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VSCI > SEC Filings for VSCI > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for VISION SCIENCES INC /DE/

Form 10-Q for VISION SCIENCES INC /DE/


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 comprise approximately 83% and 17%, respectively, of our first fiscal quarter 2014 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.

Patents

We hold 17 U.S. patents, and we have 10 U.S. patent applications pending. In addition, we have 15 foreign patents issued and 7 foreign patent applications pending. These patents relate to disposable sheaths for endoscopes and reusable flexible endoscopes, as well as other various products, endoscopy and non-endoscopy related products. The issued patents will expire on various dates in the years 2014 through 2029.

Registered Trademarks, Trademarks and Service Marks

Vision-Sciences, Inc. owns the trademarks Vision Sciences™ and Slide-On™ and registered trademarks 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.

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 flexible endoscopes are unlike conventional endoscopes, and when utilized with our EndoSheath technology, offer a multitude of benefits and advantages to the healthcare practitioner and patient.

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 them to delay this launch
indefinitely. Until we agree with
Stryker on the date of such launch, we will continue to manufacture and sell our cystoscopes and EndoSheath technology to our independent
distributors for sale in the rest of the world.
? Critical Care / Pulmonology - 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 our flexible video surgical endoscope systems to
SpineView, Inc. for use with
SpineView's space creator product.


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 of conventional endoscopes, which are difficult, costly, and time consuming to clean and disinfect or sterilize, a practice known as reprocessing. In November 2012, the ECRI Institute listed cross-contamination from flexible endoscopes as the eighth most dangerous hazard on its list of the top-ten health technology hazards for 2013. 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 needed to reprocess flexible endoscopes from approximately 27 to three, thereby saving time and lowering costs. 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.

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*
                                                        Stryker*(1); international
                        CST-5000 Video Cystoscope       distributors
                                                        Stryker*(1); international
                        CST-4000 Fiber Cystoscope       distributors
                        DPU-5050 Digital Processing
                        Unit                            International distributors
                        DPU-7000 Digital Processing
                        Unit                            International distributors
                        EndoSheath technology           Stryker*; international
                        (cystoscopy only)               distributors
                                                        Stryker*; international
                        Peripherals and accessories     distributors


ENT                                                     U.S. sales force;
                        ENT-5000 Video Endoscope        international distributors
                                                        U.S. sales force;
                        ENT-4500 Fiber Endoscope        international distributors
                                                        U.S. sales force;
                        ENT-4000 Fiber Endoscope        international distributors
                        DPU-5050 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                        DPU-7000 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                                                        U.S. sales force;
                        Peripherals and accessories     international distributors


Surgery / GI                                            U.S. sales force;
                        TNE-5000 Video Endoscope        international distributors
                        DPU-5050 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                        DPU-7000 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                                                        U.S. sales force;
                        EndoSheath technology           international distributors
                                                        U.S. sales force;
                        Peripherals and accessories     international distributors


Pulmonology                                             U.S. sales force;
(Critical Care)         BRS-5000 Video Bronchoscope     international distributors
                                                        U.S. sales force;
                        BRS-4000 Fiber Bronchoscope     international distributors
                        DPU-5050 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                        DPU-7000 Digital Processing     U.S. sales force;
                        Unit                            international distributors
                                                        U.S. sales force;
                        EndoSheath technology           international distributors
                                                        U.S. sales force;
                        Peripherals and accessories     international distributors


Spine                   SPV-7000 Video Endoscope        SpineView
                        DPU-5050 Digital Processing
                        Unit                            SpineView
                        Peripherals and accessories     SpineView

* North America, South America, Latin America, China, and Japan.
(1) Flexible video and fiber cystoscope agreement will expire in April 2014.


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.

Business Strategy

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 MedSurg 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.

As we look forward, we believe our visualization platform and Endosheath® technology provide a strong platform to drive top line sales growth, improve our operating efficiency and increase our margins. At Vision-Sciences, we are guided by our mission to focus on innovative technologies that improve patient care and reduce costs to the healthcare system. We will continue to pursue this goal by working with those on the front lines: the physicians who strive to improve their patient's quality of life. We believe that our renewed focus on the areas we have had historical success, we will emerge a stronger and more financially secure company.

New Product Releases

7000 Series Vision Systems®

In April 2013, we introduced our next generation video processor platform, the 7000 Series Vision System®, at the annual Combined Otolaryngology Spring Meeting in Orlando, Florida. Designed to provide users with a powerful, efficient and easy-to-use system, the 7000 Series Vision System is the first endoscopy, platform to include video, audio, archiving, and workflow enhancements in a single standalone unit. The all-in-one, "plug-and-play" platform provides vibrant, high-resolution imaging that can be effortlessly recorded for future assessment or on-the-spot review with the patient post-procedure, enhancing both the practice workflow and the patient experience.

The 7000 Series Vision System includes a new, simplified user interface, programmable user preference controls, expanded on-screen notifications, and easy-to-maintain patient lists, all of which allow end-users to improve productivity and workflow by customizing the operation of the system to the day-to-day needs of the practice. Additionally, the system incorporates a "one-touch" integrated keyboard to ensure quick activation of functions, including full control of video playback options, such as frame-by-frame review or historical image comparison, both of which are ideal for patient progress review. Early market feedback has been positive, and we expect this new platform will help drive video endoscopy adoption in our markets.

Flexible Ureterscope

In December 2012, Stryker Endoscopy began to ship a new flexible ureteroscope to customers, and feedback has been strong. This flexible ureteroscope is primarily used in the operating room, which represents approximately 30% of the overall urology market. Stryker added dedicated sales specialists, augmenting its 250-person endoscopy sales force that currently promotes our products.

Convertible Debt - Related Party

Pursuant to a letter agreement dated June 21, 2013, Lewis C. Pell, our chairman, has agreed to provide financial assistance to us in the amount of up to $5.0 million, if necessary to support our operations, for a period ending on the earlier of (i) July 1, 2014 or (ii) our raising debt or equity capital in the amount of $5.0 million or more. This financial assistance, if drawn by us, would be on the same terms as our existing convertible debt with Mr. Pell, but may take other forms and or terms that would not necessarily be as beneficial.


On September 19, 2012, we entered into a new $20.0 million revolving convertible promissory note (the "Replacement Note") with Mr. Pell. The Replacement Note consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under the original agreement dated September 30, 2011 and note dated July 25, 2012. At June 30, 2013, we had $19 million in outstanding borrowings under the Replacement Note, which is reflected as convertible debt - related party on our condensed consolidated balance sheet. As we draw upon the remaining $1.0 million, a beneficial conversion feature will be recorded if the market price of our common stock increases above the $1.20 conversion price of the Replacement Note.

Subsequent Event

Pursuant to a separation and release agreement dated July 1, 2013, Ms. Cynthia Ansari resigned from the Vision-Sciences, Inc. Board of Directors. Previously, Ms. Ansari indicated her intention to resign as the Company's Chief Executive Officer and President on April 30, 2013, which was accepted by the Board of Directors on May 9, 2013. Ms. Ansari's resignation from the Board was not due to any disagreement with the Company or concerns relating to the Company's operations, policies or practices. Under the separation and release agreement, Ms. Ansari is entitled to receive six months of severance pay and twelve months of medical benefits, totaling approximately $190, which was recorded in the quarter ended June 30, 2013. The agreement also provides for the lapse of restrictions of 25,126 shares of restricted stock held by Ms. Ansari and the ability to exercise her vested options to purchase 375,000 shares of common stock, at an exercise price of $2.22 per share, through July 9, 2014.

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 increased $0.3 million, or 8%, in the first quarter of fiscal 2014 to $3.7 million compared to $3.4 million in the first quarter of fiscal 2013.

Net sales by operating segment and by market/category for the three months ended June 30, 2013 and 2012 were as follows:

                                          Three Months Ended
                                               June 30,
Market/Category                            2013          2012       Change
Urology                                 $    1,862      $ 1,056          76 %
ENT /TNE                                       542          608         -11 %
Pulmonology                                     87          125         -30 %
Spine                                            -          259        -100 %
Repairs, peripherals, and accessories          538          448          20 %
Total medical sales                          3,029        2,496          21 %
Borescopes                                     337          631         -47 %
Repairs                                        286          269           6 %
Total industrial sales                         623          900         -31 %
Net sales                               $    3,652      $ 3,396           8 %


The following table summarizes net sales by market/category and by product for our medical operating segment for the three months ended June 30, 2013 and 2012:

                          Three Months Ended
                               June 30,
Market/Category            2013          2012        Change
Urology
Endoscopes                   1,037          575           80 %
EndoSheath technology          825          481           72 %
Total urology market         1,862        1,056           76 %

ENT / TNE
Endoscopes              $      492      $   578          -15 %



                                          Three Months Ended
                                               June 30,
Market/Category                            2013          2012        Change
EndoSheath technology                           50           30           67 %
Total ENT/TNE market                           542          608          -11 %

Pulmonology
Endoscopes                                      32           81          -60 %
EndoSheath technology                           55           44           25 %
Total pulmonology market                        87          125          -30 %

Spine
Endoscopes                                       -          259            - %

Repairs, peripherals, and accessories          538          448           20 %
Total medical sales                     $    3,029      $ 2,496           21 %

Product
Endoscopes                              $    1,561      $ 1,493            5 %
EndoSheath technology                          930          555           68 %
Repairs, peripherals, and accessories          538          448           20 %
Total medical sales                     $    3,029      $ 2,496           21 %

During the first quarter of fiscal 2014, our medical segment's net sales of $3.0 million increased by $0.5 million, or 21%, primarily attributable to higher sales of our endoscopes and EndoSheath disposables in the urology market. Net sales to the urology market were $1.9 million in the first quarter of fiscal 2014, representing an increase of $0.8 million (76%) over the same period in fiscal 2013, primarily attributable to shipments of our flexible ureterscope by Stryker and an increase of $0.4 million (72%) in endosheath sales.

Net sales to the ENT and TNE markets were $0.5 million in the first quarter of fiscal 2014, representing a decrease of $0.1 million (11%) over the same period in fiscal 2013. The decrease was the effect of concentrating our selling efforts in the surgical and critical care markets during the fourth fiscal quarter of 2013. We renewed our focus in this area during the first quarter of fiscal 2014 and anticipate sales of our ENT endoscopes will begin to increase over the next several quarters.

Net sales to the pulmonology market were $0.1 million in the first quarter of fiscal 2014, representing a decrease of $38 thousand (30%) over the same period in fiscal 2013. The quarter-over-quarter decline was primarily attributable to reduced sales of bronchoscopes and digital processing units, offset by 25% increase in sheath sales. Our focus remains on increasing our installed base in the U.S. and internationally to drive further adoption of our EndoSheath technology.

Net sales to the spine market were $0 for the first quarter of fiscal 2014 as compared to $0.3 million in the same period in fiscal 2013. The first quarter of fiscal 2013 included stocking order of 16 video surgical endoscope systems to SpineView. In December 2012, Spineview received 510(k) clearance from the Food and Drug Administration to use our system for spine applications. Since receiving this clearance and the units supplied on their initial order in fiscal year 2013, Spineview continues to conduct clinical preference trials for minimally invasive spine surgeries. As such, we do not anticipate any sales to Spineview in the fiscal year 2014.

Net sales of repairs, peripherals, and accessories were $0.5 million in the first quarter of fiscal 2014, representing an increase of $0.1 million (20%) over the same period in fiscal 2013. The quarter-over-quarter increase was primarily attributable to higher demand of peripherals and accessories for our urology endoscopes by Stryker.

During our first fiscal quarter of fiscal 2014, our industrial segment's net sales of $0.6 million decreased by $0.3 million, or 31%, primarily due to an atypically larger order of our 2mm video-based borescopes that shipped in the first quarter of 2013; there was no comparable order in the first quarter of 2013.


Gross Profit (Net Sales Less Cost of Sales)



Gross profit by operating segment for the three months ended June 30, 2013 and
2012 was as follows:



                               Three Months Ended
                                    June 30,
Gross Profit                    2013           2012       Change
Medical                      $       793       $ 594           34 %
As percentage of net sales            26 %        24 %
Industrial                           287         319          -10 %
As percentage of net sales            46 %        35 %
Gross profit                 $     1,080       $ 913           18 %
Gross margin percentage               30 %        27 %

Gross profit was $1.1 million in the first quarter of fiscal 2014, representing an increase of $0.2 million (18%) over the same period in fiscal 2013. Gross margin percentage was 30% in the first quarter of fiscal 2014, representing an increase of 3% over the same period in fiscal 2013. This benefit resulted from our implementation of certain cost cutting measures, as well as favorable manufacturing absorption from higher production volume of our urology endoscopes and EndoSheath technology.

Operating Expenses

Operating expenses by operating segment for the three months ended June 30, 2013 and 2012 were as follows:

                              Three Months Ended
                                   June 30,
Operating Expenses            2013          2012         Change
SG&A expenses
Medical                     $   2,760     $   2,451            13 %
Industrial                        290           279             4 %
Total SG&A expenses             3,050         2,730            12 %
R&D expenses
Medical                           419           487           -14 %
Industrial                          -             -             -
Total R&D expenses                419           487           -14 %
Total operating expenses    $  3,469      $  3,217             8  %

Selling, General, & Administrative ("SG&A") Expenses

SG&A expenses were $3.1 million in the first quarter of fiscal 2014, representing an increase of $0.3 million (12%) over the same period in fiscal 2013. The increase was primarily attributable to higher stock-based compensation expense and a one-time severance charge of $0.2 million related to the resignation of our former chief executive officer. Stock-based compensation expense also included a one-time charge of $0.2 related to options granted to our interim chief executive officer that vested immediately.

Research & Development ("R&D") Expenses

R&D expenses were $0.4 million in the first quarter of fiscal 2014, representing a decrease of $0.1 million (14%) over the same period in fiscal 2013 primarily due to timing of expenses in product development. As we continue to build upon Vision-Sciences' endoscopy platform and integrated digital processing unit over the longer term, we anticipate these expenses will increase.


 Other (Expense) Income



Other (expense) income for the three months ended June 30, 2013 and 2012 was as
follows:



                            Three Months Ended
                                 June 30,
Other (Expense) Income      2013          2012          Change
Interest expense          $     (41 )  $     (194 )           79 %
Debt cost expense                 -          (144 )          100 %
Other, net                       (4 )          (4 )            -
Other expense             $    (45  )    $  (342  )          87  %

Other expense was $45 thousand in the first quarter of fiscal 2014, representing a decrease of $0.3 million (87%) over the same period in fiscal 2013. The decrease was primarily attributable to entering into a revolving convertible promissory note with a lower interest rate and having no deferred debt costs in the first quarter of fiscal 2014 as a result of terminating the Original Agreement in September 2012 and writing off the remaining balance.

Net Loss



Net loss for the three months ended June 30, 2013 and 2012 was as follows:



                                             Three Months Ended
                                                 June 30,
Net Loss                                   2013            2012           Change
Loss before provision for income taxes   $   (2,434 )    $   (2,646 )            8 %
Income tax provision                              -               1            100 %
Net loss                                 $  (2,434  )    $  (2,647  )           8  %

Net loss was $2.4 million in the first quarter of fiscal 2014, representing a decrease of $0.2 million (8%) over the same period in fiscal 2013. The decrease was primarily attributable to higher gross profit and lower operating expenses.

. . .

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