**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31,2008.**

** **

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from                          to**

 

**CommissionFile Number: 1-11388**

 

**PLCSYSTEMS INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

 

| **Yukon Territory, Canada**                | ** ** | **04-3153858**                       |
|--------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of            |       | (I.R.S. Employer Identification No.) |
| Incorporation or Organization)             |       |                                 |
| * *                                   |       |                                 |
| **10 Forge Park, Franklin, Massachusetts** | ** ** | **02038**                            |
| (Address of Principal Executive Offices)   |       | (Zip Code)                           |

 

Registrant’stelephone number, including area code: **(508) 541-8800**

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  x    No  o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes  o   No  x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| Class                      |   | Outstanding at May 9, 2008 |
|----------------------------|--------|---------------------------------|
| Common Stock, no par value |   | 30,329,480                      |

 

 

 

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**PLCSYSTEMS INC.**

 

**Index**

 
| Part I.  | Financial  Information: |                                                                                        |
|---------------|-------------------------|---------------------------------------------------------------------------------------------|
|          |                    |                                                                                        |   |
|          | Item 1.                 | Financial Statements                                                                        |   |
|          |                    |                                                                                        |   |
|          |                    | Condensed Consolidated Balance Sheets (unaudited)                                           | 3 |
|          |                    |                                                                                        |   |
|          |                    | Condensed Consolidated Statements of Operations  (unaudited)                                | 4 |
|          |                    |                                                                                        |   |
|          |                    | Condensed Consolidated Statements of Cash Flows  (unaudited)                                | 5 |
|          |                    |                                                                                        |   |
|          |                    | Notes to Condensed Consolidated Financial Statements  (unaudited)                           | 6 |
|          |                    |                                                                                        |   |
|          | Item 2.                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 13 |
|          |                    |                                                                                        |   |
|          | Item 3.                 | Quantitative  and Qualitative Disclosures about Market Risk                                 | 20 |
|          |                    |                                                                                        |   |
|          | Item 4.                 | Controls and  Procedures                                                                    | 21 |
|          |                    |                                                                                        |   |
| Part II. | Other Information:      |                                                                                        |
|          |                    |                                                                                        |   |
|          | Item 1A.                | Risk Factors                                                                                | 21 |
|          |                    |                                                                                        |   |
|          | Item 6.                 | Exhibits                                                                                    | 32 |

 

 

2

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**Part I.         Financial Information**

**Item 1.        FinancialStatements**

**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                   | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                   | ** ** |
| Current assets:                                                                                                                                              |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                   |       | $                        | 6,840      |                        | $          | 8,060 |   |
| Accounts  receivable, net of allowance of $23 at both   March 31, 2008 and December 31, 2007                                                       |       | 696                      |       | 998                         |       |
| Inventories, net                                                                                                                                             |       | 1,433                    |       | 852                         |       |
| Prepaid expenses  and other current assets                                                                                                                   |       | 859                      |       | 823                         |       |
| Total current  assets                                                                                                                                        |       | 9,828                    |       | 10,733                      |       |
| Equipment, furniture and leasehold improvements, net                                                                                                         |       | 273                      |       | 269                         |       |
| Other assets                                                                                                                                                 |       | 196                      |       | 198                         |       |
| Total assets                                                                                                                                                 |       | $                        | 10,297     |                        | $          | 11,200 |   |
| ** **                                                                                                                                                   | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                               | ** ** |
| Current liabilities:                                                                                                                                         |       |                     |       |                        |       |
| Accounts payable                                                                                                                                             |       | $                        | 681        |                        | $          | 623 |   |
| Accrued  compensation                                                                                                                                        |       | 690                      |       | 766                         |       |
| Accrued other                                                                                                                                                |       | 306                      |       | 326                         |       |
| Deferred revenue                                                                                                                                             |       | 2,185                    |       | 2,096                       |       |
| Total current  liabilities                                                                                                                                   |       | 3,862                    |       | 3,811                       |       |
| Deferred revenue                                                                                                                                             |       | 2,194                    |       | 2,439                       |       |
| 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,   30,329 shares issued and outstanding as of both   March 31, 2008 and December 31, 2007 |       | 93,891                   |       | 93,891                      |       |
| Additional paid in capital                                                                                                                                   |       | 319                      |       | 270                         |       |
| Accumulated deficit                                                                                                                                          |       | (89,660                  | )          | (88,898                     | )          |
| Accumulated other comprehensive loss                                                                                                                         |       | (309                     | )          | (313                        | )          |
| Total  stockholders’ equity                                                                                                                             |       | 4,241                    |       | 4,950                       |       |
| Total  liabilities and stockholders’ equity                                                                                                             |       | $                        | 10,297     |                        | $          | 11,200 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

3

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Revenues:                            |       |                                   |       |   |   |
| Product sales                        |       | $                                      | 806        |   | $ | 1,134 |   |
| Service fees                         |       | 362                                    |       | 359 |   |
| Total revenues                       |       | 1,168                                  |       | 1,493 |   |
| Cost of revenues:                    |       |                                   |       |   |   |
| Product sales                        |       | 220                                    |       | 586 |   |
| Service fees                         |       | 185                                    |       | 208 |   |
| Total cost of  revenues              |       | 405                                    |       | 794 |   |
| Gross profit                         |       | 763                                    |       | 699 |   |
| Operating expenses:                  |       |                                   |       |   |   |
| Selling, general  and administrative |       | 970                                    |       | 1,013 |   |
| Research and  development            |       | 608                                    |       | 491 |   |
| Total operating  expenses            |       | 1,578                                  |       | 1,504 |   |
| Loss from operations                 |       | (815                                   | )          | (805 | ) |
| Other income, net                    |       | 53                                     |       | 119 |   |
| Net loss                             |       | $                                      | (762       | ) | $ | (686 | ) |
| Basic and diluted loss per share     |       | $                                      | (0.03      | ) | $ | (0.02 | ) |
| Average shares  outstanding:         |       |                                   |       |   |   |
| Basic and  diluted                   |       | 30,329                                 |       | 30,311 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

4

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Operating activities:                                                                         |       |                                   |       |   |   |
| Net loss                                                                                      |       | $                                      | (762       | ) | $ | (686 | ) |
| Adjustments to  reconcile net loss to net cash   provided by (used for) operating activities: |       |                                   |       |   |   |
| Depreciation and  amortization                                                                |       | 25                                     |       | 21 |   |
| Compensation  expense from stock options                                                      |       | 49                                     |       | 33 |   |
| Change in assets  and liabilities:                                                            |       |                                   |       |   |   |
| Accounts  receivable                                                                          |       | 302                                    |       | 430 |   |
| Inventory                                                                                     |       | (581                                   | )          | 178 |   |
| Prepaid expenses  and other assets                                                            |       | (37                                    | )          | 89 |   |
| Accounts payable                                                                              |       | 58                                     |       | 20 |   |
| Deferred revenue                                                                              |       | (159                                   | )          | (202 | ) |
| Accrued  liabilities                                                                          |       | (100                                   | )          | 160 |   |
| Net cash provided by (used for) operating activities                                          |       | (1,205                                 | )          | 43 |   |
| Investing activities:                                                                         |       |                                   |       |   |   |
| Maturity of  investments                                                                      |       | —                                 |       | 4,000 |   |
| Purchase of  equipment                                                                        |       | (27                                    | )          | (3 | ) |
| Net cash provided by (used for) investing activities                                          |       | (27                                    | )          | 3,997 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                 |       | 12                                     |       | 3 |   |
| Net increase (decrease) in cash and cash equivalents                                          |       | (1,220                                 | )          | 4,043 |   |
| Cash and cash equivalents at beginning of period                                              |       | 8,060                                  |       | 6,034 |   |
| Cash and cash equivalents at end of period                                                    |       | $                                      | 6,840      |   | $ | 10,077 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

5

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**PLC SYSTEMS INC.**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,2008

 

***1.             Business***

 

                PLC Systems Inc. (“PLC” or the “Company”) is amedical device company specializing in innovative technologies for the cardiacand vascular markets.  The Companypioneered and manufactures the CO2 Heart Laser System (the “Heart Laser System”)that cardiac surgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, or TMR, toalleviate symptoms of severe angina.  Inaddition, the Company has commenced clinical trials for its RenalGuard Therapyand RenalGuard System (collectively “RenalGuard”), which is the primary growthinitiative for its business. RenalGuard is designed to reduce the toxic effectsthat contrast media can have on the kidneys, which can lead to contrast-inducednephropathy (“CIN”), a potentially deadly form of acute kidney injury.  The Company also manufactures CO2 surgical lasertubes and provides contract assembly services on general purpose CO2 lasers, whichit sells to a single customer on an original equipment manufacturer (“OEM”)basis.

 

                RenalGuard Therapy is based on the theory thatcreating and maintaining a high urine output is beneficial to patientsundergoing imaging procedures where contrast agents are used.  The automated real-time measurement andmatched fluid replacement design of the Company’s RenalGuard System is intendedto optimally administer RenalGuard Therapy and ensure that a high urine flow ismaintained before, during and after these procedures, thus allowing the body torapidly eliminate contrast, reducing its toxic effects. The RenalGuard Systemconsists of a proprietary, closed loop, software-controlled console andaccompanying single-use sets used for infusion and urine collection. TheRenalGuard System, with its matched fluid replacement capability, is intendedto minimize the risk of over- or under-hydration.

 

                In December 2006,the Company received full Food and Drug Administration (“FDA”) approval toconduct its first human clinical trial utilizing its RenalGuard System andTherapy under an investigational device exemption (“IDE”). This pilot clinicaltrial was designed to evaluate the safety of the RenalGuard System and itsability to accurately measure and balance fluid inputs and outputs on patientsundergoing a catheterization imaging procedure where contrast media would beadministered.  In February 2008, theCompany submitted an IDE supplement to the FDA seeking approval to move fromits pilot study to a pivotal clinical trial to study the safety andeffectiveness of RenalGuard in the prevention of CIN. In March 2008, theFDA granted the Company conditional approval to begin this pivotal study.

 

                On March 20, 2007, the Company entered into adistribution agreement with Novadaq Corp. (“Novadaq”), a subsidiary of NovadaqTechnologies Inc., pursuant to which the Company appointed Novadaq as itsexclusive distributor in the United States for its TMR business.  The agreement amended and restated theexclusive distribution agreement between the Company and Edwards LifesciencesLLC (“Edwards”), which had been assigned by Edwards to Novadaq on the samedate.  The agreement with Novadaqreflects substantially the same roles, responsibilities and financial terms asthe previous agreement with Edwards.

 

6

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***2.            ******Basis of Presentation***

 

                The accompanying unauditedcondensed consolidated financial statements of the Company have been preparedin accordance with generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included. Operating results for the three months ended March 31, 2008 are notnecessarily indicative of the results that may be expected for the year ending December 31,2008.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

                The preparation of financialstatements in accordance with generally accepted accounting principles requiresthe Company to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***3.             New AccountingPronouncements***

 

                In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements”**(“SFASNo. 157”).  SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after November 15,2007.  On February 6, 2008, the FASBannounced it will issue a FASB Staff Position to allow a one-year deferral ofadoption of SFAS No. 157 for non-financial assets and non-financialliabilities that are recognized at fair value on a nonrecurring basis. SFAS No. 157provides a common fair value hierarchy for companies to follow in determiningfair value measurements in the preparation of financial statements and expandsdisclosure requirements relating to how such fair value measurements aredeveloped. SFAS No. 157 clarifies the principle that fair value should bebased on the assumptions that the marketplace would use when pricing an assetor liability, rather than company specific data.  The Company is currently assessing the impactthat SFAS No. 157 will have on its results of operations and financialposition.

 

                In February 2007, the FASBissued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities*”* (“SFAS No. 159”). SFAS No. 159,which includes an amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”,permits entities the option to measure many financial instruments and certainother items at fair value. SFAS No. 159 is effective for fiscal yearsbeginning after November 15, 2007. On January 1, 2008, the Company adopted SFAS 159, which did nothave a material effect on its results of operations or financial condition.

 

                In December 2007, the FASBissued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”), which replacesSFAS No 141. The statement retains the purchase method of accounting foracquisitions, but requires a number of changes, including changes in the wayassets and liabilities are recognized in the purchase accounting. It alsochanges the recognition of assets acquired and liabilities assumed arising fromcontingencies, 

 

 

7

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requiresthe capitalization of in-process research and development at fair value, andrequires the expensing of acquisition related costs as incurred. SFAS No. 141(R) iseffective for financial statements issued for fiscal years beginning after December 15,2008 and will apply prospectively to business combinations completed on orafter that date. The impact of the adoption of SFAS No. 141(R) on theCompany’s results of operations and cash flows will depend on the terms andtiming of future acquisitions, if any.

 

                In December 2007, the FASBissued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51”(“SFAS No. 160”). SFAS No. 160 changes theaccounting and reporting for minority interests, which will be recharacterizedas non-controlling interests and classified as a component of equity.SFAS No. 160 is effective for the Company on a prospective basis forbusiness combinations with an acquisition date beginning in the first quarterof fiscal year 2009. As of March 31, 2008, the Company did not have anyminority interests.

 

***4.             Inventories***

 

                Inventories are stated at the lower of cost (computedon a first-in, first-out method) or market value and include allocations oflabor and overhead.  As of March 31,2008 and December 31, 2007, inventories consisted of the following (in thousands):

 

| ** **       | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials    |       | $                        | 1,057      |                        | $          | 560 |   |
| Work in progress |       | 111                      |       | 151                         |       |
| Finished goods   |       | 265                      |       | 141                         |       |
|             |       | $                        | 1,433      |                        | $          | 852 |   |

 

                At March 31, 2008 and December 31, 2007,inventories are stated net of a specific obsolescence allowance of $536,000 and$524,000, respectively.

 

***5.             Stock-Based Compensation***

 

*                StockOption Plans*

 

                In May 2005, the Company’sshareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”).  The 2005 Plan has replaced the 1997 ExecutiveStock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock OptionPlan and 2000 Non-Qualified Performance and Retention Equity Plan(collectively, the “Previous Plans”), under which no further awards can begranted.

 

                The number of stock options thatmay 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 Plansafter the date of the adoption of the 2005 Plan because any award previouslygranted under any such plan expires or is terminated, surrendered or cancelledwithout having been fully exercised or is forfeited in whole or in part orresults in any common stock not being issued, provided that such number ofadditional shares may not exceed 2,535,492. Incentive stock options are issuable 

 

 

8

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onlyto employees of the Company, while non-qualified stock options may be issued tonon-employee directors, consultants, and others, as well as to employees. Theoptions granted under the Previous Plans and the 2005 Plan become exercisableeither 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 lessthan the fair market value of the common stock on the date the option isgranted.  The 2005 Plan provides that theCompany may not grant non-qualified stock options at an exercise price lessthan 85% of the fair market value of the Company’s common stock.

 

                The Company grants stock optionsto its non-employee directors. Generally, new non-employee directors receive aninitial grant of an option to purchase 30,000 shares of the Company’s commonstock 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 annualgrant of an option to purchase 15,000 shares of the Company’s common stock thatgenerally vests in four equal quarterly installments. The Chairman of the Boardreceives an annual grant of an option to purchase 30,000 shares of the Company’scommon stock that generally vests in four equal quarterly installments. Allsuch options have an exercise price equal to the fair market value of theCompany’s common stock on the date of grant.

 

                Options granted during 2007 vestratably annually over a three year period for employees and ratably quarterlyover a one year period for non-employee directors.  There were no options granted during thethree months ended March 31, 2008.

 

                The following is a summary ofoption 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, 2007 |       | 5,298                     |       | $                                      | 0.96       |                                              |       |   |
| Granted                             |       | —                    |       | —                                 |       |                                              |       |
| Exercised                           |       | —                    |       | —                                 |       |                                              |       |
| Forfeited                           |       | —                    |       | —                                 |       |                                              |       |
| Expired                             |       | —                    |       | —                                 |       |                                              |       |
| Outstanding, March 31, 2008    |       | 5,298                     |       | $                                      | 0.96       |                                              | 5.50       |   |
| Exercisable, March 31, 2008    |       | 4,449                     |       | $                                      | 1.02       |                                              | 4.87       |   |

 

 

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                The following table summarizesunvested option activity during the three months ended March 31, 2008:

 

| ** **                       | ** ** | **Number  of  Options**                           | ** ** | **Weighted   Average   Grant Date   Fair Value** | ** ** |
|----------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **(in  thousands, except weighted average data)** | ** ** |
| ** **                       | ** ** | ** **                                        | ** ** |
| Unvested, December 31, 2007 |       | 895                                               |       | $                                                | 0.47       |   |
| Granted                          |       | —                                            |       | —                                           |       |
| Vested                           |       | (46                                               | )          | 0.44                                             |       |
| Forfeited                        |       | —                                            |       | —                                           |       |
| Unvested, March 31, 2008    |       | 849                                               |       | $                                                | 0.47       |   |

 

*                SFAS No. 123(R)*

 

                The Company records share-basedcompensation pursuant to SFAS No. 123 (revised 2004), “Share-based Payment”.  The Company recorded compensation expense of $49,000and $33,000 in the three months ended March 31, 2008 and 2007,respectively.  As of March 31, 2008,the Company had $261,000 of total unrecognized compensation cost related to itsunvested options, which is expected to be recognized over a weighted averageperiod of 1.6 years.

 

                There were no options granted in the three monthsended March 31, 2008.  The weightedaverage fair value of options issued during the three months ended March 31,2007 was estimated using the Black-Scholes model.

 

| ** **              | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| Expected life (years)   |       | 6.00                                        |       |
| Interest rate           |       | 4.68                                        | %          |
| Volatility              |       | 77.4                                        | %          |
| Expected dividend yield |       | None                                        |       |
| Value of option granted |       | $                                           | 0.43       |   |
|                         |            |                                             |            |  |

 

                The expected life was calculated in 2007 using thesimplified method. The risk-free interest rate is based on the U.S. Treasuryyield curve in effect at the time of the grant for the expected termperiod.  Expected volatility is basedexclusively on historical volatility data of the Company’s common stock.  The Company estimates an expected forfeiturerate based on its historical forfeiture activity.  Actual results, and future changes inestimates, may differ substantially from the Company’s current estimates.  The weighted average fair value of optionsgranted during the three months ended March 31, 2007 was $0.43.

 

*                StockPurchase Plan*

 

                The Company has a 2000 EmployeeStock Purchase Plan (the “Purchase Plan”) for all eligible employees wherebyshares of the Company’s common stock may be purchased at six-month intervals at95% of the closing price of the Company’s common stock on the last business dayof the relevant plan period.  Employeesmay purchase shares having a value not exceeding 10% of their grosscompensation during an offering period, subject to certain additional 

 

 

10

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limitations.  Under the Purchase Plan, employees of theCompany purchased 5,179 shares of common stock in 2007 at an average price of$0.47 per share.  There was no purchaseactivity in the three months ended March 31, 2008.  At March 31, 2008, 316,073 shares werereserved for future issuance under the Purchase Plan.

 

***6.             Revenue Recognition***

 

                The Company records revenue fromthe sale of TMR kits at the time of shipment to Novadaq.  TMR kit revenues include the amount invoicedto Novadaq for kits shipped pursuant to purchase orders received, as well as anamortized portion of deferred revenue related to a payment of $4,533,333received in February 2004.  Thispayment was made in exchange for a reduction in the prospective purchase pricethe Company receives upon a sale of the kits. The Company is amortizing this payment into its Consolidated Statementsof Operations as revenue over a seven year period (culminating in 2010) underthe units-of-revenue method as prescribed by Emerging Issues Task Force 88-18, “Salesof Future Revenue”.  The Companydetermined that a seven year timeframe was the most appropriate amortizationperiod based on a valuation model it used to assess the economic fairness ofthe payment. Factors the Company considered in developing this valuation modelincluded the estimated foregone revenues over a seven year period resultingfrom the reduction in the prospective purchase price payable to the Company, adiscount rate deemed appropriate to this transaction and an estimate of theremaining economic useful life of the current TMR kit design, without anybenefit being given to potential future product improvements the Company maymake.  The Company reviews annually, andadjusts if necessary, the prospective revenue amortization rate for kits basedon its best estimate of the total number of kits likely remaining to be shippedto hospital customers by Novadaq through 2010. The Company recorded amortizationof $180,000 and $190,000 in the three months ended March 31, 2008 and2007, respectively, which is included in revenues in the ConsolidatedStatements of Operations.

 

                TMR lasers are billed to Novadaqin accordance with purchase orders that the Company receives.  Invoiced TMR lasers are recorded as othercurrent assets and deferred revenue on the Company’s Consolidated Balance Sheetuntil such time as the laser is shipped to a hospital, at which time theCompany records revenue and cost of revenue.

 

                Under the terms of the NovadaqTMR distribution agreement, once Novadaq has recovered a prescribed amount ofrevenue from a hospital for the use or purchase of a TMR laser, any additionalrevenues earned by Novadaq are shared with the Company pursuant to a formulaestablished in the distribution agreement. The Company only records its shareof such additional revenue, if any, at the time the revenue is earned.

 

                TheCompany records all other product revenue, including sales of TMR lasers andkits to international customers and OEM sales of surgical tubes and generalpurpose CO2 lasers, at the time of shipment.

 

                Revenues from service andmaintenance contracts are recognized ratably over the life of the contract.

 

                Installation revenues related toa TMR laser transaction are recorded as a component of service fees when thelaser is installed.

 

 

11

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***7.             Loss per Share***

 

Inthe three months ended March 31, 2008 and 2007, basic and diluted loss pershare have been computed using only the weighted average number of commonshares outstanding during the period without giving effect to any potentialfuture issuances of common stock related to stock option programs, since theirinclusion would be antidilutive.

 

Forthe three months ended March 31, 2008 and 2007, 5,298,000 and 4,817,000shares, respectively, attributable to outstanding stock options were excludedfrom the calculation of diluted earnings per share because the effect wouldhave been antidilutive.  The followingtable sets forth the computation of basic and diluted loss per share:

 
| ** **                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                              | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Basic:                                                                                                  |       |                                   |       |   |   |
| Net loss                                                                                                |       | $                                      | (762       | ) | $ | (686 | ) |
| Weighted average  shares outstanding                                                                    |       | 30,329                                 |       | 30,311 |   |
| Basic loss per  share                                                                                   |       | $                                      | (0.03      | ) | $ | (0.02 | ) |
| Diluted:                                                                                                |       |                                   |       |   |   |
| Net loss                                                                                                |       | $                                      | (762       | ) | $ | (686 | ) |
| Weighted average  shares outstanding                                                                    |       | 30,329                                 |       | 30,311 |   |
| Assumed impact  of the exercise of outstanding dilutive   stock options using the treasury stock method |       | —                                 |       | — |   |
| Weighted average  common and common equivalent   shares                                                 |       | 30,329                                 |       | 30,311 |   |
| Diluted loss per  share                                                                                 |       | $                                      | (0.03      | ) | $ | (0.02 | ) |

 

***8.             Comprehensive Loss***

 

                Total comprehensive loss for the three month periodended March 31, 2008 and 2007 amounted to $758,000 and $684,000,respectively.  Comprehensive loss iscomprised of net loss plus the increase/decrease in currency translationadjustment.

 

# ***9.             Warrantyand Preventative Maintenance Costs***

# ** **

TheCompany warranties its products against manufacturing defects under normal useand 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 TMRdistribution agreement with Novadaq, the Company is able to bill Novadaq foractual warranty costs, including preventative maintenance services, up to aspecified amount during the warranty period.

 

TheCompany evaluates the estimated future unrecoverable costs of warranty andpreventative maintenance services for its installed base of lasers on aquarterly basis and adjusts 

 

12

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itswarranty reserve accordingly.  TheCompany considers all available evidence, including historical experience andinformation obtained from supplier audits. Accrued warranty costs were $60,000 at both March 31, 2008 and December 31,2007.  There were no changes to thewarranty accrual during the three months ended March 31, 2008 and the yearended December 31, 2007.

 

**Item 2.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

This quarterly report(including certain information incorporated herein by reference) containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Statements containingterms 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 andinvolve known and unknown important risks and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements. Such important factors and uncertainties include, but are notlimited to, those set forth below in Part II, Item 1A. Risk Factors, andelsewhere in this quarterly report.

 

# **Overview**

# ** **

We are a medical device companyspecializing in innovative technologies for the cardiac and vascularmarkets.  We pioneered and manufacturethe Heart Laser System that cardiac surgeons use to perform TMR to alleviatesymptoms 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 treatingpatients in our initial pilot clinical safety trial for our RenalGuard Therapyand RenalGuard System. RenalGuard Therapy is designed to reduce the toxiceffects that contrast media can have on the kidneys.  This therapy isbased on the theory that creating and maintaining a high urine output isbeneficial to patients undergoing cardiovascular imaging procedures wherecontrast agents are used.  The automated real-timemeasurement and matched fluid replacement design of our RenalGuard System isintended to ensure that a high urine flow is maintained before, during andafter these procedures, thus allowing the body to rapidly eliminate contrast,reducing its toxic effects. The RenalGuard System, with its matched fluidreplacement capability, is intended to minimize the risk of over- orunder-hydration.

 

We enrolled a total of 23 patients in ourinitial pilot safety study. Based upon the positive safety data collected inthe study and discussions we had with the FDA, we elected to stop enrolling newpatients in the pilot study in November 2007.  We submitted an IDE supplement to the FDA in February 2008seeking approval to move from our pilot study to a pivotal clinical trial tostudy 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 havereceived approval to study RenalGuard on 246 patients at up to 30 U.S. clinicalsites. We expect to begin enrolling patients in this study this spring afterobtaining necessary institutional review board approval at the clinical siteswhere the study will be conducted.

 

OurU.S. distributor for the Heart Laser System (Novadaq currently and Edwardsprior to March 20, 2007) is our largest customer, accounting for 86% and85% of our total revenues in 

 

 

13

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thethree months ended March 31, 2008 and the year ended December 31,2007, respectively.  We expect a highlevel of sales concentration to continue in the near future with Novadaq as ourlargest customer now that it holds the exclusive U.S. distribution rights forour TMR products.

 

                Approximately 90% and 87% of ourrevenues in the three months ended March 31, 2008 and the year ended December 31,2007, respectively, came from the sale and service of TMR lasers and relateddisposable kits. We believe that the number of opportunities for new TMR lasersales to hospital customers, and specifically sales of our HL2 laser, is likelyto continue to decline in future quarters as a result of (1) a diminishingnumber of available hospitals that have not already implemented a TMR programthat are still likely to in the future and (2) continuing financialpressures that hospitals face, in particular for the funding of new capitalequipment purchases, in light of ongoing cutbacks in both Medicare and privateinsurance reimbursement rates for all medical procedures. In addition, we haveseen a recent downward trend in the price that new TMR lasers are being sold atin the market as competition for the remaining available customers increases.As such, we expect to continue to see a decline in revenue generated from thesale of HL2 lasers in future quarters and TMR revenues in future quarters willbe more dependent on the sale of TMR kits and service revenues.

 

                Aggregate TMR kit shipments toU.S. hospitals decreased approximately 17% in the three months ended March 31,2008 as compared to the three months ended March 31, 2007, and we believeit is likely that our second quarter TMR revenues and results of operations in2008 will be lower than the corresponding second quarter in 2007 due to anexpected decline in both TMR laser and kit shipments.

 

Ourmanagement reviews a number of key performance indicators to assist indetermining how to allocate resources and run our day to day operations. Theseindicators include (1) actual prior quarterly sales trends, (2) projectedTMR laser and kit sales for the next four quarters, as provided by Novadaq in arolling twelve month sales forecast, (3) research and development progressas measured against internal project plan objectives, (4) budget to actualfinancial expenditure results, (5) inventory levels (both our own andNovadaq’s) and (6) short term and long term projected cash flows of thebusiness.

 

# **Critical Accounting Policies and Estimates**

# ** **

                Our financial statements arebased on the application of significant accounting policies, many of whichrequire us to make significant estimates and assumptions (see Note 2 to theConsolidated Financial Statements).  Webelieve that the following are some of the more material judgment areas in theapplication of our accounting policies that currently affect our financialcondition and results of operations.

 

# ***                Inventories***

# ** **

                Inventories are stated at thelower of cost (computed on a first-in, first-out method) or market value andinclude allocations of labor and overhead. A specific obsolescence allowance is provided for slow moving, excessand obsolete inventory based on our best estimate of the net realizable valueof inventory on hand taking into consideration factors such as (1) actualtrailing twelve month sales, (2) expected future product line demand,based in part on sales forecast input received from Novadaq, and (3) servicepart stocking levels which, in management’s best judgment, are advisable tomaintain in order to meet warranty, service contract and time and 

 

 

14

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materialspare part demands.  Historically, wehave found our reserves to be adequate.

 

# ***                AccountsReceivable***

# ** **

                Accounts receivable is stated atthe amount we expect to collect from the outstanding balance.  We continuously monitor collections fromcustomers, and we maintain a provision for estimated credit losses based uponhistorical experience and any specific customer collection issues that we haveidentified.  Historically, we have notexperienced significant losses related to our accounts receivable. Collateralis not generally required. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

 

                ***Researchand Development***

 

                Research and development costsare expensed as incurred.

 

# ***                Warrantyand Preventative Maintenance Costs***

# ** **

Wewarranty our products against manufacturing defects under normal use and serviceduring the warranty period.  We obtainsimilar warranties from a majority of our suppliers, including those who supplycritical Heart Laser System components. In addition, under the terms of our TMR distribution agreement withNovadaq, we are able to bill Novadaq for actual warranty costs, includingpreventative maintenance services, up to a specified amount during the warrantyperiod.

 

Weevaluate the estimated future unrecoverable costs of warranty and preventativemaintenance services for our installed base of lasers on a quarterly basis andadjust our warranty reserve accordingly. We consider all available evidence, including historical experience andinformation obtained from supplier audits.

 

## ***RevenueRecognition***

## ** **

Werecord revenue from the sale of TMR kits at the time of shipment toNovadaq.  TMR kit revenues include theamount invoiced to Novadaq for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related to apayment of $4,533,333 received in February 2004.  This payment was made in exchange for areduction in the prospective purchase price we receive upon a sale of thekits.  We are amortizing this paymentinto our Consolidated Statements of Operations as revenue over a seven yearperiod (culminating in 2010) under the units-of-revenue method as prescribed byEmerging Issues Task Force 88-18, “Sales of Future Revenue”.  We determined that a seven year timeframe wasthe most appropriate amortization period based on a valuation model we used toassess the economic fairness of the payment. Factors we considered indeveloping this valuation model included the estimated foregone revenues over aseven year period resulting from the reduction in the prospective purchaseprice payable to us, a discount rate deemed appropriate to this transaction andan estimate of the remaining economic useful life of the current TMR kitdesign, without any benefit being given to potential future productimprovements we may make. We review annually, and adjust if necessary, theprospective revenue amortization rate for kits based on our best estimate ofthe total number of kits likely remaining to be shipped to hospital customersby Novadaq through 2010. We recorded amortization of $180,000 and $190,000 inthe three months 

 

 

15

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endedMarch 31, 2008 and 2007, respectively, which is included in revenues inour Consolidated Statements of Operations.

 

TMRlasers are billed to Novadaq in accordance with purchase orders that wereceive.  Invoiced TMR lasers arerecorded as other current assets and deferred revenue on our ConsolidatedBalance Sheet until such time as the laser is shipped to a hospital, at whichtime we record revenue and cost of revenue.

 

Underthe terms of the TMR distribution agreement, once Novadaq has recovered aprescribed amount of revenue from a hospital for the use or purchase of a TMRlaser, any additional revenues earned by Novadaq are shared with us pursuant toa formula established in the distribution agreement. We only record our shareof such additional revenue, if any, at the time the revenue is earned.

 

We record all other product revenue, including sales ofTMR lasers and kits to international customers and OEM sales of surgical tubesand general purpose CO2 lasers, at the time of shipment.

 

                Revenues fromservice and maintenance contracts are recognized ratably over the life of thecontract.

 

                Installationrevenues related to a TMR laser transaction are recorded as a component ofservice fees when the laser is installed.

 

## **Resultsof Operations**

## ** **

                Results for the three months ended March 31,2008 and 2007 and the related percent of revenues were as follows:

 
| ** **                                 | ** ** | **Three Months Ended   March 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **$**                                   | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)**              | ** ** |
| Total revenues                             |       | $                                       | 1,168      |   | 100 | % | $ | 1,493 |   | 100 | % |
| Total cost of revenues                     |       | 405                                     |       | 35 |   | 794 |   | 53 |   |
| Gross profit                               |       | 763                                     |       | 65 |   | 699 |   | 47 |   |
| Selling, general & administrative |       | 970                                     |       | 83 |   | 1,013 |   | 68 |   |
| Research & development            |       | 608                                     |       | 52 |   | 491 |   | 33 |   |
| Total operating expenses                   |       | 1,578                                   |       | 135 |   | 1,504 |   | 101 |   |
| Loss from operations                       |       | (815                                    | )          | (70 | ) | (805 | ) | (54 | ) |
| Other income                               |       | 53                                      |       | 5 |   | 119 |   | 8 |   |
| Net loss                                   |       | $                                       | (762       | ) | (65 | )% | $ | (686 | ) | (46 | )% |
|                                            |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

16

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| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2008**                               | ** ** | **2007**                | ** ** | **over 2007** | ** ** |
| ** **                                          | ** ** | **$**                                  | ** ** | **$**                   | ** ** | **$** | ** ** | **%** | ** ** |
|                                                |       | **(dollars in thousands)**             |       |
| Product sales                                       |       | $                                      | 806        |                    | $          | 1,134 |   | $ | (328 | ) | (29 | )% |
| Service fees                                        |       | 362                                    |       | 359                     |       | 3 |   | 1 |   |
| Total revenues                                      |       | 1,168                                  |       | 1,493                   |       | (325 | ) | (22 | ) |
| Product cost of sales                               |       | 220                                    |       | 586                     |       | (366 | ) | (62 | ) |
| Service fees cost of sales                          |       | 185                                    |       | 208                     |       | (23 | ) | (11 | ) |
| Total cost of revenues                              |       | 405                                    |       | 794                     |       | (389 | ) | (49 | ) |
| Gross profit                                        |       | 763                                    |       | 699                     |       | 64 |   | 9 |   |
| Selling, general & administrative expenses |       | 970                                    |       | 1,013                   |       | (43 | ) | (4 | ) |
| Research & development expenses            |       | 608                                    |       | 491                     |       | 117 |   | 24 |   |
| Total operating expenses                            |       | 1,578                                  |       | 1,504                   |       | 74 |   | 5 |   |
| Income loss from operations                         |       | (815                                   | )          | (805                    | )          | (10 | ) | (1 | ) |
| Other income                                        |       | 53                                     |       | 119                     |       | (66 | ) | (55 | ) |
| Net loss                                            |       | $                                      | (762       | )                       | $          | (686 | ) | $ | (76 | ) | (11 | )% |

 

***Product Sales***

 

DisposableTMR kit revenues, the largest component of product sales in the three monthsended March 31, 2008, increased by $159,000, or 40%, as compared to thethree months ended March 31, 2007. Domestic disposableTMR kit revenues increased $136,000 resulting from a higher volume of kitshipments to our U.S. TMR distributor, Novadaq, in the three months ended March 31,2008 than to Edwards in the three months ended March 31, 2007.  In the three months ended March 31,2007, there was a lower volume of kit shipments to Edwards, as Edwards hadreduced its inventory of TMR kits in anticipation of the assignment ofdistribution rights to Novadaq in March 2007.  We expect that kit shipments to Novadaqduring the remaining three quarters of 2008 will be at a similar level to thatshipped in the first quarter of 2008.  International disposable TMR kit revenuesincreased $23,000 in the first quarter of 2008 due to a higher volume of TMRkit shipments to international customers.

 

TMRlaser revenues decreased $288,000, or 70%, in the three months ended March 31,2008, as compared to the three months ended March 31, 2007.  This decrease is a result of (1) adecrease in the number of new TMR lasers sold by Novadaq in 2008 compared toEdwards in 2007 and (2) a lower average selling price on the one new TMRlaser sold.  We expect to continue to seea decline in revenue generated from the sale of HL2 lasers in future quartersand believe that TMR revenues in future quarters will be more dependent on thesale of TMR kits and service revenues.

 

Otherproduct sales decreased $199,000, or 62%, in the three months ended March 31,2008 as compared to the three months ended March 31, 2007.  This overall decrease is a result of (1) adecrease in manufacturing contract assembly product revenues and (2) decreasedrevenues from Edwards related to the discontinued Optiwave 980 productline.  These decreases were offset inpart by new international RenalGuard revenues.

 

 

 

17

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***                ServiceFee Revenues***

 

                Servicefees increased $3,000, or 1%, in the three months ended March 31, 2008 ascompared to the three months ended March 31, 2007. The increase wasprimarily a result of increased domestic service fee revenues due toincreased service billings.

 

***                GrossProfit***

 

                Gross profit was $763,000, or65% of total revenues, in the three months ended March 31, 2008 ascompared with gross profit of $699,000, or 47% of total revenues, in the threemonths ended March 31, 2007.  Theincrease in gross profit is due to (1) higher disposable TMR kit revenues,(2) lower period manufacturing expenses and (3) new internationalrevenues from RenalGuard sales.  Theseincreases were offset in part by (1) a decrease in the number of new TMRlasers sold, (2) a lower average selling price on the new TMR laser soldand (3) lower revenue from contract assembly services.

 

                ***Selling, General and Administrative Expenses***

 

                Selling, general andadministrative expenditures decreased 4% in the three months ended March 31,2008 as compared to the three months ended March 31, 2007.  This decrease was primarily the result oflower legal expenditures incurred.

 

                ***Researchand Development Expenses***

 

                Research and developmentexpenditures increased 24% in the three months ended March 31, 2008 ascompared to the three months ended March 31, 2007.  This increase was primarily due to anincrease in clinical trial expenditures for RenalGuard.

 

                We expect to continue to incursignificant new research and development expenditures during the remainder of2008 and 2009 as we progress with our clinical trials of RenalGuard.

 

                ***Other Income***

 

                The largest component of otherincome consists of interest income earned on our cash and cash equivalents.Interest income decreased $66,000 in the three months ended March 31, 2008as compared to the three months ended March 31, 2007 due to lower averageinvestable balances and lower interest rates on those investable balances inthe three months ended March 31, 2008 as compared to the three months ended March 31, 2007.

 

                ***Net Loss***

 

                In the three months ended March 31,2008 and 2007, we recorded a net loss of $762,000 and $686,000,respectively.  In the three months ended March 31,2008, higher operating expenses and lower interest income, offset in part byhigher gross margin, resulted in a higher net loss as compared to the threemonths ended March 31, 2007.

 

 

18

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***                KitShipments***

 

                We generally view disposable kitshipments to end users as an important metric in evaluating our business,although we believe that specific short-term factors not indicative oflong-term trends can sometimes affect shipments of disposable kits in any givenquarter.

 

Disposablekit shipments to end users were as follows:

 

| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2008**                               | ** ** | **2007** | ** ** | **%  Increase  (Decrease)  Over  2007** | ** ** |
| Domestic (by U.S. Distributor) |       | 375                                    |       | 452 |   | (17 | ) |
| International                  |       | 15                                     |       | 5 |   | 200 |   |
| Total                          |       | 390                                    |       | 457 |   | (15 | ) |

 

                Because a significant number of the total TMRprocedures performed each year by cardiac surgeons are done in combination withopen-heart bypass surgery, we believe any future growth in the number of TMRprocedures will be partly dependent on the number of bypass surgeries performedin the future, which we believe have the potential to grow modestly over thenext few years.

 

**Liquidity and Capital Resources**

 

                Cash and cash equivalentstotaled $6,840,000 as of March 31, 2008, a decrease of $1,220,000 from$8,060,000 as of December 31, 2007. We have no debt obligations. We believe that our existing cash resourceswill meet our working capital requirements through at least the next 12 months.

 

                Cash used for operatingactivities in the three months ended March 31, 2008 was $1,205,000 due toour net loss and unfavorable working capital changes, offset in part bynon-cash depreciation and amortization and compensation related to stockoptions.  We used $27,000 for thepurchase of equipment.  The effect ofexchange rate changes provided an additional $12,000.

 

                In the near term we will be largelydependent on the future success of Novadaq’s sales and marketing efforts in theU.S. to continue to increase the installed base of HL2 lasers and tosubstantially increase TMR procedural volumes and revenues. Should theinstalled base of HL2 lasers or TMR procedural volume not increasesufficiently, our liquidity and capital resources will be negativelyimpacted.  Additionally, otherunanticipated decreases in operating revenues or increases in expenses or changesor delays in third-party reimbursement to healthcare providers using ourproducts would adversely impact our cash position and require further costreductions or the need to obtain additional capital.  It is not certain that we, working withNovadaq and our international distributors, will be successful in achievingbroad commercial acceptance of the Heart Laser Systems, or that we will be ableto operate profitably in the future on a consistent basis, if at all.

 

 

19

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                Some hospitalcustomers prefer to acquire the Heart Laser Systems on a usage basis ratherthan as a capital equipment purchase.  Webelieve this is the result of current limitations at many hospitals regardingacquiring expensive capital equipment as well as competitive pressures in themarketplace.  A usage business model willresult in a longer recovery period for Novadaq to recoup its investment inlasers it may purchase from us in the future. This results in (1) a delay in our ability to receive additionalshared revenue, if any, that we otherwise are entitled to receive under theterms of our new distribution agreement with Novadaq and (2) a potentialdelay in the purchase of new lasers by Novadaq if the installed base of lasersplaced under usage contracts is under-performing and Novadaq chooses tore-deploy these lasers to other hospital sites in lieu of purchasing a newlaser from us.

 

                We believe we willincur losses at least through 2009 as we increase our research and developmentspending in order to conduct the clinical trials in the U.S. that are necessaryto obtain the regulatory approval to market RenalGuard.  We cannot be certain that future sales, ifany, of RenalGuard will justify the investments we plan to make. If we areunsuccessful in implementing our business strategy to introduce RenalGuard, orif the introduction of RenalGuard takes longer or costs more than anticipated,our liquidity and capital resources will be adversely affected.

 

                There can be no assurance thatthe future capital we will need to implement our business plan will beavailable on terms and conditions acceptable to us, especially considering thecurrent uncertainty in the global credit markets.  Should additional financing not be availableon terms and conditions acceptable to us, our listing on the American StockExchange (“AMEX”) will be jeopardized, and we might need to curtail ourRenalGuard program and take additional actions that could adversely impact ourability to continue to realize assets and satisfy liabilities in the normalcourse of business.  The consolidatedfinancial statements set forth in this report do not include any adjustments toreflect the possible future effects of these uncertainties.  See Part II, Item 1A. Risk Factors, “**If we areunable to raise additional capital during 2008, our common stock could bedelisted from AMEX.”**

 

**Off-BalanceSheet Arrangements**

 

**               **None.

 

**Item 3.        Quantitativeand Qualitative Disclosures about Market Risk**

 

                A portion of our operationsconsists of sales activities in foreign jurisdictions.  We manufacture our products exclusively inthe U.S. and sell our products in the U.S. and abroad. As a result, ourfinancial results could be affected by factors such as changes in foreigncurrency exchange rates or weak economic conditions in the foreign markets inwhich we distribute our products.  Ouroperating results are exposed to changes in exchange rates between the U.S.dollar and foreign currencies, especially the Euro. When the U.S. dollarstrengthens against the Euro, the value of foreign sales decreases. When theU.S. dollar weakens, the functional currency amount of sales increases. Noassurance can be given that foreign currency fluctuations in the future willnot adversely affect our business, financial condition and results ofoperations, although at present we do not believe that our exposure issignificant, as international sales represented 14% and 3% of our consolidatedsales in the three months ended March 31, 2008 and the year ended December 31,2007, respectively. We do not hedge any balance sheet exposures andintercompany balances against future movements in foreign exchange rates.

 

 

20

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                Our interest income and expenseare sensitive to changes in the general level of U.S. and foreign interestrates. In this regard, changes in U.S. and foreign interest rates affect theinterest earned on our cash and cash equivalents.  We do not believe that a 10% change to theapplicable interest rates would have a material impact on our future results ofoperations or cash flows.

 

## **Item 4.        Controlsand Procedures**

## ** **

***Evaluation of Disclosure Controls andProcedures***

 

                Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as of March 31, 2008. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosedby a company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Based on the evaluationof our disclosure controls and procedures as of March 31, 2008, our chiefexecutive officer and chief financial officer concluded that, as of such date,our disclosure controls and procedures were effective at the reasonableassurance level.

 

***Changes in InternalControl over Financial Reporting***

 

                No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedMarch 31, 2008 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Part II.  Other Information**

 

**Item 1A.       Risk Factors**

 

                The risks and uncertaintiesdescribed below are not the only risks we face. Additional risks and uncertainties not presently known to us orcurrently 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 adverselyaffected.

 

***                Weexpect to incur significant operating losses in the near future.***

 

                We expect to incur net losses infuture quarters, at least through 2009, as we increase our research anddevelopment spending for clinical studies of RenalGuard in the U.S. We cannotprovide any assurance that we will be successful with our business strategy,that RenalGuard will receive FDA approval 

 

 

21

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orcommercial acceptance, or that we will ever return to profitability.

 

***                Ourcompany may be unable to raise needed capital.***

 

                As of March 31, 2008, wehad cash and cash equivalents totaling $6,840,000. Based on our currentoperating plan, we anticipate that our existing capital resources should besufficient to meet our working capital requirements for at least the next 12months; however, we will need to raise additional capital for the future inorder to implement our business plan.  Wemay not be able to raise additional capital upon satisfactory terms, or at all,and our business, financial condition and results of operations could bematerially and adversely affected.  Tothe extent that we raise additional capital by issuing equity or convertiblesecurities, ownership dilution to our shareholders will result.  To the extent that we raise additionalcapital through the incurrence of debt, our activities may be restricted by therepayment obligations and other restrictive covenants related to the debt.

 

***                Ifwe are unable to raise additional capital during 2008, our common stock couldbe delisted from AMEX.***

 

***               ***Ourstockholders’ equity was $4,241,000 as of March 31, 2008.  Under the AMEX listing guidelines, our commonstock could be delisted from AMEX if our stockholders’ equity is less than$4,000,000, and if we sustained losses from continuing operations and/or netlosses in three of our four most recent fiscal years.  We have sustained losses in three of our fourmost recent fiscal years and, based on our current projections, ourstockholders’ equity will fall below $4,000,000 as of June 30, 2008 if weare not able to raise additional capital prior to that time.  If our stockholders’ equity falls below$4,000,000 as reported in a quarterly report, AMEX will notify us by adeficiency letter within ten business days after we file the quarterly reportthat we are below the continued listing standards.  We will have thirty days after the receipt ofthe deficiency letter to provide a plan advising AMEX of actions that we willtake to regain compliance with the continued listing standards within 18 monthsof receipt of the deficiency letter.  Theplan can include specific milestones, quarterly financial projections anddetails related to any strategic initiatives we plan to complete in the 18month period following.  AMEX willevaluate the plan within 45 days of receipt to determine if we have made areasonable demonstration of our ability to regain compliance with the continuedlisting standards within the 18 month period, during which time our stock wouldcontinue to be listed on AMEX.  We areconsidering a number of options for raising additional capital but there can beno assurance that we will be successful. If our common stock were delisted from AMEX, we could face a number ofnegative implications, including reduced liquidity in our common stock as a resultof the loss of market efficiencies associated with AMEX and the loss of federalpreemption of state securities laws, as well as the potential loss ofconfidence by investors, suppliers, customers and employees, fewer businessdevelopment opportunities and greater difficulty in obtaining financing orcredit.

 

***                Ourcompany is currently dependent on one principal customer.***

 

                Pursuant to the terms of our TMRdistribution agreement with Novadaq, Novadaq is our exclusive distributor forour HL2 laser and TMR kits in the U.S. As a result of this exclusive arrangement, our U.S. distributor (Novadaqcurrently and Edwards prior to March 20, 2007) accounted for 86% and 85%of total revenues in the three months ended March 31, 2008 and the yearended December 31, 2007, respectively, and we expect Novadaq to accountfor the significant majority of our revenue in the near future.  As a result of this expected concentration ofsales with Novadaq, we bear an increased financial risk of timely salescollection if, for any reason, Novadaq’s business condition should suffer.

 

***                Weare dependent on Novadaq in the U.S. to attempt to increase our TMR revenues.***

 

                Novadaq’s sales organization isresponsible for selling a number of different products, including our TMRproducts.  We are largely dependent onthe future success of Novadaq’s sales and marketing efforts in the U.S. toincrease the installed base of HL2 lasers and TMR procedural volumes andrevenues.  If our relationship withNovadaq does not progress, or if 

 

 

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Novadaq’ssales and marketing strategies fail to generate sales of our products in thefuture,******ourrevenue will decrease significantly and our business, financial condition andresults of operations will be seriously harmed.

 

***                Ourcompany is currently dependent on one principal product line to generaterevenues.***

 

                We currently sell one principalproduct line, the Heart Laser Systems, which accounts for the majority of ourtotal revenues.  Approximately 90% and87% of our revenues in the three months ended March 31, 2008 and the yearended December 31, 2007, respectively, were derived from the sales andservice of our Heart Laser Systems.  Thisabsence of a diversified product line means that we are directly and materiallyimpacted by changes in the market for Heart Laser Systems. We believe that thenumber of opportunities for new TMR laser sales to hospital customers, andspecifically sales of our HL2 laser, is likely to continue to decline in futurequarters as a result of (1) a diminishing number of available hospitalsthat have not already implemented a TMR program that are still likely to in thefuture and (2) continuing financial pressures that hospitals face, inparticular for the funding of new capital equipment purchases, in light ofongoing cutbacks in both Medicare and private insurance reimbursement rates forall medical procedures. In addition, we have seen a recent downward trend inthe price that new TMR lasers are being sold at in the market, as competitionfor the remaining available customers increases. These market factors and ourdependency on revenues related to sales of the Heart Laser System poses aserious risk to our ongoing ability to generate sufficient cash to fund ouroperations, which may seriously harm our business, financial condition andresults of operations in future quarters.

 

***                Ourcompany is dependent on certain suppliers.***

 

                Some of the components for ourHeart Laser Systems, most notably the power supply and certain optics andfabricated parts for the HL2, are only available from one supplier, and we haveno assurance that we will be able to source any of our sole-sourced componentsfrom additional suppliers.  We aredependent upon our sole suppliers to perform their obligations in a timelymanner.  In the past, we have experienceddelays in product delivery from our sole suppliers and, because we do not havean alternative supplier to produce these products for us, we have littleleverage to enforce timely delivery. Any delay in product delivery or otherinterruption in supply from these suppliers could prevent us from meeting ourcommercial demands for our products, which could have a material adverse effecton our business, financial condition and results of operations.  Furthermore, we do not require significantquantities of any components because we produce a limited number of ourproducts each year.  Our low-quantityneeds may not generate substantial revenue for our suppliers.  Therefore, it may be difficult for us tocontinue our relationships with our current suppliers or establishrelationships with additional suppliers on commercially reasonable terms, if atall, and such difficulties may seriously harm our business, financial conditionand results of operations.

 

***We are dependent upon our key personnel and will need to hireadditional key personnel in the near future.***

 

Our ability to operate our businesssuccessfully depends in significant part upon the retention and motivation ofcertain key technical, regulatory, production and managerial personnel andconsultants and our ongoing ability to hire and retain additional qualifiedpersonnel in these 

 

 

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areas. Competition for such personnel is intense, particularly in theGreater Boston area. We cannot be certain that we will be able to attract suchpersonnel and the loss of any of our current key employees or consultants couldhave a significant adverse impact on our business.

 

***                Inorder to compete effectively, our current and future products need to gaincommercial acceptance.***

 

                Our current TMR products maynever achieve widespread commercial acceptance. To be successful, we and Novadaq need to:

 

·                  demonstrate to the medical community ingeneral, and to heart surgeons and cardiologists in particular, that TMRprocedures are effective, relatively safe and cost effective;

 

·                  support third-party efforts to document themedical processes by which TMR procedures relieve angina;

 

·                  have more heart surgeons trained to performTMR procedures using the Heart Laser Systems; and

 

·                  maintain and expand third-party reimbursementfor the TMR procedure.

 

                To date, only a limited numberof heart surgeons have been trained in the use of TMR using the Heart LaserSystems.  We are dependent on Novadaq toexpand related marketing and training efforts in the U.S. for the use of ourproducts.

 

                The Heart Laser Systems have notyet received widespread commercial acceptance. We believe that concerns over the lack of a consensus view on the reasonor reasons why a TMR procedure relieves angina in patients who undergo theprocedure has limited demand for and use of the Heart Laser Systems. Untilthere is consensus, if ever, of the medical processes by which TMR proceduresrelieve angina, we believe some hospitals will delay the implementation of aTMR program.

 

                If we are unable to achievewidespread commercial acceptance of the Heart Laser Systems, our business,financial condition and results of operations will be materially and adverselyaffected.

 

***                Ournewest product, RenalGuard, has only had limited testing in a clinical settingand we may need to modify it in the future to be commercially acceptable.***

 

***               ***We have onlycompleted the first generation product design for our RenalGuard System and wehave only been able to perform a limited amount of testing of this device in aclinical hospital setting as part of our recently completed initial pilot humanclinical 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 ormeet customer expectations. These changes may not be able to be completed in atimely fashion, if at all. Should any such modifications prove to besignificantly more costly or time consuming to engineer than we estimate, ourability to bring this product to market may be severely and negatively impacted.

 

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***                Ourplanned future U.S. pivotal clinical trial to study the safety andeffectiveness of RenalGuard in preventing contrast-induced nephropathy willtake us a significant amount of time to complete, if we can complete it at all,and the results of this clinical trial may not show sufficient safety andefficacy for us to either obtain FDA approval or otherwise be able tosuccessfully market and sell the product.***

 

***               ***Our business strategy to grow our revenues andprofitability is largely dependent on our success in timely completion of ourplanned future U.S. pivotal clinical trial of RenalGuard. We hope to be able todemonstrate through this clinical trial that RenalGuard is safe and effectivein preventing CIN.

 

                We can provide no assurance thatwhen studied in humans, RenalGuard will be shown to be safe or effective inpreventing CIN, or that the degree of any positive safety and efficacy resultswill be sufficient to either obtain FDA approval or otherwise successfullymarket our product. Furthermore, the completion of our planned clinical trialis dependent upon many factors, some of which are not entirely within ourcontrol, including, but not limited to, our ability to successfully recruitinvestigators, the availability of patients meeting the inclusion criteria ofour clinical study, the competition for these particular study patients amongstother clinical trials being conducted by other companies at these same studysites, the ability of the sites participating in our study to successfullyenroll patients in our trial, and proper data gathering on the part of theinvestigating sites.

 

                Should our U.S. pivotal clinicaltrial take longer than we expect, our competitive position relative to existingpreventative measures, or relative to new devices, drugs or therapies that maybe developed, could be seriously harmed and our ability to successfully fundthe completion of the trial and bring RenalGuard to market may be adverselyaffected.

 

***                Wewill need to build a direct sales and marketing organization or otherwise enterinto one or more distribution arrangements in order to market our RenalGuardSystem in the U.S, if and when it is approved for sale, and in the EU, as weprepare for a sales launch in this market in 2009.***

 

***               ***We currently donot have a direct sales force. Instead, we market our existing TMR productsthrough Novadaq in the U.S. and through independent distributors outside theU.S.  We do not plan to use Novadaq orour current international TMR distributors to market our RenalGuard System ifand when it becomes commercially available to customers. We will need to eitherbuild an internal direct sales and marketing organization or find newdistribution partners in order to successfully market our RenalGuard System.

 

                If we choose to build a directsales force, we may not be able to attract qualified individuals with therequisite training or experience to sell our product. In addition, we wouldneed to devote substantial management time instituting policies, procedures andcontrols to oversee and effectively manage this new part of our organization,which could adversely impact our daily operations and would require us toinvest significant financial resources, the cost of which could be prohibitive.

 

                If we instead choose to pursuean indirect distribution strategy, which is our current plan for the EU market,we may not be able to identify suitable distribution partners with sufficientindustry experience, brand recognition, sales capacity and willingness orability to maximize 

 

 

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sales.Further, we may not be able to negotiate distribution agreements with terms andconditions that are acceptable to us, including ensuring that our productreceives adequate sales force focus and attention.

 

***                Ourprimary competitor in TMR may obtain FDA approval to market a new device, theimpact 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 toobtain FDA approval to market its “percutaneous” method of performingmyocardial revascularization, previously known as PMR, and recently rebrandedas PMC (percutaneous myocardial channeling), which would provide a lessinvasive method of creating channels in the heart.  If PMC can be shown tobe safe and effective and is approved by the FDA, it would eliminate the needin certain patients to make an incision in the chest, reducing costs andspeeding recovery.  It is unclear whatimpact, if any, approval of a PMC device would have on the future adoption ratefor TMR procedures. If PMC is approved, it could erode the potential TMRmarket, which would have a material adverse effect on our business, financialcondition and results of operations.

 

***                Rapidtechnological changes in our industry could make our products obsolete.***

 

                Our industry is characterized byrapid technological change and intense competition.  New technologies and products and newindustry standards will develop at a rapid pace, which could make our currentand future planned products obsolete. The advent of new devices and proceduresand advances in new drugs and genetic engineering are especially concerningcompetitive threats.  Our future successwill depend upon our ability to develop and introduce product enhancements toaddress the needs of our customers. Material delays in introducing product enhancements may cause customersto forego purchases of our products and purchase those of our competitors.

 

                Many potential competitors havesubstantially greater financial resources and are in a better financialposition to exploit marketing and research and development opportunities.

 

***                Wemust receive and maintain government clearances or approvals in order to marketour products.***

 

                Our products and our manufacturingactivities are subject to extensive, rigorous and changing federal and stateregulation in the U.S. and to similar regulatory requirements in other majorinternational markets, including the EU and Japan.  These regulations and regulatory requirementsare broad in scope and govern, among other things:

 

·                  product design and development;

 

·                  product testing;

 

·                  product labeling;

 

·                  product storage;

 

·                  premarket clearance and approval;

 

 

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·                  advertising and promotion; and

 

·                  product sales and distribution.

 

                Furthermore, regulatoryauthorities subject a marketed product, its manufacturer and the manufacturingfacilities to continual review and periodic inspections.  We are subject to ongoing FDA requirements,including required submissions of safety and other post-market information andreports, registration requirements, Quality Systems regulations andrecordkeeping requirements. The FDA’s Quality Systems regulations includerequirements relating to quality control and quality assurance, as well as thecorresponding maintenance of records and documentation.  Depending on its activities, Novadaq may alsobe subject to certain requirements under the Federal Food, Drug and CosmeticAct and the regulations promulgated thereunder, and state laws and registrationrequirements covering the distribution of our products. Regulatory agencies maychange existing requirements or adopt new requirements or policies that couldaffect our regulatory responsibilities or the regulatory responsibilities of adistributor like Novadaq.  We may be slowto adapt or may not be able to adapt to these changes or new requirements.

 

                Later discovery of previouslyunknown problems with our products, manufacturing processes or our failure tocomply with applicable regulatory requirements may result in enforcementactions by the FDA and other international regulatory authorities, including,but not limited to:

 

·                  warning letters;

 

·                  patient or physician notification;

 

·                  restrictions on our products or manufacturingprocesses;

 

·                  voluntary or mandatory recalls;

 

·                  product seizures;

 

·                  refusal to approve pending applications orsupplements to approved applications that we submit;

 

·                  refusal to permit the import or export of ourproducts;

 

·                  fines;

 

·                  injunctions;

 

·                  suspension or withdrawal of marketingapprovals or clearances; and

 

·                  civil and criminal penalties.

 

                Should any of these enforcementactions occur, our business, financial condition and results of operationscould be materially and adversely affected.

 

 

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                To date, we have received thefollowing regulatory approvals for our products:

 

***                HeartLaser Systems***

 

*                UnitedStates —*We received FDA approval to market the HL1 HeartLaser System in August 1998 and the HL2 Heart Laser System in January 2001.  However, although we have received FDAapproval, the FDA:

 

·                  has restricted the use of the Heart LaserSystems by not allowing us to market these products to treat patients whosecondition is amenable to conventional treatments, such as heart bypass surgery,stenting and angioplasty; and

 

·                  could impose additional restrictions orreverse its ruling and prohibit use of the Heart Laser Systems at any time.

 

Inaddition, as a condition of our original FDA approval for our TMR products, wewere required by the FDA to perform a postmarket surveillance study. The FDArequested that we submit a PMA Postapproval Study report summarizing thispostmarket surveillance study. As part of this report, the FDA requested thatwe analyze and discuss the adverse event and mortality rates seen in thepostmarket study and compare these results to the premarket study which waspresented as part of our initial FDA PMA application. We filed thispostapproval study report with the FDA on February 28, 2007.

 

Becauseof the significant safety information collected in the postapproval study, andas the FDA has indicated it plans to do in other product areas, we believe thatthe FDA plans to present the results at a future meeting of the FDA CirculatorySystem Devices Advisory Panel and thereafter determine what, if any, actionsshould 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 1995and February 2001, respectively. However:

 

·                  the European Union could impose additionalrestrictions or reverse its ruling and prohibit use of the Heart Laser Systemsat any time; and

 

·                  France has prohibited, and other EuropeanUnion countries could prohibit or restrict, use of the Heart Laser Systems.

 

*                Japan —*Our HL1 Heart Laser System received marketing approval from theJapanese Ministry of Health, Labor and Welfare (“MHLW”) in May 2006.However, the MHLW could impose restrictions in the future or reverse its rulingand prohibit use of the Heart Laser Systems at any time.

 

                In addition, it is unclear whatimpact the introduction of the HL2 into the U.S. and other internationalmarkets will have on the ability of our Japanese distributor to market ourolder, first generation HL1 in Japan. Although our Japanese distributor hasindicated to us that it plans to seek MHLW approval in the future to market ournewer HL2, we can provide no assurance that the distributor will be successfulin obtaining the necessary approvals or how long it may take to secure therequired approvals.

 

 

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***                RenalGuard***

 

***               ***We presentlyhave approval to market RenalGuard only in the EU. We must receive either FDAapproval or clearance before we can market RenalGuard in the United States.Other countries may require their own approvals prior to our being able tomarket RenalGuard in those countries.

 

                The process of obtaining andmaintaining regulatory approvals and clearances to market a medical device canbe costly and time consuming, and we cannot predict when, if ever, suchapprovals or clearances will be granted. Pursuant to FDA regulations, unless anexemption is available, the FDA permits commercial distribution of a newmedical device only after the device has received 510(k) clearance or isthe subject of an approved PMA application. The FDA will clear marketing of amedical device through the 510(k) process only if it is demonstrated thatthe new product is substantially equivalent to other 510(k)-cleared products.

 

                At the present time we are notaware of any clear predicates with substantially the same proposed indicationsfor use which would enable us to conclude that RenalGuard is likely to becleared by the FDA as a 510(k) device. Therefore, we believe RenalGuardmost likely will need to go through the PMA application process.

 

                Because the PMA applicationprocess is more costly, lengthy and uncertain than the 510(k) process andmust be supported by extensive data, including data from preclinical studiesand human clinical trials, we cannot predict when RenalGuard may eventuallycome to market in the U.S. Should we be unable to obtain FDA approval forRenalGuard, or should the approval process take longer than we anticipate, ourfuture revenue growth prospects will be materially and adversely affected.

 

***                Changesin third party reimbursement for TMR procedures or our inability to obtainthird party reimbursement for RenalGuard could materially affect future demandfor our products.***

 

Demand for medical devices is often affected bywhether third party reimbursement is available for the devices and relatedprocedures.  Currently Medicare coverageis provided for TMR when it is performed as a sole therapy treatment.  In addition, when two or more medicalprocedures are performed in combination with each other, Medicare rules generallyallow hospitals to bill for whichever of the two procedures carries the higherreimbursement amount. Therefore, in situations where sole therapy TMRreimbursement rates exceed that provided for bypass surgery alone, if hospitalsperform a combination procedure where both bypass surgery and adjunctive TMRare performed on a patient, the hospital is able to bill for the higher TMRprocedure reimbursement payment. In these instances, the doctor also can billan additional amount for performing multiple procedures.

 

Certain private insurance companies and health maintenanceorganizations also currently provide reimbursement for TMR procedures performedwith our products and physician reimbursement codeshave been established for both surgical procedures.

 

                No assurance can be given,however, that these payers will continue to reimburse healthcare providers whoperform TMR procedures using our products now or in the future.  Further, no assurance can be given thatadditional payers will reimburse healthcare providers 

 

 

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whoperform TMR procedures using our products or that reimbursement, if provided,will be timely or adequate.

 

                Should third party insurancereimbursement for TMR procedures be reduced or eliminated in the future, ourbusiness, financial condition and results of operations would be materially andadversely affected.

 

                Furthermore, we know of noexisting Medicare coverage or other third party reimbursement that would beavailable to either hospitals or physicians that would help defray theadditional cost that would result from the future purchase and/or use of ourRenalGuard System. We also can provide no assurance that we will ever be ableto obtain Medicare coverage or other third party reimbursement for the use ofRenalGuard, which could materially and adversely affect the potential futuredemand for this product.

 

                In addition, the market for ourall our products could be adversely affected by future legislation to reformthe nation’s healthcare system or by changes in industry practices regardingreimbursement policies and procedures.

 

***                Securingintellectual property rights for our RenalGuard System is critical to ourfuture business plans, but may prove to be difficult or impossible for us toobtain.***

 

***               ***We have filednine patent applications with the U.S. patent office related to our RenalGuardSystem, RenalGuard Therapy and other intellectual property in the general fieldof preventing contrast-induced nephropathy and acute renal failure. Securingpatent protection over our intellectual property ideas in this field is, webelieve, critical to our plans to successfully differentiate and market ourRenalGuard System and grow our future revenues. We can provide no assurance,however, that we will be successful in securing any patent protection for ourintellectual property ideas in this field or that our efforts to obtain patentprotection will not prove more difficult, and therefore more costly, than weare otherwise expecting. Furthermore, even if we are successful in securingpatent protection for some or all of our intellectual property ideas in thisfield, we cannot predict when in the future any such potential patents may beissued, how strong such patent protection will prove to be, or whether these patentswill be issued in a timely enough fashion to afford us any commerciallymeaningful advantage in marketing our RenalGuard System against otherpotentially competitive devices.

 

***                Assertingand defending intellectual property rights may impact our results ofoperations.***

 

                In our industry, competitorsoften assert intellectual property infringement claims against oneanother.  The success of our businessdepends on our ability to successfully defend our intellectual property.  Future litigation may have a material impacton our financial condition even if we are successful in marketing our products.We may not be successful in defending or asserting our intellectual propertyrights.

 

                An adverse outcome in anylitigation or interference proceeding could subject us to significantliabilities to third parties and require us to cease using the technology thatis at issue or to license the technology from third parties.  In addition, a finding that any of ourintellectual property is invalid could allow our competitors to more easily andcost-effectively compete with us.  Thus,an unfavorable outcome in any patent litigation or interference proceedingcould have a 

 

 

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materialadverse effect on our business, financial condition or results of operations.

 

                The cost to us of any patentlitigation or interference proceeding could be substantial.  Uncertainties resulting from the initiationand continuation of patent litigation or interference proceedings could have amaterial adverse effect on our ability to compete in the marketplace.  Patent litigation and interferenceproceedings may also absorb significant management time.

 

***                Wemay be subject to product liability lawsuits; our insurance may not besufficient to cover damages.***

 

                We may be subject to productliability claims.  Such claims may absorbsignificant management time and could degrade our reputation and themarketability of our products.  If productliability claims are made with respect to our products, we may need to recallthe implicated product, which could have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, althoughwe maintain product liability insurance, we cannot be sure that our insurance willbe adequate to cover potential product liability lawsuits. Our insurance isexpensive and in the future may not be available on acceptable terms, if atall. If a successful product liability claim or series of claims exceeds ourinsurance coverage, it could have a material adverse effect on our business,financial condition and results of operations.

 

***                Weare subject to risks associated with international operations.***

 

                A portion of our product salesis generated from operations outside of the U.S.  Establishing, maintaining and expandinginternational sales can be expensive. Managing and overseeing foreign operations are difficult and productsmay not receive market acceptance.  Risksof doing business outside the U.S. include, but are not limited to, thefollowing: agreements may be difficult to enforce and receivables difficult tocollect through a foreign country’s legal system; foreign customers may havelonger payment cycles; foreign countries may impose additional withholdingtaxes or otherwise tax our foreign income, impose tariffs or adopt otherrestrictions on foreign trade; U.S. export licenses may be difficult to obtain;and the protection of intellectual property rights in foreign countries may bemore difficult to enforce.  There can beno assurance that our international business will grow or that any of theforegoing risks will not result in a material adverse effect on our business orresults of operations.

 

***               ******Because we are incorporated in Canada, you may not beable to enforce judgments against us and our Canadian directors.***

 

                Under Canadian law, you may notbe able to enforce a judgment issued by courts in the U.S. against us or ourCanadian directors. The status of the law in Canada is unclear as to whether aU.S. citizen can enforce a judgment from a U.S. court in Canada for violationsof U.S. securities laws. A separate suit may need to be brought directly inCanada.

 

***                Ourstock price has historically fluctuated and may continue to fluctuatesignificantly in the future which may result in losses for our investors.***

 

***               ***Our stock pricehas been and may continue to be volatile. Some of the factors that can affectour stock price are:

 

·                  the announcement of new products, services ortechnological innovations by us or our competitors;

 

 

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·                  actual or anticipated quarterly increases ordecreases in revenue, gross margin or earnings, and changes in our business,operations or prospects;

 

·                  speculation or actual news announcements inthe media or industry trade journals about our company, our products, the TMRor CIN prevention procedures or changes in reimbursement policies by Medicareand/or private insurance companies;

 

·                  the status of our clinical trials forRenalGuard;

 

·                  announcements relating to strategicrelationships or mergers;

 

·                  conditions or trends in the medical deviceindustry;

 

·                  changes in the economic performance or marketvaluations of other medical device companies; and

 

·                  general market conditions or domestic orinternational macroeconomic and geopolitical factors unrelated to ourperformance.

 

***                Themarket price of our stock may fall if shareholders sell their stock.***

 

                Certain current shareholdershold large amounts of our stock, which they could seek to sell in the publicmarket from time to time.  Sales of asubstantial number of shares of our common stock within a short period of timewould cause our stock price to fall.  Inaddition, the sale of these shares could impair our ability to raise capitalthrough the sale of additional stock.

 

**Item 6.            Exhibits**

 
| 31.1   |   | Certification  of Principal 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 Principal 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.                                                                                                |

 

 

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**SIGNATURES**

 

                Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                     | PLC SYSTEMS INC. |
|--------------------------|------------------|
|                     |             |   |
| Date:  May 14, 2008 | By:              | /s/  James G. Thomasch |
|                     |             | James  G. Thomasch |
|                     |             | Chief  Financial Officer |
|                     |             | (Principal  Financial Officer and Chief  Accounting Officer) |

 

 

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**EXHIBITINDEX**

 
| **Exhibit**Number | ** ** | ****Description of Document                                                                                                                                                                                               |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                                                                                                |
| 31.1              |       | Certification  of Principal 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 Principal 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.                                                                                      |

 

 

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