SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20459
FORM 10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED June 30, 2003
COMMISSION FILE NUMBER 0-20970
VISION-SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
|
13-3430173 |
(State or other jurisdiction of |
|
(IRS Employer |
|
|
|
9 Strathmore Road, Natick, MA |
|
01760 |
(Address of principal executive offices) |
|
(Zip Code) |
|
|
|
(508) 650-9971 |
||
(Registrants telephone number, including area code) |
||
|
|
|
None |
||
(Former name, former address, and |
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 requirement for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of July 31, 2003.
Common Stock, par value of $.01 |
30,112,378 |
(Title of Class) |
(Number of Shares) |
VISION-SCIENCES, INC.
TABLE OF CONTENTS
|
|
Page |
|
|
|||
|
|
||
|
|||
|
|
||
|
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
|
|
|
|
|
|
||
|
|
||
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
|||
|
|
|
|
|
Exhibits |
23-26 |
2
PART I - FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
VISION-SCIENCES, INC. AND SUBSIDIARIES
(Unaudited)
|
|
June 30, |
|
March 31, |
|
||
ASSETS |
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
2,705,443 |
|
$ |
2,744,143 |
|
Marketable securities |
|
125,384 |
|
125,072 |
|
||
Accounts receivable, net of allowance for doubtful accounts of $74,037 and $77,185, respectively |
|
982,694 |
|
736,711 |
|
||
Inventories |
|
1,141,480 |
|
1,160,372 |
|
||
Prepaid expenses and deposits |
|
51,831 |
|
51,113 |
|
||
Total current assets |
|
5,006,832 |
|
4,817,411 |
|
||
|
|
|
|
|
|
||
Property and Equipment, at cost: |
|
|
|
|
|
||
Machinery and equipment |
|
3,412,070 |
|
3,393,099 |
|
||
Furniture and fixtures |
|
209,813 |
|
208,934 |
|
||
Leasehold improvements |
|
467,620 |
|
467,620 |
|
||
|
|
4,089,503 |
|
4,069,653 |
|
||
Less-Accumulated depreciation and amortization |
|
3,583,879 |
|
3,529,977 |
|
||
|
|
505,624 |
|
539,676 |
|
||
|
|
|
|
|
|
||
Advance to Three BY Ltd |
|
69,978 |
|
|
|
||
|
|
|
|
|
|
||
Other assets, net of accumulated amortization of $42,673 and $41,087, respectively |
|
88,173 |
|
89,759 |
|
||
Total assets |
|
$ |
5,670,607 |
|
$ |
5,446,846 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Acceptances payable to a bank |
|
$ |
17,469 |
|
$ |
10,621 |
|
Accounts payable |
|
425,126 |
|
294,312 |
|
||
Accrued expenses |
|
800,421 |
|
804,139 |
|
||
Total current liabilities |
|
1,243,016 |
|
1,109,072 |
|
||
|
|
|
|
|
|
||
Potential obligations to non-qualified option holders |
|
255,517 |
|
201,648 |
|
||
|
|
|
|
|
|
||
Stockholders Equity: |
|
|
|
|
|
||
Common stock, $.01 par value |
|
|
|
|
|
||
Authorized50,000,000 shares |
|
|
|
|
|
||
Issued and outstanding30,112,378 shares at June 30, 2003 and 29,588,280 shares at March 31, 2003 |
|
301,123 |
|
295,882 |
|
||
Additional paid-in capital |
|
60,431,085 |
|
60,082,930 |
|
||
Accumulated deficit |
|
(56,560,134 |
) |
(56,242,686 |
) |
||
Total stockholders equity |
|
4,172,074 |
|
4,136,126 |
|
||
Total liabilities and stockholders equity |
|
$ |
5,670,607 |
|
$ |
5,446,846 |
|
See accompanying notes to consolidated financial statements.
3
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended |
|
||||
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
||
Net sales |
|
$ |
1,960,482 |
|
$ |
1,734,459 |
|
Cost of sales |
|
1,202,897 |
|
1,272,486 |
|
||
|
|
|
|
|
|
||
Gross profit |
|
757,585 |
|
461,973 |
|
||
|
|
|
|
|
|
||
Selling, general and administrative expenses (1) |
|
871,424 |
|
788,058 |
|
||
Research and development expenses (1) |
|
159,639 |
|
94,540 |
|
||
Stock-based compensation |
|
55,753 |
|
(94,507 |
) |
||
Loss from operations |
|
(329,231 |
) |
(326,118 |
) |
||
|
|
|
|
|
|
||
Interest income |
|
8,172 |
|
12,147 |
|
||
Interest expense |
|
|
|
(578 |
) |
||
Other income, net |
|
3,611 |
|
7,421 |
|
||
|
|
|
|
|
|
||
Net loss |
|
$ |
(317,448 |
) |
$ |
(307,128 |
) |
|
|
|
|
|
|
||
Basic and diluted net loss per common share |
|
$ |
(0.01 |
) |
$ |
(0.01 |
) |
|
|
|
|
|
|
||
Shares used in computing basic and diluted net loss per common share |
|
29,987,202 |
|
27,185,845 |
|
(1) Excludes non-cash stock-based compensation, as follows:
Research and development expenses |
|
$ |
37,393 |
|
$ |
(174,361 |
) |
Selling, general and administrative expenses |
|
18,360 |
|
79,854 |
|
||
Total |
|
$ |
55,753 |
|
$ |
(94,507 |
) |
See accompanying notes to consolidated financial statements.
4
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
|
|
Common Stock |
|
Additional |
|
Accumulated |
|
Total |
|
Total |
|
|||||||
|
|
Number |
|
$ .01 |
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance, March 31, 2003 |
|
29,588,280 |
|
$ |
295,882 |
|
$ |
60,082,930 |
|
$ |
(56,242,686 |
) |
$ |
4,136,126 |
|
|
|
|
Sale of common stock |
|
524,098 |
|
5,241 |
|
346,271 |
|
|
|
351,512 |
|
|
|
|||||
Compensation expense related to employee non-qualified stock options |
|
|
|
|
|
1,884 |
|
|
|
1,884 |
|
|
|
|||||
Net loss |
|
|
|
|
|
|
|
(317,448 |
) |
(317,448 |
) |
$ |
(317,448 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
$ |
(317,448 |
) |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Balance June 30, 2003 |
|
30,112,378 |
|
$ |
301,123 |
|
$ |
60,431,085 |
|
$ |
(56,560,134 |
) |
$ |
4,172,074 |
|
|
|
See accompanying notes to consolidated financial statements.
5
VISION-SCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended |
|
Three Months Ended |
|
||
Cash flows from operating activities: |
|
|
|
|
|
||
Net loss |
|
$ |
(317,448 |
) |
$ |
(307,128 |
) |
Adjustments to reconcile net loss to net cash used for operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
55,488 |
|
52,408 |
|
||
Stock compensation for non-qualified options |
|
55,753 |
|
(94,507 |
) |
||
Changes in assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
(245,983 |
) |
(106,590 |
) |
||
Inventories |
|
18,892 |
|
(151,562 |
) |
||
Prepaid expenses and deposits |
|
(718 |
) |
(6,853 |
) |
||
Accounts payable |
|
130,814 |
|
295,818 |
|
||
Accrued expenses |
|
(3,718 |
) |
(154,357 |
) |
||
Net cash used for operating activities |
|
(306,920 |
) |
(472,771 |
) |
||
Cash flows used for investing activities |
|
|
|
|
|
||
Increase in marketable securities |
|
(312 |
) |
(849,520 |
) |
||
Purchase of property and equipment, net |
|
(19,850 |
) |
(25,754 |
) |
||
Advance to Three BY Ltd |
|
(69,978 |
) |
|
|
||
|
|
|
|
|
|
||
Net cash used for investing activities |
|
(90,140 |
) |
(875,274 |
) |
||
|
|
|
|
|
|
||
Cash flows provided by (used for) financing activities: |
|
|
|
|
|
||
Payments on note payable for leasehold improvements |
|
|
|
(14,250 |
) |
||
(Payments for) proceeds from acceptances payable to a bank |
|
6,848 |
|
(6,315 |
) |
||
Proceeds from the sale of common stock, net |
|
351,512 |
|
|
|
||
Exercise of stock options |
|
|
|
20,501 |
|
||
Net cash (used for) provided by financing activities |
|
358,360 |
|
(64 |
) |
||
Net (decrease) increase in cash and cash equivalents |
|
(38,700 |
) |
(1,348,109 |
) |
||
Cash and cash equivalents, beginning of period |
|
2,744,143 |
|
2,890,364 |
|
||
Cash and cash equivalents, end of period |
|
$ |
2,705,443 |
|
$ |
1,542,255 |
|
|
|
|
|
|
|
||
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
||
Cash paid during the period for interest |
|
$ |
|
|
$ |
578 |
|
|
|
|
|
|
|
||
Supplemental Disclosure of Non-cash Items from Financing Activities: |
|
|
|
|
|
||
Exercise of non-qualified options transferred to equity during the period |
|
$ |
|
|
$ |
104,452 |
|
|
|
|
|
|
|
||
Fair market value of non-qualified options granted in the period.. |
|
$ |
1,411,550 |
|
$ |
79,854 |
|
|
|
|
|
|
|
||
Change in the fair market value of non-qualified options existing at the beginning of the period |
|
$ |
53,869 |
|
$ |
(174,361 |
) |
See accompanying notes to consolidated financial statements.
6
VISION-SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) that the Company considers necessary for a fair presentation of such information. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such rules and regulations. The Company believes, however, that its disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys latest annual report to stockholders. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain accounting policies described below:
a. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
b. Cash Equivalents: Cash equivalents are carried at market value, which approximates amortized cost. Cash equivalents are short-term, highly liquid investments with original maturities of less than three months.
c. Marketable Securities: Marketable securities are carried at market value, which approximates amortized cost. The Company has classified its investments in marketable securities as available-for-sale securities. At June 30, 2003, the Companys marketable securities consisted of a certificate of deposit with a maturity of 182 days.
d. Inventories: Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method and consist of the following:
|
|
June 30, |
|
March 31, |
|
||
|
|
|
|
(audited) |
|
||
Raw materials |
|
$ |
604,937 |
|
$ |
567,008 |
|
Work-in-process |
|
183,546 |
|
155,723 |
|
||
Finished goods |
|
352,997 |
|
437,641 |
|
||
|
|
$ |
1,141,480 |
|
$ |
1,160,372 |
|
Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead.
7
e. Depreciation and Amortization: The Company provides for depreciation and amortization using the straight-line method in amounts that allocate the cost of the assets to operations over their estimated useful lives as follows:
Asset Classification |
|
Estimated |
|
Machinery and Equipment |
|
3-5 Years |
|
Furniture and Fixtures |
|
5 Years |
|
Leasehold improvements are amortized over the shorter of their estimated useful lives or the lives of the leases.
f. Basic and Diluted Net Loss Per Common Share: Basic and diluted net loss per common share is based on the weighted average number of common shares outstanding. Shares of common stock issuable pursuant to outstanding stock options have not been considered, as their effect would be antidilutive.
g. Revenue Recognition: The following must occur before the Company recognizes revenue: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable, (4) collectibility is reasonably assured and (5) the fair value of undelivered elements, if any, exists.
h. Foreign Currency Transactions: In accordance with Statement of Financial Accounting Standard (SFAS) No. 52, Foreign Currency Translation, the Company charges foreign currency exchange gains or losses, in connection with its purchases of products from vendors in Japan, to operations, and charges foreign exchange translation gains and losses to retained earnings.
i. Income Taxes: The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets or liabilities are computed based upon the differences between the financial statement and income tax bases of assets and liabilities as measured by the enacted tax rates.
The Company has recorded a valuation allowance equal to its net deferred tax asset due to the uncertainty of realizing the benefit of this asset.
8
j. Accounting for Derivatives: In September 2000, the Emerging Issues Task Force (EITF) issued EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, which requires freestanding contracts that are settled in a companys own stock, including common stock options and warrants, to be designated as an equity instrument, an asset or a liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value, with any changes in fair value recorded in the results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required.
In accordance with EITF 00-19, the Company has determined that outstanding options to non-employees as of June 30, 2003 to purchase 1,463,032 shares of the Companys common stock should be designated as a liability.
The Company valued the non-qualified options outstanding to non-employees at June 30, 2003 and 2002 using the Black-Scholes method. The value of those options increased by $53,869 and decreased by $94,507 in the three months ended June 30, 2003 and 2002, respectively. The Company recorded the charge or credit to stock-based compensation in the accompanying statements of operations for these periods.
k. Employee Stock-based Compensation Arrangements: The Company accounts for its employee stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Interpretation No. (FIN) 44. The Company does not recognize stock-based employee compensation cost when the options granted have an exercise price equal to, or greater than, the market value of the underlying common stock on the date of the grant. The Company does recognize stock-based employee compensation cost when the options granted have an exercise price less than the market value of the underlying common stock on the date of the grant.
In June 2003, the Company granted options to purchase 1,295,000 shares of common stock to its employees at an exercise price of $1.04 per share. The fair market value of the common stock on the date of grant was $1.09 per share. As a result, the Company will recognize compensation expense for the difference between the fair market value and the option price over the life of the options. In the three months ended June 30, 2003, the Company recognized $1,884 of expense as stock-based compensation in the consolidated statement of operations.
9
k. Employee Stock-based Compensation Arrangements: (Continued)
In accordance with the Financial Accounting Standards Board (FASB) Statement No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, beginning in the quarter ending March 31, 2003, the Company adopted the disclosure requirements of FASB No. 148. Had compensation expense for all stock option grants to employees been determined under the fair value method at the grant dates, consistent with the method prescribed by SFAS No. 123, the Companys net loss would have been increased to the pro forma amounts indicated as follows:
|
|
Three Months Ended June 30, |
|
||||
|
|
2003 |
|
2002 |
|
||
Net loss as reported |
|
$ |
(317,448 |
) |
$ |
(307,128 |
) |
Stock-based employee compensation as reported |
|
1,884 |
|
|
|
||
Pro forma stock-based employee compensation |
|
(69,000 |
) |
(86,300 |
) |
||
Net loss - pro forma |
|
$ |
(384,564 |
) |
$ |
(393,428 |
) |
|
|
|
|
|
|
||
Net loss per share as reported |
|
$ |
(.01 |
) |
$ |
(.01 |
) |
Stock-based employee compensation as reported |
|
|
|
|
|
||
Pro forma stock-based employee compensation |
|
|
|
|
|
||
Net loss per share - pro forma |
|
$ |
(.01 |
) |
$ |
(.01 |
) |
l. Recently Issued Accounting Standards
In May 2003, FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 is the first phase of the FASBs project on liabilities and equity. SFAS No. 150 provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. For example, if an employers issuance of its shares to a key employee requires the employer to redeem the shares upon the employees death, then those shares must be classified as a liability, not as equity. For publicly-held companies, SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. SFAS No. 150 requires companies to record the cumulative effect of financial instruments existing at the adoption date. The Company does not believe the adoption of SFAS 150 will have a significant effect on the Companys operations, financial position or cash flows.
10
l. Recently Issued Accounting Standards: (Continued)
In November 2002, the EITF reached consensus on EITF No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue arrangements with multiple deliverables include arrangements that provide for the delivery or performance of multiple products, services and/or rights to use assets where performance may occur at different points in time or over different periods of time. The Company may enter into arrangements for multiple deliverables that occur at different points in time if it enters into a contract to sell endoscopes and EndoSheaths on a per-procedure basis. EITF No. 00-21 is effective for the Company beginning October 1, 2003. The Company has not completed the evaluation of the impact, if any, of this EITF on its operations.
3. 3DV Systems Ltd.
The Company accounts for its investment in 3DV Systems Ltd. (3DV) using the equity method of accounting. As of June 30, 2003, the Company owned approximately 21% of the outstanding shares of 3DV, and would hold approximately 17% of the shares of 3DV, if all employee options and Convertible Notes were converted to common shares. The Companys investment in 3DV totaled $0 at March 31, 2003, and accordingly, the Company did not recognize any portion of the losses of 3DV for the three months ended June 30, 2003.
4. Three BY Ltd.
In June 2003, the Company entered into a Contract Manufacturing Agreement, a Loan Agreement and a Pledge Agreement (collectively, the 3BY Agreements) with Three BY Ltd., an Israeli company (3BY). The 3BY Agreements provide for, among other things, the manufacture of certain of the Companys products by 3BY, and a loan of up to $267,500 by the Company to 3BY for the purchase and installation of certain manufacturing equipment by 3BY, at 3BYs facility, to be used to manufacture certain of the Companys products. As of June 30, 2003, the Company had advanced $69,978 to 3BY, and expects to advance the complete loan by September 30, 2003. After the manufacturing equipment is completed, and production has begun, the Company and 3BY plan to establish a repayment schedule, according to the 3BY Agreements.
11
5. Segment Information
The Company has three reportable segments medical, industrial and corporate. The medical segment designs, manufactures and sells EndoSheaths and sells endoscopes to users in the health care industry. The industrial segment designs, manufactures and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. In addition, the industrial segment manufactures and repairs endoscopes for the medical segment. The corporate segment consists of certain administrative expenses applicable to the Company as a whole and the management oversight of the Companys investment in 3DV, Vision-Sciences Ltd. (the Companys Israeli subsidiary) and the Companys support of the University of Georgia Hepatitis Project, Proposal No. 022297-01 (the Egypt Project).
All segments follow the accounting policies described in the summary of significant accounting policies. The Company evaluates segment performance based upon operating income. Identifiable assets are those used directly in the operations of each segment. Corporate assets include cash, marketable securities, the assets of Vision-Sciences, Ltd. and the investment in 3DV. The carrying value of the investment in 3DV at June 30, 2003 was $0. Data regarding managements view of the Companys segments are provided in the following tables.
Three months ended June 30, |
|
Medical |
|
Industrial |
|
Corporate |
|
Adjustments |
|
Total |
|
|||||
2003 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales to external customers |
|
$ |
1,271,017 |
|
$ |
689,465 |
|
$ |
|
|
$ |
|
|
$ |
1,960,482 |
|
Intersegment sales |
|
|
|
146,384 |
|
|
|
(146,384 |
) |
|
|
|||||
Operating income (loss) |
|
23,823 |
|
(24,529 |
) |
(328,525 |
) |
|
|
(329,231 |
) |
|||||
Interest income (expense) |
|
|
|
|
|
8,172 |
|
|
|
8,172 |
|
|||||
Depreciation and amortization |
|
45,532 |
|
9,956 |
|
|
|
|
|
55,488 |
|
|||||
Advance to 3BY Ltd. |
|
69,978 |
|
|
|
|
|
|
|
69,978 |
|
|||||
Other significant non-cash items: Stock-based compensation |
|
107 |
|
36 |
|
55,610 |
|
|
|
55,753 |
|
|||||
Expenditures for fixed assets |
|
18,600 |
|
1,250 |
|
|
|
|
|
19,850 |
|
|||||
Total assets |
|
2,108,176 |
|
951,540 |
|
2,922,801 |
|
(311,910 |
) |
5,670,607 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2002 |
|
|
|
|
|
|
|
|
|
|
|
|||||
Sales to external customers |
|
$ |
1,008,006 |
|
$ |
726,453 |
|
$ |
|
|
$ |
|
|
$ |
1,734,459 |
|
Intersegment sales |
|
|
|
202,873 |
|
|
|
(202,873 |
) |
|
|
|||||
Operating income (loss) |
|
(242,989 |
) |
4,834 |
|
(87,963 |
) |
|
|
(326,118 |
) |
|||||
Interest income (expense) |
|
|
|
(578 |
) |
12,147 |
|
|
|
11,569 |
|
|||||
Depreciation and amortization |
|
44,216 |
|
8,192 |
|
|
|
|
|
52,408 |
|
|||||
Advance to 3BY Ltd. |
|
|
|
|
|
|
|
|
|
|
|
|||||
Other significant non-cash items: Stock-based compensation |
|
|
|
|
|
(94,507 |
) |
|
|
(94,507 |
) |
|||||
Expenditures for fixed assets |
|
14,860 |
|
10,894 |
|
|
|
|
|
25,754 |
|
|||||
Total assets |
|
1,879,284 |
|
1,290,133 |
|
2,735,194 |
|
(164,676 |
) |
5,739,935 |
|
12
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. See the Notes to the Consolidated Financial Statements included elsewhere herein. Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based upon our historical experience, current trends and information available from other sources, as appropriate. If different conditions result from those assumptions used in our judgment, the results could be materially different from our estimates. Our critical accounting policies include the following:
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended by SAB 101A and 101B, and EITF 00-21. These pronouncements require that five basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; (4) collectibility is reasonably assured and (5) the fair value of undelivered elements, if any, exists. Determination of criterion (4) is based on managements judgment regarding the collectibility of invoices for products and services delivered to customers. Determination of criterion (5) is based on managements judgment regarding the fair value of any undelivered elements of a contract. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Financial instruments, including derivatives and non-qualified options to purchase our common stock, require disclosure of an estimate of their fair values. Fair values are based on listed market prices, where possible. We account for certain non-qualified options granted to non-employees to purchase our common stock in accordance the EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, and carry these contracts at fair value, with any changes in fair value recorded in the results of operations. Fair values for certain non-qualified options are derived from pricing models that consider current market and contractual prices for the underlying financial instruments or commodities, as well as time value and yield curve or volatility factors underlying the positions. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. The Company uses the Black-Scholes method for determining the value of the potential obligation to non-qualified option holders.
We account for certain non-qualified options granted to employees to purchase our common stock in accordance with SFAS No. 123, Accounting for Stock-Based Compensation. If the fair market value of the underlying stock at the date of grant is greater than the option price, we recognize compensation expense for the difference between the market price and the option price over the life of the options.
13
Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to the availability of capital resources, the availability of third-party reimbursement, government regulation, the availability of supplies, competition, technological difficulties, general economic conditions and other risks detailed in our most recent Annual Report on Form 10-K and any subsequent periodic filings made with the Securities and Exchange Commission. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.
We develop, manufacture and sell flexible endoscope products for the medical device and industrial device markets. We operate in three reporting segments, medical, industrial and corporate.
The medical segment supplies endoscopes and disposable EndoSheath® Systems (EndoSheaths) to the Ear-Nose-Throat (ENT), gastrointestinal (GI) and pulmonary markets. Health-care providers use EndoSheaths to cover the insertion tube of flexible endoscopes, such as ENT endoscopes, sigmoidoscopes and bronchoscopes. The EndoSheaths allow the health-care providers to process patients economically by permitting the providers to avoid reprocessing the endoscopes after each use. In addition, the EndoSheaths are sterile, thus helping to ensure each patient a contaminant-free procedure.
The industrial segment designs, manufactures and sells flexible endoscopes, termed borescopes, for industrial users, and manufactures and repairs flexible endoscopes for the medical segment. The industrial segment users consist primarily of companies in the aircraft engine manufacturing and maintenance markets and the defense market.
The corporate segment consists of certain administrative and business development activities applicable to the company as a whole, and management oversight of our investments in 3DV, Vision Sciences, Ltd. and the Egypt Project.
14
Sales
Net sales for the three months ended June 30, 2003 (Q1 04) were $1,960,482, an increase of $226,023, or 13%, compared to the three-month period ended June 30, 2002 (Q1 03). During Q1 04, sales of the medical segment increased by $263,011, or 26%, and sales of the industrial segment decreased by $36,988, or 5%, compared to Q1 03. In the medical segment, the sales and changes in sales by market were as follows ($000s):
Market |
|
Q1 04 |
|
Q1 03 |
|
Increase |
|
Percent |
|
|||
ENT |
|
$ |
1,058 |
|
$ |
828 |
|
$ |
230 |
|
28 |
% |
GI |
|
151 |
|
119 |
|
32 |
|
27 |
% |
|||
Pulmonary |
|
15 |
|
27 |
|
(12 |
) |
(44% |
) |
|||
Other |
|
47 |
|
34 |
|
13 |
|
38 |
% |
|||
Total |
|
$ |
1,271 |
|
$ |
1,008 |
|
$ |
263 |
|
26 |
% |
Medical segment sales to the ENT market include sales of our own ENT endoscope and ENT EndoSheaths for our ENT endoscope, and for the ENT endoscopes of most other major manufacturers. Sales to the GI and pulmonary markets include sales of our proprietary endoscopes and EndoSheaths for use with those endoscopes. Sales termed Other include repairs of our endoscopes and accessories.
In the ENT market, sales of EndoSheaths increased by approximately $213,000, or 32%, compared to Q1 03. In addition, sales of ENT endoscopes increased by approximately $13,000, or 8%, compared to Q1 03. The remainder of the increase in sales to the ENT market was due to initial sales of our new ENT Channeled EndoSheath. The ENT Channeled EndoSheath is designed to allow health-care providers to perform therapeutic procedures in their offices, using conventional diagnostic ENT endoscopes, that currently they can only perform using a therapeutic ENT endoscope that contains a channel, typically in a hospital setting. The channel contained in the ENT Channeled EndoSheath allows the health-care provider to pass tools, such as biopsy forceps or brushes, through it, or to irrigate the sinus cavity of a patient, a common procedure after sinus surgery. Therapeutic ENT endoscopes are typically only found in hospital settings as they represent a large investment.
This increase in sales of ENT EndoSheaths was due primarily to higher unit volume from the domestic and international markets. Sales to domestic customers were approximately $399,000, an increase of approximately $36,000, or 10%, compared to Q1 03, with unit sales increasing to approximately 37,000 from 33,700 in Q1 03. Sales to international distributors were approximately $483,000, an increase of approximately $177,000, or 58%, with unit sales increasing to approximately 82,800 from 52,400 in Q1 03. The increase in sales to domestic customers resulted from higher demand from more customers and higher average usage from all customers who purchased product in Q1 04. We believe this reflects improvements in our sales and distribution capabilities, our program of discount pricing for new customers and our emphasis on the practice efficiencies attained when using our ENT EndoSheath.
15
On August 6, 2003, we entered into an exclusive marketing and distribution agreement (the Medtronic Agreement) with Medtronic Xomed, Inc. (Medtronic Xomed), which we expect will become effective on or about September 17, 2003. The initial term of the Medtronic Agreement is three years. Thereafter, the Medtronic Agreement will be automatically renewed for successive one-year periods, unless terminated by either party upon advance written notice. Under the Medtronic Agreement, we have granted Medtronic Xomed exclusive distribution rights in the United States and Canada to market and sell our ENT EndoSheaths and ENT endoscopes to ENT practitioners. Medtronic Xomed has agreed to certain minimum purchase requirements for the initial twelve-month period of the term. We expect the Medtronic Agreement will result in an increase in sales of our ENT EndoSheaths and ENT endoscopes due to the significantly greater marketing and sales capabilities of Medtronic Xomed. In addition, the Medtronic Agreement is expected to facilitate the introduction of new ENT products by allowing quicker market acceptance of these products. As a result of the Medtronic Agreement, the success of our ENT product lines will be substantially dependent upon the success of the marketing and sales activities of Medtronic Xomed over which we have limited control.
The increase in sales to international distributors is primarily due to higher demand, especially from Europe and Australia. In addition to continuing to promote our existing products to the international market, we plan to introduce our new products to these distributors. Further, we continue to seek new distributors who have a strong ENT presence in countries where we have no representation. Our business is subject to the typical risks associated with operating in international markets, including longer sales cycles, exposure to adverse changes in currency exchange rates and compliance with local customs, rules and regulations. Despite the increase in sales to international distributors and our continuing marketing and sales efforts in international markets, there can be no assurance that our sales to international distributors will continue to increase at the same rate, or at all.
The increase in sales to the GI (Gastrointestinal) market was due primarily to higher prices for GI EndoSheaths, offset partially by lower demand due to reimbursement rates to health-care providers not being sufficient to support the use of our GI EndoSheaths for those gastrointestinal procedures.
The decrease in sales to the pulmonary market was due primarily to lower demand for our bronchoscopes. In Q1 03 we sold two bronchoscopes, whereas we sold none in Q1 04. The sales cycle for all endoscopes can be lengthy, especially for our proprietary endoscopes, due primarily to the commitment that customers must make to use our proprietary EndoSheath. We expect sales to this market will improve, compared to the fiscal year ended March 31, 2003, but there is no assurance that such an improvement will occur.
The decrease in sales of the industrial segment was due to continued lower demand for jet engine repair services due to continued slowness in air travel.
16
Gross Profit
Gross profit in Q1 04 increased to $757,585, or 39% of net sales, compared to $461,973, or 27% of net sales in Q1 03. Gross profit increased by approximately $348,500 in the medical segment, and decreased by approximately $52,900 in the industrial segment. The increase in gross profit in the medical segment was due primarily to the lower unit costs of the ENT EndoSheath, resulting from full implementation of our new manufacturing equipment. In addition, the higher volume of ENT EndoSheath units sold and the higher prices attained for GI EndoSheaths added to the increase in gross profit. In the industrial segment, the decrease in gross profit was due primarily to lower sales volume and product mix.
In order to further reduce our production costs, we recently entered into a contract manufacturing agreement with 3BY, providing for the transfer of the production of our GI and pulmonary EndoSheaths to 3BY. In addition, we have agreed to lend 3BY up to $267,500 to purchase and install a line of equipment that will allow 3BY to manufacture our ENT EndoSheaths. We will then have the ability to manufacture ENT EndoSheaths in both Natick, MA and Israel. The purpose of this transfer of manufacturing is to lower our production costs. As of June 30, 2003, we have advanced approximately $70,000 of the loan amount to 3BY. According to the 3BY Agreements, we will establish a repayment schedule once the production line is operational. Until that time, 3BY has agreed to provide us a security interest in the equipment to be purchased, or in other equipment of equal value. We expect shipments of GI and pulmonary EndoSheaths from 3BY will begin in December 2003 and January 2004, respectively. We expect shipments of ENT EndoSheaths from 3BY will begin in February 2004. As a result of the 3BY Agreements, we expect that the per unit production costs of our EndoSheaths will decrease by approximately 50%, thereby increasing our gross profit.
The Medtronic Agreement is expected to result in an increase in unit sales of our ENT EndoSheaths and ENT endoscopes, the gross profit benefits of which will be offset by the lower unit sales prices to Medtronic Xomed, compared to our current sales prices to end users. Additional benefits of the Medtronic Agreement include the elimination of the commission expense we currently pay to our independent sales representatives for sales of ENT products, and the potential reduction of other marketing and sales expenses.
We expect to experience the full effects of the Medtronic Agreement and the 3BY Agreements on our sales and gross profits in our fiscal year beginning April 1, 2003.
Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses in Q1 04 increased by $83,366, or 11%, compared to Q1 03. SG&A expenses amounted to 44% and 45% of net sales in Q1 04 and Q1 03, respectively. SG&A expenses increased in the medical segment by approximately $32,000, due primarily to higher costs for personnel and consulting fees. SG&A expenses declined in the industrial segment by approximately $24,000, due primarily to lower costs for personnel. SG&A expenses increased by approximately $75,000 in the corporate segment due primarily to higher costs for personnel costs and professional fees.
17
Research and Development Expenses
R&D expenses increased by $65,099 in Q1 04, compared to Q1 03, and were 8% of sales in Q1 04, compared to 5% in Q1 03. The primary causes for this increase were higher costs for additional personnel hired to work on developing new products, and outside services related to CMOS patent applications. We expect costs for R&D will continue to be higher in FY 04, compared to FY 03, as we increase our efforts to develop new products utilizing the technology inherent in our EndoSheaths.
On May 29, 2003 we signed a Development, Supply and Distribution Agreement (DSDA) with Endoscopic Technologies, Inc. (ESTECH), a company with certain proprietary technologies relating to methods for minimally-invasive cardiovascular surgery. In the DSDA, we and ESTECH have agreed to use commercially reasonable and diligent efforts to complete the development of certain products being designed for minimally-invasive surgery, specifically for the treatment of coronary atrial fibrillation. The total value of the product development component of the DSDA is approximately $90,000. According to the terms of the DSDA, as of June 30, 2003, we had invoiced $45,000 to ESTECH, and recorded that total amount in a deferred revenue account within accrued liabilities on the accompanying consolidated financial statements. We plan to utilize percentage-completion accounting to recognize revenue from this contract. We expect to complete the product development stage of the DSDA in the fiscal quarter ending June 30, 2004.
Stock-based Compensation Expenses
Stock-based compensation costs increased by $150,260, due primarily to an increase in the fair value of non-qualified options. This cost is computed by determining the change in the fair value of stock options granted to non-employees of the Company. We use the Black-Scholes method to calculate the fair value. This method uses stock price volatility, the closing price of our common stock as traded on the Nasdaq SmallCap Market and other factors to determine the fair value of non-qualified options. In addition, during the three months ended June 30, 2003, the compensation committee of our board of directors authorized the issuance of non-qualified options to purchase 1,295,000 shares of common stock to certain of our employees. These options were priced below the fair market price of our common stock on the date of grant. Accordingly, we will recognize compensation expense totaling approximately $65,000 from June 2003 through December 2007, the vesting period of these options.
The net loss per share for Q1 04 was $.01, compared to a net loss of $.01 per share for Q1 03.
Operating Income (Loss)
Operating income (loss) by segment was as follows ($000s):
Segment |
|
Q1 04 |
|
Q1 03 |
|
Change |
|
|||
Medical |
|
$ |
24 |
|
$ |
(243 |
) |
$ |
267 |
|
Industrial |
|
(25 |
) |
5 |
|
(30 |
) |
|||
Corporate |
|
(328 |
) |
(88 |
) |
(240 |
) |
|||
Total |
|
$ |
(329 |
) |
$ |
(326 |
) |
$ |
(3 |
) |
18
In the medical segment, the improved gross profit was the primary driver for the improvement in operating income (loss). This improved gross profit was partially offset by higher costs for SG&A and increased R&D expenses. In the industrial segment, the lower gross profit, partially offset by lower SG&A expenses was the primary driver for the change. In the corporate segment, the higher costs for stock-based compensation for non-qualified options to non-employees was the primary driver for the higher loss. In addition, the corporate segment incurred higher expenses for personnel costs, R&D and professional fees.
Liquidity and Capital Resources
At June 30, 2003, our principal source of liquidity was working capital of approximately $3.8 million, including $2.8 million in cash, cash equivalents and marketable securities. At June 30, 2003, we had acceptances payable to a bank totaling approximately $17,000. We have pledged $125,000 to secure the acceptances payable.
We also have an agreement with a bank, which includes a revolving line of credit under which we may borrow up to $1,000,000, net of up to $250,000 of any outstanding letters of credit and bankers acceptances. Borrowings under this loan arrangement must be fully cash collateralized. The agreement also stipulates that when we achieve positive cash flow, as defined in the agreement, we will be eligible to negotiate changes to this loan arrangement that may include changing the borrowing base for revolving loans, and the release of the pledged cash collateral.
Our cash and cash equivalents decreased by approximately $39,000 in the three months ended June 30, 2003, due primarily to cash used for operations of approximately $307,000 and cash used for investing activities of approximately $90,000. These uses were offset by selling new shares to non-affiliated investors for approximately $352,000 in a private placement in April 2003 and an increase in acceptances payable to a bank of approximately $7,000. We expect our current balance of cash, cash equivalents and marketable securities is sufficient to fund our operations at least for the next twelve months.
In connection with the 3BY Agreements, we have agreed to lend 3BY up to $267,500 to purchase and install a line of equipment that will allow 3BY to manufacture our ENT EndoSheaths. As of June 30, 2003 we have advanced approximately $70,000 of the loan amount to 3BY. According to the 3BY Agreements, we will establish a repayment schedule once the production line is operational. Until that time, 3BY has agreed to provide us a security interest in the equipment to be purchased, or in other equipment of equal value.
We expect total spending for property and equipment will not exceed $500,000 for the fiscal year ending March 31, 2004.
19
We conduct our operations in certain facilities leased from non-related parties. These leases expire on various dates through October 31, 2006. In addition, we have operating leases for certain office equipment leased from non-related parties. These leases expire on various dates through May 2006. Approximate future minimum lease commitments under these leases are as follows:
Year ending March 31, |
|
|
|
|
2004 |
|
$ |
302,000 |
|
2005 |
|
309,000 |
|
|
2006 |
|
229,000 |
|
|
2007 |
|
95,000 |
|
|
Total |
|
$ |
935,000 |
|
We have incurred losses since our inception, and losses are expected to continue at least during the fiscal year ending March 31, 2004 (FY 04). We have funded the losses principally with the proceeds from public and private equity financings. Although we do not anticipate the need for additional financing in FY 04, management has decided that new financing may be desirable. However, there can be no assurance that additional funding will be available, or available on reasonable terms.
In the normal course of business, we are subject to the risks associated with fluctuations in interest rates and changes in foreign currency exchange rates.
We maintain a portfolio of marketable, primarily fixed income, available-for-sale securities of various issuers, types and maturities. We have not used derivative financial instruments in our investment portfolio. We attempt to limit our exposure to interest rate and credit risk by placing our investments with high-quality financial institutions and have established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity.
Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. Fixed-rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates decline. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates.
We face exposure, due to purchases of raw materials from Japanese suppliers, to adverse movements in the value of the Japanese Yen. This exposure may change over time, and could have a materially adverse effect on our financial results. We may attempt to limit this exposure by purchasing forward contracts, as required. Most of our liabilities are settled within 90 days of receipt of materials. At June 30, 2003, our liabilities relating to Japanese Yen were approximately $49,000.
20
a) Evaluation of Disclosure Controls and Procedures.
Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934), the chief executive officer and chief financial officer have concluded that our disclosure controls and procedures as of the end of the three months ended June 30, 2003, are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and are operating in an effective manner.
b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation.
21
PART II - OTHER INFORMATION
Item 5. Other Information
In June 2003, we entered into a Contract Manufacturing Agreement, a Loan Agreement and a Pledge Agreement with 3BY. The information included in Note 4 to the unaudited, consolidated financial statements furnished under Part I, Item 1 herein, and the information included in Part I, Item 2 under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations is hereby incorporated by reference.
On August 6, 2003, we entered into the Medtronic Agreement, which we expect will become effective on or about September 17, 2003. Under the Medtronic Agreement, we have granted Medtronic Xomed exclusive rights to distribute our ENT EndoSheaths and ENT endoscopes to ENT practitioners in the United States and Canada. The information included in Part I, Item 2 under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations is hereby incorporated by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Contract Manufacturing Agreement, dated June 25, 2003, by and between the Registrant and Three BY Ltd.
10.2 Loan Agreement, dated June 25, 2003, by and between the Registrant and Three BY Ltd.
10.3 Pledge Agreement, dated June 25, 2003, by and between the Registrant and Three BY Ltd.
31 Rule 13a-14(c)/15d-14(c) Certifications
32 Certification pursuant to 18 U.S.C. §1350
(b) Reports on Form 8-K
None.
22
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.
|
VISION-SCIENCES, INC. |
|||
|
|
|||
Date: August 14, 2003 |
/s/ Ron Hadani |
|
||
|
Ron Hadani |
|||
|
President, Chief Executive Officer |
|||
|
|
|||
|
|
|||
Date: August 14, 2003 |
/s/ James A. Tracy |
|
||
|
James A. Tracy |
|||
|
Vice
President Finance, Chief Financial Officer and |
|||
23