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PLCSF > SEC Filings for PLCSF > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PLC SYSTEMS INC

Form 10-Q for PLC SYSTEMS INC


14-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. Our key strategic growth initiative is our newest marketable product, RenalGuard.

RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys of certain higher risk patients can lead to CIN, a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, we believe the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance automatically, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney.

The RenalGuard System consists of a proprietary console and accompanying single-use sets. RenalGuard operates by first collecting and measuring patient urine outputs and then in real-time precisely matching these urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is intended to promote and maintain high urine outputs and minimize the risk to patients of over- or under-hydration during image-guided catheterization procedures where contrast media are routinely administered.

We obtained a CE Mark for RenalGuard in December 2007 and began our initial commercialization efforts in the EU in Italy in April 2008. We are now marketing RenalGuard in several additional countries around the world. In the U.S. we must first successfully complete a pivotal clinical study assessing the safety and effectiveness of RenalGuard in reducing the rates of CIN in at-risk patients and obtain FDA pre-market approval in order to market RenalGuard. The first patient was enrolled in the U.S. pivotal study in January 2012.

Our distributor of RenalGuard in Italy, Artech, accounted for 78% and 68% of our total revenues in the three and nine months ended September 30, 2013, respectively, and 32% and 22% of our total revenues in the three and nine months ended September 30, 2012, respectively. ACIST, our distributor in Germany and France, accounted for 18% and 12% of our total revenues in the three and nine months ended September 30, 2013 and 4% and 9% of our revenues in the three months ended September 30, 2012.

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 sales for the next four quarters, (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.

For the three and nine months ended September 30, 2013, we incurred net losses from operations of approximately $1,270,000 and $3,625,000, respectively, and used cash in operations of approximately $4,190,000. As of September 30, 2013, cash and cash equivalents were $1,404,000. Management expects that quarterly losses from operations and negative cash flows will continue during 2013. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Critical Accounting Policies and Estimates

Our financial statements are based upon the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Condensed 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.


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Inventories

Inventories are stated at the average cost (computed on a first-in, first-out method) of market value and include allocations of labor and overhead. We regularly review slow-moving and excess inventories, and write down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory.

Accounts Receivable

Accounts receivable are stated at the amount we expect to collect from the outstanding balances. 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. 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 might be required.

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.

We evaluate the estimated future unrecoverable costs of warranty and preventative maintenance services for our installed base of RenalGuard consoles and single-use sets on a quarterly basis and adjust our warranty reserve accordingly. We consider all available evidence, including historical experience and information obtained from supplier audits. Historically, we have not experienced significant costs related to warranty and preventative maintenance.

Valuation of Convertible Notes, Warrant and Option Liabilities

The valuation of our convertible notes, warrant and option liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.

Revenue Recognition

We recognize revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. We assess credit worthiness of customers based upon prior history with the customer and assessment of financial condition. Our shipping terms are customarily Free On Board ("FOB") shipping point.

We generally record product revenue, including sales of RenalGuard consoles and single-use sets at the time of shipment, if all other revenue recognition criteria have been met. As of September 30, 2013 and 2012, we had deferred revenue balances of $13,000 and $394,000, respectively, related to shipments to our distributor in Italy, Artech, because not all revenue recognition criteria were met. During the quarter ended September 30, 2013, we recognized $40,000 in revenue of previously deferred revenue upon the receipt of cash.


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Results of Operations



Results for the three and nine months ended September 30, 2013 and 2012 were as
follows:



                          Three Months Ended                               Nine Months Ended
                            September 30,         Increase (decrease)        September 30,       Increase (decrease)
                          2013         2012            over 2012            2013       2012           over 2012
                            $            $            $            %         $           $           $            %
                                                            (dollars in thousands)
Total revenues                348          212           136         64      1,069        595           474         80
Total cost of
revenues                      124           84            40         48        438        308           130         42
Gross profit                  224          128            96         75        631        287           344        120
Selling, general &
administrative
expenses                      945          674           271         40      2,595      1,899           696         37
Research and
development expenses          549          549             -          -      1,661      1,618            43          3
Total operating
expenses                    1,494        1,223           271         22      4,256      3,517           739         21
Loss from operations       (1,270 )     (1,095 )        (175 )       16     (3,625 )   (3,230 )        (395 )       12
Interest expense              (63 )       (137 )          74         54       (264 )     (369 )         105        (28 )
Interest income                 -            -             -                     -          -             -          -
Foreign currency
transaction gains              16           17            (1 )       (6 )        9          2             7        350
Financing costs
associated with
convertible notes               -          (80 )          80        100          -        (80 )          80        100
Change in fair value
of warrant
liabilities                 1,078       (1,117 )       2,195       (197 )    3,192     (3,517 )       6,709       (191 )
Change in fair value
of convertible notes        1,620         (757 )       2,377       (314 )    3,485     (4,218 )       7,703       (183 )
Other expense                   1            4            (3 )      (75 )        4         24           (20 )      100
Loss on
extinguishment of
convertible notes          (1,991 )          -        (1,991 )      100     (3,274 )        -        (3,274 )      100
Total other income
(expense)                     661       (2,070 )       2,731       (132 )    3,152     (8,158 )      11,310       (139 )
Net loss                     (609 )     (3,165 )       2,556        (81 )     (473 )  (11,388 )      10,915        (96 )

Product Sales

Revenues increased $136,000 and $474,000 or 64% and 80% in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012, respectively. RenalGuard Console sales decreased $65,000 and $135,000 or 38% and 32% in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012, respectively, due to a lower volume of RenalGuard consoles sold to international distributors. RenalGuard single use set revenues increased $204,000 and $605,000 or 479% and 341% in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012, respectively, due to a higher volume of RenalGuard single-use sets sold to international distributors. As of September 30, 2013 and 2012, we had deferred revenue balances of $13,000 and $394,000, respectively, related to shipments to our distributor in Italy, Artech, because not all revenue recognition criteria were met. During the quarter ended September 30, 2013, we recognized $40,000 in revenue of previously deferred revenue upon the receipt of cash.

Gross Profit

Gross profit was $224,000 and $631,000 or 64% and 59% of total revenues, in the three and nine months ended September 30, 2013, as compared with gross profit of $128,000 and $287,000, or 60% and 48% of total revenues, in the three and nine months ended September 30, 2012, respectively. Gross margin generated from the low volume of RenalGuard revenues was sufficient to offset the fixed manufacturing costs incurred during the three and nine months ended September 30, 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenditures increased 40% and 37% in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012, respectively. The increase was due to higher investor relations expense during the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012.


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Research and Development Expenses

Research and development expenditures increased 0% and 3% in the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012, respectively, due to RenalGuard U.S. clinical trial costs.

As we continue our U.S. clinical trial for our RenalGuard program, we expect our Research and development expenses to significantly increase in 2013.

Other Income (Expense)

In February 2011, we entered into a Securities Purchase Agreement and a 5% Senior Secured Convertible Debenture Agreement as described in the Condensed Consolidated Financial Statements. In July 2012, we entered into an Amendment to the Securities Purchase Agreement and 5% Senior Secured Convertible Debenture Agreement as described in Note 10 of the Condensed Consolidated Financial Statements. In January 2013, we entered into an Amendment to the Securities Purchase Agreement and 5% Senior Secured Convertible Debenture Agreement as described in Note 10 of the Condensed Consolidated Financial Statements. As a result of these three transactions, interest expense on the Convertible Notes, Second Tranche Convertible Notes, and Third Tranche Convertible Notes of $63,000 and $264,000 in the three and nine months ended September 30, 2013, and $137,000 and $369,000 in the three and nine months ended September 30, 2012, was recorded.

We recorded other income of $1,078,000 and $3,192,000 in the three and nine months ended September 30, 2013 as compared to other expense of $1,117,000 and $3,517,000 in the three and nine months ended September 30, 2012, respectively, as a result of a fair value adjustments related to our Warrant and Option Liabilities. We recorded other income of $1,620,000 and $3,485,000 in the three and nine months ended September 30, 2013 as compared to other expense of $757,000 and $4,218,000 in the three and nine months ended September 30, 2012, respectively, as a result of fair value adjustments related to the Convertible Notes. We also recorded other expense of $1,991,000 and $3,274,000 in the three and nine months ended September 30, 2013, related to the modification of convertible notes and warrants.

Net Loss

In the three and nine months ended September 30, 2013, we recorded net losses of $609,000 and $473,000, respectively, as compared to net losses of $3,165,000 and $11,388,000 for the three and nine months ended September 30, 2012, respectively.

Liquidity and Capital Resources

We compete in the highly regulated and competitive medical device market place where products can take significant time to develop, gain regulatory approval and then introduce to distributors and end users. We have incurred recurring quarterly operating losses over the past few years as we have worked to bring our RenalGuard System through development and initial commercialization efforts outside the United States. We expect such operating losses will continue until such time, if ever, that RenalGuard product sales increase sufficiently to generate profitable results.

Under the terms of the Securities Purchase Agreement entered into in February 2011, we had the opportunity to raise up to an additional $2 million from the Holders of the Convertible Notes in two separate $1 million tranches, based upon meeting certain operational milestones within certain periods of time. The deadline for achieving the operational milestones for the first $1 million tranche expired in February 2012 without our achieving such milestones; however, the investors agreed to waive both the deadline and the achievement of these milestones as a condition for the investment of the first additional $1 million and invested such funds in July 2012. On February 22, 2013 we entered into a Securities Purchase Agreement with a number of accredited investors which revised certain terms of this Securities Purchase Agreement, including the cancellation of remaining milestone investments. See Note 10 to our condensed consolidated financial statements for additional disclosure surrounding this amendment.

On July 2, 2012 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $1,000,000 of 5% Senior Secured Convertible


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Debentures maturing on July 2, 2015, (ii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.15 per share and (iii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.25 per share. On February 22, 2013 we entered into a Securities Purchase Agreement with a number of accredited investors which revised certain terms of this Securities Purchase Agreement, including the cancellation of the $0.25 warrants and a repricing of the $0.15 Warrants. See Note 10 to our condensed consolidated financial statements for additional disclosure surrounding this amendment.

On January 16, 2013 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $250,000 of 5% Senior Secured Convertible Debentures maturing on January 16, 2016 (ii) warrants exercisable for a period of five years to purchase up to 2,500,000 shares of common stock at an exercise price of $0.15 per share. On February 22, 2013 we entered into the February Securities Purchase Agreement with a number of accredited investors which revised certain terms of this Securities Purchase Agreement. See Note 10 to our condensed consolidated financial statements for additional disclosure surrounding this amendment.

Under the February Securities Purchase Agreement, we sold an aggregate of 26,933,333 shares of common stock and the February 2013 Warrants to purchase an additional 26,933,333 shares of common stock with gross proceeds of $4,040,000 to these accredited investors. We utilized the proceeds of the private placement for general working capital purposes, to pay for investor relations services, for payment of fees to Palladium Capital, LLC, the exclusive placement agent, and for legal, blue sky and related expenses. After payment of the placement agent fees and these other expenses, we received net proceeds of approximately $2.5 million. See Note 9 to our condensed consolidated financial statements for additional disclosure surrounding this agreement.

On September 18, 2013, we entered into a Securities Purchase Agreement with a number of accredited investors, whereby we sold an aggregate of 29,166,667 shares of common stock and warrants to purchase an additional 29,166,667 shares of common stock (the "Warrants") with gross proceeds of $1,750,000 to these accredited investors. We intend to utilize the proceeds of the private placement for general working capital purposes, to pay for investor relations services, for payment of fees to Palladium Capital, LLC, the exclusive placement agent, and for legal, blue sky and related expenses. After payment of the placement agent fees and these other expenses, we received net proceeds of approximately $1.5 million. See Note 9 to our condensed consolidated financial statements for additional disclosure surrounding this agreement.

Cash and cash equivalents totaled $1,404,000 as of September 30, 2013, an increase of $1,146,000 from $258,000 as recorded as of December 31, 2012. We also had restricted cash of $250,000 as of September 30, 2013 as required per the terms of the Securities Purchase Agreement we entered into on February 22, 2013. These funds are reserved for investor relations awareness and related activities. We have historically funded our working capital requirements through cash received from public and private offerings of our common stock and to a lesser extent, through our sales of products and services. We believe that our existing resources, based on our currently projected financial results, are sufficient to fund operations through the first quarter of 2014. Based upon current and anticipated revenue projections from foreign sales of our RenalGuard product, and the anticipated costs of our U.S. clinical trial, we expect that we will need to raise additional capital during the first quarter of 2014.

Our plan is to seek additional capital through the sale of equity and/or debt securities to fund operations. However, there can be no assurance that such capital will be available at all, or if available, that the terms of such financing will not be dilutive to our existing stockholders. The holders of the Convertible Notes (and holders of the Common Stock and the Warrants issued in the February 2013 and September 2013 Securites Purchase Agreements have certain rights to participate in any subsequent financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of the company by our stockholders would be diluted. In addition, any debt securities would have rights, preferences and privileges senior to our common stock and we may sell equity or other convertible debt financing securities which would have rights, preferences and privileges senior to our common stock.

If we are unable to generate adequate cash flows or obtain sufficient additional funding when needed, we may have to take certain actions including, but not limited to, cutting back our operations, selling some or all of our assets, licensing potentially valuable technologies to third parties, and/or ceasing some or all of our operations.

Cash flows used in operating activities in the nine months ended September 30, 2013 were $4,190,000 due to our net income, partially offset by non-cash activity including 1) the change in fair value of convertible notes and warrant liabilities 2) non-cash interest expense; 3) depreciation expense; 4) stock-based compensation expense; 5) modification of convertible notes


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and warrants; and 6) retirement of warrants. Cash flows from financing activities in the nine months ended September 30, 2013 were $5,329,000 from the issuance of 56,100,000 shares of common stock with net proceeds of $5,079,000 and convertible notes with proceeds of $250,000. The effect of exchange rate changes was a $7,000 increase in cash.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements containing terms such as "believes", "plans", "expects", "anticipates", "intends", "estimates" and similar expressions contain 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:

We expect to incur significant net losses in future quarters;

We have received a 'going concern' opinion in our consolidated financial statements indicating that our cash balance as of December 31, 2012, combined with recurring net losses and negative cash flows from operations, raises substantial doubt about our ability to continue as a going concern for the next 12 months. As noted above, we are investigating ways to raise additional capital to continue our operations;

Our quarterly operating results have varied in the past and will continue to vary significantly in the future, causing volatility in our stock price;

With the sale of our TMR business in February 2011, our future prospects are solely dependent upon the successful commercialization of RenalGuard. To date we have recorded only a limited amount of sales of RenalGuard, principally to a single customer in one country, Italy. Sales of RenalGuard alone are currently insufficient, and may never grow to be sufficient, to sustain our ongoing operations;

Our ability to effectively market RenalGuard outside the U.S. is largely dependent on the reception of the results of the MYTHOS and REMEDIAL II investigator-sponsored clinical trials. We have no assurance that the results from these two trials will be viewed as clinically meaningful or that they will lead to increased sales of RenalGuard;

We may never be successful in establishing a broad distribution channel for RenalGuard outside the U.S., and any distribution channel we may establish may never generate sufficient sales for us to attain profitability;

If we are required to change our pricing models to compete successfully, our margins and operating results may be adversely affected;

We commenced our U.S. pivotal clinical trial in 2012 to study RenalGuard, which is necessary to obtain FDA pre-market approval to market RenalGuard in the U.S. This study will take us a significant amount of time and money to complete and will require us to raise additional capital in the future. We can provide no assurance that we will be able to complete this study or, if we are able to complete it, that 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 a U.S. pivotal clinical trial 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 a U.S. pivotal clinical trial 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 trial and bring RenalGuard to market may be adversely affected;

Our RenalGuard System has only had limited testing in a clinical setting in the United States and we may need to modify it substantially in the . . .

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