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| PLC > SEC Filings for PLC > Form 10-K on 28-Mar-2008 | All Recent SEC Filings |
28-Mar-2008
Annual 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. We also manufacture CO2 surgical laser tubes and provide contract assembly services on general purpose CO2 lasers.
In addition, in 2007, we began treating patients in our initial 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 System, with its matched fluid replacement capability, is intended to minimize the risk of over- or under-hydration.
We enrolled a total of 23 patients in our initial pilot safety study. Based upon the positive safety data collected in the study and discussions we had with the FDA, we elected to stop enrolling new patients in the pilot study in November 2007. We submitted an IDE supplement to the FDA in February 2008 seeking approval to move from our pilot study to a pivotal clinical trial to study the safety and effectiveness of RenalGuard in the prevention of CIN. In March 2008 the FDA granted us conditional approval to begin our pivotal study. We have received approval to study RenalGuard on 246 patients at up to 30 U.S. clinical sites. We expect to begin enrolling patients in this study this spring after obtaining necessary institutional review board approval at the clinical sites where the study will be conducted.
Our U.S. distributor for the Heart Laser System (Novadaq currently and Edwards prior to March 20, 2007) is our largest customer, accounting for 85%, 88% and 89% of our total revenues in the years ended December 31, 2007, 2006 and 2005, respectively. 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 87%, 95% and 89% of our revenues in the years ended
December 31, 2007, 2006 and 2005, respectively, came from the sale and service
of TMR lasers and related disposable kits. We believe that the number of
opportunities for new TMR laser sales to hospital customers, and specifically
sales of our HL2 laser, is likely to continue to decline in future quarters as a
result of (1) a diminishing number of available hospitals that have not already
implemented a TMR program that are still likely to in the future and
(2) continuing financial pressures that hospitals face, in particular for the
funding of new capital equipment purchases, in light of ongoing cutbacks in both
Medicare and private insurance reimbursement rates for all medical procedures.
In addition, we have seen a recent downward trend in the price that new TMR
lasers are being sold at in the market as competition for the remaining
available customers increases. As such, we expect to continue to see a decline
in revenue generated from the sale of HL2 lasers in future quarters and TMR
revenues in future quarters will be more dependent on the sale of TMR kits and
service revenues.
Aggregate TMR kit shipments to U.S. hospitals through Novadaq and Edwards decreased approximately 20% and 22% in the three and twelve months ended December 31, 2007 as compared to the three and twelve months ended December 31, 2006, respectively. We believe the decline in fourth quarter TMR kit shipments was primarily the result of the transition from an experienced Edwards' sales force to the new Novadaq sales team.
While we believe it is likely that our first and second quarter revenues and results of operations in 2008 will be lower than the corresponding periods in 2007, we believe that during the second half of 2008 TMR kit shipments from Novadaq to U.S. hospitals may equal or slightly exceed the corresponding TMR kit shipments to U.S. hospitals in the second half of 2007.
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 Novadaq 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 Novadaq's) 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). 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 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 Novadaq, and (3) service part stocking levels which, in management's 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 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 costs are expensed as incurred.
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.
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 $660,000, $630,000 and $356,000 in the years ended December 31, 2007, 2006 and 2005, 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.
We record all other product revenue, including sales of TMR lasers and kits to international customers and OEM sales of surgical tubes and general purpose CO2 lasers, 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 for the past three years and the related percent of total revenues were as follows:
2007 2006 2005
-------------- ------------- --------------
(dollars in thousands)
Total revenues $ 6,004 100 % $ 7,146 100 % $ 7,636 100 %
Total cost of sales 2,635 44 2,732 38 3,066 40
-------- --- ------- --- -------- ---
Gross profit 3,369 56 4,414 62 4,570 60
Selling, general and administrative 3,794 63 3,014 42 3,336 44
Research and development 2,382 40 1,924 27 2,750 36
Gain on sale of manufacturing rights - - 1,432 20 - -
-------- --- ------- --- -------- ---
Income (loss) from operations (2,807 ) (47 ) 908 13 (1,516 ) (20 )
Other income 426 7 436 6 248 3
-------- --- ------- --- -------- ---
Income (loss) before income taxes (2,381 ) (40 ) 1,344 19 (1,268 ) (17 )
Provision for (benefit from) income taxes (14 ) 1 25 1 - -
-------- --- ------- --- -------- ---
Net income (loss) $ (2,367 ) (39 )% $ 1,319 18 % $ (1,268 ) (17 )%
-------- --- ------- --- -------- ---
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Increase Increase
(decrease) (decrease)
over over
2007 2006 2006 2005 2005
-------- --------------- ------- -------------- --------
(dollars in thousands)
Product sales $ 4,564 $ (1,098 ) (19 )% $ 5,662 $ (435 ) (7 )% $ 6,097
Service fees 1,440 (44 ) (3 ) 1,484 (55 ) (4 ) 1,539
-------- -------- ---- ------- -------- --- --------
Total revenues 6,004 (1,142 ) (16 ) 7,146 (490 ) (6 ) 7,636
-------- -------- ---- ------- -------- --- --------
Product cost of sales 1,829 (202 ) (10 ) 2,031 (285 ) (12 ) 2,316
Service fees cost of sales 806 105 15 701 (49 ) (7 ) 750
-------- -------- ---- ------- -------- --- --------
Total cost of revenues 2,635 (97 ) (4 ) 2,732 (334 ) (11 ) 3,066
-------- -------- ---- ------- -------- --- --------
Gross profit 3,369 (1,045 ) (24 ) 4,414 (156 ) (3 ) 4,570
-------- -------- ---- ------- -------- --- --------
Selling, general and
administrative expenses 3,794 780 26 3,014 (322 ) (10 ) 3,336
Research and development
expenses 2,382 458 24 1,924 (826 ) (30 ) 2,750
-------- -------- ---- ------- -------- --- --------
Total operating expenses 6,176 1,238 25 4,938 (1,148 ) (19 ) 6,086
Gain on sale of manufacturing
rights - (1,432 ) (100 ) 1,432 1,432 100 -
Other income 426 (10 ) (2 ) 436 188 76 248
-------- -------- ---- ------- -------- --- --------
Income (loss) before income
taxes (2,381 ) (3,725 ) (277 ) 1,344 2,612 206 (1,268 )
Provision for (benefit from)
income taxes (14 ) (39 ) (156 ) 25 25 100 -
-------- -------- ---- ------- -------- --- --------
Net income (loss) $ (2,367 ) $ (3,686 ) (279 )% $ 1,319 $ 2,587 204 % $ (1,268 )
-------- -------- ---- ------- -------- --- --------
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Disposable TMR kit revenues, the largest component of product sales in 2007, decreased by $586,000, or 21%, in 2007 as compared to 2006. Domestic disposable TMR kit revenues decreased $548,000 resulting from a lower volume of kit shipments to Novadaq than to Edwards in 2006. This decrease in TMR kit shipments to Novadaq was offset in part by a $30,000 increase in deferred kit revenue amortization. International disposable TMR kit revenues decreased $68,000 due to a lower volume of TMR kit shipments to international customers.
Other product sales increased $418,000, or 112%, in 2007 as compared to 2006. This increase was 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, (2) increased sales of new and refurbished surgical tubes to a single OEM customer and (3) increased Optiwave 980 revenues to Edwards. 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. We believe we will record a similar level of other product sales in 2008 as in 2007.
Disposable TMR kit revenues, the largest component of product sales in 2006, increased by $471,000, or 20%, in 2006 as compared to 2005. The increase is primarily related to a $442,000, or 20%, increase in domestic disposable revenues resulting from a $274,000 increase in deferred revenue amortization related to the $4,533,333 payment by Edwards and a higher volume of kit shipments to Edwards. International disposable TMR kit revenues increased $29,000, or 24%, in 2006 as compared to 2005.
TMR laser revenues, the second largest component of product sales in 2006, decreased by $472,000, or 16%, in 2006 as compared to 2005. This decrease is primarily attributable to a $675,000, or 23%, decrease in domestic TMR laser revenues generated through our Edwards sales channel. The $675,000 decline in domestic TMR laser revenues is primarily a result of (1) decreased revenue sharing earned under the TMR distribution agreement with Edwards and (2) a decrease in the number of new TMR lasers sold by Edwards in 2006 compared to 2005. International TMR laser revenues increased $203,000 due to the sale of two TMR lasers in 2006, while there were no TMR laser sales in 2005.
Optiwave 980 revenues to Edwards decreased $325,000, or 94% in 2006, as compared to 2005 due to a lower number of Optiwave 980 units sold to Edwards in 2006.
Other product sales, which related to sales of new and refurbished surgical tubes in 2006 and 2005, decreased $109,000, or 24%, as compared to 2005.
Service fees decreased $44,000, or 3%, in 2007 as compared to 2006, and decreased $55,000, or 4%, in 2006 as compared to 2005. These decreases were primarily a result of decreased international service fee revenues due to decreased service billings to international customers.
Total gross profit was $3,369,000, or 56% of total revenues, in 2007 as compared with gross profit of $4,414,000, or 62% of total revenues, in 2006. The decrease in gross profit is due to (1) lower disposable TMR kit 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 sold. 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 and (2) lower period manufacturing expenses.
Selling, general and administrative expenditures increased 26% in 2007 as compared to 2006. This increase was 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.
Selling, general and administrative expenditures decreased 10% in 2006 as compared to 2005. This decrease is related to lower incentive compensation, corporate and legal expenditures offset in part by increased consulting and bad debt expenses.
Research and development expenditures increased 24% in 2007 as compared to 2006. This increase was primarily due to an increase in clinical trial expenditures for RenalGuard, partially offset by decreases in expenditures in connection with new product development costs related to RenalGuard.
Research and development expenditures decreased 30% in 2006 as compared to 2005. There was a decrease in expenditures in connection with both the Optiwave 980 and RenalGuard products.
We expect to continue to incur significant new research and development expenditures in 2008 and 2009 as we progress with our clinical trials of RenalGuard.
The largest component of other income consists of interest income earned on our cash, cash equivalents and short-term investments. Interest income decreased $10,000 in 2007 as compared to 2006 due to lower average investable balances in 2007 offset in part by higher interest rates earned on those investable balances. Interest income increased $188,000 in 2006 as compared to 2005 primarily due to higher interest rates earned on our cash, cash equivalents and short-term investments.
In 2007, we recorded a benefit for income taxes resulting from an income tax refund related to the year ended December 31, 2006.
In 2006, we recorded a provision for income taxes due to limitations on the utilization of U.S. net operating loss carryforwards being available to reduce taxable income. Under the Internal Revenue Code of 1986, as amended (the "Code"), certain substantial changes in our ownership may limit the amount of net operating loss carryforwards that can be utilized in any one year to offset future taxable income.
In 2007, we recorded a net loss of $2,367,000 as compared to net income of $1,319,000 in 2006. We recorded lower sales, lower gross margin and higher operating expenses in 2007 as compared to 2006. The 2006 period also included a non-recurring gain from the sale of our Optiwave 980 manufacturing rights to Edwards.
In 2006, we recorded a gain from the sale of our Optiwave 980 disposable manufacturing rights to Edwards. This non-recurring gain as well as a decrease in overall operating expenses resulted in net income of $1,319,000 as compared to a net loss of $1,268,000 in 2005.
Kit Shipments
We view disposable kit shipments to end users as an important metric in
evaluating our business. We believe that kit shipments (particularly kit
shipments to U.S. hospitals), although not a direct measure, are a reasonable
indicator for the adoption of TMR as a therapy in the marketplace. Disposable
kit shipments to end users are as follows:
% %
Increase Increase
(Decrease) (Decrease)
Over Over
2007 2006 2006 2005 2005
----- ---------- ----- ---------- -----
Domestic (U.S. Distributor) 1,566 (22 )% 1,996 (3 )% 2,056
International 32 (60 ) 81 (7 ) 87
----- ---------- ----- ---------- -----
Total 1,598 (23 )% 2,077 (3 )% 2,143
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In addition to the impact of factors previously discussed that we believe affected kit shipments in 2007, it is our belief that TMR kit shipments in recent years were also largely affected by what we believe was an ongoing downward trend in the number of bypass surgeries being performed. We believe the proliferation in the number of interventional cardiac procedures being performed, particularly with the increased use of drug-eluting stents, was causing a delay in the number of patients being referred to cardiac surgeons for 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 number of TMR procedures in years prior to 2007 was adversely impacted by a reduction in the number of bypass surgeries performed.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments totaled $8,060,000 as of December 31, 2007, a decrease of $1,974,000 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.
Cash used for operating activities in 2007 was $1,803,000 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 $200,000 for the purchase of equipment. Additional cash of $9,000 resulted from the exercise of stock options and proceeds from our employee stock purchase plan . . .
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