| PLC SYSTEMS INC 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 |
| 12 ______________________________________________________________________ We expect to incur significant operating losses in the near future We incurred a net loss of dlra1cmam268cmam000 for the year ended December 31, 2005 |
| We expect to continue to incur net losses for at least the next 12-24 months as we increase our spending primarily in the area of research and development |
| Moreover, as we continue to pursue our business strategy of acquiring or developing new medical devices to address cardiac and vascular related markets, we may continue to incur expenses that exceed the revenues we generate |
| We cannot provide any assurance that we will be successful with our business strategy, that any new products under development will be successful or that we will ever return to profitability |
| Our company is currently dependent on one principal product line to generate revenues We currently sell one principal product line, which consists of two patented high-powered carbon dioxide lasers and related TMR disposable kits known as the Heart Laser Systems, which account for the majority of our total revenue |
| Approximately 89prca and 90prca, of our revenues in the years ended December 31, 2005 and December 31, 2004, respectively, 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 one principal customer Pursuant to the terms of our TMR distribution agreement with Edwards, Edwards is our exclusive distributor for our HL2 TMR laser and TMR kits in the United States |
| In addition, we are the exclusive manufacturer of the current version of the Optiwave 980 laser console for Edwards |
| As a result of these exclusive arrangements, Edwards accounted for 89prca and 88prca of our total revenues in the years ended December 31, 2005 and December 31, 2004, respectively, and we expect Edwards to account for the significant majority of our revenue in the near future |
| If our relationship with Edwards does not progress as anticipated, or if Edwards’ 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 ability to realize future revenues from the Optiwave 980 is dependent upon Edwards successfully launching this new product into an existing market with a new sales team Edwards has only recently completed its marketing evaluations of the Optiwave 980 System and, as a result, has a limited amount of experience selling this new product into the US market |
| Edwards must effectively train a new sales team to market the Optiwave 980 System and faces significant competition from several other companies that have been selling competitive non-laser based technologies for several years |
| We cannot assure you that Edwards will successfully commercialize the Optiwave 980 System or that we will ever receive any or all of the royalty revenue we negotiated to receive from the sale of disposable products under our royalty agreement with Edwards |
| 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, and certain components for the Optiwave 980 System, 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 13 ______________________________________________________________________ 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 |
| 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 December 31, 2005, we had cash, cash equivalents and short-term investments totaling dlra9cmam460cmam000 |
| 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, if our business does not progress in accordance with our current business plan, 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 TMR and surgical ablation for cardiac arrhythmias are still both novel technologies |
| Our current and planned future products may never achieve widespread commercial acceptance |
| To be successful, we and Edwards need to: · demonstrate to the medical community in general, and to heart surgeons and cardiologists in particular, that TMR and surgical tissue ablation for cardiac arrhythmias are procedures that are effective, relatively safe and cost effective; · support third-party efforts to document the medical processes by which TMR procedures relieve angina and surgical tissue ablation cures cardiac arrhythmias; · have more heart surgeons trained to perform TMR procedures using the Heart Laser Systems and surgical tissue ablation procedures using the Optiwave 980 System; 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 and cardiac tissue ablation procedures using the Optiwave 980 System |
| We are dependent on Edwards to expand related marketing and training efforts in the US 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 14 ______________________________________________________________________ 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 may delay the implementation of a TMR program |
| If we are unable to achieve widespread commercial acceptance of the Heart Laser Systems or the Optiwave 980 System, our business, financial condition and results of operations will be materially and adversely affected |
| 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, is attempting to obtain FDA approval to market their “percutaneous” method of performing myocardial revascularization, previously known as PMR, and recently rebranded as PMC (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, an 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 |
| In addition, we are aware that other companies are developing or already have developed proprietary systems for the treatment of cardiac arrhythmias, and specifically AF, that may be safer, clinically more effective, easier and more cost effective to use and, in the case of percutaneous devices, less invasive than the system we are developing |
| 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 US 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 |
| 15 ______________________________________________________________________ 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 FDA’s Quality Systems regulations include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation |
| Edwards, our distributor, depending on its activities, is also subject to certain requirements under the Federal 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 Edwards |
| 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 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 |
| 16 ______________________________________________________________________ Europe—We received the CE Mark from the European Union for the HL1 and HL2 in March 1995 and February 2001, respectively |
| However: · our current ISO certification (13485-1996) that enables us to apply the CE mark and ship our products into the EU will expire on July 31, 2006 |
| We must conform our quality system to a new ISO standard (13485-2003), undergo an audit and be certified by our registrar prior to July 31, 2006, in order to be able to continue to ship our products into the EU We are currently in the process of implementing the necessary changes to our quality system in order to conform to the new ISO standard, however, we cannot provide any assurance that we will timely meet or maintain conformance to the requirements of the new standard before July 31, 2006 or in the future; · 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—We cannot market our product in Japan until we receive government approval |
| Prior to marketing the Heart Laser Systems in Japan, we must receive approval from the Japanese government |
| Although the results of this study have been submitted to the Japanese government, we do not know whether the clinical study will be sufficient or when, if ever, we will receive approval to sell the HL1 in Japan |
| In addition, it is unclear what impact the introduction of the HL2 into the US and other international markets will have on our ability to market the HL1 in Japan |
| Optiwave 980 System United States—The FDA has given clearance to the Optiwave 980 System through the 510(k) premarket notification process with indications for use as a surgical instrument for coagulation of soft tissue, including cardiac tissue, in conjunction with or without endoscopic equipment in the contact or non-contact mode in open or closed surgical procedures |
| Although the Optiwave 980 System has received clearance from the FDA only for the indications of use stated above, physicians, under the practice of medicine exception, may use the device in any manner they choose in treating an individual patient, including using the device to treat patients with AF However, neither we nor Edwards have conducted any clinical trials designed to obtain data to submit to the FDA for the purpose of obtaining a specific indication for use of the Optiwave 980 System that would allow us or Edwards to make claims or otherwise market this device for the treatment of AF We are aware of several other companies that have announced their plans to conduct clinical trials in support of a labeling claim that would allow them to market their devices for the treatment of AF if clearance is obtained from the FDA In the event these other competitors are successful in obtaining specific indications of use for their devices in the treatment of AF, the Optiwave 980 System may be at a competitive marketing disadvantage until such time, if ever, that Edwards conducts a clinical trial, submits sufficient data to the FDA by means of a new 510(k) and obtains clearance to market the Optiwave 980 System for the treatment of AF We cannot provide any assurance that Edwards will ever conduct such a clinical trial or, if they do, that the data they obtain and submit to the FDA will be sufficient for the FDA to expand the current indications of use and provide clearance for the Optiwave 980 System to be marketed for the treatment of AF Also, we cannot assure you that even if such clearance is obtained, that it will be obtained in a timely enough fashion for our products to remain competitive in the marketplace |
| 17 ______________________________________________________________________ Europe—The Optiwave 980 System cannot be marketed in the EU until such time as it receives CE Mark approval |
| Edwards needs to complete and submit the relevant technical documentation to the appropriate certifying body in order to be able to apply the CE Mark to the product |
| If approval to apply the CE Mark is granted, the Optiwave 980 System will then be able to be distributed in the EU Changes in third party reimbursement for either TMR or cardiac tissue ablation procedures 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; however, we have limited data as to the breadth of this coverage for the TMR procedure by private insurance companies and health maintenance organizations |
| Cardiac tissue ablation procedures, such as those that are expected to be performed using the Optiwave 980 System, are also currently reimbursed by Medicare when performed as a sole therapy |
| In instances where a surgeon might perform a cardiac tissue ablation procedure in combination with another heart related procedure, such as a valve replacement or repair, we believe the other procedure will normally carry a higher reimbursement and, therefore, will be the procedure that the hospital bills to Medicare |
| No assurance can be given, however, that these payers will continue to reimburse healthcare providers who perform TMR or cardiac tissue ablation 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 or cardiac tissue ablation procedures using our products or that reimbursement, if provided, will be timely or adequate |
| In addition, the market for our products could be adversely affected by future legislation to reform the nation’s healthcare system or by changes in industry practices regarding reimbursement policies and procedures |
| Should third party insurance reimbursement for either TMR or cardiac tissue ablation procedures be reduced or eliminated in the future, our business, financial condition and results of operations would be materially and adversely affected |
| 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 18 ______________________________________________________________________ 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 |
| 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 are generated from operations outside of the US 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 US include, but are not limited to, the following: agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s 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; US 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 |
| Our international sales have declined since 2003 |
| We will soon have to comply with internal controls evaluations and attestation requirements Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required, beginning with our year ending December 31, 2007, to perform an evaluation of our internal controls over financial reporting and have our independent registered public accounting firm attest to such evaluation |
| We are developing a program 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, or if our independent registered public accounting firm cannot timely attest to our 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 US against us or our Canadian directors |
| The status of the law in Canada is unclear as to whether a US citizen can 19 ______________________________________________________________________ enforce a judgment from a US court in Canada for violations of US securities laws |
| A separate suit may need to be brought directly in Canada |
| 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 cardiac ablation 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 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 |
| We have no intention to pay dividends We have never paid any cash dividends on our common stock |
| We currently intend to retain all future earnings, if any, for use in our business and do not expect to pay any dividends in the foreseeable future |