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| VSCI > SEC Filings for VSCI > Form 10-Q on 29-Jan-2013 | All Recent SEC Filings |
29-Jan-2013
Quarterly Report
Executive Summary
Vision-Sciences, Inc. and its subsidiaries (the "Company," or "our", "us", or "we") designs, develops, manufactures, and markets 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, which comprises approximately 74% and 26%, respectively, of our fiscal 2013 revenues. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our industrial segment, through our wholly-owned subsidiary, Machida, Inc. ("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.
Medical Business Segment
Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our proprietary reusable flexible endoscope is combined with a single-use, sterile protective EndoSheath disposable, which is placed over the patient contact area of the scope. Our "always sterile" EndoSheath technology reduces the risks of cross-contamination associated with the reuse (or "reprocessing") of conventional endoscopes, which are difficult, costly, and time consuming to clean and disinfect or sterilize. In November 2011, the ECRI Institute listed cross-contamination from flexible endoscopes as the fourth most dangerous hazard on its list of the top-ten health technology hazards for 2012. The use of our EndoSheath technology allows healthcare providers to perform a rapid, simplified reprocessing routine after use, avoiding the elaborate high level disinfection/sterilization routines required by the U.S. Food and Drug Administration (the "FDA") for conventional endoscopes. The FDA requires that all conventional flexible endoscopes be reprocessed according to FDA-cleared manufacturers' regulations and organizational guidelines, whether they are used in hospitals, clinics or office settings. With our EndoSheath technology we are able to reduce the steps to reprocess flexible endoscopes from approximately 27 to three, thereby lowering costs and saving time. This design of "always ready" equipment, which allows for a rapid and less damaging cleaning process, provides a multitude of benefits to healthcare practitioners, such as lower capital equipment investment, less service and maintenance costs of capital equipment, less staff exposure to toxic chemicals, increased patient scheduling flexibility and throughput, improved staff productivity and a more practical implementation of endoscopy.
We target six market spaces for our endoscopes and our EndoSheath technology:
· Urology - we supply our cystoscopes, ureteroscopes, and EndoSheath technology to the Endoscopy Division of Stryker Corporation ("Stryker") in North and Latin America, South America, China and Japan. Although Stryker was to receive the exclusive rights for the rest of the world in April 2012, we reached an agreement with Stryker to delay this launch indefinitely. Until that time, we manufacture and sell our cystoscopes and EndoSheath technology to our independent distributors for the rest of the world.
· Pulmonology (Critical Care) - we manufacture, market, and sell our bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology to intensivists, pulmonologists, thoracic surgeons, and other airway-related physicians.
· Surgery - we manufacture, market, and sell our TNE (trans-nasal esophagoscopy) endoscope and EndoSheath technology to general surgeons, primarily bariatric and gastroesophageal reflux disease ("GERD") surgeons.
· Gastroenterology - we manufacture, market, and sell our TNE endoscopes and EndoSheath technology to gastroenterology ("GI") physicians, ear, nose, and throat ("ENT") physicians and others with a GI focus as part of their practice.
· ENT (ear, nose, and throat) - we manufacture, market, and sell our ENT endoscopes to ENT physicians.
· Spine - we supply to SpineView our flexible video surgical endoscope systems for use with SpineView's products.
The following table summarizes the products we sell in each market space and the distribution network we use to market and sell those products:
Market Products Distribution Network
Urology URT-7000 Video
Ureteroscope Stryker*
CST-5000 Video Stryker*; international
Cystoscope distributors
CST-4000 Fiber Stryker*; international
Cystoscope distributors
DPU-5050 Digital International
Processing Unit distributors
EndoSheath technology Stryker*; international
(cystoscopy only) distributors
Peripherals and Stryker*; international
accessories distributors
ENT U.S. sales force;
international
ENT-5000 Video Endoscope distributors
U.S. sales force;
international
ENT-4500 Fiber Endoscope distributors
U.S. sales force;
international
ENT-4000 Fiber Endoscope distributors
U.S. sales force;
DPU-5050 Digital international
Processing Unit distributors
U.S. sales force;
Peripherals and international
accessories distributors
Surgery / GI U.S. sales force;
international
TNE-5000 Video Endoscope distributors
U.S. sales force;
DPU-5050 Digital international
Processing Unit distributors
U.S. sales force;
international
EndoSheath technology distributors
U.S. sales force;
Peripherals and international
accessories distributors
Pulmonology U.S. sales force;
(Critical Care) BRS-5000 Video international
Bronchoscope distributors
U.S. sales force;
BRS-4000 Fiber international
Bronchoscope distributors
U.S. sales force;
DPU-5050 Digital international
Processing Unit distributors
U.S. sales force;
international
EndoSheath technology distributors
U.S. sales force;
Peripherals and international
accessories distributors
Spine SPV-7000 Video Endoscope SpineView
DPU-5050 Digital
Processing Unit SpineView
Peripherals and
accessories SpineView
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* North America, South America, Latin America, China, and Japan
We believe our technology delivers significant value to our customers - doctors, clinics and hospitals - through reduced capital, staff and service costs, and increased patient throughput, practice revenue, and profitability. Our goal is to become a customer-centric organization with a focus on enhancing shareholder value. We are doing this by:
· Growing our sales force in the U.S. by adding proven medical-surgical device sales professionals;
· Targeting acute care facilities and office-based clinics that recognize patient safety and the patient experience as a primary value position;
· Capitalizing on our extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology; and
· Enhancing our professional educational programs to allow healthcare professionals to teach other healthcare professionals.
During the first quarter of fiscal 2013, we began to exclusively supply to Stryker our first charge-coupled device (CCD) based flexible ureteroscope under our existing agreement. This ureteroscope expands our new 7000 Series video endoscopy platform and is the smallest CCD-based video endoscope in the marketplace today. Ureteroscopes are used for diagnostic and therapeutic procedures in the ureter and the kidney, typically done in a hospital operating room setting.
Industrial Business Segment
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. Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items.
Machida's quality line of borescopes includes a number of advanced standard features normally found only in custom designed instruments. We were the first to offer a flexible borescope with a grinding attachment, allowing users to "blend" or smooth small cracks in turbine blades of jet engines without disassembling the engine, which would involve significant expense and delay.
Our borescopes are constructed in a variety of body types, including portable models, each specifically designed to cover a multitude of needs and applications:
· Modular (MBS) - borescope with diameter range from 0.6mm to 2mm. This is Machida's smallest body type.
· Slim Lever - borescope with diameter range from 2mm to 6mm; it provides angulations in two directions. Machida's most widely used body type includes high quality optics and illumination.
· Knob - borescope with diameter range from 8mm to 11mm. This four-way, ambulating scope is particularly suited for longer (up to 20 feet) borescopes. It comes in different configurations, including direct view with different types of covers, side views, with a working channel and with a permanent side-view option.
· Battery Operated Portable Flexible Borescope - borescope with small battery handle; it is ideal for field inspections. The borescope kit includes the scope, light guide and sleeve, a light source, battery and handle, and a carrying case.
· Industrial Videoscope - 3mm video borescope product line, the smallest diameter videoscope offered in the industrial market. The video borescope uses a CCD-based video system, which includes an integrated built-in LED light source and operates with our streamlined, multi-functional processor.
· Portable Video Processor - digital processing unit, which works with the industrial videoscope, allows for portability and accessibility in constrained areas, a common situation in the aviation field.
Long-Term Debt - Related Party
On September 19, 2012 (the "Effective Date"), we entered into a new $20.0 million revolving promissory note (the "Replacement Note") with our chairman (the "Lender"). The Replacement Note consolidates and restructures the $15.0 million in aggregate borrowings collectively outstanding under the Original Agreement (as defined below) and the Supplemental Note (as defined below) and provides for an additional $5.0 million available to us, for an aggregate of up to $20.0 million. We also terminated the letter agreement dated August 14, 2012, pursuant to which the Lender had agreed to provide financial assistance to us in the amount of up to $3.0 million.
The Replacement Note accrues annual interest, payable annually, and is set at the "applicable federal rate" in effect on the date of the Replacement Note (as defined in the Replacement Note; equal to 0.84%). The Replacement Note must be repaid in full on or before its fifth anniversary (the "Maturity Date"), but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.
The outstanding principal amount of the Replacement Note is convertible at any time prior to the Maturity Date, at the Lender's option, into shares of our common stock at a price of $1.20 per share, the closing price of our common stock on the Effective Date.
The Replacement Note replaces the original loan agreement between us and the Lender dated September 30, 2011 (the "Original Agreement") pursuant to which we borrowed $10.0 million, and the promissory note dated July 25, 2012 (the "Supplemental Note") pursuant to which we borrowed $5.0 million. The amounts borrowed against the Original Agreement and Supplemental Note accrued interest at an annual rate of 7.5%. The Lender also had received an availability fee equal to an annual rate of 0.5% on the difference between the average annual principal amount of the outstanding balance under the Original Agreement and the maximum amount of $10.0 million.
At December 31, 2012, we had $15.0 million in outstanding borrowings and $5.0 million available under the Replacement Note. The outstanding balance is reflected as convertible debt - related party on our condensed consolidated balance sheet.
Equity Purchase Agreement
On April 27, 2012, we entered into a purchase agreement (the "Purchase Agreement") with Lincoln Park Capital Fund, LLC ("LPC"), pursuant to which we have the right to sell to LPC up to $15 million in shares of our common stock from time-to-time over a period of up to three years, subject to certain limitations and conditions set forth in the Purchase Agreement. This total maximum amount of $15 million would increase to $21 million if the aggregate market value of shares of our common stock held by non-affiliates reached at least $75 million during the 36-month term of the Purchase Agreement. The Purchase Agreement contains customary representations, warranties and agreements between us and LPC, limitations (market price of our common stock and LPC's ownership limit) and conditions to completing future sale transactions, indemnification rights and other obligations of the parties. In connection with the initial purchase under the Purchase Agreement, and any future sales under the Purchase Agreement, the Lender waived the repayment requirement under the Loan Agreement. On July 26, 2012, we amended the Purchase Agreement with LPC to, among other things, create a threshold price of $3.00 for the sale of our common stock to LPC, as calculated pursuant to the formula provided in the Purchase Agreement.
As consideration for entering into the Purchase Agreement and for their initial purchase of $1.0 million of our common stock, we issued to LPC 175,333 shares of our common stock. As consideration for any remaining future purchases under the Purchase Agreement, we also will also issue to LPC, on a pro rata basis in connection with each purchase of shares by LPC, up to a total of 215,000 additional shares of our common stock. We did not receive any cash proceeds from the issuance of 175,333 shares and will not receive any proceeds upon the issuance of any of the remaining 215,000 shares.
Registered Trademarks, Trademarks and Service Marks
Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this quarterly report on Form 10-Q are approved or cleared for sale, distribution, or use.
Results of Operations (in thousands, except percentages)
Net Sales
In the medical segment, we track sales of our endoscopes and EndoSheath
technology by market. We also track sales of peripherals and accessories that
can be sold to more than one market. Net sales by operating segment and by
market/category for the three and nine months ended December 31, 2012 and 2011
were as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
Market/Category 2012 2011 Change 2012 2011 Change
Urology $ 1,421 $ 1,839 -23 % $ 3,365 $ 5,251 -36 %
ENT 398 500 -20 % 1,417 1,430 -1 %
Surgery / GI 385 340 13 % 895 765 17 %
Pulmonology (Critical Care) 238 254 -6 % 525 563 -7 %
Spine - 186 -100 % 440 612 -28 %
Repairs, peripherals, and
accessories 528 449 18 % 1,548 1,436 8 %
Total medical sales 2,970 3,568 -17 % 8,190 10,057 -19 %
Borescopes 743 583 27 % 2,216 1,542 44 %
Repairs 239 163 47 % 681 496 37 %
Total industrial sales 982 746 32 % 2,897 2,038 42 %
Net sales $ 3,952 $ 4,314 -8 % $ 11,087 $ 12,095 -8 %
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Net sales decreased $0.4 million, or 8%, in the third quarter of fiscal 2013 to $4.0 million compared to $4.3 million in the third quarter of fiscal 2012. During the third quarter of fiscal 2013, our medical segment's net sales of $3.0 million decreased by $0.6 million, or 17%, primarily attributable to lower sales of our endoscopes in the urology market (as further described below). Our industrial segment's net sales of $1.0 million increased by $0.2 million, or 32%, primarily attributable to higher demand of our custom blending scopes and video-based borescopes. Although we achieved year-over-year growth in our industrial segment, we expect the level of future sales to remain relatively flat as this operating segment's products are mature.
Net sales decreased $1.0 million, or 8%, in the first nine months of fiscal 2013 to $11.1 million compared to $12.1 million in the first nine months of fiscal 2012. During the first nine months of fiscal 2013, our medical segment's net sales of $8.2 million decreased by $1.9 million, or 19%, primarily attributable to lower sales in the urology market (as further described below). Our industrial segment's net sales of $2.9 million increased by $0.9 million, or 42%, primarily attributable to higher demand of our custom blending scopes, video-based borescopes, and engine turning tools.
The following table summarizes net sales by market/category and by product for our medical operating segment for the three and nine months ended December 31, 2012 and 2011:
Three Months Ended Nine Months Ended
December 31, December 31,
Market/Category 2012 2011 Change 2012 2011 Change
Urology
Endoscopes $ 610 $ 953 -36 % $ 1,546 $ 2,975 -48 %
EndoSheath
technology 811 886 -8 % 1,819 2,276 -20 %
Total urology
market 1,421 1,839 -23 % 3,365 5,251 -36 %
ENT
Endoscopes 398 500 -20 % 1,417 1,430 -1 %
Surgery / GI
Endoscopes 348 319 9 % 781 700 11 %
EndoSheath
technology 37 21 76 % 114 65 78 %
Total surgery /
GI market 385 340 13 % 895 765 17 %
Pulmonology
(Critical Care)
Endoscopes 211 203 4 % 417 462 -10 %
EndoSheath
technology 27 51 -47 % 108 101 6 %
Total
pulmonology
market 238 254 -6 % 525 563 -7 %
Spine
Endoscopes - 186 -100 % 440 612 -28 %
Repairs,
peripherals, and
accessories 528 449 18 % 1,548 1,436 8 %
Total medical
sales $ 2,970 $ 3,568 -17 % $ 8,190 $ 10,057 -19 %
Product
Endoscopes $ 1,567 $ 2,161 -27 % $ 4,601 $ 6,179 -26 %
EndoSheath
technology 875 958 -9 % 2,041 2,442 -16 %
Repairs,
peripherals, and
accessories 528 449 18 % 1,548 1,436 8 %
Total medical
sales $ 2,970 $ 3,568 -17 % $ 8,190 $ 10,057 -19 %
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Net sales to the urology market during the third quarter and first nine months of fiscal 2013 decreased by $0.4 million (23%) and $1.9 million (36%), respectively, compared to the same periods in fiscal 2012. The year-over-year decline was primarily attributable to the lower sales of our flexible video and fiber cystoscopes and related EndoSheath technology products to Stryker due in large part to an initial blanket stocking by Stryker in the first nine months of fiscal 2012 to support the April 2011 launch of their marketing and sales efforts. Net sales to Stryker were down $0.1 million (13%) and $1.6 million (45%) in the third quarter and first nine months of fiscal 2013, respectively.
Net sales to the ENT market during the third quarter and first nine months of fiscal 2013 decreased by $102 thousand (20%) and $13 thousand (1%), respectively, compared to the same periods in fiscal 2012 due to lower demand of our ENT scopes, both domestically and internationally.
Net sales to the surgery and GI markets during the third quarter and first nine months of fiscal 2013 increased by $45 thousand (13%) and $130 thousand (17%), respectively, compared to the same periods in fiscal 2012. Higher average selling prices of our surgical endoscopic platform (TNE-5000 videoscope and digital processing unit) and an increase in demand for our EndoSheath technology contributed to the year-over-year growth. Our EndoSheath technology unit volume increased 70% during the third quarter and first nine months of fiscal 2013 compared to the same period in fiscal 2012.
Net sales to the pulmonology (critical care) market during the third quarter and first nine months of fiscal 2013 decreased by $16 thousand (6%) and $38 thousand (7%), respectively, compared to the same periods in fiscal 2012. The decreases were primarily attributable to lower worldwide sales of our fiber bronchoscopes. We continue to focus our marketing and sales efforts on increasing our installed base to drive further adoption of our EndoSheath technology.
Net sales to SpineView during the third quarter and first nine months of fiscal 2013 decreased by $186 thousand (100%) and $172 thousand (28%), respectively, compared to the same periods in fiscal 2012. In December 2012, SpineView received 510(k) clearance from the Food and Drug Administration ("FDA") to use our 2mm video-based endoscope for spine applications. With this clearance, SpineView will commence clinical preference trials for minimally invasive spine surgeries.
Net sales of repairs, peripherals, and accessories during the third quarter and first nine months of fiscal 2013 increased by $79 thousand (18%) and $112 thousand (8%), respectively, compared to the same periods in fiscal 2012. The year-over-year growth was primarily attributable to an increase in our repairs business, which increased 10% and 22% during the third quarter and first nine months of fiscal 2013, respectively.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit by operating segment for the three and nine months ended December
31, 2012 and 2011 was as follows:
Three Months Ended Nine Months Ended
December 31, December 31,
Gross Profit 2012 2011 Change 2012 2011 Change
Medical $ 728 $ 1,079 -33 % $ 2,068 $ 3,122 -34 %
As percentage of
net sales 25 % 30 % -5 % 25 % 31 % -6 %
Industrial 404 278 45 % 1,046 760 38 %
As percentage of
net sales 41 % 37 % 4 % 36 % 37 % -1 %
Gross profit $ 1,132 $ 1,357 -17 % $ 3,114 $ 3,882 -20 %
Gross margin
percentage 29 % 31 % -2 % 28 % 32 % -4 %
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The gross margin percentage was 29% in the third quarter of fiscal 2013 compared to 31% in the third quarter of fiscal 2012. The gross margin percentage was 28% in the first nine months of fiscal 2013 compared to 32% in the first nine months of fiscal 2012. The year-over-year decline was primarily attributable to a reduction in the allocation of manufacturing expenses to support research and development activities (gross margin percentage point impact of 3% and 4% in the third quarter and first nine months of fiscal 2013, respectively).
Operating Expenses . . . |
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