News Column

PLC SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 13, 2014

Overview

We are a medical device company specializing in innovative technologies for the cardiac and vascular markets. Our key strategic growth initiative is our newest marketable product, RenalGuard. RenalGuard is designed to reduce the potentially toxic effects that contrast media can have on the kidneys when it is administered to patients during certain medical imaging procedures. It is believed that allowing contrast media to dwell in the kidneys of certain higher risk patients can lead to CIN, a potentially deadly form of acute kidney injury. By inducing and maintaining a high urine flow rate before, during and after these medical imaging procedures, we believe the incidence rates of CIN in at-risk patients can be reduced. RenalGuard facilitates this increased urine clearance automatically, enabling the body to more rapidly void the contrast media, thereby reducing its overall resident time and toxic effects in the kidney. The RenalGuard System consists of a proprietary console and accompanying single-use sets. RenalGuard operates by first collecting and measuring patient urine outputs and then in real-time precisely matching these urine outputs with a prescribed replacement fluid by means of intravenous infusion. With its automated matched fluid replacement capability, RenalGuard is intended to promote and maintain high urine outputs and minimize the risk to patients of over- or under-hydration during image-guided catheterization procedures where contrast media are routinely administered. We obtained a CE Mark for RenalGuard in December 2007 and began our initial commercialization efforts in the EU in Italy in April 2008. We are now marketing RenalGuard in several additional countries around the world. In the U.S. we must first successfully complete a pivotal clinical study assessing the safety and effectiveness of RenalGuard in reducing the rates of CIN in at-risk patients and obtain FDA pre-market approval in order to market RenalGuard. The first patient was enrolled in the U.S. pivotal study in January 2012. Our distributor of RenalGuard in Italy, Artech, accounted for 0% of our total revenues in the three and six months ended June 30, 2014, respectively and 94% and 63% of our total revenues in the three and six months ended June 30, 2013, respectively. ACIST, our distributor in France and Germany, accounted for 65% and 43% of our total revenues in the three and six months ended June 30, 2014, respectively and 0% and 13% of our total revenues in the three and six months ended June 30, 2013. Aquilant, accounted for 18% and 16% of our total revenues in the three and six months ended June 30, 2014, respectively. Our management reviews a number of key performance indicators to assist in determining how to allocate resources and run our day-to-day operations. These indicators include (1) actual prior quarterly sales trends, (2) projected sales for the next four quarters, (3) research and development progress as measured against internal project plan objectives, (4) budget to actual financial expenditure results, (5) inventory levels (both our own and our distributors'), and (6) short term and long term projected cash flows of the business. For the three and six months ended June 30, 2014, we incurred net losses from operations of approximately $1,191,000 and $2,165,000, respectively. For the six months ended June 30, 2014, we used cash in operations of approximately $1,175,000. As of June 30, 2014, cash and cash equivalents were $87,000. Management expects that quarterly losses from operations and negative cash flows will continue during 2014. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. - 32 - --------------------------------------------------------------------------------



Critical Accounting Policies and Estimates

Our financial statements are based upon the application of significant accounting policies, many of which require us to make significant estimates and assumptions (see Note 2 to the Condensed Consolidated Financial Statements). We believe that the following are some of the more material judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations. Inventories Inventories are stated at the average cost (computed on a first-in, first-out method) and include allocations of labor and overhead. We regularly review slow-moving and excess inventories, and write down inventories to net realizable value if the ultimate expected proceeds from the disposals of excess inventory are less than the carrying cost of the inventory. Accounts Receivable Accounts receivable are stated at the amount we expect to collect from the outstanding balances. We continuously monitor collections from customers, and we maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that we have identified. Historically, we have not experienced significant losses related to our accounts receivable. Collateral is not generally required. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.



Warranty and Preventative Maintenance Costs

We warranty our products against manufacturing defects under normal use and service during the warranty period. We obtain similar warranties from a majority of our suppliers.

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



Valuation of Convertible Notes, Warrant and Option Liabilities

The valuation of our convertible notes, warrant and option liabilities as derivative instruments utilizes certain estimates and judgments that affect the fair value of the instruments. Fair values are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. Revenue Recognition We recognize revenue when the following basic revenue recognition criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the price to the buyer charged for products delivered or services rendered and collectability of the sales price. We assess credit worthiness of customers based upon prior history with the customer and assessment of financial condition. Our shipping terms are customarily Free On Board ("FOB") shipping point. We generally record product revenue, including sales of RenalGuard consoles and single-use sets at the time of shipment, if all other revenue recognition criteria have been met. As of June 30, 2014 and 2013, we had deferred revenue balances of $108,000 and $51,000, respectively because not all revenue recognition criteria were met. During the quarter ended June 30, 2014 and 2013, we recognized $0 and $201,000, respectively, in revenue previously deferred upon the receipt of cash. - 33 -

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Results of Operations Results for the three and six months ended June 30, 2014 and 2013 were as follows: Three Months Ended Six Months Ended June 30, June 30 Increase (decrease) Increase (decrease) 2014 2013 over 2013 2014 2013 over 2013 $ $ $ % $ $ $ % (dollars in thousands) Total revenues 73 372 (299 ) (80 ) 126 721 (595 ) (83 ) Total cost of revenues 24 135 (111 ) (82 ) 55 314 (259 ) (82 ) Gross profit 49 237 (188 ) (79 ) 71 407 (336 ) (83 ) Selling, general & administrative expenses 812 965 153 (16 ) 1,349 1,650 (301 ) (18 ) Research and development expenses 428 558 (130 ) (23 ) 887 1,113 (226 ) (20 ) Total operating expenses 1,240 1,523 (283 ) (19 ) 2,236 2,763 (527 ) (19 ) Loss from operations (1,191 ) (1,286 ) 95 7 (2,165 ) (2,356 ) 191 (8 ) Interest expense (71 ) (61 ) (8 ) 13 (139 ) (198 ) 59 (30 ) Other expense (1 ) -- (1 ) (100 ) (1 ) -- (1 ) (100 ) Foreign currency transaction gains 7 3 4 133 8 (5 ) 13 260 Change in fair value of warrant and options liabilities 2,873 6,113 (3,240 ) 53 1,867 2,114 (247 ) (12 ) Change in fair value of convertible notes 711 3,177 (2,466 ) 78 344 1,865 (1,521 ) (82 ) Loss on extinguishment of convertible notes -- -- -- --



-- (1,283 ) 1,283 100 Total other income (expense) 3,520 9,232

(5,712 ) (62 ) 2,080 2,493 (413 ) (17 ) Net income (loss) 2,329 7,946 (5,617 ) (71 ) (85 ) 137 (222 ) (161 ) Product Sales Revenues decreased $299,000 and $595,000 or 80% and 83% in the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013. RenalGuard Console sales decreased $0 and $147,000 or 0% and 82% in the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, respectively, due to a lower volume of RenalGuard consoles sold to international distributors. RenalGuard single use set revenues decreased $438,000 and $300,000 or 81% and 83% in the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, respectively, due to a lower volume of RenalGuard single-use sets sold to international distributors. As of June 30, 2014 and 2013, we had deferred revenue balances of $108,000 and $51,000, respectively, because not all revenue recognition criteria were met. During the quarter ended June 30, 2014, we recognized $0 in revenue of previously deferred revenue upon the receipt of cash. During the quarter ended June 30, 2013, we recognized $201,000 in revenue of previously deferred revenue upon the receipt of cash. Gross Profit Gross profit was $49,000 and $71,000, or 67% and 56% of total revenues, in the three and six months ended June 30, 2014, as compared with gross profit of $237,000 and $407,000, or 64% and 56% of total revenues, in the three and months ended June 30, 2013, respectively. Gross margin generated from the low volume of RenalGuard revenues was sufficient to offset the fixed manufacturing costs incurred during the three and six months ended June 30, 2014.



Selling, General and Administrative Expenses

Selling, general and administrative expenditures decreased 16% and 18% in the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, respectively. The decrease was due to higher investor relations expense during the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2014 as well as the impact of certain personnel changes during 2013.



Research and Development Expenses

Research and development expenditures decreased 23% and 20% in the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013, respectively, due to there being fewer patients enrolled during the quarter ended June 30, 2014 than the quarter ended June 30, 2013 as well as there being more new hospital sets ups in the quarter ended June 30, 2013 than June 30, 2014 in connection with our U.S. clinical trials. - 34 - --------------------------------------------------------------------------------

Other Income (Expense) Between February 2011 and May 2014, the Company entered into convertible note arrangements and amendments as described in Note 10 of the Condensed Consolidated Financial Statements. As a result of these five transactions, interest expense of $71,000 and $139,000 in the three and six months ended June 30, 2014, and $61,000 and $198,000 in the three and six months ended June 30, 2014 and 2013 was recorded. The Company accounts for its outstanding common stock warrants, certain common stock options and convertible notes at fair value. Changes in the fair value of these instruments are recorded as a component of other income. The Company recorded other income of $2,873,000 and $1,867,000 in the three and six months ended June 30, 2014 as compared to other income of $6,113,000 and $2,114,000 in the three and six months ended June 30, 2013, respectively, as a result of fair value adjustments related to outstanding common stock warrants and options. The Company recorded other income of $711,000 and $344,000 in the three and six months ended June 30, 2014 as compared to other income of $3,177,000 and $1,865,000 in the three and six months ended June 30, 2013, respectively, as a result of fair value adjustments related to the outstanding convertible notes. The Company also recorded other expense of $1,283,000 in the six months ended June 30, 2013, related to an extinguishment of the outstanding convertible notes and warrants. Net Income (Loss)



In the three and six months ended June 30, 2014, we recorded net income of $2,329,000 and net loss of $85,000 as compared to net income of $7,946,000 and $137,000 for the three and six months ended June 30, 2013.

Liquidity and Capital Resources

We compete in the highly regulated and competitive medical device market place where products can take significant time to develop, gain regulatory approval and then introduce to distributors and end users. We have incurred recurring quarterly operating losses over the past few years as we have worked to bring our RenalGuard System through development and initial commercialization efforts outside the United States. We expect such operating losses will continue until such time, if ever, that RenalGuard product sales increase sufficiently to generate profitable results. Under the terms of the Securities Purchase Agreement entered into in February 2011, we had the opportunity to raise up to an additional $2 million from the Holders of the Convertible Notes in two separate $1 million tranches, based upon meeting certain operational milestones within certain periods of time. The deadline for achieving the operational milestones for the first $1 million tranche expired in February 2012 without our achieving such milestones; however, the investors agreed to waive both the deadline and the achievement of these milestones as a condition for the investment of the first additional $1 million and invested such funds in July 2012. On February 22, 2013 we entered into a Securities Purchase Agreement with a number of accredited investors which revised certain terms of this Securities Purchase Agreement, including the cancellation of remaining milestone investments. See Note 10 to our Condensed Consolidated Financial Statements for additional disclosure surrounding this amendment. On July 2, 2012 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $1,000,000 of 5% Senior Secured Convertible Debentures maturing on July 2, 2015, (ii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.15 per share and (iii) warrants exercisable for a period of five years to purchase up to 10,000,000 shares of common stock at an exercise price of $0.25 per share. On February 22, 2013 we entered into a Securities Purchase Agreement with a number of accredited investors which revised certain terms of this Securities Purchase Agreement, including the cancellation of the $0.25 warrants and a re-pricing of the $0.15 Warrants. See Note 10 to our Condensed Consolidated Financial Statements for additional disclosure surrounding this amendment. On January 16, 2013 we entered into an Amendment and Waiver to Securities Purchase Agreement to amend our Securities Purchase Agreement to provide for the issuance of (i) an additional $250,000 of 5% Senior Secured Convertible Debentures maturing on January 16, 2016 and (ii) warrants exercisable for a period of five years to purchase up to 2,500,000 shares of common stock at an exercise price of $0.15 per share. See Note 10 to our Condensed Consolidated Financial Statements for additional disclosure surrounding this amendment. - 35 - -------------------------------------------------------------------------------- Under the February 2013 Securities Purchase Agreement with a number of accredited investors, we sold an aggregate of 26,933,333 shares of common stock at $0.15 per share and issued warrants (the "February 2013 Warrants") to purchase an additional 26,933,333 shares of common stock with gross proceeds of $4,040,000. We utilized the proceeds of the private placement for general working capital purposes, to pay for investor relations services, for payment of fees to Palladium Capital, LLC, the exclusive placement agent, and for legal, blue sky and related expenses. After payment of the placement agent fees and these other expenses, we received net proceeds of approximately $3.5 million. See Note 10 to our Condensed Consolidated Financial Statements for additional disclosure surrounding this agreement. On September 18, 2013, we entered into a Securities Purchase Agreement with a number of accredited investors, whereby we sold an aggregate of 29,166,668 shares of common stock and warrants to purchase an additional 29,166,668 shares of common stock with gross proceeds of $1,750,000 to these accredited investors. We intend to utilize the proceeds of the private placement for general working capital purposes, to pay for investor relations services, for payment of fees to Palladium Capital, LLC, the exclusive placement agent, and for legal, blue sky and related expenses. After payment of the placement agent fees and these other expenses, we received net proceeds of approximately $1.6 million. See Note 9 to our Condensed Consolidated Financial Statements for additional disclosure surrounding this agreement. Cash and cash equivalents totaled $87,000 as of June 30, 2014, a decrease of $682,000 from $769,000 as of December 31, 2013. As of June 30, 2014 and December 31, 2013, the maturity date principal of the convertible debt was $4,994,355 and $4,494,355, respectively, and is due between June 2015 and January 2016. We have historically funded our working capital requirements through cash received from public and private offerings of our common stock and to a lesser extent, through our sales of products and services. We believe that our existing resources, based on our currently projected financial results and the receipt of an aggregate of $500,000 in funding in April 2014 and May 2014, respectively, and the receipt of an aggregate of $250,000 in funding in July 2014 and August 2014, respectively, are sufficient to fund operations into the third quarter of 2014. Based upon current and anticipated revenue projections from foreign sales of our RenalGuard product, and the anticipated costs of our U.S. clinical trial, we expect that we will need to raise additional capital during the third quarter of 2014. Our plan is to seek additional capital through the sale of equity and/or debt securities to fund operations. However, there can be no assurance that such capital will be available at all, or if available, that the terms of such financing will not be dilutive to our existing stockholders. The holders of the Convertible Notes (and holders of the Common Stock and the Warrants issued in the February 2013 and September 2013 Securities Purchase Agreements) have certain rights to participate in any subsequent financing. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of the company by our stockholders would be diluted. In addition, any debt securities would have rights, preferences and privileges senior to our common stock and we may sell equity or other convertible debt financing securities which would have rights, preferences and privileges senior to our common stock. On May 14, 2014, the Company filed a proxy statement with the Securities and Exchange Commission describing the form of a proposed merger transaction, as described in Note 1 to Condensed Consolidated Financial Statements. If we are unable to generate adequate cash flows or obtain sufficient additional funding when needed, we may have to take certain actions including, but not limited to, cutting back our operations, selling some or all of our assets, licensing potentially valuable technologies to third parties, and/or ceasing some or all of our operations. As a result of this, our auditors have issued a going concern opinion on our financial statements. Cash flows used in operating activities in the six months ended June 30, 2014 were $1,175,000 due to our net income, offset by non-cash activity including 1) the change in fair value of convertible notes and warrant liabilities 2) depreciation expense; 3) stock-based compensation expense. The effect of exchange rate changes was a $7,000 decrease in cash.



Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Statements containing terms such as "believes", "plans", "expects", "anticipates", "intends", "estimates" and similar expressions contain uncertainty and are forward-looking statements. Forward-looking statements are based on current plans and expectations and involve known and unknown important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such important factors and uncertainties include, but are not limited to: ? We expect to incur significant net losses in future quarters; - 36 -

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? We will require additional capital in the immediate future. Such capital may

not be available, or if available, may not be on terms acceptable to us. If we

are unable to raise such capital, we will need to suspend or cease operations;

? We have received a 'going concern' opinion in our consolidated financial

statements indicating that our cash balance as of December 31, 2013, combined

with recurring net losses and negative cash flows from operations, raises

substantial doubt about our ability to continue as a going concern for the

next 12 months. As noted above, we are investigating ways to raise additional

capital to continue our operations;

? Our quarterly operating results have varied in the past and will continue to

vary significantly in the future, causing volatility in our stock price;

? With the sale of our TMR business in February 2011, our future prospects are

solely dependent upon the successful commercialization of RenalGuard. To date

we have recorded only a limited amount of sales of RenalGuard, principally to

a single customer in one country, Italy. Sales of RenalGuard alone are

currently insufficient, and may never grow to be sufficient, to sustain our

ongoing operations;

? Our ability to effectively market RenalGuard outside the U.S. is largely

dependent on the reception of the results of the MYTHOS and REMEDIAL II

investigator-sponsored clinical trials. We have no assurance that the results

from these two trials will be viewed as clinically meaningful or that they

will lead to increased sales of RenalGuard;

? We may never be successful in establishing a broad distribution channel for

RenalGuard outside the U.S., and any distribution channel we may establish may

never generate sufficient sales for us to attain profitability;

? If we are required to change our pricing models to compete successfully, our

margins and operating results may be adversely affected;

? We commenced our U.S. pivotal clinical trial in 2012 to study RenalGuard,

which is necessary to obtain FDA pre-market approval to market RenalGuard in

the U.S. This study will take us a significant amount of time and money to

complete and will require us to raise additional capital in the future. We can

provide no assurance that we will be able to complete this study or, if we are

able to complete it, that RenalGuard will be shown to be safe or effective in

preventing CIN, or that the degree of any positive safety and efficacy results

will be sufficient to either obtain FDA approval or otherwise successfully

market our product. Furthermore, the completion of a U.S. pivotal clinical

trial is dependent upon many factors, some of which are not entirely within

our control, including, but not limited to, our ability to successfully

recruit investigators, the availability of patients meeting the inclusion

criteria of our clinical study, the competition for these particular study

patients amongst other clinical trials being conducted by other companies at

these same study sites, the ability of the sites participating in our study to

successfully enroll patients in our trial, and proper data gathering on the

part of the investigating sites. Should a U.S. pivotal clinical trial take

longer than we expect, our competitive position relative to existing

preventative measures, or relative to new devices, drugs or therapies that may

be developed could be seriously harmed and our ability to successfully fund

the completion of the trial and bring RenalGuard to market may be adversely

affected;

? Our RenalGuard System has only had limited testing in a clinical setting in

the United States and we may need to modify it substantially in the future for

it to be commercially acceptable in the broader market;

? Any potential future modifications required to make RenalGuard commercially

acceptable for the broader market may result in substantial additional costs

and/or market introduction delays;

? Rapid technological change in the medical device industry could make our

products obsolete and requires substantial research and development

expenditures and responsiveness to customer needs. We expect to continue to

face substantial competition from different treatment modalities and if we do

not compete effectively with these alternatives our market share may never

grow and could decline; ? An inability to obtain third party reimbursement for RenalGuard could materially affect future demand for our product. We know of no existing



Medicare coverage or other third party reimbursement that currently would be

available in the U.S. to either hospitals or physicians that would help defray

the additional cost that would result from the future purchase and/or use of

our RenalGuard System. We also can provide no assurance that we will ever be

able to obtain Medicare coverage or other third party reimbursement for the

use of RenalGuard, which could materially and adversely affect the potential

future demand for our product;

? Securing patent protection over our intellectual property ideas in the field

of CIN prevention is, we believe, critical to our plans to successfully

differentiate and market our RenalGuard System and grow our future revenues.

However, we can provide no assurance as to how strong our issued patents will

prove to be. Furthermore we can provide no assurance that we will be

successful in securing any additional patent protection for our intellectual

property ideas in this field or that our efforts to obtain patent protection

will not prove more difficult, and therefore more costly, than we are

otherwise expecting. Finally, even if we are successful in securing patent

protection for some of our pending patent applications, or for additional

intellectual property ideas in this field, we cannot predict when in the

future any such potential patents may be issued, how strong such additional

patent protection will prove to be, or whether these patents will be issued in

a timely enough fashion to afford us any commercially meaningful advantage in

marketing our RenalGuard System against other potentially competitive devices;

- 37 -

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? We are exposed to risks associated with outsourcing activities, which could

result in supply shortages that could affect our ability to meet customer

needs;

? If we deliver systems with defects, our credibility may be harmed, sales and

market and regulatory approvals acceptance of our systems may decrease and we

may incur liabilities associated with those defects;

? If we require additional capital in the future, it may not be available, or if

available, may not be on terms acceptable to us;

? We are exposed to various risks related to the regulatory environment for

medical devices. Compliance with medical device health and safety regulations

may be very costly, and the failure to comply could result in liabilities,

fines and cessation of our business;

? Our share price will fluctuate based upon a number of factors including, but

not limited to: - actual or anticipated fluctuations in our results of operations;



- changes in estimates of our future results of operations by us or securities

analysts;

- announcements of technological innovations or new products or services by us

or our competitors; - changes affecting the medical device industry;



- announcements of significant acquisitions, strategic partnerships, joint

ventures or capital commitments by us or our competitors; - additions or departures of key technical or management personnel; - issuances of debt or equity securities; - significant lawsuits, including patent or stockholder litigation; - changes in the market valuations of similar companies; - sales of our common stock by us or our stockholders in the future;



- dilution caused by the conversion of convertible debt currently outstanding or

which may be issued to our current secured lender and its assignees as well as

the exercise of warrants issued to this lender, as well as by the exercise of

employee stock options or the issuance of shares on the vesting of restricted

stock units; - trading volume of our common stock; and



- other events or factors that may directly or indirectly affect the value or

perceived value of our business and/or prospects, including the risk factors

identified in this prospectus.

? We have pledged all of our assets to our secured debtholders. We are not

currently permitted, nor do we currently intend, to pay any cash dividends on

our common stock in the foreseeable future and therefore our shareholders may

not be able to receive a return on their shares unless they sell them at an

amount greater than the price paid for such shares;

? Our secured debtholders may be able to exert significant control over the

company through restrictive covenants contained in such debt agreements or

through the conversion to our equity securities of the convertible debt and

warrants issued and/or issuable to these debtholders;

? Sales of a substantial number of shares of our common stock in the public

market could cause our stock price to fall. Future sales and issuances of our

common stock or rights to purchase common stock, including pursuant to our

stock plans, could result in additional dilution of the percentage ownership

of our stockholders and could cause our stock price to fall;

? U.S. broker-dealers may be discouraged from effecting transactions in shares

of our common stock because they may be considered penny stocks and thus be

subject to the penny stock rules; and

? Our ability to recruit and retain management and other qualified personnel is

crucial to our ability to develop, market, sell and support our products.

Off-Balance Sheet Arrangements

None.


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