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| VSCI > SEC Filings for VSCI > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
Executive Summary
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to, further weakening of economic conditions that could adversely affect the level of demand for our products; pricing pressures, including cost-containment measures which could adversely affect the price of, or demand for, our products; availability of parts on acceptable terms; our ability to design new products and the success of such new products, maintaining or renewing our exclusive distribution agreement with Medtronic Xomed, Inc. on acceptable terms, changes in foreign exchange markets; changes in financial markets and changes in the competitive environment. Other examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Generally, words such as "expect" "believe", "anticipate", "may", "will", "plan", "intend", "estimate", "could", and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on our future plans, strategies, projections and predictions and involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference could include the availability of capital resources; the availability of third-party reimbursement; government regulation; the availability of raw material components; our dependence on certain distributors and customers; competition; technological difficulties; general economic conditions and other risks detailed in this Annual Report on Form 10-K and any subsequent periodic filings we make with the Securities and Exchange Commission (SEC). While we believe the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.
We design, develop, manufacture and market products for endoscopy - the science of using an instrument, known as an endoscope - to provide minimally invasive access to areas not readily visible to the human eye. We operate in two segments, medical and industrial. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products for a variety of specialties, including our state-of-the-art flexible fiber and video endoscopes and our Slide-On EndoSheath technology. Our industrial segment, through our wholly-owned subsidiary, Machida, designs, manufactures and sells borescopes to a variety of users, primarily in the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities.
We believe that our medical segment's endoscopes are the only ones which do not contain difficult-to-clean operating channels associated with endoscopes from other manufacturers. Instead, our endoscopes are used in combination with our EndoSheath disposables, which covers the entire scope and prevents any contact between the patient and the scope's insertion tube.
Within our medical segment we target four main areas for our fiber and video endoscopes and our EndoSheath technology: ENT (ear, nose and throat), urology, gastroenterology (GI) and pulmonology. Within the ENT area, we manufacture ENT endoscopes and sell these scopes exclusively to Medtronic Xomed, Inc., the ENT subsidiary of Medtronic, Inc. (Medtronic) for use by ENT physicians. In March 2007, we completed the sale to Medtronic of our ENT EndoSheath product line, which Medtronic now manufactures and distributes along with our ENT endoscopes. Our TNE (trans-nasal esophagoscopy) endoscopes are manufactured by us, and are marketed to ENT and GI physicians. The TNE endoscopes which are sold to the ENT physicians are marketed and distributed by Medtronic. Within the urology area, we manufacture, market and sell our cystoscopes and EndoSheath technology to urologists and other urology-gynecology related physicians. Within the GI area, we manufacture, market and sell our TNE scopes and EndoSheath technology to GI physicians, primary care physicians and others with a GI focus as part of their practice. We manufacture, market and sell our recently released bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology for bronchoscopy to pulmonologists, oncologists, thoracic surgeons and other pulmonology-related physicians.
Registered Trademarks, Trademarks and Service Marks
Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution or use.
New Product Release
During the months of March and April 2009, we received clearance from the FDA, and the Canadian and European regulatory agencies to market our newly developed line of ENT 4000. We then started manufacturing this new ENT 4000 line of products, which includes fiberscopes that will replace the ENT-2000, a standard scope for office and hospital based laryngen care, and the ENT-3000, a portable laryngoscope utilizing a battery-powered LED light source.
In Q1 10 we started marketing and selling of our BRS-5000, our new advanced digital, video-based flexible bronchoscope (an endoscope which allows detailed viewing of the lungs) which is utilized with our EndoSheath technology. The BRS-5000 is a CCD-based video imaging endoscopy system, which includes an integrated built-in LED light source and operates with our streamlined, multi-functional 5000-Series processor. This streamlined video-based system eliminates the need for a separate camera head, light source and video monitor. It is marketed to pulmonologists, oncologists, thoracic surgeons and other pulmonology related physicians.
Results of Operations
Three months ended June 30, 2009 (Q1 10) compared to the three months ended June 30, 2008 (Q1 09), in (000's)
Net Sales
Net sales for Q1 10 were $3,318, an increase of $622, or 23%, compared to the sales of $2,696 for Q1 09. During Q1 10 our medical segment's net sales of $2,605 increased by $605, or 30%, and our industrial segment's net sales of $713, increased by $17, or 2%.
In the medical segment, we track sales of endoscopes and EndoSheath disposables by market. We also track sales of peripherals and accessories which can be sold to more than one market. Sales by segment, market and by category in Q1 10 and Q1 09 were as follows:
Three Months Ended
June 30,
Market/Category 2009 2008 Difference Percentage
ENT and TNE $ 1,187 $ 695 $ 492 71 %
Urology 738 698 40 6 %
Bronchoscopy 196 - 196 100 %
Repairs 147 499 (352 ) -71 %
Peripherals and accessories 337 108 229 212 %
Total Medical $ 2,605 $ 2,000 $ 605 30 %
Borescopes 560 459 101 22 %
Repairs 153 237 (84 ) -35 %
Total Industrial $ 713 $ 696 $ 17 2 %
Total Sales $ 3,318 $ 2,696 $ 622 23 %
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Medical Segment
Medical Segment - ENT and TNE Markets
Sales to the ENT and TNE market include both our ENT and TNE endoscopes and
EndoSheath disposables, as follows:
Three Months Ended
June 30,
ENT/TNE Market 2009 2008 Difference Percentage
Endoscopes $ 1,158 $ 690 $ 468 68 %
Slide-On EndoSheaths 29 5 24 480 %
Total ENT/TNE $ 1,187 $ 695 $ 492 71 %
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ENT/TNE net sales in Q1 10 were $1,187, an increase of $492, or 71%, over Q1 09 sales of $695. The increase in net sales is mainly due to a higher sales volume of fiberscopes and the positive impact of our videoscope product line which commands a higher price per unit. In Q 1 09, we had limited sales of videoscopes as they were introduced only by the end of the quarter.
Medical Segment - Urology Market
Sales to the urology market include urology endoscopes and EndoSheath
disposables, as follows:
Three Months Ended
June 30,
Urology Market 2009 2008 Difference Percentage
Endoscopes $ 372 $ 487 $ (115 ) -24 %
Slide-On EndoSheaths 366 211 155 73 %
Total Urology Market $ 738 $ 698 $ 40 6 %
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Net sales to the urology market in Q1 10 were $738, an increase of $40, or 6%, over Q1 09 net sales of $698. Our urology endoscope sales decrease of $115, or 24%, was offset by an increase in EndoSheath disposable net sales of $155, or 73%. The increase of EndoSheath disposable sales was mainly due to an initial order of $100 from a European distributor.
Medical Segment - Bronchoscopy Market
Three Months Ended
June 30,
Bronchoscopy Market 2009 2008
Endoscopes $ 182 $ -
Slide-On EndoSheaths 14 -
Total Bronchoscopy Market $ 196 $ -
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In Q1 10, we launched our video bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology for bronchoscopy to pulmonologists, oncologists, thoracic surgeons and other pulmonology-related physicians. Net sales were $196, of which $182 was from endoscopes sales and $14 was from EndoSheath disposable sales.
Medical Segment - Repairs
Our repairs business decreased from $499 in Q1 09 to $147 in Q1 10, representing a 71% decline. Our Q1 09 net sales of $499 included delayed repairs from prior quarters due to the shortage of Pentax parts we experienced in the second half of fiscal year ended March 31, 2008 (FY 08).
Medical Segment-Peripherals and Accessories
Our peripherals and accessories net sales in Q1 10 were $337, an increase of $229, or 212%, over Q1 09 net sales of $108. The increase reflects the additional endoscope sales during Q1 10, which increased demand for our peripherals and accessories.
Industrial Segment
Net sales of industrial products in Q1 10 of $713, increased by $17, or 2% over Q1 09 net sales of $696. Sales of borescopes increased by $101, or 22%, to $560 in Q1 10 from $459 in Q1 09. Repair revenue decreased by $84, or 35%, to $153 in Q1 10 from $237 in Q1 09. This segment's products are mature, and therefore we expect future sales to remain relatively flat.
Gross Profit
Gross profit of $788 in Q1 10 increased by $139 compared to gross profit of $649
in Q1 09.
Three Months Ended
June 30,
Gross Profit 2009 2008 Difference Percentage
Medical $ 440 $ 478 $ (38 ) -8 %
As Percentage of Sales 17 % 24 % -7 %
Industrial 348 171 177 104 %
As Percentage of Sales 49 % 25 % 24 %
Total Gross Profit $ 788 $ 649 $ 139 21 %
As Percentage of Sales 24 % 24 % 0 %
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For the current quarter, gross profit was $440 and $348 for the medical and industrial segments, respectively, as opposed to $478 and $171 in Q1 09.
Our total gross profit as a percentage of net sales in Q1 10 was unchanged from Q1 09 at 24%. In the medical segment gross profit as percentage of sales decreased by 7%, from 24% in Q1 09 to 17% in Q1 10 due to product mix - in Q1 09 we had more fiberscope produced, whereas in Q1 10 we produced more videoscopes, and we are still in the process of improving manufacturing efficiencies for our videoscope family of products. In the industrial segment, our gross profit as percentage of sales increased by 24%, from 25% to 49%, mainly due to manufacturing efficiencies.
Operating Expenses
Our Q1 10 total operating expenses of $3,268 decreased by $622, or 16%, from Q1
09. Sales, General and Administrative (SG&A) expenditures decreased by $209, or
8%, and Research and development (R&D) expenditures decreased by $385, or 33%.
Operating expenses, by segment, were as follows:
Three Months Ended
June 30,
Operating Expenses 2009 2008 Difference Percentage
SG&A
Medical $ 2,270 $ 2,478 $ (208 ) -8 %
Industrial 212 213 (1 ) -
Total SG&A 2,482 2,691 (209 ) -8 %
R&D Medical 786 1,171 (385 ) -33 %
Sub-Total Operating Expenses 3,268 3,862 (594 ) -15 %
Restructing Charge - 28 (28 ) 100 %
Total Operating Expenses $ 3,268 $ 3,890 $ (622 ) -16 %
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Following is a detailed explanation of operating expenses, by categories:
SG&A - medical segment:
In Q1 10 SG&A decreased by $208 from Q1 09, mainly due to the following expense
reductions (i) $100 in compensation expense; (ii) $41 in consulting expense
(iii) $33 on investor relations and (iv) $30 in sales commissions.
SG&A - industrial segment
In Q1 10, SG&A expenditures in the industrial segment were virtually flat at $212 when compared to Q1 09.
R&D
Q1 09 R&D expenses were down by $385 from Q1 09, mainly due to (i) reduced expenses on new product development of $250, (ii) reduced consulting expenses of $65, and (iii) a $30 reduction in compensation expenses.
Restructuring charge:
A one-time restructuring charge of $28 in Q1 09 was related to expected severance and other termination expenses due to the staff reduction and relocation of our Natick, MA facility. This restructuring charge was reversed in the quarter ending September 30, 2008 (Q2 09).
Other Income/(Expense)
In Q1 10, our Other Income was $22 as compared to $3,295 in Q1 09, as follows:
Three Months Ended
June 30,
Other Income/(Expense) 2009 2008 Difference Percentage
Interest income $ 50 $ 79 $ (29 ) -37 %
Interest expense - (14 ) 14 -100 %
Gain on sale of
product line, net of
direct costs - 3,230 (3,230 ) -100 %
Loss on investments (28 ) - (28 ) -
Total Other
Income/(Expense), Net $ 22 $ 3,295 $ (3,273 ) -99 %
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Following is a detailed explanation of other income/(expense), by category:
Q1 10 interest income decreased from $79 to $50, or 37%, primarily due to lower cash and short term investment balance.
Gain on sale of product line, net of direct costs
In March of 2007, we completed the sale to Medtronic of certain assets with respect to our ENT EndoSheath technology business. As part of the transaction, we granted to Medtronic an exclusive, royalty-free worldwide license to certain of our intellectual property, for use in making and selling EndoSheath technology products solely within the ENT field.
Additionally, as part of the transaction and under a separate transition agreement, we transferred our ENT production lines for the ENT EndoSheath disposables from our Natick facility to a Medtronic facility in Jacksonville, FL. Medtronic distributes, markets and sells our ENT endoscope products worldwide, on a co-branded basis, through Medtronic's dedicated sales force.
Total payments under this transaction were $34,000, which we received in full. In Q1 09 we received net payments of $3,230 related to the transition agreement.
Net (Loss) Income
Our Q1 10 net loss was $2,468, versus a net loss of $143 in Q1 09, an increase
in net loss of $2,325, as follows:
Three Months Ended
June 30,
Net (loss)/income: 2009 2008 Difference
(Loss)/income before provision
for income taxes $ (2,458 ) $ 54 $ (2,512 )
Provision for income taxes 10 9 1
(Loss)/income before
discontinued operations (2,468 ) 45 (2,513 )
Loss from discontinued
operations, net - (188 ) 188
Net loss $ (2,468 ) $ (143 ) $ (2,325 )
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(Loss)/income before provision for income taxes
In Q1 10, our loss before provision for income taxes was $2,458 versus income of $54, a $2,512 increased loss. Q1 09 income was a result of the net gain on sale of product line generated from our transition agreement with Medtronic, for a total of $3,230.
Provision for income taxes
Our provision for taxes in Q1 10 of $10 was slightly higher than that $9 in the same quarter last year.
(Loss)/Income before discontinued operations
In Q1 10, our loss before discontinued operations of BEST DMS was $2,468 versus an income of $45, a $2,513 increased loss. Q1 09 income was a result of net income generated from our transition agreement with Medtronic, for a total of $3,230.
Discontinued operations
Below are summarized operating results of discontinued operations, as follows:
Three Months Ended
June 30,
Description 2009 2008
Revenue $ - $ 233
Gross margin - 17.2 %
Loss from discontinued operations $ - $ (188 )
(net of taxes of zero)
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Net Loss
Our net loss in Q1 10 was $2,468 versus a loss of $143, a $2,325 increase in loss. Q1 09 net loss was offset by the income generated from our transition agreement with Medtronic, for a total of $3,230.
Liquidity and Capital Resources
At June 30, 2009 our principal source of liquidity was working capital of approximately $12,432 including $6,972 in cash and short term investments.
During Q1 10 we sold $1,009 of short term investments for a net investment of $6,936. Net cash used in operating activities of ($2,794) included (i) a decrease of $685 in accounts receivable, mainly due to higher sales volume during the end of the quarter; (ii) non-cash stock-based compensation of $321 offset by $41 in cash for exercise of options; and (iii) a net decrease of $116 in accounts payable and accrued expenses.
Our cash and cash equivalents decreased by approximately $1,936 in Q1 10 as compared to a decrease of $7,408 in Q1 09. This decrease was mainly due to cash uses in operating activities of $2,794 and cash provided by investment activities of $826, and net cash provided by financing of $32.
We have incurred losses since our inception, and losses are expected to continue through at least FY 10 and fiscal 2011 (FY 11). We have funded the losses principally with proceeds from operations, proceeds from public and private equity financings, payments from Medtronic related to the sale of certain assets related to our ENT EndoSheath technology business and the sale of other assets. We believe that our cash and cash equivalents on-hand will be sufficient to fund our working capital, capital expenditures, and future operating losses until June 30, 2010. However, if our performance expectations fall short, we will need to either secure additional financing or cut costs or a combination thereof, and in such instance, the failure to do so would have a material adverse impact on our financial condition.
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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