Part I. Financial Information
Item 1. Financial Statements
PLC
SYSTEMS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
|
|
September 30,
2007
|
|
December 31,
2006
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
8,712
|
|
$
|
6,034
|
|
Short-term
investments
|
|
|
|
4,000
|
|
Accounts
receivable, net of allowance of $26 and $51 at September 30, 2007 and
December 31, 2006, respectively
|
|
1,218
|
|
918
|
|
Inventories, net
|
|
855
|
|
1,255
|
|
Prepaid expenses
and other current assets
|
|
718
|
|
595
|
|
Total current
assets
|
|
11,503
|
|
12,802
|
|
Equipment,
furniture and leasehold improvements, net
|
|
253
|
|
166
|
|
Other assets
|
|
199
|
|
208
|
|
Total assets
|
|
$
|
11,955
|
|
$
|
13,176
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
471
|
|
$
|
456
|
|
Accrued
compensation
|
|
782
|
|
396
|
|
Accrued other
|
|
274
|
|
317
|
|
Deferred revenue
|
|
2,290
|
|
1,784
|
|
Total current
liabilities
|
|
3,817
|
|
2,953
|
|
Deferred revenue
|
|
2,419
|
|
3,094
|
|
Commitments and
contingencies
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Preferred stock,
no par value, unlimited shares authorized, none issued and outstanding
|
|
|
|
|
|
Common stock, no
par value, unlimited shares authorized, 30,325 and 30,311 shares issued and
outstanding as of September 30, 2007 and December 31, 2006, respectively
|
|
93,889
|
|
93,882
|
|
Additional paid
in capital
|
|
220
|
|
101
|
|
Accumulated
deficit
|
|
(88,079
|
)
|
(86,531
|
)
|
Accumulated
other comprehensive loss
|
|
(311
|
)
|
(323
|
)
|
Total
stockholders equity
|
|
5,719
|
|
7,129
|
|
Total
liabilities and stockholders equity
|
|
$
|
11,955
|
|
$
|
13,176
|
|
The accompanying
notes are an integral part of the condensed consolidated financial statements.
3
PLC
SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
975
|
|
$
|
1,205
|
|
$
|
3,629
|
|
$
|
4,262
|
|
Service fees
|
|
356
|
|
362
|
|
1,127
|
|
1,137
|
|
Total revenues
|
|
1,331
|
|
1,567
|
|
4,756
|
|
5,399
|
|
Cost of
revenues:
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
258
|
|
422
|
|
1,406
|
|
1,487
|
|
Service fees
|
|
210
|
|
168
|
|
631
|
|
516
|
|
Total cost of
revenues
|
|
468
|
|
590
|
|
2,037
|
|
2,003
|
|
Gross profit
|
|
863
|
|
977
|
|
2,719
|
|
3,396
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative
|
|
830
|
|
786
|
|
2,919
|
|
2,470
|
|
Research and
development
|
|
637
|
|
394
|
|
1,684
|
|
1,385
|
|
Total operating
expenses
|
|
1,467
|
|
1,180
|
|
4,603
|
|
3,855
|
|
Gain on the sale
of manufacturing rights
|
|
|
|
|
|
|
|
1,432
|
|
Income (loss)
from operations
|
|
(604
|
)
|
(203
|
)
|
(1,884
|
)
|
973
|
|
Other income,
net
|
|
105
|
|
123
|
|
336
|
|
310
|
|
Net income
(loss)
|
|
$
|
(499
|
)
|
$
|
(80
|
)
|
$
|
(1,548
|
)
|
$
|
1,283
|
|
Basic income
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
Diluted income
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
30,323
|
|
30,237
|
|
30,315
|
|
30,080
|
|
Diluted
|
|
30,323
|
|
30,237
|
|
30,315
|
|
30,518
|
|
The accompanying notes
are an integral part of the condensed consolidated financial statements.
4
PLC SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(1,548
|
)
|
$
|
1,283
|
|
|
|
|
|
|
|
Adjustments to
reconcile net income (loss) to net cash provided by (used for) operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
75
|
|
87
|
|
Compensation
expense from stock options
|
|
119
|
|
68
|
|
Loss on
retirement of equipment
|
|
|
|
77
|
|
Change in assets
and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
(300
|
)
|
(248
|
)
|
Inventory
|
|
400
|
|
(201
|
)
|
Prepaid expenses
and other assets
|
|
(123
|
)
|
84
|
|
Accounts payable
|
|
15
|
|
51
|
|
Deferred revenue
|
|
(172
|
)
|
(410
|
)
|
Accrued
liabilities
|
|
343
|
|
(61
|
)
|
Net cash
provided by (used for) operating activities
|
|
(1,191
|
)
|
730
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
Purchase of
investments
|
|
|
|
(4,000
|
)
|
Maturity of
investments
|
|
4,000
|
|
5,400
|
|
Purchase of
equipment
|
|
(153
|
)
|
(69
|
)
|
Net cash
provided by investing activities
|
|
3,847
|
|
1,331
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
Net proceeds
from exercise of stock options
|
|
6
|
|
107
|
|
Net proceeds
from issuance of common stock
|
|
1
|
|
1
|
|
Net cash
provided by financing activities
|
|
7
|
|
108
|
|
|
|
|
|
|
|
Effect of
exchange rate changes on cash and cash equivalents
|
|
15
|
|
15
|
|
Net increase in
cash and cash equivalents
|
|
2,678
|
|
2,184
|
|
Cash and cash
equivalents at beginning of period
|
|
6,034
|
|
2,560
|
|
Cash and cash
equivalents at end of period
|
|
$
|
8,712
|
|
$
|
4,744
|
|
The accompanying notes
are an integral part of the condensed consolidated financial statements.
5
PLC
SYSTEMS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
1.
Nature
of Business
PLC Systems Inc. (PLC or the Company) is a medical
device company specializing in innovative technologies for the cardiac and
vascular markets. The Company pioneered and manufactures the
CO
2
Heart Laser System
(the Heart Laser System) that cardiac
surgeons use to perform carbon dioxide (CO
2
) transmyocardial revascularization, or
TMR, to alleviate symptoms of severe angina. In addition, the Company has
commenced clinical trials for the Companys RenalGuard Therapy
and
RenalGuard System (collectively RenalGuard). RenalGuard Therapy is designed
to reduce the toxic effects that contrast media can have on the kidneys. This
therapy is based on the theory that creating and maintaining a high urine
output is beneficial to patients undergoing cardiovascular imaging procedures
where contrast agents are used. The real-time measurement and matched fluid
replacement design of the Companys RenalGuard System is intended to ensure
that a high urine flow is maintained before, during and after these procedures,
thus allowing the body to rapidly eliminate contrast, reducing its toxic
effects. The RenalGuard System, with its matched fluid replacement capability,
is intended to minimize the risk of over- or under-hydration.
In December
2006, the Company received full FDA approval to conduct its first human
clinical trial utilizing RenalGuard under an investigational device exemption.
This 40-patient pilot clinical trial is designed to evaluate the safety of the
RenalGuard System and its ability to accurately measure and balance fluid
inputs and outputs on patients undergoing a catheterization imaging procedure
where contrast media will be administered.
The Company
hopes to be able to demonstrate through future clinical trials that RenalGuard
is also safe and effective in preventing Contrast-Induced Nephropathy (CIN),
a form of acute renal failure caused by exposure to contrast media for certain
patients undergoing imaging procedures.
On March 20, 2007, the Company entered into a
distribution agreement with Novadaq Corp. (Novadaq), a subsidiary of Novadaq
Technologies Inc., pursuant to which the Company appointed Novadaq as its
exclusive distributor in the United States for the TMR business. This agreement
amended and restated the exclusive distribution agreement between the Company
and Edwards Lifesciences LLC (Edwards), which was assigned by Edwards to
Novadaq on the same date. The agreement with Novadaq reflects substantially the
same roles, responsibilities and financial terms as the Companys previous
agreement with Edwards.
2.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating results for the three and nine
months ended
6
September
30, 2007 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2007. These
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2006.
3.
New
Accounting Pronouncement
In June 2006, the Financial
Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (FIN
48). This statement clarifies the
criteria that an individual tax position must satisfy for some or all of the
benefits of that position to be recognized in a companys financial
statements. FIN 48 prescribes a
recognition threshold of more-likely-than-not, and a measurement attribute for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in the financial statements.
Effective January 1, 2007,
the Company has adopted the provisions of FIN 48. The adoption of FIN 48 did
not have an impact on the Companys consolidated financial statements.
Effective with the adoption of FIN 48, t
he Company recognizes interest and penalties related
to uncertain tax positions as a component of the provision for income taxes.
As of January 1, 2007, the
Company had deferred tax assets of $51 million, primarily comprised of federal
and state tax net operating loss carryforwards and federal and state research
and development credit carryforwards. Under the Internal Revenue Code, certain
substantial changes in the Companys ownership may limit the amount of net
operating loss carryforwards that can be utilized in any one year to offset
future taxable income. Any carryforwards that will expire prior to utilization
as the result of any limitations will be removed from deferred tax assets with
a corresponding reduction of the valuation allowance. Due to the
existence of the valuation allowance, future changes in the Companys
unrecognized tax benefits will not impact its effective tax rate.
The Company maintained a
reserve of $70,000 as of September 30, 2007 for any potential tax matters that
could arise in the future. The reserve
did not change during the nine months ended September 30, 2007.
The Company files income tax
returns in the U.S. federal jurisdiction and in several state and foreign
jurisdictions. For U.S. federal and state tax purposes, the tax years 2003
through 2006 remain open to examination.
In addition, the amount of the Companys federal and state net operating
loss carryforwards may be subject to examination and adjustment. The
examination periods for the Companys foreign jurisdictions range from 1997
through 2006.
4.
Inventories
Inventories are stated at the lower of cost
(computed on a first-in, first-out method) or market value and include
allocations of labor and overhead. As of
September 30, 2007 and December 31, 2006, inventories consisted of the
following (in thousands):
7
|
|
September 30,
2007
|
|
December 31,
2006
|
|
Raw materials
|
|
$
|
610
|
|
$
|
791
|
|
Work in progress
|
|
98
|
|
118
|
|
Finished goods
|
|
147
|
|
346
|
|
|
|
$
|
855
|
|
$
|
1,255
|
|
At September 30, 2007 and December 31, 2006,
inventories are stated net of a specific obsolescence allowance of $507,000 and
$548,000, respectively.
5.
Stock-Based
Compensation
Stock Option and Stock Purchase Plans
In May 2005,
the Company adopted the 2005 Stock Incentive Plan (the 2005 Plan). The 2005 Plan replaced the 1997 Executive
Stock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock Option
Plan and 2000 Non-Qualified Performance and Retention Equity Plan (collectively,
the Previous Plans), under which no further awards can be granted.
The number of stock options
that may be granted under the 2005 Plan is equal to 2,156,175 shares of common
stock (subject to adjustment in the event of stock splits and other similar
events), plus such number of shares as may become available under the Previous
Plans after the date of the adoption of the 2005 Plan because any award
previously granted under any such plan expires or is terminated, surrendered or
cancelled without having been fully exercised or is forfeited in whole or in
part or results in any common stock not being issued, provided that such number
of additional shares may not exceed 2,535,492.
Incentive stock options are issuable only to employees of the Company,
while non-qualified options may be issued to non-employee directors,
consultants, and others, as well as to employees. The options granted under the
Previous Plans and the 2005 Plan become exercisable either immediately, or
ratably over one to four years from the date of grant, and expire ten years
from the date of grant. The per share
exercise price of incentive stock options may not be less than the fair market
value of the common stock on the date the option is granted.
The Company grants stock
options to its non-employee directors. Generally, new non-employee directors
receive an initial grant of an option to purchase 30,000 shares of the Companys
common stock that vests in installments over three years. Once the initial grant has fully vested,
non-employee directors other than the Chairman of the Board receive an annual
grant of an option to purchase 15,000 shares of the Companys common stock that
generally vests in four equal quarterly installments. The Chairman of the Board
receives an annual grant of an option to purchase 30,000 shares of the Companys
common stock that generally vests in four equal quarterly installments in the
same manner as the options granted annually to the other non-employee
directors. All such options have an exercise price equal to the fair market
value of the common stock on the date of grant.
Options granted during 2007
and 2006 will vest ratably annually over a three year period for employees and
ratably quarterly over a one year period for non-employee directors.
8
The following is a summary of option activity under all plans (in
thousands, except per option data):
|
|
Number
of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Average
Remaining
Contractual
Life (Years)
|
|
Outstanding,
December 31, 2006
|
|
4,767
|
|
$
|
1.05
|
|
|
|
Granted
|
|
618
|
|
0.64
|
|
|
|
Exercised
|
|
(13
|
)
|
0.47
|
|
|
|
Forfeited
|
|
(7
|
)
|
0.75
|
|
|
|
Expired
|
|
(67
|
)
|
4.74
|
|
|
|
Outstanding,
September 30, 2007
|
|
5,298
|
|
0.96
|
|
6.00
|
|
Exercisable,
September 30, 2007
|
|
4,379
|
|
1.02
|
|
5.31
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes unvested option activity during the nine
months ended September 30, 2007:
|
|
Number
of
Options
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
(in thousands, except weighted average data)
|
|
Unvested,
December 31, 2006
|
|
531
|
|
$
|
0.51
|
|
Granted
|
|
618
|
|
0.44
|
|
Vested
|
|
(227
|
)
|
0.50
|
|
Forfeited
|
|
(3
|
)
|
0.50
|
|
Unvested,
September 30, 2007
|
|
919
|
|
0.47
|
|
|
|
|
|
|
|
|
SFAS No. 123R
Effective January 1, 2006, the Company
adopted the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-based Payment (SFAS No.
123R), using the modified-prospective transition method, which did not require
restatement of prior period results. In the three and nine months ended
September 30, 2007, the Company recorded compensation expense of $49,000 and
$119,000, respectively, for all share-based payments granted subsequent to
December 31, 2005, based on the grant-date fair value estimated in accordance
with the provisions of SFAS No. 123R. The Company estimates an expected
forfeiture rate based on its historical forfeiture activity. Actual results, and future changes in
estimates, may differ substantially from the Companys current estimates. As of September 30, 2007, the Company had
$437,000 of total unrecognized compensation cost related to its unvested
options, which is expected to be recognized over a weighted average period of
2.09 years.
The weighted average fair
value of options issued during the nine months ended September 30, 2007 was estimated
using the Black-Scholes model.
9
|
|
Nine Months Ended
September 30, 2007
|
|
Expected life
(years)
|
|
5.50-6.00
|
|
Interest rate
|
|
4.62%-5.20%
|
|
Volatility
|
|
74.7%-77.4%
|
|
Expected
dividend yield
|
|
None
|
|
Value of option
granted
|
|
$0.43-$0.45
|
|
There were no options granted in the three months
ended September 30, 2007.
The expected life
is calculated using the simplified method. The risk-free interest rate is based
on the U.S. Treasury yield curve in effect at the time of the grant for the
expected term period. Expected
volatility is based exclusively on historical volatility data of the Companys
common stock.
The Company has a 2000
Employee Stock Purchase Plan (the Purchase Plan) for all eligible employees
whereby shares of the Companys common stock may be purchased at six-month
intervals at 95% of the closing price of the Companys common stock on the last
business day of the relevant plan period.
Employees may purchase shares having a value not exceeding 10% of their
gross compensation during an offering period, subject to certain additional
limitations. Under the Purchase Plan, employees of the Company purchased 612
shares and 1,235 shares of common stock in the nine months ended September 30,
2007 and the year ended December 31, 2006 at average prices of $0.64 and $0.65
per share, respectively. At September 30, 2007, 320,640 shares were reserved
for future issuance under the Purchase Plan.
6.
Revenue Recognition
The Company records revenue
from the sale of TMR kits at the time of shipment to Novadaq. TMR kit revenues include the amount invoiced
to Novadaq for kits shipped pursuant to purchase orders received, as well as an
amortized portion of deferred revenue related to a payment of $4,533,333
received in February 2004. This payment
was made in exchange for a reduction in the prospective purchase price the
Company receives upon a sale of the kits.
The Company is amortizing this payment into its Consolidated Statements
of Operations as revenue over a seven year period (culminating in 2010) under
the units-of-revenue method as prescribed by Emerging Issues Task Force 88-18, Sales
of Future Revenue. The Company
determined that a seven year timeframe was the most appropriate amortization
period based on a valuation model it used to assess the economic fairness of
the payment. Factors the Company considered in developing this valuation model
included the estimated foregone revenues over a seven year period resulting
from the reduction in the prospective purchase price payable to the Company, a
discount rate deemed appropriate to this transaction and an estimate of the
remaining economic useful life of the current TMR kit design, without any
benefit being given to potential future product improvements the Company may
make. The Company reviews annually, and
adjusts if necessary, the prospective revenue amortization rate for kits based
on its best estimate of the total number of kits likely remaining to be shipped
to hospital customers by Novadaq through 2010. The Company recorded
amortization of $132,000 and $503,000 in the three and nine months ended
September 30, 2007, respectively, as compared to $158,000 and $483,000 in the
three and nine months ended September 30, 2006, respectively, which is included
in revenues in the Consolidated Statements of Operations.
10
TMR lasers are billed to
Novadaq in accordance with purchase orders that the Company receives. Invoiced TMR lasers are recorded as other
current assets and deferred revenue on the Companys Consolidated Balance Sheet
until such time as the laser is shipped to a hospital, at which time the
Company records revenue and cost of revenue.
Under the terms of the TMR
distribution agreement, once Novadaq has recovered a prescribed amount of
revenue from a hospital for the use or purchase of a TMR laser, any additional
revenues earned by Novadaq are shared with the Company pursuant to a formula
established in the distribution agreement. The Company only records its share
of such additional revenue, if any, at the time the revenue is earned.
The Company records revenue from the sale of
TMR kits and TMR lasers to international distributors or hospitals at the time
of shipment.
Revenues from service and
maintenance contracts are recognized ratably over the life of the contract.
Installation revenues
related to a TMR laser transaction are recorded as a component of service fees
when the laser is installed.
7.
Earnings
(Loss) per Share
In the three and nine months
ended September 30, 2007 and the three months ended September 30, 2006, basic
and diluted loss per share have been computed using only the weighted average
number of common shares outstanding during the period without giving effect to
any potential future issuances of common stock related to stock option
programs, since their inclusion would be antidilutive.
In the nine months ended September 30, 2006, basic
earnings per share has been computed using only the weighted average number of
common shares outstanding during the period, while diluted earnings per share
was computed using the weighted average number of common shares outstanding
during the period plus the effect of outstanding stock options using the
treasury stock method.
In calculating
diluted earnings per share, the dilutive effect of stock options is computed
using the average market price for the respective period.
For
the three months ended September 30, 2007 and 2006, 5,298,000 and 5,036,000
shares, respectively, and for the nine months ended September 30, 2007 and
2006, 5,298,000 and 5,036,000 shares, respectively, attributable to outstanding
stock options were excluded from the calculation of diluted earnings per share
because the effect would have been antidilutive. The following table sets forth the
computation of basic and diluted earnings (loss) per share:
11
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
Basic:
|
|
|
|
Net income
(loss)
|
|
$
|
(499
|
)
|
$
|
(80
|
)
|
$
|
(1,548
|
)
|
$
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
30,323
|
|
30,237
|
|
30,315
|
|
30,080
|
|
Basic earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(499
|
)
|
$
|
(80
|
)
|
$
|
(1,548
|
)
|
$
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares outstanding
|
|
30,323
|
|
30,237
|
|
30,315
|
|
30,080
|
|
Assumed impact
of the exercise of outstanding dilutive stock options using the treasury
stock method
|
|
|
|
|
|
|
|
438
|
|
Weighted average
common and common equivalent shares
|
|
30,323
|
|
30,237
|
|
30,315
|
|
30,518
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share
|
|
$
|
(0.02
|
)
|
$
|
(0.00
|
)
|
$
|
(0.05
|
)
|
$
|
0.04
|
|
8.
Comprehensive
Income (Loss)
Total comprehensive loss for the three and nine month
periods ended September 30, 2007 amounted to $492,000 and $1,536,000,
respectively, as compared to comprehensive loss of $78,000 in the three months
ended September 30, 2006 and comprehensive income of $1,296,000 in the nine
months ended September 30, 2006.
Comprehensive income (loss) is comprised of net income (loss) plus the
increase/decrease in currency translation adjustment.
9.
Warranty
and Preventative Maintenance Costs
The Company warranties its
products against manufacturing defects under normal use and service during the
warranty period. The Company obtains
similar warranties from a majority of its suppliers, including those who supply
critical Heart Laser System components.
In addition, under the terms of its TMR distribution agreement with
Novadaq, the Company is able to bill Novadaq for actual warranty costs,
including preventative maintenance services, up to a specified amount during
the warranty period.
The Company evaluates the
estimated future unrecoverable costs of warranty and preventative maintenance
services for its installed base of lasers on a quarterly basis and adjusts its
warranty reserve accordingly. The
Company considers all available evidence, including historical experience and
information obtained from supplier audits.
12
Changes in the
warranty accrual were as follows (in thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Balance,
beginning of period
|
|
$
|
60
|
|
$
|
60
|
|
Payments made
|
|
|
|
|
|
Change in
liability for warranties issued during the year
|
|
|
|
|
|
Change in
liability for preexisting warranties
|
|
|
|
|
|
Balance, end of
period
|
|
$
|
60
|
|
$
|
60
|
|
10. Gain on Sale of
Manufacturing Rights
In
February 2004, the Company signed an agreement with Edwards to assume
development and manufacturing of the Optiwave 980 Cardiac Laser Ablation System
(Optiwave 980) and related system disposables. In March 2006, the Company and
Edwards terminated this agreement. The Company received $1,500,000 in
consideration for selling its Optiwave 980 system related disposable
manufacturing rights to Edwards. In
conjunction with the sale, the Company wrote off certain inventory and capital
assets acquired to manufacture the Optiwave 980 disposables and recorded a net
gain of $1,432,000 in its Consolidated Statement of Operations during the nine
months ended September 30, 2006.
Item 2.
Managements Discussion and
Analysis of Financial Condition and Results of Operations
This quarterly report (including certain information
incorporated herein by reference) contains 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 (the Exchange
Act). Statements containing terms such as believes, plans, expects, anticipates,
intends, estimates and similar expressions reflect uncertainty and are
forward-looking statements. Forward-looking statements are based on current
plans and expectations and involve known and unknown important risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. Such important factors and
uncertainties include, but are not limited to, those set forth below in Part
II, Item 1A. Risk Factors, and elsewhere in this quarterly report.
Overview
We are a medical device company specializing in
innovative technologies for the cardiac and vascular markets. We pioneered and manufacture the Heart Laser
System that cardiac surgeons use to perform TMR to alleviate symptoms of severe
angina. In addition, in early 2007, we
began treating patients in our pilot clinical safety trial for our RenalGuard
Therapy and RenalGuard System. RenalGuard Therapy is designed to reduce the
toxic effects that contrast media can have on the kidneys. This therapy
is based on the theory that creating and maintaining a high urine output is
beneficial to patients undergoing cardiovascular imaging procedures where
contrast agents are used. The real-time
measurement and matched fluid replacement design of our RenalGuard System is
intended to ensure that a high urine flow is maintained before, during and
after these procedures, thus allowing the body to rapidly eliminate contrast,
reducing its toxic effects. The RenalGuard
13
System,
with its matched fluid replacement capability, is intended to minimize the risk
of over- or under-hydration.
In December
2006, we received full FDA approval to conduct our first human clinical trial
utilizing RenalGuard under an investigational device exemption. This 40-patient
pilot clinical trial is designed to evaluate the safety of the RenalGuard
System and its ability to accurately measure and balance fluid inputs and
outputs on patients undergoing a catheterization imaging procedure where
contrast media will be administered.
We hope to
be able to demonstrate through future clinical trials that RenalGuard is also
safe and effective in preventing Contrast-Induced Nephropathy (CIN), a form
of acute renal failure caused by exposure to contrast media for certain
patients undergoing imaging procedures.
Our U.S. distributor (Novadaq currently and Edwards
prior to March 20, 2007) is our largest customer, accounting for 88% and 85% of
our total revenues in the three and nine months ended September 30, 2007,
respectively, and 88% of our total revenues in the year ended December 31,
2006. We expect a high level of sales concentration to continue in the near
future with Novadaq as our largest customer now that it holds the exclusive
U.S. distribution rights for our TMR products.
Approximately 89% and 86% of our revenues in the three
and nine months ended September 30, 2007, respectively, and 95% in the year
ended December 31, 2006, came from the sale and service of TMR lasers and
related disposable kits.
Aggregate TMR kit shipments to U.S. hospitals through
Novadaq and Edwards decreased approximately 38% and 22% in the three and nine
months ended September 30, 2007 as compared to the three and nine months ended
September 30, 2006, respectively. We believe the decline in third quarter TMR
kit shipments was primarily the result of (1) disruptions in the effectiveness
of the sales channel resulting from a new organizational sales force structure
that Novadaq implemented in the third quarter and (2) reduced marketing
activities during the quarter on the part of the Novadaq sales force, as
Novadaq was forced to divert attention to solving and explaining to customers a
critical inventory component supply shortage for its principal product line
(the SPY
®
Imaging System). We believe this reduced sales
activity in the third quarter negatively impacted potential new sales of TMR
kits to U.S. hospital customers.
We believe the decline in TMR kit shipments between
the respective nine month periods is due to (1) lower than normal TMR sales
activities conducted by Edwards during the first quarter of 2007, as Edwards
focused its sales force on product lines other than TMR in anticipation of
assigning its TMR distribution rights, (2) sales channel transition issues in
the second quarter, which included the need to train the Novadaq sales force on
TMR and the Heart Laser System, and (3) the aforementioned causes for the
decline in third quarter TMR kit shipments under Novadaq.
We believe it is likely to take at least several
quarters for Novadaqs sales force to regain both the volume of TMR kit
shipments to customers and the level of TMR revenues that the Edwards sales
channel was able to generate in 2006. As such, we believe that our fourth
quarter revenues and results of operations for 2007 will likely be lower than those
in the corresponding period in 2006. The transition of distribution
responsibilities from Edwards to Novadaq also is expected to affect our revenue
and operating results during future quarters in
14
2008 and we will be largely dependent on the success of Novadaqs sales
and marketing efforts in the future to increase our installed base of TMR
lasers and increase TMR procedure volumes and revenues in the U.S.
Our management reviews a
number of key performance indicators to assist in determining how to allocate
resources and run our day to day operations. These indicators include (1)
actual prior quarterly sales trends, (2) projected TMR laser and kit sales for
the next four quarters, as provided by our exclusive U.S. distributor in a
rolling twelve month sales forecast, (3) research and development progress as
measured against internal project plan objectives, (4) budget to actual
financial expenditure results, (5) inventory levels (both our own and our
distributors) and (6) short term and long term projected cash flows of the
business.
Critical Accounting Policies and Estimates
Our financial statements are based on the application of significant
accounting policies, many of which require us to make significant estimates and
assumptions (see Note 2 to the Consolidated Financial Statements included in
our Annual Report on Form 10-K for the year ended December 31, 2006). We believe that the following are some of the
more material judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
Inventories
Inventories are stated at
the lower of cost (computed on a first-in, first-out method) or market value
and include allocations of labor and overhead.
A specific obsolescence allowance is provided for slow moving, excess
and obsolete inventory based on our best estimate of the net realizable value
of inventory on hand taking into consideration factors such as (1) actual
trailing twelve month sales, (2) expected future product line demand, based in
part on sales forecast input received from our exclusive U.S. distributor, and
(3) service part stocking levels which, in managements best judgment, are
advisable to maintain in order to meet warranty, service contract and time and
material spare part demands.
Historically, we have found our reserves to be adequate.
Accounts
Receivable
Accounts receivable is
stated at the amount we expect to collect from the outstanding balance. We continuously monitor collections from
customers, and we maintain a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that we have
identified. Historically, we have not
experienced significant losses related to our accounts receivable, primarily
from Edwards and, more recently, Novadaq. Collateral is not generally required.
If the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be required.
Research and Development Expenses
Research and development
expenses are expensed as incurred.
15
Warranty
and Preventative Maintenance Costs
We warranty our products
against manufacturing defects under normal use and service during the warranty
period. We obtain similar warranties
from a majority of our suppliers, including those who supply critical Heart
Laser System components. In addition,
under the terms of our TMR distribution agreement with Novadaq, we are able to
bill Novadaq for actual warranty costs, including preventative maintenance
services, up to a specified amount during the warranty period.
We evaluate the estimated
future unrecoverable costs of warranty and preventative maintenance services
for our installed base of lasers on a quarterly basis and adjust our warranty
reserve accordingly. We consider all
available evidence, including historical experience and information obtained
from supplier audits.
Revenue
Recognition
We record revenue from the
sale of TMR kits at the time of shipment to Novadaq. TMR kit revenues include the amount invoiced
to Novadaq for kits shipped pursuant to purchase orders received, as well as an
amortized portion of deferred revenue related to a payment of $4,533,333
received in February 2004. This payment
was made in exchange for a reduction in the prospective purchase price we
receive upon a sale of the kits. We are
amortizing this payment into our Consolidated Statements of Operations as
revenue over a seven year period (culminating in 2010) under the
units-of-revenue method as prescribed by Emerging Issues Task Force 88-18, Sales
of Future Revenue. We determined that a
seven year timeframe was the most appropriate amortization period based on a
valuation model we used to assess the economic fairness of the payment. Factors
we considered in developing this valuation model included the estimated
foregone revenues over a seven year period resulting from the reduction in the
prospective purchase price payable to us, a discount rate deemed appropriate to
this transaction and an estimate of the remaining economic useful life of the
current TMR kit design, without any benefit being given to potential future
product improvements we may make. We review annually, and adjust if necessary,
the prospective revenue amortization rate for kits based on our best estimate
of the total number of kits likely remaining to be shipped to hospital
customers by Novadaq through 2010. We recorded amortization of $132,000 and
$503,000 in the three and nine months ended September 30, 2007, respectively,
as compared to $158,000 and $483,000 in the three and nine months ended
September 30, 2006, respectively, which is included in revenues in our
Consolidated Statements of Operations.
TMR lasers are billed to
Novadaq in accordance with purchase orders that we receive. Invoiced TMR lasers are recorded as other
current assets and deferred revenue on our Consolidated Balance Sheet until
such time as the laser is shipped to a hospital, at which time we record
revenue and cost of revenue.
Under the terms of the TMR
distribution agreement, once Novadaq has recovered a prescribed amount of
revenue from a hospital for the use or purchase of a TMR laser, any additional
revenues earned by Novadaq are shared with us pursuant to a formula established
in the distribution agreement. We only record our share of such additional
revenue, if any, at the time the revenue is earned.
16
We record revenue from the sale of TMR kits
and TMR lasers to international distributors or hospitals at the time of
shipment.
Revenues from service and
maintenance contracts are recognized ratably over the life of the contract.
Installation revenues
related to a TMR laser transaction are recorded as a component of service fees
when the laser is installed.
Results
of Operations
Results for the three and nine months ended
September 30, 2007 and 2006 and the related percent of revenues were as
follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
1,331
|
|
100
|
|
1,567
|
|
100
|
|
4,756
|
|
100
|
|
5,399
|
|
100
|
|
Total cost of
revenues
|
|
468
|
|
35
|
|
590
|
|
38
|
|
2,037
|
|
43
|
|
2,003
|
|
37
|
|
Gross profit
|
|
863
|
|
65
|
|
977
|
|
62
|
|
2,719
|
|
57
|
|
3,396
|
|
63
|
|
Selling, general
& administrative
|
|
830
|
|
62
|
|
786
|
|
50
|
|
2,919
|
|
62
|
|
2,470
|
|
46
|
|
Research &
development
|
|
637
|
|
48
|
|
394
|
|
25
|
|
1,684
|
|
35
|
|
1,385
|
|
26
|
|
Total operating
expenses
|
|
1,467
|
|
110
|
|
1,180
|
|
75
|
|
4,603
|
|
97
|
|
3,855
|
|
71
|
|
Gain on sale of
manufacturing rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,432
|
|
27
|
|
Income (loss)
from operations
|
|
(604
|
)
|
(45
|
)
|
(203
|
)
|
(13
|
)
|
(1,884
|
)
|
(40
|
)
|
973
|
|
18
|
|
Other income
|
|
105
|
|
8
|
|
123
|
|
8
|
|
336
|
|
7
|
|
310
|
|
6
|
|
Net income
(loss)
|
|
(499
|
)
|
(37
|
)
|
(80
|
)
|
(5
|
)
|
(1,548
|
)
|
(33
|
)
|
1,283
|
|
24
|
|
17
|
|
Three Months Ended September 30,
|
|
Increase (decrease)
|
|
Nine Months Ended September 30,
|
|
Increase (decrease)
|
|
|
|
2007
|
|
2006
|
|
over 2006
|
|
2007
|
|
2006
|
|
over 2006
|
|
|
|
$
|
|
$
|
|
$
|
|
%
|
|
$
|
|
$
|
|
$
|
|
%
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
975
|
|
1,205
|
|
(230
|
)
|
(19
|
)
|
3,629
|
|
4,262
|
|
(633
|
)
|
(15
|
)
|
Service fees
|
|
356
|
|
362
|
|
(6
|
)
|
(2
|
)
|
1,127
|
|
1,137
|
|
(10
|
)
|
(1
|
)
|
Total revenues
|
|
1,331
|
|
1,567
|
|
(236
|
)
|
(15
|
)
|
4,756
|
|
5,399
|
|
(643
|
)
|
(12
|
)
|
Product cost of
sales
|
|
258
|
|
422
|
|
(164
|
)
|
(39
|
)
|
1,406
|
|
1,487
|
|
(81
|
)
|
(5
|
)
|
Service fees
cost of sales
|
|
210
|
|
168
|
|
42
|
|
25
|
|
631
|
|
516
|
|
115
|
|
22
|
|
Total cost of
revenues
|
|
468
|
|
590
|
|
(122
|
)
|
(21
|
)
|
2,037
|
|
2,003
|
|
34
|
|
2
|
|
Gross profit
|
|
863
|
|
977
|
|
(114
|
)
|
(12
|
)
|
2,719
|
|
3,396
|
|
(677
|
)
|
(20
|
)
|
Selling, general
& administrative expenses
|
|
830
|
|
786
|
|
44
|
|
6
|
|
2,919
|
|
2,470
|
|
449
|
|
18
|
|
Research &
development expenses
|
|
637
|
|
394
|
|
243
|
|
62
|
|
1,684
|
|
1,385
|
|
299
|
|
22
|
|
Total operating
expenses
|
|
1,467
|
|
1,180
|
|
287
|
|
24
|
|
4,603
|
|
3,855
|
|
748
|
|
19
|
|
Gain on sale of
manufacturing rights
|
|
|
|
|
|
|
|
|
|
|
|
1,432
|
|
(1,432
|
)
|
(100
|
)
|
Income (loss)
from operations
|
|
(604
|
)
|
(203
|
)
|
(401
|
)
|
(198
|
)
|
(1,884
|
)
|
973
|
|
(2,857
|
)
|
(294
|
)
|
Other income
|
|
105
|
|
123
|
|
(18
|
)
|
(15
|
)
|
336
|
|
310
|
|
26
|
|
8
|
|
Net income
(loss)
|
|
(499
|
)
|
(80
|
)
|
(419
|
)
|
524
|
|
(1,548
|
)
|
1,283
|
|
(2,831
|
)
|
(221
|
)
|
Product
Sales
Disposable TMR kit revenues, the largest component of
product sales in the three months ended September 30, 2007, decreased by
$119,000, or 16%, as compared to the three months ended September 30, 2006. Domestic
disposable TMR kit revenues decreased $87,000 resulting from a lower volume of
kit shipments to Novadaq than to Edwards in the 2006 period as well as
decreased deferred kit revenue amortization. International disposable TMR kit
revenues decreased $32,000 in the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006 due to a lower volume of
kit shipments to international customers.
In the nine months ended September 30, 2007,
disposable TMR kit revenues decreased by $378,000, or 18%, as compared to the
nine months ended September 30, 2006. Domestic disposable TMR kit revenues
decreased $399,000 resulting from a lower volume of kit shipments to Novadaq
than to Edwards in the 2006 period. This decrease in TMR kit shipments to
Novadaq was offset in part by a $20,000 increase in deferred kit revenue
amortization. International disposable TMR kit revenues increased $1,000.
TMR laser revenues, the second largest component of
product sales in the three months ended September 30, 2007, decreased by
$179,000, or 24%, as compared to the three months ended September 30, 2006. This
decrease resulted from (1) decreased revenue sharing earned under our TMR
distribution agreements and (2) a lower average selling price on new domestic
18
TMR lasers.
In the nine months ended September 30, 2007, TMR laser
revenues decreased by $678,000, or 35%, as compared to the nine months ended
September 30, 2006. International TMR laser revenues decreased $276,000
due to the sale of two lasers to international customers in the nine months
ended September 30, 2006, whereas there were no international TMR laser sales
in the nine months ended September 30, 2007.
Domestic TMR laser revenues decreased $402,000, or 24%, primarily as a
result of (1) decreased revenue sharing earned under our TMR distribution
agreements with Edwards and Novadaq and (2) a lower average selling price on
new TMR lasers.
Other product sales
increased $88,000, or 100%, and $343,000, or 162%, respectively, in the three
and nine months ended September 30, 2007 as compared to the three and nine
months ended September 30, 2006. These
increases were driven primarily by (1) new manufacturing contract assembly
product revenues, which we commenced as a new source of revenue during the
fourth quarter of 2006, and (2) increased sales of new and refurbished surgical
laser tubes to a single OEM customer. We believe the addition of new contract
assembly work will result in increased revenues in this category of product
sales during the remaining quarter of 2007 as compared to what we realized in
this category in the corresponding quarter in 2006.
Optiwave
980 revenues to Edwards were $0 and $100,000 in the three and nine months ended
September 30, 2007, respectively, while they were $20,000 in the three and nine
months ended September 30, 2006. In
December 2006, Edwards announced the discontinuation of the Optiwave 980, which
we manufactured for Edwards under a supply agreement prior to its being
discontinued. We do not expect to
generate any revenues from this product line in the future.
Service Fee Revenues
Service
fees decreased $6,000, or 2%, and $10,000, or 1%, respectively, in the three
months and nine months ended September 30, 2007 as compared to the three and
nine months ended September 30, 2006.
The decreases are primarily related to decreases in international
service billings.
Gross Profit
Total gross profit was $863,000, or 65% of total revenues, in the three
months ended September 30, 2007 as compared with gross profit of $977,000, or
62% of total revenues, in the three months ended September 30, 2006. The improved gross profit percentage is
primarily a result of both lower inventory obsolescence and period
manufacturing expenses in the three months ended September 30, 2007 as compared
to the three months ended September 30, 2006.
The decrease in gross profit dollars is due to (1) lower disposable TMR
revenues, (2) a decrease in revenue sharing earned under our U.S. TMR
distribution agreements with Edwards and Novadaq and (3) a lower average
selling price on new TMR lasers.
These decreases were offset in part by
higher gross profit dollars generated from (1) increased revenues from new and
refurbished surgical tubes and contract assembly services, (2) a decrease in
inventory obsolescence expense and (3) lower period manufacturing expenses.
19
Total gross profit was $2,719,000, or 57% of total revenues, in the
nine months ended September 30, 2007 as compared with gross profit of
$3,396,000, or 63% of total revenues, in the nine months ended September 30,
2006. The decrease in gross profit
dollars is due to (1) lower disposable TMR revenues, (2) a decrease in revenue
sharing earned under our U.S. TMR distribution agreements with Edwards and
Novadaq, (3) lower international TMR laser revenue, and (4) a lower average
selling price on new domestic TMR lasers.
These
decreases were offset in part by higher gross margin generated from (1)
increased revenues from new and refurbished surgical tubes and contract
assembly services, (2) a decrease in inventory obsolescence expense and (3)
lower period manufacturing expenses.
Selling, General and Administrative
Expenses
Selling, general and
administrative expenditures increased 6% and 18%, respectively, in the three
and nine months ended September 30, 2007 as compared to the three and nine
months ended September 30, 2006. These
increases are related to increased headcount and higher compensation expense, increased
overall spending on sales and marketing activities related to RenalGuard, as
well as higher corporate and legal expenditures incurred in connection with (1)
the transfer of the U.S. TMR distribution agreement and (2) RenalGuard clinical
trial contracts.
Research and Development Expenses
Research and development
expenditures increased 62% and 22% in the three and nine months ended September
30, 2007 as compared to the three and nine months ended September 30,
2006. These increases are primarily due
to increases in clinical trial expenditures for RenalGuard. These increases were partly offset by
decreases in expenditures in connection with new product development costs
related to RenalGuard.
We expect to continue to
incur significant new research and development expenditures for the remainder
of 2007 and future years. Our near term
development efforts are focused on performing clinical trials of our newest
product initiative, RenalGuard, which should lead to increased research and
development expenditures from what we incurred in the first nine months of 2007
at least through 2009.
Gain on the Sale of Manufacturing Rights
In March 2006, we received
$1,500,000 related to the sale our Optiwave 980 disposable manufacturing rights
to Edwards. In conjunction with this
transaction, we wrote off certain production equipment and inventory and
recorded a net gain of $1,432,000 in the nine months ended September 30, 2006.
Other Income
The largest component of
other income consists of interest income earned on our cash, cash equivalents
and short-term investments.
Interest income decreased
$18,000 in the three months ended September 30, 2007 as compared to the three
months ended September 30, 2006. The
decrease is primarily a result of lower investable cash balances in the three
months ended September 30, 2007.
Interest income increased
$26,000 in the nine months ended September 30, 2007 as compared to the nine
months ended September 30, 2006. The
increase is primarily a result of a higher average interest rate earned on
investable cash balance during the nine months September 30, 2007.
20
Net Income (Loss)
In the three months ended September 30, 2007, we
recorded a net loss of $499,000 as compared to a net loss of $80,000 in the
three months ended September 30, 2006. This increased net loss is
primarily a result of higher operating expenses and lower sales and gross
margin in the three months ended September 30, 2007 as compared to the three months
ended September 30, 2006.
In the nine months ended
September 30, 2006, we recorded a gain from the sale of our Optiwave 980
disposable manufacturing rights to Edwards.
This non-recurring gain as well as higher sales, gross margin and lower
operating expenses resulted in recorded net income of $1,283,000 in the nine
months ended September 30, 2006 as compared to a net loss of $1,548,000 in the
nine months ended September 30, 2007.
Kit Shipments
Although we have generally
viewed disposable kit shipments to end users as an important metric in
evaluating our business, we believe that specific short-term factors not
indicative of long-term trends negatively affected shipments of disposable kits
in 2007 as previously indicated above.
Disposable kit shipments to end users were as follows:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
%
Increase
(Decrease)
Over
2006
|
|
2007
|
|
2006
|
|
%
Increase
(Decrease) Over
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (by
U.S. Distributor)
|
|
313
|
|
502
|
|
(38
|
)
|
1,194
|
|
1,530
|
|
(22
|
)
|
International
|
|
2
|
|
13
|
|
(85
|
)
|
32
|
|
38
|
|
(16
|
)
|
Total
|
|
315
|
|
515
|
|
(39
|
)
|
1,226
|
|
1,568
|
|
(22
|
)
|
In addition to the impact of factors previously
discussed that we believe affected kit shipments in the first nine months of
2007, it is our belief that
TMR kit shipments in recent years have
largely been affected by what we believe is an ongoing downward trend in the
number of bypass surgeries being performed. We believe the proliferation of
interventional cardiac procedures being performed, particularly with the use of
drug eluting stents, is causing a delay in the number of patients being
referred to cardiac surgeons for surgical treatment of their cardiovascular
disease. Because a significant number of the total TMR procedures performed
each year by cardiac surgeons are done in combination with bypass surgery, we
believe the growth in the number of TMR procedures may be being adversely
impacted by this reduction in the number of bypass surgeries being performed.
Liquidity
and Capital Resources
Cash, cash equivalents and
short-term investments totaled $8,712,000 as of September 30, 2007, a decrease
of $1,322,000 from $10,034,000 as of December 31, 2006. We have no debt obligations. We believe that
our existing cash resources will meet our working capital requirements through
at least the next 12 months.
21
Cash used for operating
activities in the nine months ended September 30, 2007 was $1,191,000 due to
our net loss, partially offset by favorable working capital changes, non-cash
depreciation and amortization and compensation related to stock options. We used $153,000 for the purchase of
equipment. Additional cash of $7,000
resulted from the exercise of stock options and proceeds from our employee
stock purchase plan and $15,000 was provided by the effect of exchange rate
changes.
We
will be largely dependent on the future success of Novadaqs sales and
marketing efforts in the U.S. to continue to increase the installed base of our
second generation Heart Laser System, the HL2, and to substantially increase
TMR procedural volumes and revenues. Should the installed base of HL2 lasers or
TMR procedural volume not increase sufficiently, our liquidity and capital
resources will be negatively impacted.
Additionally, other unanticipated decreases in operating revenues or
increases in expenses or changes or delays in third-party reimbursement to
healthcare providers using our products may adversely impact our cash position
and require further cost reductions or the need to obtain additional
financing. It is not certain that we,
working with Novadaq and our international distributors, will be successful in
achieving broad commercial acceptance of the Heart Laser Systems, or that we
will be able to operate profitably in the future on a consistent basis, if at
all.
Some hospital customers
prefer to acquire the Heart Laser Systems on a usage basis rather than as a
capital equipment purchase. We believe
this is the result of limitations many hospitals currently have on acquiring
expensive capital equipment as well as competitive pressures in the
marketplace. A usage business model will
result in a longer recovery period for Novadaq to recoup its investment in
lasers it will purchase from us in the future.
This results in (1) a delay in our ability to receive additional shared
revenue, if any, that we otherwise are entitled to receive under the terms of
our new distribution agreement with Novadaq and (2) a potential delay in the
purchase of new lasers by Novadaq if the installed base of lasers placed under
usage contracts are under-performing and Novadaq chooses to re-deploy these
lasers to other hospital sites in lieu of purchasing a new laser from us. Our cash position and our potential need for
additional financing to fund operations will be dependent in part upon the
number of hospitals that acquire Heart Laser Systems from Novadaq on a usage
basis and the number and frequency of TMR procedures performed by these
hospitals.
We believe we will incur
losses at least through 2009 as we increase our research and development
spending in order to conduct the clinical trials that are necessary to obtain
the regulatory approval to market RenalGuard.
We cannot be certain that future sales, if any, of RenalGuard will
justify the investments we plan to make. If we are unsuccessful in implementing
our business strategy to introduce RenalGuard, or if the introduction of
RenalGuard takes longer or costs more than anticipated, our liquidity and
capital resources will be adversely affected and we may need to obtain
additional financing.
There
can be no assurance that, should we require additional financing, such
financing will be available on terms and conditions acceptable to us. Should additional financing not be available
on terms and conditions acceptable to us, additional actions may be required
that could adversely impact our ability to continue to realize assets and
satisfy liabilities in the normal course of business. The consolidated financial statements set
forth in this report do not include any adjustments to reflect the possible
future effects of these uncertainties.
22
Off-Balance Sheet Arrangements
None.
Item 3. Quantitative
and Qualitative Disclosures about Market Risk
A portion of our
operations consists of sales activities in foreign jurisdictions. We manufacture our products exclusively in
the U.S. and sell our products in the U.S. and abroad. As a result, our
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which we distribute our products. Our
operating results are exposed to changes in exchange rates between the U.S.
dollar and foreign currencies, especially the Euro. When the U.S. dollar
strengthens against the Euro, the value of foreign sales decreases. When the
U.S. dollar weakens, the functional currency amount of sales increases. No
assurance can be given that foreign currency fluctuations in the future will
not adversely affect our business, financial condition and results of
operations, although at present we do not believe that our exposure is significant,
as international sales represented only 1% and 4% of our consolidated sales
during the three and nine months ended September 30, 2007, respectively, and 8%
of our consolidated sales in the year ended December 31, 2006. We do not hedge
any balance sheet exposures or intercompany balances against future movements
in foreign exchange rates.
Our interest income and expense are sensitive to
changes in the general level of U.S. and foreign interest rates. In this
regard, changes in U.S. and foreign interest rates affect the interest earned
on our cash and cash equivalents. We do
not believe that a 10% change to the applicable interest rates would have a
material impact on our future results of operations or cash flows.
Item 4. 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 of September 30, 2007. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed
by a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in
the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
Management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of September 30, 2007, our chief executive officer
and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
No change in our
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
September 30, 2007
23
that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Part II. Other Information
Item 1A. Risk
Factors
The risks and uncertainties described below are not
the only risks we face. Additional risks
and uncertainties not presently known to us or currently deemed immaterial may
also impair our business operations. If
any of the following risks actually occur, our financial condition and
operating results could be materially adversely affected.
We
expect to incur significant operating losses in the near future.
We expect to incur net losses in
future quarters, at least through 2009, as we increase our research and
development on clinical studies of RenalGuard. We cannot provide any assurance
that we will be successful with our business strategy, that RenalGuard will
receive FDA approval or commercial acceptance, or that we will ever return to
profitability.
We are dependent on our new distributor of TMR products in
the U.S. to attempt to increase our TMR revenues.
Novadaqs sales
organization is responsible for selling a number of different products,
including our TMR products. We will be
largely dependent on the future success of Novadaqs sales and marketing
efforts in the U.S. to increase the installed base of HL2 lasers and TMR
procedural volumes and revenues. If our
relationship with Novadaq does not progress as anticipated, or if Novadaqs
sales and marketing strategies fail to generate sales of our products in the
future,
our
revenue will decrease significantly and our business, financial condition and
results of operations will be seriously harmed.
Our
company is currently dependent on one principal customer.
Pursuant to the terms of our new
TMR distribution agreement with Novadaq, Novadaq is our exclusive distributor
for our HL2 TMR laser and TMR kits in the United States. As a result of this exclusive arrangement,
Novadaq has become our principal customer, just as Edwards was our principal
customer prior to the assignment of the distribution rights.
Our U.S. distributor accounted
for 88% and 85% of total revenues in the three and nine months ended September
30, 2007, respectively, and 88% in the year ended December 31, 2006. As a result of this expected concentration of
sales with our U.S. distributor, we bear an increased financial risk of timely
sales collection if, for any reason, Novadaqs business condition should
suffer.
Our company is currently dependent on one principal
product line to generate revenues.
We currently sell one principal
product line, the Heart Laser Systems, which accounts for the majority of our
total revenues. Approximately 89% and
86% of our revenues in the three and
24
nine months ended
September 30, 2007, respectively, and 95% in the year ended December 31, 2006,
were derived from the sales and service of our Heart Laser Systems. This absence of a diversified product line
means that we are directly and materially impacted by changes in the market for
Heart Laser Systems.
Our company is dependent on
certain suppliers.
Some of the
components for our Heart Laser Systems, most notably the power supply and
certain optics and fabricated parts for the HL2, are only available from one
supplier, and we have no assurance that we will be able to source any of our
sole-sourced components from additional suppliers. We are dependent upon our sole suppliers to
perform their obligations in a timely manner.
In the past, we have experienced delays in product delivery from our
sole suppliers and, because we do not have an alternative supplier to produce
these products for us, we have little leverage to enforce timely delivery. Any
delay in product delivery or other interruption in supply from these suppliers
could prevent us from meeting our commercial demands for our products, which
could have a material adverse effect on our business, financial condition and
results of operations. Furthermore, we
do not require significant quantities of any components because we produce a
limited number of our products each year.
Our low-quantity needs may not generate substantial revenue for our
suppliers. Therefore, it may be
difficult for us to continue our relationships with our current suppliers or
establish relationships with additional suppliers on commercially reasonable
terms, if at all, and such difficulties may seriously harm our business,
financial condition and results of operations.
We
are dependent upon our key personnel and will need to hire additional key
personnel in the near future.
Our ability to operate our
business successfully depends in significant part upon the retention and
motivation of certain key technical, regulatory, production and managerial
personnel and consultants and our ongoing ability to hire and retain additional
qualified personnel in these areas. Competition for such personnel is intense,
particularly in the Greater Boston area. We cannot be certain that we will be
able to attract such personnel and the loss of any of our current key employees
or consultants could have a significant adverse impact on our business.
Our
company may be unable to raise needed funds.
As of September 30, 2007, we had
cash and cash equivalents totaling $8,712,000. Based on our current operating
plan, we anticipate that our existing capital resources should be sufficient to
meet our working capital requirements for at least the next 12 months; however,
we may need to raise additional funds in the future. We may not be able to raise additional
capital upon satisfactory terms, or at all, and our business, financial
condition and results of operations could be materially and adversely
affected. To the extent that we raise
additional capital by issuing equity or convertible securities, ownership
dilution to our shareholders will result.
To the extent that we raise additional capital through the incurrence of
debt, our activities may be restricted by the repayment obligations and other
restrictive covenants related to the debt.
In
order to compete effectively, our current and future products need to gain
commercial acceptance.
Our current TMR products may
never achieve widespread commercial acceptance.
To be
25
successful, we and
Novadaq need to:
demonstrate to the medical community in general, and to heart surgeons
and cardiologists in particular, that TMR procedures are effective, relatively
safe and cost effective;
support third-party efforts to document the medical processes by which
TMR procedures relieve angina;
have more heart surgeons trained to perform TMR procedures using the
Heart Laser Systems; and
maintain and expand third-party reimbursement for the TMR procedure.
To date, only a limited number
of heart surgeons have been trained in the use of TMR using the Heart Laser
Systems. We are dependent on Novadaq to
expand related marketing and training efforts in the U.S. for the use of our
products.
The Heart Laser Systems have not
yet received widespread commercial acceptance.
We believe that concerns over the lack of a consensus view on the reason
or reasons why a TMR procedure relieves angina in patients who undergo the
procedure has limited demand for and use of the Heart Laser Systems. Until
there is consensus, if ever, of the medical processes by which TMR procedures
relieve angina, we believe some hospitals will delay the implementation of a
TMR program.
If we are unable to achieve
widespread commercial acceptance of the Heart Laser Systems, our business,
financial condition and results of operations will be materially and adversely
affected.
Our
newest product, RenalGuard, is still undergoing development and we have only
recently begun to test it in a clinical setting as part of our initial pilot
clinical study.
We have only completed the first
generation product design for our RenalGuard System and we are testing the
device in a clinical hospital setting as part of our pilot human clinical
study. We may need to make substantial modifications to the design, features or
functions of our device in order for it to obtain FDA approval or meet customer
expectations. These changes may not be able to be completed in a timely
fashion, if at all. Should any such modifications prove to be significantly
more costly or time consuming to engineer than we estimate, our ability to
bring this product to market may be severely and negatively impacted.
Our
planned future clinical trials to study the safety and effectiveness of
RenalGuard in preventing contrast-induced nephropathy will take us a
significant amount of time to complete, if we can complete them at all, and the
results of these clinical trials may not show sufficient safety and efficacy
for us to either obtain FDA approval or otherwise be able to successfully
market and sell the product.
Our business
strategy to grow our revenues and profitability is largely dependent on our
success in timely completion of our planned future clinical trials of
RenalGuard. We hope to be able to demonstrate through clinical trials that
RenalGuard is safe and effective in preventing CIN, a
26
form of acute renal failure caused by exposure to
contrast media for patients undergoing imaging procedures.
We can provide no assurance that when studied in
humans, RenalGuard will be shown to be safe or effective in preventing CIN, or
that the degree of any positive safety and efficacy results will be sufficient
to either obtain FDA approval or otherwise successfully market our product.
Furthermore, the completion of our planned clinical trials is dependent upon many
factors, some of which are not entirely within our control, including, but not
limited to, our ability to successfully recruit investigators, the availability
of patients meeting the inclusion criteria of our clinical study, the
competition for these particular study patients amongst other clinical trials
being conducted by other companies at these same study sites, the ability of
the sites participating in our study to successfully enroll patients in our
trial, and proper data gathering on the part of the investigating sites.
Should our clinical trials take
longer than we expect, our competitive position relative to existing
preventative measures, or relative to new devices, drugs or therapies that may
be developed, could be seriously harmed and our ability to successfully fund
the completion of the trials and bring RenalGuard to market may be adversely
affected.
We will
need to build a direct sales and marketing organization or otherwise enter into
one or more distribution arrangements in order to market our RenalGuard System
if and when it is approved for sale.
We currently do not have a direct sales
force. Instead, we market our existing TMR products through Novadaq in the
United States and through independent distributors outside the U.S. We do not plan to use Novadaq to market our
RenalGuard System if and when it becomes commercially available to customers.
We will need to either build an internal direct sales and marketing
organization or find distribution partners in order to successfully market our
RenalGuard System.
If we choose to build a direct sales force, we may
not be able to attract qualified individuals with the requisite training or
experience to sell our product. In addition, we would need to devote
substantial management time instituting policies, procedures and controls to
oversee and effectively manage this new part of our organization, which could
adversely impact our daily operations and would require us to invest
significant financial resources, the cost of which could be prohibitive.
If we instead choose to pursue an indirect
distribution strategy, we may not be able to identify suitable distribution
partners with sufficient industry experience, brand recognition, sales capacity
and willingness/ability to maximize sales. Further, we may not be able to
negotiate distribution agreements with terms and conditions that are acceptable
to us, including ensuring that our product receives adequate sales force focus
and attention.
Our
primary competitor in TMR may obtain FDA approval to market a new device, the
impact of which is uncertain on the future adoption rate of TMR.
Our primary TMR competitor, CardioGenesis, has
attempted in the past and may attempt in the future to obtain FDA approval to
market its percutaneous method of performing myocardial revascularization,
previously known as PMR, and recently rebranded as PMC
27
(percutaneous myocardial
channeling), which would provide a less invasive method of creating channels in
the heart. If PMC can be shown to be safe and effective and is approved
by the FDA, it would eliminate the need in certain patients to make an incision
in the chest, reducing costs and speeding recovery. It is unclear what impact, if any, approval
of a PMC device would have on the future adoption rate for TMR procedures. If
PMC is approved, it could erode the potential TMR market, which would have a
material adverse effect on our business, financial condition and results of
operations.
Rapid
technological changes in our industry could make our products obsolete.
Our industry is characterized by
rapid technological change and intense competition. New technologies and products and new
industry standards will develop at a rapid pace, which could make our current and
future planned products obsolete. The advent of new devices and procedures and
advances in new drugs and genetic engineering are especially concerning
competitive threats. Our future success
will depend upon our ability to develop and introduce product enhancements to
address the needs of our customers.
Material delays in introducing product enhancements may cause customers
to forego purchases of our products and purchase those of our competitors.
Many potential competitors have
substantially greater financial resources and are in a better financial
position to exploit marketing and research and development opportunities.
We must
receive and maintain government clearances or approvals in order to market our
products.
Our products and our
manufacturing activities are subject to extensive, rigorous and changing
federal and state regulation in the U.S. and to similar regulatory requirements
in other major international markets, including the European Union and
Japan. These regulations and regulatory
requirements are broad in scope and govern, among other things:
product design and development;
product testing;
product labeling;
product storage;
premarket clearance and approval;
advertising and promotion; and
product sales and distribution.
Furthermore, regulatory
authorities subject a marketed product, its manufacturer and the manufacturing
facilities to continual review and periodic inspections. We are subject to ongoing FDA requirements,
including required submissions of safety and other post-market information and
reports, registration requirements, Quality Systems regulations, and
recordkeeping requirements. The FDAs Quality Systems regulations include
requirements relating to quality
28
control and
quality assurance, as well as the corresponding maintenance of records and
documentation. Depending on its
activities, Novadaq may also be subject to certain requirements under the U.S.
Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, and
state laws and registration requirements covering the distribution of our
products. Regulatory agencies may change existing requirements or adopt new
requirements or policies that could affect our regulatory responsibilities or
the regulatory responsibilities of a distributor like Novadaq. We may be slow to adapt or may not be able to
adapt to these changes or new requirements.
Later discovery of previously
unknown problems with our products, manufacturing processes, or our failure to
comply with applicable regulatory requirements may result in enforcement
actions by the FDA and other international regulatory authorities, including,
but not limited to:
warning letters;
patient or physician notification;
restrictions on our products or manufacturing processes;
voluntary or mandatory recalls;
product seizures;
refusal to approve pending applications or supplements to approved
applications that we submit;
refusal to permit the import or export of our products;
fines;
injunctions;
suspension or withdrawal of marketing approvals or clearances; and
civil and criminal penalties.
Should any of these enforcement
actions occur, our business, financial condition and results of operations
could be materially and adversely affected.
To date, we have received the
following regulatory approvals for our products:
Heart
Laser Systems
United States
We received FDA approval to market the
HL1 Heart Laser System in August 1998 and the HL2 Heart Laser System in January
2001. However, although we have received
FDA approval, the FDA:
has restricted the use of the Heart Laser Systems by not allowing us to
market these
29
products to treat
patients whose condition is amenable to conventional treatments, such as heart
bypass surgery, stenting and angioplasty; and
could impose additional restrictions or reverse its ruling and prohibit
use of the Heart Laser Systems at any time.
In
addition, as a condition of our original FDA approval for our TMR products, we
were required by the FDA to perform a postmarket surveillance study. The FDA
recently requested that we submit a PMA Postapproval Study report summarizing
this postmarket surveillance study. As part of this report, the FDA requested that
we analyze and discuss the adverse event and mortality rates seen in the
postmarket study and compare these results to the premarket study which was
presented as part of our initial FDA PMA application. We filed this
postapproval study report with the FDA on February 28, 2007.
Because
of the significant safety information collected in the postapproval study, and
as the FDA has indicated it plans to do in other product areas, we believe that
the FDA plans to present the results at a future meeting of the FDA Circulatory
System Devices Advisory Panel and thereafter determine what, if any, actions
should be taken with respect to our current Heart Laser Systems PMA.
Europe
We received the CE Mark from the European
Union for the HL1 and HL2 in March 1995 and February 2001, respectively. However:
the European Union could impose additional restrictions or reverse its
ruling and prohibit use of the Heart Laser Systems at any time; and
France has prohibited, and other European Union countries could prohibit
or restrict, use of the Heart Laser Systems.
Japan
Our HL1 Heart Laser System received
marketing approval from the Japanese Ministry of Health, Labor and Welfare (MHLW)
in May 2006. However, the MHLW could impose restrictions in the future or
reverse its ruling and prohibit use of the Heart Laser Systems at any time.
In addition, it is unclear what
impact the introduction of the HL2 into the U.S. and other international
markets will have on the ability of our Japanese distributor to market our
older, first generation HL1 in Japan. Although our Japanese distributor has
indicated to us that it plans to seek MHLW approval in the future to market our
newer HL2, we can provide no assurance that the distributor will be successful
in obtaining the necessary approvals or how long it may take to secure the
required approvals.
RenalGuard
We presently have no governmental
approvals to market our RenalGuard System. We must receive either FDA approval
or clearance before we can market our product in the United States. We must
also receive CE Mark approval before we can market our product in the EU. Other
countries may require their own approvals prior to our being able to market our
product in those countries.
30
The process of obtaining and maintaining regulatory
approvals and clearances to market a medical device can be costly and time
consuming, and we cannot predict when, if ever, such approvals or clearances
will be granted. Pursuant to FDA regulations, unless exempt, the FDA permits
commercial distribution of a new medical device only after the device has
received 510(k) clearance or is the subject of an approved PMA application. The
FDA will clear marketing of a medical device through the 510(k) process only if
it is demonstrated that the new product is substantially equivalent to other
510(k)-cleared products.
At the present time we are not aware of any clear
predicates with substantially the same proposed indications for use which would
enable us to conclude that RenalGuard is likely to be cleared by the FDA as a
510(k) device. Therefore, we believe RenalGuard most likely will need to go
through the PMA application process.
Because the PMA application process is more costly,
lengthy and uncertain than the 510(k) process and must be supported by
extensive data, including data from preclinical studies and human clinical
trials, we cannot predict when our product may eventually come to market.
Should we be unable to obtain FDA or CE Mark approval for RenalGuard, or should
the approval process take longer than we anticipate, our future revenue growth
prospects could be materially and adversely affected.
Changes
in third party reimbursement for TMR procedures or our inability to obtain
third party reimbursement for RenalGuard could materially affect future demand
for our products.
Demand for medical devices is often affected by
whether third party reimbursement is available for the devices and related
procedures. Currently Medicare coverage
is provided for TMR when it is performed as a sole therapy treatment. In addition, when two or more medical
procedures are performed in combination with each other, Medicare rules
generally allow hospitals to bill for whichever of the two procedures carries
the higher reimbursement amount. Therefore, in situations where sole therapy
TMR reimbursement rates exceed that provided for bypass surgery alone, if
hospitals perform a combination procedure where both bypass surgery and
adjunctive TMR are performed on a patient, the hospital is able to bill for the
higher TMR procedure reimbursement payment. In these instances, the doctor also
can bill an additional amount for performing multiple procedures.
Certain private insurance companies and health
maintenance organizations also currently provide reimbursement for TMR
procedures performed with our products and physician reimbursement codes have
been established for both surgical procedures.
No assurance can be given, however, that these payers
will continue to reimburse healthcare providers who perform TMR procedures
using our products now or in the future.
Further, no assurance can be given that additional payers will reimburse
healthcare providers who perform TMR procedures using our products or that
reimbursement, if provided, will be timely or adequate.
Should third party insurance reimbursement for TMR
procedures be reduced or eliminated in the future, our business, financial
condition and results of operations would be materially and adversely affected.
31
Furthermore, we know of no existing Medicare coverage
or other third party reimbursement that would be available to either hospitals
or physicians that would help defray the additional cost that would result from
the future purchase and/or use of our RenalGuard System. We also can provide no
assurance that we will ever be able to obtain Medicare coverage or other third
party reimbursement for the use of RenalGuard, which could materially and
adversely affect the potential future demand for this product.
In addition, the market for our all our products
could be adversely affected by future legislation to reform the nations
healthcare system or by changes in industry practices regarding reimbursement
policies and procedures.
Securing
intellectual property rights for our RenalGuard System is critical to our
future business plans, but may prove to be difficult or impossible for us to
obtain.
We have filed seven patent applications
and have one provisional patent application pending at the United States patent
office related to our RenalGuard System, RenalGuard Therapy and other
intellectual property in the general field of preventing contrast-induced
nephropathy and acute renal failure. Securing patent protection over our
intellectual property ideas in this field is, we believe, critical to our plans
to successfully differentiate and market our RenalGuard System and grow our
future revenues. We can provide no assurance, however, that we will be
successful in securing any patent protection for our intellectual property
ideas in this chosen field or that our efforts to obtain patent protection will
not prove more difficult, and therefore more costly, than we are otherwise
expecting. Furthermore, even if we are successful in securing patent protection
for some or all of our intellectual property ideas in this field, we cannot
predict when in the future any such potential patents may be issued, how strong
such patent protection will prove to be, or whether these patents will be
issued in a timely enough fashion to afford us any commercially meaningful
advantage in marketing our RenalGuard System against other potentially
competitive devices.
Asserting
and defending intellectual property rights may impact our results of
operations.
In our industry, competitors
often assert intellectual property infringement claims against one
another. The success of our business
depends on our ability to successfully defend our intellectual property. Future litigation may have a material impact
on our financial condition even if we are successful in marketing our products.
We may not be successful in defending or asserting our intellectual property
rights.
An adverse outcome in any
litigation or interference proceeding could subject us to significant liabilities
to third parties and require us to cease using the technology that is at issue
or to license the technology from third parties. In addition, a finding that any of our
intellectual property is invalid could allow our competitors to more easily and
cost-effectively compete with us. Thus,
an unfavorable outcome in any patent litigation or interference proceeding
could have a material adverse effect on our business, financial condition or
results of operations.
The cost to us of any patent
litigation or interference proceeding could be substantial. Uncertainties resulting from the initiation
and continuation of patent litigation or interference proceedings could have a
material adverse effect on our ability to compete in the marketplace. Patent litigation and interference
proceedings may also absorb significant management time.
32
We may
be subject to product liability lawsuits; our insurance may not be sufficient
to cover damages.
We may be subject to product
liability claims. Such claims may absorb
significant management time and could degrade our reputation and the
marketability of our products. If
product liability claims are made with respect to our products, we may need to
recall the implicated product, which could have a material adverse effect on
our business, financial condition and results of operations. In addition,
although we maintain product liability insurance, we cannot be sure that our
insurance will be adequate to cover potential product liability lawsuits. Our
insurance is expensive and in the future may not be available on acceptable
terms, if at all. If a successful product liability claim or series of claims
exceeds our insurance coverage, it could have a material adverse effect on our
business, financial condition and results of operations.
We are
subject to risks associated with international operations.
A portion of our product sales
is generated from operations outside of the U.S. Establishing, maintaining and expanding international
sales can be expensive. Managing and
overseeing foreign operations are difficult and products may not receive market
acceptance. Risks of doing business
outside the U.S. include, but are not limited to, the following: agreements may
be difficult to enforce and receivables difficult to collect through a foreign
countrys legal system; foreign customers may have longer payment cycles;
foreign countries may impose additional withholding taxes or otherwise tax our
foreign income, impose tariffs or adopt other restrictions on foreign trade;
U.S. export licenses may be difficult to obtain; and the protection of
intellectual property rights in foreign countries may be more difficult to
enforce. There can be no assurance that
our international business will grow or that any of the foregoing risks will
not result in a material adverse effect on our business or results of
operations.
We
will soon have to comply with requirements regarding internal control over
financial reporting.
Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, beginning with our fiscal year ending December 31,
2007, our management will be required to provide a report on the effectiveness
of our internal control over financial reporting. We are working to perform this evaluation in
order to comply with these requirements.
Compliance with these requirements is expected to be expensive and
time-consuming. If we fail to timely
complete this evaluation, we could be subject to regulatory action and public
confidence in us could be adversely affected and our stock price could
decline. In addition, any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations.
Because
we are incorporated in Canada, you may not be able to enforce judgments against
us and our Canadian directors.
Under Canadian law, you may not
be able to enforce a judgment issued by courts in the U.S. against us or our
Canadian directors. The status of the law in Canada is unclear as to whether a
U.S. citizen can enforce a judgment from a U.S. court in Canada for violations
of U.S. securities laws. A separate suit may need to be brought directly in
Canada.
33
Our
stock price has historically fluctuated and may continue to fluctuate
significantly in the future which may result in losses for our investors.
Our stock price has been and may continue
to be volatile. Some of the factors that can affect our stock price are:
the announcement of new products, services or technological innovations
by us or our competitors;
actual or anticipated quarterly increases or decreases in revenue,
gross margin or earnings, and changes in our business, operations or prospects;
speculation or actual news announcements in the media or industry trade
journals about our company, our products, the TMR or CIN prevention procedures
or changes in reimbursement policies by Medicare and/or private insurance companies;
announcements relating to strategic relationships or mergers;
conditions or trends in the medical device industry;
changes in the economic performance or market valuations of other
medical device companies; and
general market conditions or domestic or international macroeconomic
and geopolitical factors unrelated to our performance.
The
market price of our stock may fall if shareholders sell their stock.
Certain current shareholders, including Edwards, hold
large amounts of our stock, which they could sell in the public market from
time to time. Sales of a substantial
number of shares of our common stock within a short period of time could cause
our stock price to fall. In addition,
the sale of these shares could impair our ability to raise capital through the
sale of additional stock.
Item 6. Exhibits
31.1
|
|
Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
34
SIGNATURES
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.
|
PLC SYSTEMS INC.
|
|
|
Date: November 14, 2007
|
By:
|
/s/ James G. Thomasch
|
|
|
James G. Thomasch
|
|
|
Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer)
|
35
EXHIBIT INDEX
Exhibit
Number
|
|
Description of
Document
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
36
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