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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number: 0-27605

VASCULAR SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)

6464 Sycamore Court
Minneapolis, MN 55369
(Address of Principal Executive Offices, including zip code)

(763) 656-4300
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]    No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]    No [X]

The registrant had 14,419,057 shares of common stock, $.01 par value per share, outstanding as of April 15, 2005.

VASCULAR SOLUTIONS, INC.

TABLE OF CONTENTS

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PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

VASCULAR SOLUTIONS, INC.

Consolidated Balance Sheets

See accompanying notes.

Note:   The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date.

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VASCULAR SOLUTIONS, INC.

Consolidated Statements of Operations

See accompanying notes.

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VASCULAR SOLUTIONS, INC.

Consolidated Statements of Cash Flows

See accompanying notes.

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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements

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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements–Continued

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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements–Continued

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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements–Continued

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VASCULAR SOLUTIONS, INC.

Notes to Unaudited Consolidated Financial Statements–Continued

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

Overview

        Vascular Solutions, Inc. (we, us or Vascular) is a medical device company focused on bringing clinically advanced solutions to interventional cardiologists and interventional radiologists worldwide. We were incorporated in the state of Minnesota in December 1996, and we began operations in February 1997. Our current product line consists of the following medical devices:

• D-Stat Dry™ hemostatic bandage, a topical pad with a bandage used to control surface bleeding,
• Pronto™ extraction catheter, a mechanical system for the removal of soft thrombus from arteries,
• Vari-Lase® endovenous laser, a laser and procedure kit used for the treatment of varicose veins,
• Duett™ sealing device, used to seal the puncture site following catheterization procedures,
• D-Stat® Flowable hemostat, a thick, yet flowable, mixture used to control bleeding,
• Langston™ dual lumen pigtail catheter, used to measure intravascular pressure gradients,
• MAX-Support™ abdominal retraction belt, used to allow femoral access in obese patients, and
• Acolysis® ultrasound (international only), a treatment for peripheral occlusive arterial disease.

As a vertically-integrated medical device company, we generate ideas and create new interventional medical devices, and then deliver these products directly to the physician through our direct domestic sales force and our international distribution network.

        We currently have in development several additional products that leverage our existing infrastructure to bring additional solutions to the interventional cardiologist and interventional radiologist. Additional products that we expect to gain regulatory clearance and market launch before the end of 2005 in the United States include the following medical devices:

• Skyway™ support catheter and the Twin-Pass™ dual access catheter, both specialty-purpose catheters designed for interventional cardiology which address market opportunities we estimate at between $1 million and $5 million per year.
• ThrombiGel™ hemostat, a resorbable version of our D-Stat Dry which we expect to launch in 2005 with a limited topical indication, and expect to expand to a much broader surgical indication by the end of 2006. This resorbable version of the D-Stat Dry addresses a market in excess of $100 million annually for a surgical thrombin-based resorbable pad hemostat.

Results of Operations

Three months ended March 31, 2005 compared to three months ended March 31, 2004

        Net sales increased 63% to $7,274,000 for the quarter ended March 31, 2005 from $4,459,000 for the quarter ended March 31, 2004. Approximately 89% of our net sales for the quarter ended March 31, 2005 were to customers in the United States and 11% of our net sales were to customers in international markets. Net sales by product category were as follows:

• Net sales of the D-Stat Dry hemostatic bandage were $3,133,000 for the quarter ended March 31, 2005, compared to $1,665,000 in the first quarter of 2004, a 88% increase. Through March 31, 2005, we have sold our D-Stat Dry to 659 interventional cardiology and interventional radiology labs in the United States.

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• Net sales of the Pronto extraction catheter were $1,281,000 for the quarter ended March 31, 2005, compared to net sales of $394,000 in the first quarter of 2004, a 225% increase. Through March 31, 2005, we have sold our Pronto to 560 interventional cardiology and interventional radiology labs in the United States.
   
• Net sales of our Vari-Lase product line increased to $892,000 for the quarter ended March 31, 2005 compared to net sales of $371,000 in the quarter ended March 31, 2004, a 141% increase. Through March 31, 2005, we have sold our Vari-Lase products to 198 accounts.
   
• Net sales of the D-Stat Flowable increased to $461,000 for the quarter ended March 31, 2005 from $331,000 for the quarter ended March 31, 2004, a 39% increase.
   
• Net sales of our Duett sealing device decreased to $1,258,000 for the quarter ended March 31, 2005 from $1,662,000 for the quarter ended March 31, 2004, a 24% decrease. Our Duett sales in the first quarter of 2005 remained stable from the fourth quarter of 2004. We continue to believe that our Duett business will represent a substantial but declining percentage of our on-going sales as our focus is on “harvesting” this product line. A total of 122 accounts purchased the Duett sealing device in the first quarter 2005.
   
• Net sales of our other products were $249,000 for the quarter ended March 31, 2005, compared to $36,000 for the quarter ended March 31, 2004, a 592% increase.

        Gross profit as a percentage of net sales increased to 72% for the quarter ended March 31, 2005 from 68% for the quarter ended March 31, 2004. The increase was the result of the change in the selling mix of our products, increased volume and related manufacturing efficiencies. The D-Stat Dry and Pronto now account for 43% and 18%, respectively, of our net sales. The D-Stat Dry has a gross margin in excess of 80% and the Pronto has a gross margin in excess of 75%. We expect gross margins to hold steady in 2005 and finish the year in the range of 71% to 73%.

        Research and development expenses decreased 11% to $880,000 for the quarter ended March 31, 2005 from $988,000 for the quarter ended March 31, 2004. Research and development expenses fluctuate due to outside project spending. We expect our normal research and development expenses to remain relatively steady for the remainder of 2005 in the range of $800,000 to $1,000,000 as we continue to pursue additional new products at an expected rate of approximately two new products per year.

        Thrombin qualification expenses were $486,000 for the quarter ended March 31, 2005 and $0 for the quarter ended March 31, 2004. We have now incurred a total of $696,000 of expenses of the total estimated expense of $3.7 million associated with qualifying the new source of thrombin to be incurred over the next two years. We also estimate that there will be approximately $400,000 of capital expenditures for this project and approximately $3.0 million of thrombin inventory purchases from our new supplier towards the end of 2005 for use in products sold starting in 2007. We remain on plan to qualify and receive approval for our new thrombin by the first quarter of 2007 which should allow us to participate directly in the $200 million annual market for thrombin and thrombin-based surgical hemostats.

        Clinical and regulatory expenses increased 14% to $442,000 for the quarter ended March 31, 2005 from $389,000 for the quarter ended March 31, 2005. Clinical and regulatory expenses fluctuate due to the timing of clinical and marketing studies. The increase is the result of our increased activity with the completion of our D-Stat Flowable “Pocket Protector” clinical study and our D-Stat Dry marketing

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clinical study. We expect clinical and regulatory expenses to be in the range of $500,000 to $600,000 per quarter in 2005.

        Sales and marketing expenses increased 19% to $3,090,000 for the quarter ended March 31, 2005 from $2,601,000 for the quarter ended March 31, 2004. This increase was primarily due to increased headcount in our direct sales force, which went from 48 field employees as of March 31, 2004 to 56 field employees as of March 31, 2005. We anticipate that sales and marketing expenses will be between $3.2 million and $3.5 million per quarter for the remainder of 2005, as we plan to add up to 10 additional new field sales employees by the end of 2005.

        General and administrative expenses increased 13% to $587,000 for the quarter ended March 31, 2005 from $521,000 for the quarter ended March 31,2004. The increase was principally the result of legal fees related to the Diomed intellectual property litigation (see “Legal Proceedings” in Item 1 of Part II of this Form 10-Q) and increased accounting and tax services. We expect to incur approximately $50,000 in legal fees per quarter related to the Diomed litigation. We currently anticipate that general and administrative expenses will be approximately $550,000 to $650,000 per quarter in 2005.

        Amortization of purchased technology was $54,000 for the quarter ended March 31, 2005, which is unchanged from the quarter ended March 31, 2005. The amortization resulted from our acquisition of the Acolysis assets from the secured creditors of Angiosonics, Inc. in 2002. We allocated $870,000 of the acquisition price to purchased technology and are amortizing the amount over four years.

        Interest income increased to $34,000 for the quarter ended March 31, 2005 from $12,000 for the quarter ended March 31, 2004, primarily as a result of an increased cash balance and higher interest rates.

Income Taxes

        We have not generated any pre-tax income to date and therefore have not paid any federal income taxes since inception in December 1996. No provision or benefit for federal and state income taxes has been recorded for net operating losses incurred in any period since our inception.

        As of March 31, 2005, we had approximately $58.3 million of federal net operating loss carryforwards available to offset future taxable income which begin to expire in the year 2013. As of March 31, 2005, we also had federal and state research and development tax credit carryforwards of approximately $1.7 million which begin to expire in the year 2013. As of March 31, 2005, we also had a foreign tax loss carryforward of approximately $2.3 million, which does not expire. Under the United States Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including significant changes in ownership interests. Future use of our existing net operating loss carryforwards may be restricted due to changes in ownership or from future tax legislation.

Liquidity and Capital Resources

        We have financed all of our operations since inception through the issuance of equity securities and, to a lesser extent, sales of our products. Through March 31, 2005, we have sold capital stock generating aggregate net proceeds of approximately $76.7 million. At March 31, 2005, we had $7,248,000 in cash, cash equivalents on-hand compared to $7,184,000 at December 31, 2004.

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        During the quarter ended March 31, 2005, we gained $145,000 from operating activities. The cash gained in operating activities was primarily used to fund our net loss for the period of $289,000, an increase in accounts receivable of $296,000 and a decrease in accounts payable of $101,000. The preceding were offset by depreciation and amortization of $185,000, an increase in accrued expenses of $170,000, a decrease in inventories of $366,000 and a decrease in prepaid expenses of $105,000. The increase in accounts receivable and decrease in inventory were due to increased sales. The decrease in prepaid expenses, the decrease in accounts payables and increase in accrued liabilities were the result of timing of payments. During the quarter ended March 31, 2005, we had capital purchased of $126,000 and we generated $102,000 in financing activities through the exercise of stock options.

        During the fourth quarter of 2004, we renewed our credit facility with Silicon Valley Bank and increased the line of credit to $5.0 million. The line of credit has a 12 month term, bears interest at the rate of prime plus 0.5% and is secured by a first security interest on all of our assets. The line of credit includes two covenants: minimum tangible net worth of $11.0 million and a liquidity coverage of not less than 1.25 to 1.00. We were in compliance with these covenants at March 31, 2005. As of March 31, 2005, we had no outstanding balance on the line of credit balance and the availability was $3.3 million.

        We purchase our requirements for thrombin (a component in the Duett and in all of the D-Stat products) under a Purchase Agreement dated June 10, 1999 with a subsidiary of King Pharmaceuticals, Inc. The agreement provides for a fixed price, with adjustments based on the supplier’s manufacturing costs and the supplier’s annual percentage increase in the wholesale price of thrombin. The agreement expires on May 29, 2005. During the remainder of 2005 and the first part of 2006, we intend to purchase and take delivery of approximately $3 million of thrombin to benefit from the pricing provisions of the agreement. We believe that these purchases will satisfy our thrombin requirements for all of 2005 and 2006. We have executed a supply agreement for a new source of thrombin, which we plan to fully qualify and bring through the regulatory process over the next two years at a cumulative cost of approximately $3.7 million in development and qualification expenditures and approximately $400,000 in capital expenditures. We also expect to purchase approximately $3.0 million of thrombin from our new supplier at the end of 2005. With these planned actions, we expect our inventory to peak at approximately $8.0 million at the end of 2005, and then decrease throughout all of 2006 as no additional thrombin is purchased. This investment, while substantial, is within our projected capital resources and will allow us to introduce new thrombin-based products as well as control our long term cost of thrombin.

        We do not have any other significant cash commitments related to supply agreements, nor do we have any significant commitments for capital expenditures.

        We currently anticipate that we will continue to experience positive cash flow from our normal operating activities, excluding requirements associated with our new supply of thrombin. We currently believe that our working capital of $11,653,000 and anticipated cash from product sales will be sufficient to meet all of our operating and capital requirements, including our thrombin inventory purchases under our current thrombin supply contract and our costs associated with the new supply of thrombin. However, our actual liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of sales and marketing activities; the amount of revenues from sales of our existing and new products; the cost of maintaining, enforcing and defending patents and other intellectual property rights; competing technological and market developments; developments related to regulatory and third party reimbursement matters; the cost and progress of our research and development efforts; and other factors.

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        If cash generated from operations is insufficient to satisfy our cash needs, we may be required to raise additional funds. In the event that additional financing is needed, and depending on market conditions, we may seek to raise additional funds for working capital purposes through the sale of equity or debt securities.

Critical Accounting Policies

        Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of our financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate these estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and which require complex management judgment.

Inventory

        We state our inventory at the lower of cost (first-in, first-out method) or market. We record reserves for inventory shrinkage and for potentially excess, obsolete and slow moving inventory based upon historical experience and forecasted demand. At March 31, 2005, this reserve was $410,000, compared to $430,000 at December 31, 2004. Our reserve requirements could be materially different if demand for our products decreased because of competitive conditions or market acceptance, or if products become obsolete because of advancements in the industry.

Revenue Recognition

        We recognize revenue upon shipment of products to customers, net of estimated returns. We analyze the rate of historical returns when evaluating the adequacy of the allowance for sales returns, which is included with the allowance for doubtful accounts on our balance sheet. At March 31, 2005, this reserve was $25,000, which is an increase of $5,000 from December 31, 2004. If the historical data we use to calculate these estimates does not properly reflect future returns, revenue could be overstated.

Allowance for Doubtful Accounts

        We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. At March 31, 2005, this reserve was $110,000, which is a decrease of $50,000 from December 31, 2004. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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Income Taxes

        The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States and, to a lesser extent, Germany, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax assets to the amount that is more likely than not to be realized. For the quarter ended March 31, 2005, we recorded a $26.7 million valuation allowance related to our net deferred tax assets of $26.7 million. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax assets would increase net income in the period such determination is made. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirement for a valuation allowance.

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995

        The Private Securities Litigation Reform Act of 1995 (the Act) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their business, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. We desire to take advantage of the safe harbor provisions with respect to any forward-looking statements we may make in this filing, other filings with the Securities and Exchange Commission and any public oral statements or written releases. The words or phrases “will likely,” “is expected,” “will continue,” “is anticipated,” “estimate,” “projected,” “forecast,” or similar expressions are intended to identify forward-looking statements within the meaning of the Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. In accordance with the Act, we identify the following important general factors which, if altered from the current status, could cause our actual results to differ from those described in any forward-looking statements: risks associated with our limited operating history, the qualification of a new source of thrombin, defense of patent infringement lawsuits, adoption of our new products, lack of profitability, lack of experience with a direct sales force, exposure to possible product liability claims, the development of new products by others, dependence on third party distributors in international markets, doing business in international markets, limited manufacturing experience, the availability of third party reimbursement, actions by the FDA related to our products, the loss of key vendors, and those factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004. This list is not exhaustive, and we may supplement this list in any future filing with the Securities and Exchange Commission or in connection with the making of any specific forward-looking statement.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

        Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivables. We maintain our accounts for cash and cash equivalents principally at one major bank and one investment firm in the United States. We have a formal written investment policy that permits only the placement of investments to issuers evaluated as creditworthy. We have not experienced any losses on our deposits of our cash and cash equivalents.

        With respect to accounts receivable, we perform credit evaluations of our customers and do not require collateral. There have been no material losses on accounts receivables.

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        In the United States and Germany, we sell our products directly to hospitals and clinics in the local currency. Revenue is recognized upon shipment of products to customers.

        In all other international markets, we sell our products to independent distributors who, in turn, sell to medical clinics. We sell our product in these countries through independent distributors denominated in United States dollars. Loss, termination or ineffectiveness of distributors to effectively promote our product would have a material adverse effect on our financial condition and results of operations.

        We do not believe our operations are currently subject to significant market risks for interest rates, foreign currency exchange rates, commodity prices or other relevant market price risks of a material nature.

Item 4.   Controls and Procedures

Evaluation of disclosure controls and procedures.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act of 19934 (the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in internal controls.

        During the fiscal quarter ended March 31, 2005, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 1.   Legal Proceedings

        On December 11, 2003, we and a non-officer employee of the Company were named as defendants in a lawsuit brought by Diomed, Inc. in the United States District Court for the District of Massachusetts. The complaint alleges that in marketing our Vari-Lase endovenous laser procedure kit we engaged in false advertising and infringed a registered trademark of Diomed. The complaint also alleges that our employee, who previously worked for a company that conducted business with Diomed, improperly utilized trade secrets of Diomed in developing our Vari-Lase procedure kit. The complaint requests monetary damages and an injunction on the sale of our Vari-Lase procedure kit. We believe that the allegations included in the complaint are wholly without merit, have filed our answer to the complaint, and intend to defend this litigation vigorously. Our insurance carrier has accepted our tender of this claim and is defending this lawsuit. It is not possible to predict the timing or outcome of this litigation, including whether it will affect our ability to sell our Vari-Lase procedure kit, or to estimate the amount or range of potential loss, if any.

        On March 4, 2004, we were named as the defendant in an intellectual property lawsuit brought by Diomed, Inc. in the United States District Court for the District of Massachusetts. The complaint requested a judgment that our Vari-Lase procedure kit and Vari-Lase laser console infringes on a single patent held by Diomed, Inc. and asked for relief in the form of an injunction that would prevent us from

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selling our Vari-Lase products, compensatory and treble damages caused by the manufacture and sale of our product, and other costs, disbursements and attorneys’ fees. On April 12, 2005, the Judge entered a Memorandum and Order on Claims Construction from the Markman hearing phase of the litigation. In the Order, the Judge held that in order to violate the Diomed patent, a competing method must deliberately put the tip of the laser fiber in physical contact with the wall of the vein, must drain blood from the vein, must compress the vein and must maintain vein wall contact as the laser energy is delivered. We believe that our Vari-Lase products are not used in this method, and thus we do not believe that the litigation has merit. It is not possible to predict the timing or outcome of this litigation, including whether it will affect our ability to sell our Vari-Lase products, or to estimate the amount or range of potential loss, if any.

        From time to time we are involved in legal proceedings arising in the normal course of our business. As of the date of this report we are not a party to any legal proceeding not described in this section in which an adverse outcome would reasonably be expected to have a material adverse effect on our results of operations or financial condition.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.   Defaults Upon Senior Securities

Item 4.   Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders of the Company was held on April 19, 2005, at which time seven nominees were elected to the Board of Directors for one-year terms and the appointment of Virchow, Krause & Company, LLP as the independent auditors of the Company was ratified. Proxies for the Company were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition to management’s solicitations. All nominees for directors as listed in the proxy statement were elected.

The voting results were as follows:

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Item 5.   Other Information

Item 6.   Exhibits

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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