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 MARCH 31, 2010
 
 OR
 
 o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
 
 COMMISSION FILE 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 “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o

Accelerated Filer oNon-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Act. Yes   No   x
 
 There were 14,397,903 shares (post-split) of the registrant's common stock, par value $0.001, issued and outstanding as of May 13, 2010.
 
 
 1
 
 CARDIMA, INC.
 
 TABLE OF CONTENTS
 
 PART I.  Financial Information
 
 
 Description
PageItem 1.
Financial Statements (unaudited)
3Condensed Balance Sheets as of March 31, 2010 and December 31, 2009
3Condensed Statements of Operations for the Three Months ended March 31, 2010 and 2009
4Condensed Statements of Cash Flows for the Three Months ended March 31, 2010 and 2009
5Notes to Condensed Financial Statements
6Item 2.
Management’s Discussion and Analysis and Results of Operations
17Item 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.
Reserved
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)ASSETS

March 31,

2010


December 31, 2009Current assets:

(Unaudited)Cash and cash equivalents

$
462


$
524Short term investment


3,981



6,446Accounts receivable, net of allowances for doubtful accounts of

$200 and $183, as of March 31, 2010 and December 31, 2009, respectively


175



136Inventories


1,903



1,969Prepaid expenses


535



306Other current assets


11



19Total current assets


7,067



9,400Property and equipment, net of accumulated depreciation of

$3,253 and $3,173 as of March 31, 2010 and December 31,

2009, respectively


1,424



1,393Other assets


61



61TOTAL ASSETS

$
8,552


$
10,854LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
621


$
187Accrued liabilities


855



619Deferred revenue


108



108Loans payable


15



15Capital leases - current portion


28



27Total current liabilities


1,627



956Deferred rent


38



37Loans payable - net of current portion


22



26Capital leases - net of current portion


11



18TOTAL LIABILITIES


1,698



1,037Shareholders' Equity:Preferred stock – Series A Participating Preferred Stock of the Stockholder Rights Plan, $0.001 par value, 750,000 shares authorized, none issued


-



-Preferred stock, $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, 14,397,103 (post-split) and 14,395,103 (post-split) shares issued and

outstanding at March 31, 2010 and December 31, 2009, respectively


14



14Additional paid-in-capital


213,120



212, 613Accumulated deficit


(206,780
)


(203,310
)Total Shareholders' Equity


6,854



9,817TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
8,552


$
10,854
 
 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 March 31,2010


2009Net sales

$
439


$
361Cost of goods sold


531



866Gross margin deficiency


(92
)


(505
)Operating expenses:Research and development


1,437



1,705Selling, marketing, and general and administrative


1,932



2,037Total operating expenses


3,369



3,742Operating loss


(3,461
)


(4,247
)Other income/(expense):Interest income / (expense), net


6



(58
)Other income / (expense)


(14
)


1Total other expenses


(8
)


(57
)Loss before income taxes


(3,469
)


(4,304
)Income taxes


1



1Net loss

$
(3,470
)

$
(4,305
)Basic and diluted net loss per share (post-split)

$
(0.24
)

$
(0.33
)Shares used in computing basic and diluted net loss per share (post-split)


14,397



13,159
 
 
 
 See accompanying notes to these condensed financial statements
   4
 
 CARDIMA, INC.CONDENSED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited)For the Three Months Ended March 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(3,470
)

$
(4,305
)Adjustments to reconcile net loss to net cash used in operating activities provided by operations:Depreciation and amortization


129



79Non-cash stock-based compensation


495



448Excess and obsolete inventory


70



155Allowance for doubtful accounts


17



2Changes in operating assets and liabilities:Accounts receivable


(56
)


(66
)Inventories


(4
)


(381
)Prepaid and other assets


(301
)


157Accounts payable, accrued compensation and other liabilities


671



154Accrued interest and fees


-



264Net cash used in operating activities


(2,449
)


(3,493
)CASH FLOWS FROM INVESTING ACTIVITIESPurchase of short-term investment


-



(15,147
)Maturity of short-term investment


2,465



-Purchase of property and equipment


(80
)


(157
)Net cash provided by/(used in) investing activities


2,385



(15,304
)CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments under capital leases and credit facility


(7
)


(6
)Payment on notes payable


(3
)


(3
)Payments on notes payable to related party


-



(100
)Proceeds from exercise of stock options


12



48Net proceeds from sale of common stock


-



14,000Net cash provided by financing activities


2



13,939Change in cash and cash equivalents


(62
)


(4,858
)Beginning cash and cash equivalents


524



5,325Ending cash and cash equivalents

$
462


$
467SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATIONCash paid for income taxes

$
1


$
1Cash paid for interest

$
2


$
7SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of accrued interest into common stock

$
-


$
184Conversion of $6 million note into common stock

$
-


$
6,000Reclassification of INTELLITEMP products from operating to investing activities

$
81


$
209
 
 
 See accompanying notes to these condensed financial statements
 
 5
  CARDIMA, INC.
  NOTES TO CONDENSED FINANCIAL STATEMENTS
 March 31, 2010
 (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 financial statements in this report have been presented on the going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Historically, we have obtained needed equity financing to meet our working capital needs, including $20 million in February 2009.  However, our viability as a going concern is dependent upon our ability to obtain additional financing and to maintain and increase profitable operations through increased sales and the higher profit margins received from product sales. Historically, we have experienced significant operating losses with corresponding reductions in working capital and shareholders' equity. We do not currently have any external financing in place to support operating cash flow requirements. However, we are regularly working with investors through public or private financings or other arrangements to raise additional capital in order to continue operations. In the past years, we have been able to raise capital through the issuance of debt or equity to meet working capital needs.  In 2010, management intends to raise additional capital through either debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs.
 
 The accompanying unaudited interim financial statements included herein have been prepared 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, 2009 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, 2009 audited financial statements and the accompanying notes thereto filed on our annual report on Form-10K with the SEC on March 29, 2010. 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 condensed 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.
 
 3.
REVERSE STOCK SPLIT
 
 On May 11, 2010, we filed a Form 8-K announcing that our common stock has commenced trading under the new ticker symbol, “CADMD”, following the implementation of a reverse stock split in a 1-for-10 ratio. Our ticker symbol will revert to CADM in approximately 20 business days. The reverse stock split was approved by our shareholders at a special meeting held on March 17, 2010 and by our board of directors. Based on approximately 143,979,034 pre-split shares of common stock issued and outstanding as of May 11, 2010, the following table reflects the approximate number of shares of common stock that were outstanding as a result of the reverse stock split:
   6
    
 Pre-split Shares

Reverse Stock Split

Post-Split Shares143,979,034

1-for-10

14,397,903
 All outstanding options, warrants, rights and convertible securities were appropriately adjusted for the reverse stock split automatically on May 11, 2010, the effective date. The reverse stock split affects all shareholders equally and does not affect any shareholders’ proportionate equity interest in the Company except for those shareholders whose fractional shares will be rounded up.
 
 Additional information about the reverse stock split is available in our proxy statement filed with the Securities and Exchange Commission on March 4, 2010.
 
 4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 There have been no significant changes in our significant accounting policies during the three months ended March 31, 2010, compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
 REVENUE RECOGNITION
 
 We recognize revenue from two types of customers, end users and distributors in accordance with Accounting Standard Codification “ASC” 605, “Revenue Recognition”. Revenue is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, shipment of the product has occurred and title of products transferred at the point of shipment, payment of the product is reasonably assured and no substantive obligations to the customer remain. Revenue is presented net of discounts, allowances, and returns. Customers are not entitled to any rights of product return. Payment terms are either open trade credit or cash. We have distributors in Asia and Europe and we record as revenue the wholesale price we charge our distributors. The distributors assume the title and risk of loss at the shipping point.
 
 We typically do not receive advance payments from our customers in connection with the sale of our products. We occasionally enter into an arrangement under which a customer agrees to purchase a large quantity of product that is to be delivered over a period of time. Depending on the size of these arrangements, we may negotiate an advance payment from these customers. Advance payments from a customer aggregating $108,000 as of March 31, 2010 is included in deferred revenue on our condensed balance sheets. Revenue recognition for customer orders that include advance payments is consistent with our revenue recognition policy described above.
 
 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”. We, however, do not have any components of other comprehensive loss as defined by ASC 220 and therefore, for the three months ended March 31, 2010 and 2009, 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.
   7
  
 STOCK WARRANTS ISSUED TO THIRD PARTIES
 
 We account for stock warrants issued to third parties, including customers, in accordance with the provisions of ASC 505-50, “Equity-Based Payments To Non-Employees” and ASC 605-50, “Revenue Recognition – Customer Payments and Incentives”. Under the provisions of ASC 505-50, because none of our agreements have a disincentive for nonperformance, we record a charge for the fair value of the portion of the warrants earned from the point in time when vesting of the warrants becomes probable. Final determination of fair value of the warrants occurs upon actual vesting. ASC 605-50 requires that the fair value of certain types of warrants issued to customers be recorded as a reduction of revenue to the extent of cumulative revenue recorded from that customer.  We have not issued any warrants to customers in the three months ended March 31, 2010 or 2009.
 
 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:
 
 
 March 31,2010


2009Warrants (post-split)


1,402,680



1,478,421Stock Options (post-split)


798,115



943,666Preferred Shares, common stock equivalent (post-split)


100,000



100,000Total Warrants, Options and Preferred Shares (post-split)


2,300,795



2,522,087
 
 
 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.  Earnings per share and share amounts have been modified to reflect the reverse stock split announced on May 11, 2010.
 
 SUBSEQUENT EVENTS
 
 On May 11, 2010, we filed a Form 8-K announcing that our common stock has commenced trading under the new ticker symbol, “CADMD”, following the implementation of a reverse stock split in a 1-for-10 ratio. The reverse stock split was approved by our shareholders at a special meeting held on March 17, 2010 and by our board of directors. Our ticker symbol will revert to CADM in approximately 20 business days.
 
 5.
RECENTLY ISSUED ACCOUNTING STANDARDS
 
 In January 2010, the FASB issued guidance to improve disclosures about fair value measurements. The guidance provides amendments to require new disclosures regarding transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and activity in Level 3, and to clarify existing disclosures regarding the level of disaggregation, inputs and valuation techniques. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We adopted the guidance, except for the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, as of January 1, 2010, as required. We do not expect that the adoption of the guidance will have a material impact on our condensed financial statements. We are currently determining the impact of the new disclosures regarding purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements on our financial statements.
 
 In January 2010, the FASB issued guidance to address implementation issues related to the changes in ownership provisions in ASC 810, "Consolidation," ("ASC 810"). The guidance clarifies the scope of the decrease in ownership provisions in ASC 810 and expands the disclosures about the deconsolidation of a subsidiary or derecognition of a group of assets within the scope of ASC 810. The guidance is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009, and should be applied retrospectively to the first period that ASC 810 was adopted by us. We do not expect that the adoption of this guidance will have a material impact on our financial statements.
   8
 
 In April 2010, the FASB issued ASU No. 2010-17 which establishes authoritative guidance permitting use of the milestone method of revenue recognition for research or development arrangements that contain payment provisions or consideration contingent on the achievement of specified events. This guidance is effective for milestones achieved in fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. We are currently evaluating the impact that adoption of this guidance will have on our condensed consolidated Financial Statements.
 
 6.
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 March 31, 2010, we had cash and cash equivalents of $462,000.  Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times we may exceed the federally insured limits.
 
 7.
SHORT TERM INVESTMENTS
 
 Short-term investments consist of certificates of deposit with maturities of less than a year.  As of March 31, 2010, we had short-term investments of approximately $4.0 million with a major financial institution.
 
 8.
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):
 
 March 31, 2010


December 31, 2009Raw Materials

$
683


$
775Work-In-Process


860



737Finished Goods


653



753Reserve for obsolescence


(293
)


(296
)$
1,903


$
1,969
 
  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. For the first quarter of 2010, we recorded $70,000 in inventory write down due to obsolete products, consumed $22,000 of previously reserved inventory, and disposed of $50,000 of inventory.
 
 Pursuant to ASC 330-10-30 “Inventory-Initial Measurement”, items such as idle facility expense, excessive spoilage, double freight and re-handling costs should be recognized as current-period charges. In addition, 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 quarter of 2010, we have identified no idle facility costs as compared to $4,000 for the same period in 2009 resulting from a period of slow production and facilities maintenance. These expenses were charged to general and administrative expenses in our condensed statement of operations in 2009.
 
 9.
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 $129,000 for the three months ended March 31, 2010, as compared to $79,000 for the same period in 2009.
 
 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 or clinical trial, evaluation, training and internal use is included as a component of operating expenses.The total of such depreciation included in cost of goods sold and operating expenses for the three months ended March 31, 2010 was $10,000 and $0 for the same period in 2009.
    9
  
 Property and equipment consist of the following (in thousands):
 March 31,

2010


December 31, 2009Equipment

$
4,292


$
4,181Leasehold improvements


385



3854,677



4,566Less accumulated depreciation and amortization


(3,253
)


(3,173
)Property and equipment, net

$
1,424


$
1,393
 
 10.
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 approved by the Compensation Committee of our Board of Directors and extends through February 2011.  Per the agreement, Dr. Gaston is paid a monthly fee in exchange for advisory services to our Sales and Marketing departments.  During the three months ended March 31, 2010 and 2009, total fees earned under the agreement were $25,140 and $24,000, 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 approved by the Compensation Committee of our Board of Directors and extended through September 2010.  Dr. Chun is paid a monthly fee in exchange for the services he provides as our Chief Medical Officer. Total fees earned under the agreement were $30,000 for each of the three months ended March 31, 2010 and 2009.
 
 In April 2009, we entered into a one-year consulting agreement with Eric Chan, who resigned as our Chief Technology Officer, but remained as a member of our Board of Directors until February 2010. Per the agreement, Eric Chan was paid $100,000 in 2009 and will be paid the remaining $20,000 by the end of the contract term.  Per the agreement, Mr. Chan is to provide advisory services to our Research and Development departments over the term of the contract.
 
 11.
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.  The original discounted value of the note payable and note receivable were $232,287 and $162,022, respectively.  The short-term and long-term of the net payable balance amounted to $15,000 and $22,000, as of March 31, 2010, respectively, as compared to $15,000 and $26,000, as of December 31, 2009, respectively.
 
 12.
COMMITMENTS AND CONTINGENCIES
 
 Commitments
 
 We lease our facility in Fremont, California under an operating lease scheduled to expire in July 2014. We have the option to extend 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 lease agreements, which bear interest at the rate of 10% per annum.  Following is a schedule of future minimum lease payments under both operating and capital leases at March 31, 2010 (in thousands):
 
 Fiscal Year

Operating Leases


Capital Leases2010

$
156


$
232011


208



182012


208



-2013


208



-2014


121



-Total minimum lease payments


901



41Less amounts representing interest


-



(2
)Present value of net minimum lease payments

$
901


$
39Short-Term


-


$
28Long-Term


-


$
11
   10
  
 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.  During the first three months of 2010 and 2009, we did not grant options to purchase shares of our common stock to non-employees.  Expense recognized related to options issued to non-employees was approximately $5,000 for the three months ended March 31, 2010.  For the same period in 2009, the company reversed $164,000 of accrued stock compensation expense for an option granted to a consultant in 2008. This option had a performance based vesting which was not met.
 
 Contingencies
 
 Commencing October 2008 through February 2010, we issued an aggregate of 53,194 (post-split) shares of common stock to approximately 25 employees upon exercise of options granted pursuant to the Company’s 2007 Stock Option Plan (the “Option Plan”) from which we received an aggregate of approximately $250,000 of proceeds. The number of shares issued constitute 0.3% of our issued an outstanding share total at December 31, 2009. Such shares were inadvertently issued without restriction. At the time of the issuance of such shares, we had not sought to register or qualify these shares or options under federal or state securities laws. Accordingly, the shares purchased pursuant to the exercise of these options may have been issued in violation of federal and state securities laws, and may be subject to rescission. On March 30, 2010, we filed a registration statement on Form S-8 to register the shares issuable under our 2007 Stock Option Plan and have included shares issued to employees who continue to hold shares of our common stock that were issued upon exercise of options granted under the Option Plan. We may be subject to liabilities for violation of applicable federal or state securities state laws. We are currently unable to determine the amount of any fines or any action that may be taken against the Company as a result of these issuances. The assessment of any fines and/or penalties could have a material adverse effect on our profits, results of operations, financial condition and future prospects.
 
 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.
 
 13.
INCOME TAXES
 
 ASC 740, Income Taxes, addresses the accounting for uncertainties in income taxes recognized in an entity’s financial statements and prescribes a threshold of “more likely than not” for recognition and derecognition of tax positions taken or expected to be taken in the tax returns.  This standard also provides related guidance on measurement, classification, interest and penalties, and disclosure.  We have not accrued any amounts for tax liability from unrecognized tax benefits for the three months ended March 31, 2010 and 2009.  We have included a full valuation of our deferred tax assets as of March 31, 2010.  We do not have items that would be considered as uncertainties in regards to income taxes as of March 31, 2010.
 
 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.
   11
   
 14.  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 March 31,2010


2009United States

$
327



75
%

$
301



83
%Europe


87



20
%


58



16
%Asia/Pacific


19



4
%


2



1
%Others


6



1
%


-



-Total Net Sales

$
439



100
%

$
361



100
%
 
 Our diagnostic product group, namely the PATHFINDER family of micro-catheter systems, accounted for 63% and 60% of net sales for the three months ended March 31, 2010 and 2009, 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.
 
 15.
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 3,000,000 (post-split) shares of Common Stock were reserved for issuance over the term of the 2007 Stock Option Plan.
 
 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.
 
 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, 82,000 (post-split) shares of Common Stock were reserved for issuance.  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 76,507 (post-split) 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.  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.
 
  12
   1997 Directors' Stock Option Plan
 
 In March 1997, the Board of Directors adopted the 1997 Directors’ Stock Option Plan and reserved 9,000 (post-split) 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.
 
 Valuation Assumptions
 
 We estimate the forfeiture rate based on past turnover data.  The rate used in the three months ended March 31, 2010 and 2009 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 months ended March 31, 2010 and 2009 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

March 31,2010


2009Dividend yield


0.0
%


0.0
%Volatility factor


163.9
%


154.9
%Risk-free interest rate


3.1
%


2.5
%Expected term (years)


7



7Weighted-average fair valueof options granted during theperiods (post-split)

$
8.76


$
11.65
 
 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.
  Stock based compensation expense has been reported in the statements of operations is as follow:
 
 Three Months Ended March 31,2010


2009Stock-based compensation expense by caption:Cost of sales

$
52


$
54Research and development


42



107Selling, general and administrative


401



287Total stock-based compensation expense

$
495


$
448
 
 For stock subject to vesting, we have utilized the “straight-line” method for allocating compensation cost by period. As of March 31, 2010, there was approximately $2.6 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 1.5 years.  There were approximately 24,100 and 9,500 (post-split) options that became vested during the three months ended March 31, 2010 and 2009, respectively.
 
 There was no capitalized share-based compensation cost and there were no recognized tax benefits for the three months ended March 31, 2010 and 2009.
 
 
 
 13
 
 
 
 The following is a summary of stock option activity under all plans (post-split):
 
 Shares Available


Options Outstanding


Average Exercise Price


Intrinsic ValueOption Plan

Status2007

Outstanding December 31, 2009


2,167,824



780,982


$
.9.31


$
2,444,900Granted


(11,300
)


11,300



-



-Exercised


-



(2,000
)


-



-Cancelled/expired


4,333



(4,333
)


-



-Outstanding March 31, 2010


2,160,857



785,949


$
9.31


$
1,959,7602003

Outstanding December 31, 2009


75,614



5,877


$
38.77


$
15,007Granted


-



-



-



-Exercised


-



-



-



-Cancelled/expired


-



-



-



-Outstanding March 31, 2010


75,614



5,877


$
38.77


$
11,1801993

Outstanding December 31, 2009


-



3,729


$
119.64


$
-Granted


-



-



-



-Exercised


-



-



-



-Cancelled/expired


-



-



-



-Outstanding March 31, 2010


-



3,729


$
119.64


$
-Director's Plan

Outstanding December 31, 2009


-



2,560


$
10.23


$
6,680Granted


-



-



-



-Exercised


-



-



-



-Cancelled/expired


-



-



-



-Outstanding March 31, 2010


-



2,560


$
10.23


$
4,720
 
 
 As of March 31, 2010, there were 431,654 (post-split) vested and exercisable shares and 366,461 (post-split) unvested and expected to vest shares.
 
 There were 2,000 and 11,500 (post-split) options to purchase common stock exercised during the three months ended March 31, 2010 and 2009, respectively.
   14
 
 The following is a summary of information relating to stock options outstanding and exercisable by price range as of March 31, 2010 (post-split):
  Options Outstanding


Options ExercisableOption Plan

Range of exercise prices


As of March 31, 2010


Weighted avg. remaining contractual life


Weighted avg. exercise price


As of March 31, 2010


Weighted avg. remaining contractual life


Weighted avg. exercise price2007

$
4.10-$9.00



475,782



7.69


$
4.88



326,830



7.64


$
4.76$
11.00-$15.70



66,000



8.70


$
12.92



20,507



8.68


$
13.06$
16.00-$18.50



244,167



8.40


$
16.97



72,174



8.40


$
16.98Total



785,949



8.00


$
9.31



419,511



7.83


$
7.272003

$
5.50-$7.00



3,758



5.65


$
6.01



3,735



5.65


$
6.01$
25.00-$104.00



2,119



3.97


$
96.87



2,119



3.97


$
96.87Total



5,877



5.05


$
38.77



5,854



5.04


$
38.901993

$
34.00-$86.00



315



1.14


$
36.83



315



1.14


$
36.83$
103.00-$150.00



3,414



2.23


$
127.28



3,414



2.23


$
127.28Total



3,729



2.14


$
119.64



3,729



2.14


$
119.641997 Director's Plan

$
5.00-$10.00



2,480



6.02


$
7.31



2,480



6.02


$
7.31$
84.00-$145.00



80



2.67


$
101.00



80



2.67


$
101.00Total



2,560



5.91


$
10.23



2,560



5.91


$
10.23
 
 
 Non-employee Compensation
 
 The Company accounts for options and warrants issued to non-employees under ASC 718,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.  Expense recognized related to options issued to non-employees was approximately $5,000 for the three months ended March 31, 2010.  For the same period in 2009, we reversed $164,000 of accrued stock compensation expense for an option granted to a consultant in 2008. This option had a performance based vesting which was ultimately not met.  During the first three months of 2010 and 2009, we did not grant options to purchase shares of our common stock to non-employees.
 
 16.
WARRANTS
 
 The following table summarizes warrants for the three months ended March 31, 2010 (post-split):
 
 
 Outstanding WarrantsWarrant Shares Available


Number of Warrant Shares


Exercise Price Per Warrant Share


Weighted-Average Exercise PriceBalance as of 12/31/2009


1,402,681



1,402,681


$
5.50 - $12.50


$
8.42Warrant Shares Granted


-



-



-



-Warrant Shares Cancelled


-



-



-



-Warrant Shares Exercised


-



-



-



-Balance as of 03/31/2010


1,402,681



1,402,681


$
5.50 - $12.50


$
8.42
 
  15
   
 The following table summarizes information about warrants outstanding and exercisable at March 31, 2010 (post-split):
 
 Warrants Outstanding


Warrants ExercisableRange of Exercise Prices


Number of Warrant Shares Outstanding


Weighted-Average Remaining Contractual Life


Weighted-Average Exercise Price


Number of Warrant Shares Exercisable


Weighted-Average Exercise Price$
5.50 - $6.50



847,125



2.8


$
5.74



847,125


$
5.74$
12.50



555,556



3.9


$
12.50



555,556


$
12.501,402,681



3.3


$
8.42



1,402,681


$
8.42
 
 No warrants were exercised during the three months ended March 31, 2010 and 2009.
 
 17.
STOCKHOLDER RIGHTS PLAN
 
 In May 2002, we adopted a stockholder rights plan (“Rights Plan”) and declared a dividend distribution of one right for each outstanding share of common stock on May 21, 2002. Each right, when exercisable, entitles the registered holder to purchase from us one one-hundredth of a share of Series A Participating Preferred Stock on the terms stated in our Rights Plan. The rights will generally separate from the common stock and become exercisable if any person or group acquires or announces a tender offer to acquire 15% or more of our outstanding common stock without the consent of our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our board of directors, our stockholder rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors. In addition, we are governed by provisions of Delaware law that may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. Since adoption, no triggering events have occurred. The Rights Plan will expire on May 20, 2012.
 
 18.
PREFERRED SHARES
 
 We are authorized to issue ten million shares of blank check preferred. We have designated 5,000,000 shares of preferred stock as Series A Convertible Preferred Stock and 750,000 shares of preferred stock as Series A Participating Preferred Stock. In 2007, we issued five million shares of Series A Convertible Preferred stock to APIX Corporation. As a result of the 1-for-10 reverse stock split effectuated on May 11, 2010, APIX, at its sole discretion, may convert the five million Preferred Shares it owns into 100,000 shares (post-split) of our common stock. The Series A Preferred votes together with the common stock will continue to carry 28 votes for each share of Series A Preferred Stock. APIX is an entity that is solely owned by Robert Cheney, who is also our CEO, CFO and a Director. As of March 31, 2010, no shares have been issued under our Rights Plan. (See Note 17).
 
 19.
FAIR VALUE MEASUREMENTS
 
 Our financial assets recorded at fair value on a recurring basis have been categorized based upon a fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Specifically, Level 1 fair values are defined as observable inputs such as quoted prices in active markets; Level 2 fair values are defined as inputs other than quoted prices in active markets that are either directly or indirectly observable. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment; Level 3 fair values are defined as inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
 Our financial assets consist of short-term investments in certificates of deposit with financial institutions in the US and we consider these to be level 1 due to the short-term nature of the maturities. The aggregate total of these certificates of deposits is $4.0 million at March 31, 2010.
   16
  
 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.
 
 Reverse Stock Split
 
 On May 11, 2010, we filed a Form 8-K announcing that our common stock has commenced trading under the new ticker symbol, “CADMD”, following the implementation of a reverse stock split in a 1-for-10 ratio. Our ticker symbol will revert to CADM in approximately 20 business days. The reverse stock split was approved by our shareholders at a special meeting held on March 17, 2010 and by our board of directors. Based on approximately 143,979,034 pre-split shares of common stock issued and outstanding as of May 11, 2010, the following table reflects the approximate number of shares of common stock that were outstanding as a result of the reverse stock split.
 
 Pre-split Shares

Reverse Stock Split

Post-Split Shares143,979,034

1-for-10

14,397,903
 All outstanding options, warrants, rights and convertible securities were appropriately adjusted for the reverse stock split automatically on May 11, 2010, the effective date. The reverse stock split affects all shareholders equally and does not affect any shareholders’ proportionate equity interest in the Company except for those shareholders whose fractional shares will be rounded up.
 
 CE Mark Approval for our Surgical Ablation Probe
 
 In March 2010, we received CE Mark approval with an Indication for the surgical treatment of atrial fibrillation for our Surgical Ablation Probe. All components of our Surgical Ablation System are now approved for marketing for the treatment of AF in European countries recognizing CE Mark approval.
 
 Japanese Diagnostic Market
 
 We had no sales to Japan during 2008, as our former Japanese distributor failed to maintain the legal documentation standard required to sell our PATHFINDER products in Japan. In December 2009, we received regulatory approval to re-enter the Japanese market and resumed sales of our PATHFINDER products. Even though we have resumed sales of our PATHFINDER products to Japan, there can be no assurance that we will be able to maintain sales or achieve the levels reached prior to suspension of sales in the first quarter of 2007.
    17
  
 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
 
 In the fourth quarter of 2009, we launched surgical programs at hospitals affiliated with select leading European cardiac surgeons who have extensive experience in the surgical treatment of AF. These programs highlight the benefits and advantages of our Surgical Ablation System over competing products for European physicians, patients and hospitals. A European surgical study using our Surgical Ablation System is also planned.
 
 Surgical Ablation System – Thailand
 
 We have completed the first stage of surgeon training on our Surgical Ablation System at the Ramathibodhi Hospital, a large public and teaching hospital in Bangkok.  Ramathibodhi Hospital is preparing to launch its AF Center of Excellence utilizing our Surgical Ablation System. This Center of Excellence will be promoted in Thailand, as well as more broadly throughout Asia.  We also expect to begin training surgeons at one of Thailand’s leading private and tourist medicine cardiac centers, Bangkok Heart Hospital. Thailand is known as a significant “tourist medicine” market and our move into the private market in Thailand are underway in 2010.
 
 Surgical Ablation System – China
 
 We expect to receive marketing approval for our Surgical Ablation System in China in 2010, acknowledging the approval is outside of our control. We have established relationships with leading physicians at cardiac centers involved in the treatment of AF to facilitate market entry, subject to marketing approval. Some of these physicians also are attached to academic teaching hospitals.  Currently, we believe clinical studies with our Surgical Ablation System are being actively considered in the Chinese market.
 
 Surgical Ablation System – Regulatory and Clinical
 
 We are actively considering entering additional markets with our Surgical Ablation System, including Australia, Russia and several European markets. A decision to enter these markets is dependent on regulatory approvals, and an assessment of the individual market’s potential and the resources available to us.
 
 EP Ablation System
 
 As part of our regulatory and commercial strategy in the electrophysiology ablation market, we maintain contact with several leading EPs around the world. We are in regular dialogue with these leading EPs, getting their input and feedback on the clinical performance of our EP Ablation System and regulatory strategy.
 
 We concluded in early 2009 that an opportunity existed to significantly improve our existing EP Ablation System with the key objective of marketing a system with a significantly higher clinical success rate from a single ablation procedure compared with existing commercial products. We elected to implement and clinically validate product improvements prior to a wide commercial launch of the EP Ablation System in Europe and the filing of a premarket approval application with the U.S. FDA.
 
 We have made significant advances and are currently validating and clinically evaluating our next generation EP ablation system, the Cardima Cadence EPL. We expect that EPs will benefit from the new Cardima Cadence EPL’s improved power delivery, temperature feedback, tissue temperature stability, tissue contact, deflection characteristics and ease of catheter manipulation, as well as shorten total procedure times and improved formation of critical target lesions.
 
 Based on the performance of the new Cardima Cadence EPL in studies to date, we are considering seeking regulatory approvals for a range of clinical indications that can benefit from linear, deep and contiguous lesions, including AF and atrial flutter. We are planning an aggressive regulatory strategy in 2011 focused on seeking CE Mark approval for marketing the Cardima Cadence EPL in the European Union, a PMA filing with the FDA for the treatment of AF, an updated filing for China that incorporates product modifications, and potentially seeking approvals in additional global markets, like Thailand, Australia and Russia.
    18
 
 New Energy Management Device
 
 We are developing an entirely new and updated energy management device to improve both the Surgical Ablation System and EP Ablations System. Clinical studies with this new unit are scheduled to begin in the later part of 2010 and, following clinical evaluation, the new is expected to be validated for sale in Europe and the U.S in the later part of 2011. This new unit will incorporate its own radiofrequency (“RF”) energy source and is expected to offer significant benefits in terms of improved power delivery and stability over our current INTELLITEMP, which relies on a third-party RF generator.
 
 Commercial sale and use of new products in each market will be entirely dependent upon receipt of the applicable regulatory approvals.  In addition, new product development, clinical trials and application for regulatory approval for new products will require substantial amount of working capital. We do not have any external financing currently in place to support the cash flow required to support these functions. However, we are regularly working with potential investors through public or private financings, or other arrangements to raise additional capital in order to continue operations. Historically, we have been able to raise capital through the issuance of debt or equity to meet working capital needs.  To date, we have no definitive agreements in place to raise additional capital and there can be no assurance that a definitive agreement will ever materialize. If we are unable to raise additional capital, all new product development efforts will likely to be curtailed.
 
 Results of Operations
 
 NetSales
 
 (unaudited, in thousands)Three Months Ended March 31,Net sales

2010


2009United States

$
327


$
301Europe


87



58Asia/Pacific


19



2Other


6



-Total net sales

$
439


$
361
  Sales for the three months ended March 31, 2010 were $439,000, an increase of $78,000, or 22%, as compared to $361,000 for the same period in 2009.  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. Domestic sales of $327,000 and $301,000 for the three months ended March 31, 2010 and 2009, respectively, represent 75% and 83% of total sales, respectively. International sales of $112,000 and $60,000 for the three months ended March 31, 2010 and 2009, respectively, represent 25% and 17% of total sales, respectively. Our future revenue will depend on various factors including the effectiveness of our commercialization of our products and continued commercial success and duration of that commercial acceptance. In addition to the foregoing, the effect of competing products; coverage and reimbursement under commercial or government plans both domestically and internationallywill impact future revenues. In addition to the continuing sales of PATHFINDER, our future revenue will also depend on our ability to obtain regulatory approvals for our new products in the US.
 
 Cost of goods sold; gross margin (deficiency)
 
 (unaudited, in thousands)Three Months Ended March 31,2010


2009Sales

$
439


$
361Cost of goods sold


531



866Gross margin deficiency

$
(92
)

$
(505
)
 
 
 
 19
 
 
 Cost of goods sold for the three months ended March 31, 2010 and 2009 were $531,000, or 121% of sales, and $866,000, or 240% of sales, respectively. The improved cost of goods sold percentage was mainly due to more stringent cost controls in manufacturing including, material cost reductions, enhanced manufacturing processes, better utilization of production labor in general and higher output of our PATHFINDER line of diagnostic catheters. We expect our cost of goods sold and our gross margins to improve as sales volume increases.
 
 Research and Development Expenses
 
 (unaudited, in thousands)Three Months Ended March 31,2010


2009Research and development

$
1,437


$
1,705
  Research and development expenses for the three months ended March 31, 2010 were $1.4 million, or 327% of sales, as compared to $1.7 million, or 472% of sales, for the same period in 2009. The decrease in research and development expenses of $268,000 was primarily due to reduced consulting expenses of $381,000 and lower compensation expenses of $123,000 from reduced headcounts, offset in part by higher expenses of $376,000 related to testing of new products.  Research and development expenses include all direct and indirect costs, including salaries for our research and development personnel, consulting fees, clinical trial costs, including the development and manufacture of products for clinical trials, and other fees and costs related to the development of our products.  Research and development expenses vary according to the number of products in development and the stage of that development. Our future research and development expenses will depend on the results and magnitude or scope of our clinical activities and requirements imposed by regulatory agencies. Year over year spending on active development programs can vary due to the differing levels and stages of development activity, the timing of certain expenses and other factors. Accordingly, our research and development expenses may fluctuate significantly from period to period. In addition, if we in-license or out-license rights to product candidates, our research and development expenses may fluctuate significantly from period to period.
 
 Selling, Marketing, General and Administrative Expenses
 
 (unaudited, in thousands)Three Months Ended March 31,2010


2009Selling, general and administrative

$
1,932


$
2,037
  Selling, marketing, general and administrative expenses for the three months ended March 31, 2010 were $1.9 million, or 440% of sales, as compared to $2.0 million, or 564% of sales for the same period in 2009.  The slight decrease in selling general and administrative expenses of approximately $105,000, or approximately 5%, for the three months ended March 31, 2010, as compared to the same period in 2009, was primarily due to a general decrease in administrative personnel related expenses and legal costs of approximately $217,000. However these reductions were offset by higher compensation costs in selling and marketing resulting from increased headcount.  Our selling and marketing expenses include all direct costs associated with the commercial organization, which include our sales force and marketing programs. Our sales force expenses include salaries, training and educational program costs, product sample costs, and travel. Our marketing and promotion expenses include product management, promotion, advertising, public relations, physician training and administrative expenses. These costs can fluctuate from period to period. Future selling and marketing expenses will depend on the level of our future commercialization activities. We expect selling and marketing expenses will increase in periods that immediately precede and follow product launches. Our general and administrative expenses consist primarily of personnel, facility and related costs for general corporate functions, including business development, finance, accounting, legal, human resources, quality/compliance, facilities and information systems. Future general and administrative expenses will depend on the level and extent of support required to conduct our future research and development, commercialization, business development, and corporate activities.
 
 Total other income/(expense)
  Total other expenses for the three months ended March 31, 2010 were $8,000 expense as compared to $57,000 for the same period in 2009 mainly due to $100,000 of interest expense recorded in the first quarter of 2009 on a $6 million loan which was offset by interest income of $50,000 earned on our short term investments.  Other income/(expense) fluctuates from year to year depending on the level of interest income earned on variable cash and short-term investment balances and interest expense on debt and capital lease obligations. Future other income/(expense) will depend on our future cash and investment balances, the return and change in fair market value on these investments, as well as levels of debt and the associated interest rates.
 
 Liquidity and Capital Resources
 
 We have financed our operations primarily through the sale of equity securities, including private placements of promissory notes and common stock. We had cash and cash equivalents of $462,000 and $524,000 as of March 31, 2010 and December 31, 2009, respectively. We also had $4.0 million in short-term investments as of March 31, 2010. Our working capital was $5.4 million as of March 31, 2010 as compared to $8.4 million as of December 31, 2009.
 The cash used in operating activities in the three months ended March 31, 2010 was $2.4 million, which reflected primarily a net loss of $3.5 million and non-cash charges of $624,000 consisting primarily of depreciation expense and stock-based compensation and an increase in prepaid expenses of $301,000, offset partially by an increase in accounts payable and accrued liabilities of $671,000 due mostly to timing of payments. The cash used in operating activities in the three months ended March 31, 2009 was $3.5 million, which reflected primarily a net loss of $4.3 million and non-cash charges of $527,000 consisting primarily of depreciation expense and stock-based compensation, an increase in inventory of $226,000, offset partially by an increase in accounts payable and accrued interest of $418,000.
   20
   Net cash provided by investing activities of $2.4 million in the three months ended March 31, 2010 was mainly attributable to maturities of short-term investments of approximately $2.5 million to support our operating needs, offset by our investment in capital expenditures to acquire lab equipment, computer hardware and software of $80,000. Net cash used in investing activities of $15.5 million in the three months ended March 31, 2009 was primarily due to purchases of certificates of deposits amounting to$15.1 million, offset by our investment in capital expenditures of $157,000.
  Net cash provided by financing activities was $2,000 in the three months ended March 31, 2010 as compared to $14.0 million in the same period in 2009, resulting from $14.0 million of funds received from an equity raise during the first quarter of 2009.
  Our working capital requirements may fluctuate in future periods depending on many factors, including: the number, magnitude, scope and timing of our development programs; the commercial potential and success of our products; the loss of revenue from our products due to competition or loss of market share; the level of ongoing costs related to the commercialization of our existing products; the costs related to the potential FDA approval of our other product candidates; the cost, timing and outcome of any regulatory reviews, regulatory investigations, and changes in regulatory requirements; the costs of obtaining patent protection for our product candidates; the timing and terms of business development activities; the rate of technological advances relevant to our operations; the timing, method and cost of the commercialization of our product candidates; the efficiency of manufacturing processes developed on our behalf by third parties; the level of required administrative support for our daily operations; the availability of capital to support product candidate development programs we pursue; and the commercial potential of our product candidates.
  There was no new capital financing during the first quarter of 2010.  Historically, we have funded our operations primarily with proceeds from issuances of our common stock, debt financing, and lease financing. We have used the net proceeds for general corporate purposes, including working capital and equipment purchase.
  While we obtained additional equity financing of $20 million in February 2009, our viability as a going concern is dependent upon our ability to obtain additional financing and to maintain and increase profitable operations through increased sales and the higher profit margins received from product sales. Historically, we have experienced significant operating losses with corresponding reductions in working capital and shareholders' equity. We do not currently have any external financing in place to support operating cash flow requirements. However, we are regularly working with potential investors through public or private financings or other arrangements to raise additional capital in order to continue operations. Historically, we have been able to raise capital through the issuance of debt or equity to meet working capital needs.  To date, we have no definitive agreements in place to raise additional capital and there can be no assurance that any definitive agreement will ever materialize. If we are unable to raise additional capital, our business may fail.
 Off-Balance Sheet Arrangements
 
 We have no off-balance sheet arrangements as of March 31, 2010.
   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
 
 Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2010. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2010, our disclosure controls and procedures were effective to provide reasonable assurance that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
 
 Changes in Internal Control Over Financial Reporting
 
 As disclosed in our annual report on Form 10-K for the year ended December 31, 2009, we identified a material weakness in our system of internal controls, related to the inadvertent issuance of an aggregate of 531,944 shares of common stock without legend upon exercise of options under the Company’s 2007 Stock Option Plan. Management did not believe that this material weakness had a material impact on our financial statements for any interim periods in 2009 or 2010 and believes that the financial information presented herein is materially correct and in accordance with the generally accepted accounting principles.  Therefore, a restatement of those prior interim periods was not considered by management to be necessary.
 
 To remediate this material weakness, management has taken the following steps: (1) implementation of policies and procedures to govern the issuance of shares of our common stock, including instructing our transfer agent to seek an opinion of counsel from our securities counsel prior to the issuance of shares of our common stock without a restrictive legend and (2) filing of a registration statement on March 30, 2010 on Form S-8 to register the shares issuable under our 2007 Employee Stock Option Plan and which included shares issued to employees who continue to hold shares of our common stock that were issued upon exercise of options granted under the Option Plan.
 
 Except as disclosed above, there was no other 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, 2009 filed with the SEC on March 29, 2010.
 
 ITEM 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
 None.
 
 ITEM 3.   Defaults Upon Senior Securities
 
 None.
 
 ITEM 4.   Reserved
 
 This item was removed and reserved pursuant to SEC Release No. 33-9089A issued on February 23, 2010.
 
 ITEM 5.   Other Information
 
 None.
    23
 
 ITEM 6.   Exhibits
 
 3.1
Amended and Restated Certificate of Incorporation of Cardima, Inc. filed filed with the Secretary of State of Delaware on April 6, 2010 (Incorporated by reference to the Form 8-K filed by Cardima, Inc. on April 8, 2010)
  3.2
Certificate of Amendment of Cardima, Inc. filed filed with the Secretary of State of Delaware on April 6, 2010 (Incorporated by reference to the Form 8-K filed by Cardima, Inc. on April 8, 2010)
 
 3,3
Certificate of Correction of Certificate of Elimination of Cardima, Inc. filed with the Secretary of State of Delaware on April 1, 2010 (Incorporated by reference to the Form 8-K filed by Cardima, Inc. on April 8, 2010)
  10.1
Amendment to the Rights Agreement between Cardima and American Stock Transfer & Trust Company, as Rights Agent (Incorporated by reference to the Form 8-K filed by Cardima, Inc. on April 8, 2010)
  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, Inc., 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.May 13, 2010
By:
/s/ Robert CheneyChief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)