million loan. The loan was
converted to equity in February 2009.
 
 Liquidity
and Capital Resources
 
 We had
cash and cash equivalents of approximately $580,000 and $5.3 million as of
September 30, 2009 and December 31, 2008, respectively. We also had $9.1
million in short-term investments as of September 30, 2009. Our working capital
was $10.7 million as of September 30, 2009 as compared to a negative working
capital of $338,000 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 the nine months ended September 30, 2009 was
$9.4 million, which reflected primarily a net loss of $10.1 million and
non-cash charges of $1.7 million consisting primarily of depreciation expense
and stock-based compensation, a decrease in accounts payable and accrued
liabilities of $717,000 due to the timing of payments and an increase in
inventory of $1.2 million in anticipation of the regulatory approval to re-enter
the Japanese market with our PATHFINDER line of diagnostic catheters, offset in
part by deferred revenue of $656,000. The cash used in operating activities in
the nine months ended September 30, 2008 was $9.1 million, which was essentially
due to a net loss of $9.9 million, non-cash charges of $1.1 million consisting
primarily of depreciation expense and stock-based compensation, an increase in
inventory of $687,000 and prepaid expenses of $855,000, offset in part by an
increase in accounts payable of $467,000 due to timing of payments and the
recognition of a non-cash compensation expense of $868,000 resulted from the
issuance of warrants for the sales of our common stock in May 2008. We may not
be able to obtain favorable regulatory approval from Japan to re-enter the
Japanese market with our PATHFINDER line of diagnostic catheters in a timely
manner or at all. Delay or denial of our Shonin application may affect our cash
flow in a negative manner.
  Net cash
used in investing activities of $9.3 million in the nine months ended September
30, 2009 was primarily for the purchase of short-term investments of $9.0
million consisting of certificates of deposit and our investment in capital
expenditures of $287,000. This compares to capital expenditures of $500,000 in
the same period of 2008 and a maturity of short-term investment of $2 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.
  Net cash
provided by financing activities was $14.0 million in the nine months ended
September 30, 2009 as compared to $5.0 million in the same period in 2008. We
have funded our operations primarily with proceeds from issuances of common
stock, debt financing, and lease financing. In November 2008, we obtained
approximately $6 million in debt financing. In February 2009, we obtained an
additional $14 million in equity capital financing. The note holder of the $6
million we obtained in November 2008 converted the principal into equity in
February 2009.
  We
believe our existing cash and cash equivalents, estimated cash from future
revenue and various cost reduction measures will be sufficient to meet our
anticipated cash needs for at least nine to twelve months. Our future working
capital requirements will depend on many factors, including the rates of our
revenue growth, our introduction of new features and complementary services for
our products and services, and our expansion of research and development and
sales and marketing activities. To the extent our cash and cash equivalents and
cash flow from operating activities are insufficient to fund our future
activities, we may need to raise additional funds through public or private
equity or debt financings. If additional funding is required, there can be no
assurance what we may be able to obtain bank credit arrangements or to effect an
equity or debt financing on terms acceptable to us or at all.
 Off-Balance
Sheet Arrangements
 
 We have
no off-balance sheet arrangements.
 
  21
  ITEM
3. Quantitative and Qualitative Disclosure 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; as a
result, the effect of the foreign exchange fluctuations on our financial results
has not been significant.
 
 
 ITEM
4. Controls and Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that, as of
September 30, 2009, our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is: (i) recorded, processed, summarized
and reported, within the time periods specified in the Commission's rules and
forms, and (ii) accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
  
 Changes
in Internal Control Over Financial Reporting
 
 
 There was
no change to our internal control over financial reporting that occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  
 
 
  22
  PART
II - OTHER INFORMATION
 
 ITEM
1.   Legal Proceedings
 
 None.
 
 ITEM
1A. Risk factors
 
 There are
no material changes from the risk factors previously disclosed in our Form I0-K
for the year ended December 31, 2008 filed with the SEC on March 19,
2009.
 
 ITEM
2.   Unregistered Sales of Equity Securities and Use of
Proceeds
 
 None.
 
 ITEM
3.   Defaults Upon Senior Securities
 
 None.
 
 ITEM
4.   Submission of Matters to a Vote of the Security
Holders
 
 None.
 
 ITEM
5.   Other Information
 
 None.
  23
  
 ITEM
6.   Exhibits
 
 31.1
              
              Certification
      of the Chief Executive Officer and Chief Financial Officer of
      Cardima, Inc., pursuant to Rule 13a-14(a) under the Securities Exchange
      Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002.32.1
              
              Certification
      of the Chief Executive Officer and Chief
      Financial Officer of Cardima furnished pursuant to Section 1350
      of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 *  Filed
herewith
 CARDIMA,
INC.
 
 SIGNATURE
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 
 CARDIMA,
      INC.November
      13, 2009
              By:
              /s/ Robert
      CheneyRobert
      CheneyChief
      Executive Officer and Chief Financial Officer (Principal Executive Officer
      and Principal Financial and Accounting Officer)