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VSCI > SEC Filings for VSCI > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for VISION SCIENCES INC /DE/

Form 10-Q for VISION SCIENCES INC /DE/


12-Nov-2013

Quarterly Report


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

Executive Summary

Business Overview

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.

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 Stryker 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 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 our flexible video surgical endoscope systems to SpineView for use with SpineView's space creator product to provide direct visualization for minimally invasive spine surgery procedures.


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


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


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


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


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

* North America, South America, Latin America, China, and Japan

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. 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 number of 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.

Our goal is to become a customer-centric organization with a focus on enhancing stockholder value. We are doing this by:

? Enhancing our sales force in the U.S. through continued sales training and development;

? 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 that 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 physicians who strive to improve their patients' quality of life. We believe that our renewed focus on the areas where we have had historical success will help us to become a more financially secure company.

New Product Releases

7000 Series Vision System®

In April 2013, we introduced our next generation video processor platform, the 7000 Series Vision System®, at the annual Combined Otolaryngology Spring Meeting ("COSM") 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.

Flexible Ureteroscope

In December 2012, Stryker began to ship a new flexible ureteroscope, the URT-7000 video ureteroscope, to its customers, and customer 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 urology products.

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.

Patents

We hold 17 U.S. patents, and we have 10 U.S. patent applications pending. In addition, we have 16 foreign patents issued and have 6 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. The issued patents will expire on various dates in the years 2014 through 2029.

Trademark Property

We own the trademarks Vision SciencesTM and Slide-OnTM and the registered trademarks EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.

Debt Arrangements - Related Party

Convertible Promissory Notes

On September 25, 2013 (the "Effective Date"), we entered into a new $3.5 million revolving convertible promissory note (the "2013 Note") with Mr. Pell. The 2013 Note accrues annual interest, payable annually, at the rate of 1.66%. The 2013 Note must be repaid in full on or before the fifth anniversary of the Effective Date (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 2013 Note upon an event of default, as defined in the 2013 Note. As we draw upon the note, a beneficial conversion feature will be recorded if the market price of our common stock increases after the Effective Date. From the Effective Date to September 30, 2013, the conversion price of the 2013 Note was below the market price of our common stock.

The outstanding principal amount of the 2013 Note is convertible at any time prior to the Maturity Date, at Mr. Pell's option, into shares of our Common Stock at a price of $0.89, the closing bid price of our common stock on the Effective Date.


On September 19, 2012 (the "Replacement Note Effective Date"), we entered into a $20.0 million revolving convertible promissory note (the "Replacement Note") with Mr. Pell. The Replacement Note (i) consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under an Amended and Restated Loan Agreement, dated September 30, 2011, between us and Mr. Pell (the "Original Agreement") and a separate promissory note, dated July 25, 2012, between us and Mr. Pell, and (ii) provided $5.0 million in additional borrowings.

The Replacement Note accrues annual interest, payable annually, at the rate of 0.84%. The Replacement Note must be repaid in full on or before the fifth anniversary of the Replacement Note Effective Date (the "Replacement Note 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 Replacement Note Maturity Date, at Mr. Pell's option, into shares of our common stock at a conversion price of $1.20 per share, which was the closing bid price of our common stock on the Replacement Note Effective Date.

At September 30, 2013, we had $20.0 million in outstanding principal borrowings under the Replacement Note, which is reflected as convertible debt - related party on our condensed consolidated balance sheet, and no outstanding principal borrowings under the 2013 Note. At September 30, 2013, we had $150 thousand in accrued interest under the Replacement Note, which is included in accrued expenses on our condensed consolidated balance sheet, and no accrued interest under the 2013 Note. On October 7, 2013, we borrowed $1.0 million of the $3.5 million commitment under the 2013 Note.

Letter Agreement

Pursuant to a letter agreement dated June 21, 2013, Mr. Pell 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 in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. As of September 30, 2013, we had not utilized the financial assistance agreement.

Results of Operations (in thousands, except percentages)

Net Sales

In our medical segment, we track sales of our endoscopes and EndoSheath technology by market. We also track sales of peripherals and accessories which can be sold to more than one market. Net sales by operating segment and by market/category for the three and six months ended September 30, 2013 and 2012 were as follows:

                       Three Months Ended                               Six Months Ended
                          September 30,                                  September 30,
Market/Category       2013             2012          Change           2013            2012          Change
Urology            $     1,681      $      888              89 %   $     3,542     $    1,944              82 %
ENT                        403             587             -31 %           743          1,019             -27 %
TNE                        355             334               6 %           558            510               9 %
Pulmonology                395             162             144 %           481            287              68 %
Spine                        -             181            -100 %             -            440            -100 %
Repairs,
peripherals, and
accessories                565             572              -1 %         1,104          1,020               8 %
Total medical
sales                    3,399           2,724              25 %         6,428          5,220              23 %
Borescopes                 385             842             -54 %           819          1,473             -44 %
Repairs                    184             173               6 %           373            442             -16 %
Total industrial
sales                      569           1,015             -44 %         1,192          1,915             -38 %
Net sales          $     3,968      $    3,739               6 %   $     7,620     $    7,135               7 %

Net sales increased $0.2 million (6%) in the second quarter of fiscal 2014 to $4.0 million compared to $3.7 million in the second quarter of fiscal 2013. During the second quarter of fiscal 2014, our medical segment's net sales of $3.4 million increased by $0.7 million (25%), primarily attributable to higher sales to Stryker of our endoscopes and EndoSheath technology in the urology market. Our industrial segment's net sales of $0.6 million decreased by $0.4 million (44%), primarily attributable to lower demand of our engine turning tools, which are used with our 2mm video-based borescopes.

Net sales increased $0.5 million (7%) in the first half of fiscal 2014 to $7.6 million compared to $7.1 million in the first half of fiscal 2013. During the first half of fiscal 2014, our medical segment's net sales of $6.4 million increased by $1.2 million (23%), primarily attributable to higher sales to Stryker of our endoscopes and EndoSheath technology in the urology market. Our industrial segment's net sales of $1.2 million decreased by $0.7 million (38%), primarily attributable to lower demand of our 2mm 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 six months ended September 30, 2013 and 2012:

                       Three Months Ended                               Six Months Ended
                          September 30,                                  September 30,
Market/Category       2013             2012          Change           2013            2012          Change
Urology
Endoscopes         $       975      $      361             170 %   $     2,011     $      936             115 %
EndoSheath
technology                 706             527              34 %         1,531          1,008              52 %
Total urology
market                   1,681             888              89 %         3,542          1,944              82 %

ENT
Endoscopes                 403             587             -31 %           743          1,019             -27 %

TNE
Endoscopes                 302             288               5 %           455            433               5 %
EndoSheath
technology                  53              46              15 %           103             77              34 %
Total TNE market           355             334               6 %           558            510               9 %

Pulmonology
Endoscopes                 358             126             184 %           388            206              88 %
EndoSheath
technology                  37              36               3 %            93             81              15 %
Total
pulmonology
market                     395             162             144 %           481            287              68 %

Spine
Endoscopes                   -             181            -100 %             -            440            -100 %

Repairs,
peripherals, and
accessories                565             572              -1 %         1,104          1,020               8 %
Total medical
sales              $     3,399      $    2,724              25 %   $     6,428     $    5,220              23 %

Product
Endoscopes         $     2,038      $    1,543              32 %   $     3,597     $    3,034              19 %
EndoSheath
technology                 796             609              31 %         1,727          1,166              48 %
Repairs,
peripherals, and
accessories                565             572              -1 %         1,104          1,020               8 %
Total medical
sales              $     3,399      $    2,724              25 %   $     6,428     $    5,220              23 %

Net sales to the urology market during the second quarter and first half of fiscal 2014 increased by $0.8 million (89%) and $1.6 million (82%), respectively, compared to the same periods in fiscal 2013. The year-over-year increase was primarily attributable to the higher sales of our endoscopes and EndoSheath technology products to Stryker. Net sales to Stryker were up $0.8 million (204%) and $1.3 million (133%) in the second quarter and first half of fiscal 2014, respectively. We also achieved solid growth of 36% of our EndoSheath technology in the international markets during the first half of fiscal 2014 ($0.3 million, or 36%).

Net sales to the ENT market during the second quarter and first half of fiscal 2014 decreased by $184 thousand (31%) and $276 thousand (27%), respectively, compared to the same periods in fiscal 2013. We recently renewed our sales effort in the ENT market after spending the second half of fiscal 2013 and most of the first quarter of fiscal 2014 focusing on the TNE and pulmonology market opportunities. We believe this change will enable us to grow this product line's sales over the next several quarters.

Net sales to the TNE (surgical and GI) market during the second quarter and first half of fiscal 2014 increased by $21 thousand (6%) and $48 thousand (9%), respectively, compared to the same periods in fiscal 2013. Higher average selling prices ("ASP's") of our surgical endoscopic platform (TNE-5000 video endoscope and digital processing unit) and an increase in demand for our EndoSheath technology contributed to the year-over-year growth. Our platform ASP's increased by 12% and 22% in the second quarter and first half of fiscal 2014, respectively. We are encouraged by the continued adoption of our EndoSheath technology as evidenced by the 26% unit volume increase during the first half of fiscal 2014 compared to the same period in fiscal 2013.

Net sales to the pulmonology (critical care) market during the second quarter and first half of fiscal 2014 increased by $233 thousand (144%) and $194 thousand (68%), respectively, compared to the same periods in fiscal 2013. The increases were primarily attributable to higher demand of our critical care platform (BRS-5000 video bronchoscope and digital processing unit) in the U.S. and fiber bronchoscopes worldwide. We continue to focus our efforts on increasing our installed base to drive further adoption of our EndoSheath technology in this market.


Net sales to SpineView during the second quarter and first half of fiscal 2014 decreased by $181 thousand (100%) and $440 thousand (100%), respectively, compared to the same periods in fiscal 2013. In December 2012, SpineView received 510(k) clearance from the FDA to use our system for spine applications. With this clearance and the units supplied from the initial stocking order, the balance of which was fulfilled during fiscal 2013, SpineView continues to conduct clinical preference trials for minimally invasive spine surgeries. As a result, we do not anticipate any sales to SpineView during the remainder of fiscal 2014.

Net sales of repairs, peripherals, and accessories during the second quarter and first half of fiscal 2014 decreased by $7 thousand (1%) and increased by $84 thousand (8%), respectively, compared to the same periods in fiscal 2013. The year-over-year growth in the first half of fiscal 2014 was primarily attributable to an increase in sales of our peripherals and accessories ($189 thousand, or 46%).

Gross Profit (Net Sales Less Cost of Sales)



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



                       Three Months Ended                               Six Months Ended
                          September 30,                                  September 30,
Gross Profit          2013             2012          Change           2013            2012          Change
Medical            $       981      $      746              32 %   $     1,774     $    1,341              32 %
As percentage of
net sales                 28.9 %          27.4 %           1.5 %          27.6 %         25.7 %           1.9 %
Industrial                 214             324             -34 %           501            642             -22 %
As percentage of
net sales                 37.6 %          31.9 %           5.7 %          42.0 %         33.5 %           8.5 %
Gross profit       $     1,195      $    1,070              12 %   $     2,275     $    1,983              15 %
Gross margin
percentage                30.1 %          28.6 %           1.5 %          29.9 %         27.8 %           2.1 %

The gross margin percentage was 30.1% in the second quarter of fiscal 2014 compared to 28.6% in the second quarter of fiscal 2013. The gross margin percentage was 29.9% in the first half of fiscal 2014 compared to 27.8% in the first half of fiscal 2013. The year-over-year improvement in our gross margin percentage was primarily attributable to the following:

? Favorable manufacturing absorption from higher production of our urology endoscopes and EndoSheath technology (gross margin percentage impact of 1.8% and 1.1% in the second quarter and first half of fiscal 2014, respectively); and

? Favorable purchase price variance (gross margin percentage impact of 1.1% in the first half of fiscal 2014).

Operating Expenses



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



                              Three Months Ended                     Six Months Ended
. . .
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