Forward Looking Statements
This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PLSRA"), Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") regarding
Vycor Medical, Inc.(the "Company" or "Vycor," also referred to as "us", "we" or "our"). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plans," "potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" or the negative of these words or other variations on these words or comparable terminology. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Business," as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA.
1. Organizational History
The Company was formed as a limited liability company under the laws of the
State of New Yorkon June 17, 2005as " Vycor Medical LLC". On August 14, 2007, we converted into a Delawarecorporation and changed our name to " Vycor Medical, Inc.". The Company's listing went effective on February 2009and on November 29, 2010Vycor completed the acquisition of substantially all of the assets of NovaVision, Inc.("NovaVision") and on January 4, 2012Vycor, through its wholly-owned NovaVision subsidiary, completed the acquisition of all the shares of Sight Science Limited("Sight Science"), a previous competitor to NovaVision. 19
2. Overview of Business
Vycor is dedicated to providing the medical community with innovative and superior neurosurgical and neurotherapeutic solutions and operates two distinct business units within the medical industry.
Vycor Medicaldesigns, develops and markets medical devices for use in neurosurgery. NovaVision develops non-invasive, computer-based light stimulation therapies for those suffering from vision loss resulting from neurological trauma. Both businesses adopt a minimally or non-invasive approach. Both technologies have strong sales growth potential, address large potential markets and have the requisite regulatory approvals. The Company has 40 granted patents and a further 15 pending. The Company leverages joint resources across the divisions to operate in a cost-efficient manner. In addition to our existing products and products in development we actively seek acquisition, joint venture and in-licensing opportunities in the medical device field which we believe are complementary, can benefit from our existing infrastructure and will add shareholder value.
Vycor Medicaldesigns, develops and markets medical devices for use in neurosurgery. Vycor Medical'sViewSite Brain Access System ("VBAS") is a next generation retraction and access system that was fully commercialized in early 2010 and is the first significant technological change to brain tissue retraction in over 50 years in contrast to significant development in most other neuro-surgical technologies. Vycor Medicalis ISO 13485:2003 compliant, and VBAS has U.S. FDA510(k) clearance and CE Marking for Europe(Class III) for brain and spine surgeries, full regulatory approvals in Australia, Canada, China, Koreaand Japanand is seeking or has partial regulatory approvals in Brazil, India, Russia, Taiwanand Vietnam.
To access a surgical site in the brain, a surgeon usually needs to remove part of the skull (craniotomy) and then make an entry incision in the outer protective brain tissue (corticotomy); the soft brain tissue is then parted (retracted) to access the targeted site. The current standard of care, the blade retractor, utilizes a metal blade retractor to pull the tissue apart; to maintain the opening the blades are attached to a head frame and parting tension is applied to the tissue. In a typical procedure somewhere more than 2 blades are used.
Many clinical studies have shown that retractors can cause excessive pressure on brain tissues, resulting in damage and a prolonged patient recovery. The incidence of contusions (tissue injuries) or infarctions (blockage of blood supply) from brain retraction is as great as 5-10% in cranial surgeries.
Vycor's VBAS is a significant improvement over current technologies for accessing regions within the brain. A disposable product that can be used with both endoscopic and neuro-navigation systems (IGS), the VBAS includes an introducer and working channel. Available in multiple sizes, the current series consists of 12 disposable products, offered in four different port (working channel) diameters of 12mm, 17mm, 21mm, and 28 mm and a choice of three lengths: 3cm, 5cm, and 7cm. The surgeon makes a smaller corticotomy, inserts the clear, elliptical-shaped VBAS introducer through the brain tissue, removes the introducer and is left with a clear hollow working channel to provide access to the precise location desired for surgery. 20 -------------------------------------------------------------------------------- VBAS' clinical advantages are supported by a number of leading peer-reviewed articles (see Peer Review and Other Clinical Studies). Clinical benefits cited include: minimally invasive shape and less invasive procedure; resultant reduction of pressure on the brain; improved visual field; improved working channel; and more accurate target access. Management also believes, from anecdotal surgeon feedback, that although a disposable product VBAS offers potential cost savings from shorter operating theater time and reduced post-operative recovery time.
The Market For Vycor Medical's VBAS Product
VBAS is used for craniotomy procedures. Based on statistics from the
American Association of Neurological Surgeons(AANS), management estimates 700,000 such procedures were performed in the US in 2012. Of this, management believe approximately 200,000 (28 percent) are addressable by the VBAS range currently, with another 125,000 (total of 325,000 or 46 percent) addressable by an expanded future range. Management estimates, for the global market, there exists a current addressable market of approximately 1,000,000 procedures with another 600,000 addressable by an expanded VBAS range.
The VBAS device is both a brain access system and a retractor and is therefore unique with no direct competitors. Competitive manufacturers of brain retractors include Cardinal Health (V. Mueller line), Aesculap, Integra Life Science and Codman (Division of Johnson & Johnson).
Nico Corporationhas a brain access device specifically designed to work with its Myriad resection and suction product. Sales and Marketing Domestic According to the American Board of Neorological Surgery (ABNS), there are approximately 3,500 neurosurgeons in the US, providing a well-defined target audience. Vycor Medical'ssales channels are to stocking regional distributors and direct to hospitals through independent representatives, all of whom have existing relationships with neurosurgeons and provide an experienced and efficient distribution infrastructure without the need for a large and costly dedicated Vycor regional sales team. The distributors and representatives are supported by Vycor Medical Sales, Marketing and Customer Service. Vycor Medicalhas found that the learning curve is only 1-2 cases for surgeons, who like the simplicity of design and ease of use after trialing the product. However, Hospital Administrationis required to approve the purchase of a new product and sometimes even a trial or evaluation of the product in the hospital by the neurosurgeon and this is one of the key barriers to the speed of adoption as this process can take several months.
Vycor Medicalutilizes select medical device distributors with experience in neurosurgical devices in their countries or regions. Vycor Medicalhas regulatory approvals for VBAS in Australia, Canada, China, Europe(Class III), Koreaand Japanand is seeking or has partial regulatory approvals in Russia, India, Vietnamand Taiwanwith distribution agreements in place or being sought. 22
Peer Review and Other Clinical Studies
The publication of clinical papers in neurosurgery journals by surgeon-users of VBAS regarding their experiences with the products (peer review papers), and the publication of other clinical data, is important for the Company as it continues to evidence the clinical superiority of VBAS which in turn drives its adoption and accelerates the hospital approval process. During the last 3 years the following papers were published:
• "Usage of a Minimally Invasive Tubular Retraction System for Deep-Seated Tumors
in Pediatric Patients" in
intra-axial tumors is challenging, the ViewSite™ tubular retractor and
frameless neuro navigation facilitated the surgical approach and the
combination of these technologies adds to the surgeon's armamentarium to safely
approach tumors in deep locations. • "Vycor Viewsite TC: Endoscope-guided Intraparenchimal Brain Tumor Resection,"
Program at the
patient taking Avastin®, which delays surgical wound healing. He said the
Viewsite TC was essential to the surgery; otherwise, no procedure could have
been performed on the patient. • "Minimally Invasive Trans-Portal Resection of Deep Intracranial Lesions" in
Minimally Invasive Neurosurgery,
by lead author
adult and pediatric patients with a variety of pathologies, including colloid
cyst, DNET, papillary pineal tumor, anaplastic astrocytoma, toxoplasmosis and
lymphoma. The locations of the lesions approached included: lateral ventricle,
basal ganglia, pulvinar/posterior thalamus and insular cortex. Post-operative
imaging was assessed to determine extent of resection and extent of white
matter damage along the surgical trajectory. Satisfactory resection or biopsy
was obtained in all patients. "VBAS lends itself well to minimally invasive
microsurgical approaches and can be used in combination with modern
navigational systems. The use of navigation permits not only the creation of a
smaller craniotomy but also facilitates the creation of a trajectory that
provides efficient and safe means for splitting white fiber tracts," said the
• "3D Endoscope-Assisted Transcallosal Approach to the Third Ventricle Using a
Minimally Invasive Tubular Retractor System - A Feasibility Study" by Alireza
J Neurol Surg B 2014; 75 - A047.
Though some authors have advocated the benefits of retractorless microsurgical
techniques in approaching the third ventricle, the use of routine retractors
and their potential complications, in some cases, cannot be avoided. An
increased incidence of cortical damage has been reported in a rat model,
wherein retractors were held in place for more than 15 minutes at a pressure of
20 mmHg. We found the interhemispheric 3D endoscope-assisted trancallosal
approach through tubular retractors to be feasible for the management of
pathologies of the third ventricle. • "3D Endoscopic Transtubular Anterior Petrosectomy for Petroclival Meningiomas:
Assessment of Resection in Varying Tumor Volumes Utilizing a Synthetic Tumor
transtubular anterior transpetrosal approaches in the treatment of medium and
large petroclival meningiomas is both feasible and effective. Despite the
demonstrated efficacy on those tumor types, resection of specific giant
petroclival meningiomas still necessitate the use of traditional skull base
microsurgical techniques. Further clinical studies are necessary to determine
potential clinical complications 22
Vycor Medicaluses sub-contract manufacturers to manufacture, package, label and sterilize its products. Lacey Manufacturing Companyof Bridgeport, Connecticutmanufactures 6 of the VBAS 12 different sizes, is FDA-registered and meets ISO standards and certifications. C&J Industries, Meadville PA("C&J") manufactured the remaining 6 of the VBAS 12 different sizes. The sub-contract agreement with C&J formally expired in 2014; Vycor Medicalholds sufficient inventory for its foreseeable needs and is in discussions with selected qualified sub-contract manufacturers to replace C&J. Intellectual Property Patents Vycor Medicalmaintains a portfolio of patent protection on its methods and apparatus for its Brain and Spine products and technology in the form of issued patents and applications, both domestically and internationally, with a total of 8 granted and 8 pending patents.
Vycor Growth Strategy
1. Increasing U.S. market penetration through broader hospital coverage and targeted direct physician marketing.
Vycor Medical'ssales and marketing strategy is to penetrate a well defined target market of 3,500 neurosurgeons by trade shows, significantly increased direct marketing with VBAS samples and existing clinical data, and through its existing distributors which it is continually evaluating and upgrading as well as adding additional distributors in regions where it has little to no presence. In marketing to these hospitals and surgeons, Vycor Medicalleads with those neurosurgical procedures where VBAS' competitive advantages are most easily understood - deep seated tumors and other complicated deep procedures. The focus is both on adding new hospitals and expanding to additional surgeons in hospitals where VBAS is already approved and to expand usage to a broader range of procedures. Vycor Medicalprioritizes its attention on teaching hospitals, which not only carry out more relevant procedures but also provide a natural way to drive adoption through the conversion of new surgeons.
2. Provision of more Clinical and Scientific Data supporting the products superiority over the current standard of care blade retractors and to demonstrate the products potential for cost savings.
Clinical and scientific data (in the form of peer reviewed articles, clinical studies and other reports and case studies) are critical in driving adoption further and faster by demonstrating VBAS' superiority as a minimally invasive access system which helps VBAS move further up the hospital cost/benefit curve. To this end an animal comparative study is currently underway. This study is intended to demonstrate greater ease of access, faster surgery time and reduced tissue damage. The second area
Vycor Medicalwill address is MRI compatibility. Increasingly, intra operative MRI is increasingly being used in neurosurgery, further playing to 23
-------------------------------------------------------------------------------- VBAS' competitive edge over the traditional non MRI-compatible metal blade retractor.
Vycor Medicalintends to commission a brief technical study so that VBAS can be formally certified as MRI compatible. Vycor Medicalis also aware of two additional studies in peer-reviewed journals anticipated to be published during 2014 by the Weill Cornell Medical Center, and additional studies are also underway and should be published during 2014 and 2015.
3. International Market Growth
Vycor Medicalutilizes select medical device distributors with experience in neurosurgical devices in their countries or regions. In Europe, the Company currently only has a limited number of distributors and is only now turning its focus to this geographic region. VBAS has full regulatory approvals in Australia, Canada, China, Europe(EU - Class III), Koreaand Japanand is seeking or has partial regulatory approvals in Brazil, India, Russia, Taiwanand Vietnam. Vycor Medicalplans on focusing on the international markets and is actively pursuing new distribution agreements.
4. New Product Development
New Product Development is targeted at both driving the use of its existing VBAS product range through ancillaries that will facilitate the product's use and through new product extensions to broaden VBAS applicability to procedures currently not addressed by the existing product line.
Vycor Medicalhas launched in the US a universal non-disposable extension arm to VBAS, as a result of surgeon feedback, which further increases the ease of use of its disposable VBAS product and, management believes, will augment VBAS adoption. Vycor Medicalhas prototyped and is now implementing manufacturing of two new smaller VBAS devices that will facilitate endoscopic work within the ventricles including the placement of catheters, with particular relevance for the pediatric neurosurgical market. Vycor Medicaldeveloped this with a leading neurosurgeon and anticipates the product being available by the end of 2014. Vycor Medicalis also working on a new set of VBAS devices that will be targeted at being completely compatible with selected Image Guided Systems. Management strongly believes that the existing VBAS rigid structure lends itself well to being incorporated into the increasing trend of IGS surgery and anticipates having compatible devices finalized for production during the first part of 2015. NovaVision, Inc.Introduction NovaVision provides non-invasive, computer-based vision solutions targeted at a substantial and largely un-addressed market of people who have lost their sight as a result of Stroke or Traumatic Brain Injury (neurological brain damage). NovaVision addresses a significant target market, estimated at approximately $2 billionin the U.S. and over $13 billionglobally.
NovaVision has a family of therapies that both restore lost vision and address other neurologically-induced vision issues:
Restoration of vision: NovaVision's VRT and Sight Science's Neuro-Eye Therapy (NeET), aim to improve visual sensitivity. VRT delivers a series of light stimuli along the border of the patient's visual field loss. These programmed light sequences stimulate the border zone between the "seeing" and "blind" visual fields, repetitively challenging the visual cortex in the border zone with multiple stimuli over the course of time. NeET targets deep within the blind area by repeated stimulation, allowing patients to detect objects within the blind field. 24
Compensation and Re-training: NeuroEyeCoach™ provides a complementary therapy to VRT and NeET, which re-trains ability of a patient to move their eyes, re-integrate left and right vision and to make the most of their remaining visual field.
NovaVision operates in the US through our wholly-owned subsidiary,
NovaVision, Inc., in Germanythrough our wholly-owned subsidiary, NovaVision GmbHand in the UKthrough our wholly-owned subsidiary, Sight Science Limited.
NovaVision's VRT is the only medical device aimed at the restoration of vision for neurologically induced vision loss which has
VRT and NeET
VRT and NeET are aimed at those suffering from vision loss resulting from neurological trauma such as stroke and traumatic brain injury (TBI). It is estimated that approximately 16% of these patients experience a visual field deficit, reducing mobility and other activities of daily living. NovaVision's VRT and NeET target market is this subset of patients who have suffered a visual field deficit. Both VRT and NeET work on the basis that repeated stimulation of the blind or transition areas by either bright patches of light (VRT) or the specific spatial patterns (NeET) which can lead to increases in sensitivity of the blind areas. Patients progress after VRT appears to be initiated at the blind and sighted borders whereas NeET results in changes deep within the blind field. Both therapies are able to demonstrate improvements in both visual sensitivity and activities of daily living. The Company believes that these therapies are complementary. VRT and NeET are patient-specific diagnostic and therapeutic platforms with extensive clinical data supporting their ability to increase a patient's visual field. The diagnostic algorithm first maps the visual field and defines the areas of defect in patients suffering vision loss. The therapeutic algorithm is then specifically designed for each patient based upon the results of the diagnostic program and it repetitively challenges the visual cortex with thousands of stimuli over the course of time. The therapies are delivered through a computer device in the patient's home and are generally performed over a four to six month period, twice a day for approximately an hour total, six days a week. With VRT therapy, the patient first focuses on a fixation point on a display screen. Then, a series of light stimuli are presented along the border of the patient's visual field loss. These programmed light sequences stimulate the border zone between the "seeing" and "blind" visual fields, repetitively challenging the visual cortex in the border zone with thousands of stimuli over the course of time. With NeET, the patient responds to the images that appear on the screen, initially in the border area of the patient's visual field loss and over time deeper within the damaged field of vision. Vycor acquired NovaVision at the end of 2010. While its VRT was clinically supported to be effective, was underpinned by 15 years of clinical research and 20 studies evidencing that 70% of patients benefited from the therapy further development was required in order: to ensure that all patients received benefit; to make it cost effective and affordable; and to make it scalable. As not all patients benefit from VRT, management concluded that a new complementary eye training therapy should be introduced into the NovaVision therapy suite to provide broader benefits to patients than the delivery of VRT on its own, and has recently soft-launched NeuroEyeCoach™ in the U.S. 25 --------------------------------------------------------------------------------
NovaVision's recently soft-launched NeuroEyeCoach™ in the U.S. This is also a computer based program providing eye-movement training to those who have suffered a visual field loss as a result of neurological.
The program is supported by more than four decades of scientific findings and was developed as collaboration between NovaVision and Josef Zihl, a NovaVision Scientific Advisor who is a world thought leader in saccadic training and the pioneer of this computer based training technique. The program is designed to result in a meaningful improvement in the patients visual search performance resulting in improvements in their navigation and object finding skills. Given that NeuroEyeCoach™ addresses the patients difficulty with their eye movements and their ability to integrate visual information while VRT and NeET focuses on the restoration of lost vision the two therapy types are highly complementary. NeuroEyeCoach™ is delivered to patients' computers in their homes and also provided as a clinic-based version to enable healthcare professionals to provide the therapy to patients under supervision. NovaVision has commenced marketing NeuroEyeCoach™ as a standalone therapy; in addition to benefitting patients in VRT's target market, those suffering non-permanent defects or those otherwise unsuited to VRT can benefit from NeuroEyeCoach™. Upon completion of the VRT web based development it will be marketed with NeuroEyeCoach™ in one therapy suite providing broad benefits to all patients.
The Market For NovaVision's Therapies
The market for NovaVision's therapies comprises those suffering from vision loss resulting from neurological trauma such as Stroke and Traumatic Brain Injury (TBI).
The U.S. Centers for Disease Control(CDC) estimates there are 8 million Americans who have previously had a stroke incident, with 740,000 additional cases occurring annually. Additionally, approximately 5.3 million Americans live with long-term effects of a TBI. Based on published reports of industry specialists, A. Pambakian and C. Kennard, it is estimated that approximately 30% experience some visual impediment and 16% of these patients experience a permanent visual field deficit, reducing mobility and other activities of daily living. The target market for NeET and VRT is this 16% subset of patients who have suffered a permanent visual field deficit. Management estimates that the addressable target market is approximately 1.5 million people in the US, approximately 1.4 million people in Europeand approximately 6.4 million people throughout the rest of the world. The market potential is further increased by the introduction of NeuroEyeCoach™ which addresses all 30% of patients who experience visual impediments and therefore adds an additional 3.6m people in the US and Europeand 8m in the rest of the world.
NovaVision provides restitution or restoration therapies (with VRT and NeET) and compensation or saccadic therapies (with NeuroEyeCoach™) for those suffering neurologically-induced vision loss. The other therapy type for this condition is substitution (optical aids such as prisms) and is not considered by NovaVision as competition.
In restitution, competition has been reduced through NovaVision's acquisition of Sight Science and really only leaves two small companies, Teltra and Visiontrainer in
NovaVision has accumulated significant amounts of clinical data as a result of company-sponsored trials as well as studies conducted by independent third parties, of which some of the key findings can be summarized as:
• Approximately 70% of patients experience positive outcome reflected by an
increase in their visual field and studies have indicated an average increase
of 4.9 degrees (Mueller I, Mast H, Sabel BA (2007), Romano JG 2008).
• Elapsed time since injury does not seem to impact VRT and NeET therapies
success. Therefore, a large historical backlog of patients can potentially be
treated (Romano JG, Schulz P, Kenkel S, Todd DP (2008)).
• Improvements are permanent and do not appear to be age or gender dependent.
• Age at the onset of the injury is not a critical factor, allowing access to
the therapy by both young and older adults with brain injuries (Romano JG,
Schulz P, Kenkel S, Todd DP (2008)).
The PC-based treatment approach was originally developed by Prof. Zihl (1988, 1990) and has since been used with various modifications in 14 studies on a total of 591 patients with homonymous visual field loss and persistent visual disabilities. The main outcome is a significant improvement in visual search performance accompanied by more efficient oculomotor strategies, and a reduction in visual disability as assessed with standardized questionnaires and behavioral measures. The efficacy of this treatment approach for the improvement of visual overview and visual exploration is superior to practice with reading (Schuett et al., 2012), non-specific visual training (Roth et al., 2009), standard occupational therapy (MÖdden et al., 2012) or counseling with regards to coping strategies (Zihl, 2011). Importantly, time since brain injury (Zihl, 2011) and age of hemianopic patients (Schuett & Zihl, 2012) do not play a significant role for the treatment effect. In conclusion, there is convincing scientific empirical evidence for the efficacy of the visual search treatment method. It is important to note, that visual field borders did not change after the treatment, indicating that visual search training represents a compensatory technique and not a restorative approach. Intellectual Property Patents NovaVision maintains a portfolio of patent protection on its methods and apparatus in the form of issued patents and applications, both domestically and internationally, with a total of 32 granted and 8 pending patents (including Sight Science).
NovaVision's 32 granted patents are in the U.S. (13),
NovaVision's 7 pending patents are in
NovaVision maintains a portfolio of registered trademarks for NOVAVISION, NOVAVISION VRT and VRT VISION RESTORATION THERAPYamongst others, both in the US and internationally.
NovaVision's Growth Strategy
Prior to Vycor's acquisition in late 2010, NovaVision previous management had already invested more than
$50 millionlargely on developing the business's core VRT therapy, gaining significant patent protection and validating the therapy through significant clinical research. While its VRT was clinically supported to be effective, being underpinned by 15 years of clinical research and 20 studies evidencing that 70% of patients benefited from the therapy, further development was required in order to: ensure that all patients received a benefit; to make it cost effective and affordable; and to make it scalable. Following the acquisition, Vycor put in place a world class Scientific Advisory Boardand acquired Sight Science in the UK, NovaVision's only sizeable competitor, thereby also gaining a highly regarded Chief Scientific Officer. Leveraging this scientific team, NovaVision's strategy is centered around driving the adoption of its therapies, through: 1. Reduced Cost and Greater scalability; enabled by a completely new therapy delivery mechanism moving away from hardware based to an asset light software solution allowing significant cost savings, which will be passed onto the patients. This different delivery mechanism and significant business process streamlining of currently largely manual tasks will enable NovaVision to provide an affordable and much more scalable therapy and thus be in a position to service a much larger number of patients. 2. Introduction of a new therapy module into the NovaVision's overall visual rehabilitation therapy regime that will provide additional functional benefits to patients who undergo the regime. This new therapy program, NeuroEyeCoach™, is a saccadic training program which is highly complementary to VRT and will ensure that patients will receive greater benefit from the overall NovaVision therapy regime. NeuroEyeCoach™ is internet-delivered and is targeted at the same patients as VRT. Stroke patients, in addition to losing their sight, typically also have difficulty moving their eyes and integrating visual information. These conditions lead patients to need specific re-training to make effective use of their eyes and get the most out of their remaining vision. NeuroEyeCoach™ will be sold as a standalone therapy; in addition to benefitting VRT patients, those suffering non-permanent defects or those otherwise unsuited to VRT can benefit from NeuroEyeCoach™. Upon completion of the VRT web based development it will be marketed with NeuroEyeCoach™ in one therapy suite providing broader benefit to patients. 3. New Potential Licensingmodel targeted at Rehabilitation Centers. Management is also in the advanced stages of exploring a licensing model under which NovaVision would license a diagnostic-only VRT device to a rehabilitation center for a monthly fee. The center, be it in-patient or out-patient, would be able to efficiently screen its patients on their own for visual field deficits. NovaVision would receive licensing fees and benefit from incremental patient flow from center referrals. 3. Other Matters Product Liability Insurance
We presently have Product Liability insurance for both
Government Regulations We are committed to an integrated total quality management system. We believe that we have completed the necessary procedures and
Vycor Medicalis certified to the ISO standards expected of medical device manufacturers as follows: 28 --------------------------------------------------------------------------------
ISO 13485:2003 Medical Devices - Quality Management Systems
The certification of a quality management system to ISO 13485, specifically for medical devices, is advantageous and often essential for medical companies to export their products to the global market, as well as maintain and enter into certain agreements and business growth opportunities within the U.S. For example,
Canadarequires that medical device manufacturers marketing their products in Canadamust have a quality system certified to ISO 13485:2003. The certification is also required for placement of branded devices into the European Union.
Fully Quality Assurance System Directive 93/42/EEC for Medical Devices, Annex II (3)
EC Design-Examination Certificate Directive 93/42/EEC for Medical Devices, Annex II (4)
• ISO 13485.2003
Continuing Regulatory Requirements
Vycor Medical'sproducts have been classified as Class II products by the FDAand cleared for marketing through the 510(k) process. NovaVision's VRT product has been cleared as a Class U product through the 510(k) while its HMP is registered as an exempt Class 1 device.
After a device is placed on the market, numerous regulatory requirements apply. These include:
• quality system regulation, which requires manufacturers to follow
design, testing, control, documentation and other quality assurance
procedures during the manufacturing process; • labeling regulations, which prohibit the promotion of products for
unapproved or "off-label" uses and impose other restrictions on
labeling; and • medical device reporting regulations, which require that manufacturers report to the
FDAif their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.
Failure to comply with applicable regulatory requirements, and failure to respond to requested corrective actions on an ongoing basis, can result in enforcement action by the
Medical device laws are also in effect in many of the countries outside of
the United Statesin which we do business. These laws range from comprehensive device approval and quality system requirements for some or all of our medical device products to simple requests for product data or certifications. The number and scope of these requirements are increasing. In June 1998, the European Union Medical Device Directive became effective, and all medical devices must meet the Medical Device Directive standards and receive CE mark certification. CE mark certification involves a comprehensive Quality System program, and submission of data on a product to the Notified Body in Europe. Vycor Medicalhas obtained the CE marking approval to allow for distribution of its VBAS products in Europeas a Class III device and has received HPB licensing approval for distribution in Canada. NovaVison's VRT and Sight Science's NeET have CE mark registrations as Class I devices in Europe. HMP does not have European regulatory clearance at this time.
We currently have 17 employees.
Website. The Company operates websites at at www.vycormedical.com,www.vycorvbas.com, www.novavision.com, www.novavisionvrt.com, www.sightscience.com and www.neuroeyecoach.com.
29 -------------------------------------------------------------------------------- Comparison of the Three Months Ended
June 30, 2014to the Three Months Ended June 30, 2013Revenue and Gross Margin: % 2014 2013 Change Revenue: Vycor Medical $ 203,191 $ 146,35839 % NovaVision 95,349 88,596 8 % Total Revenue $ 298,540 $ 234,95427 % Gross Profit Vycor Medical $ 177,717 $ 135,15231 % NovaVision 85,056 71,908 18 % Total Gross Profit $ 262,773 $ 207,06027 % Vycor Medicalrecorded revenue of $203,191from the sale of its products for the three months ended June 30, 2014, an increase of $56,833over the same period in 2013, reflecting increased activity in the US and internationally. Gross margin of 87% compared to 92%, was achieved in 2014 for the same period in 2013. Gross margin is mostly a product of sale mix between US sales through distributors, US sales direct and international sales. International sales are all indirect through distributors and end-market prices internationally tend to be lower.
NovaVision recorded revenues of
Research and Development Expense:
Research and development ("R&D") expenses were
$37,395for the three months ended June 30, 2014, as compared to $21,285for the same period in 2013. The expense increase is mostly due to costs related to developing the compatibility of its current VBAS range with Image Guided Systems. Capitalized software development costs for the three months ended June 30, 2014and 2013 were $25,405and $0, respectively. During the period the Company's VRT 7.0 program completed the preliminary project stage, following which there was a capitalization of $17,028of software development costs. Additional costs of $8,377were capitalized for the Company's NeuroEyeCoach program retail/physician model in the three month period ended June 2014.
General and Administrative Expenses:
General and administrative expenses increased by
$123,878to $829,989for the three months ended June 30, 2014from $706,111for the same period in 2013. Included within General and Administrative Expenses are non-cash charges for share based compensation as the result of amortizing employee and non-employee shares, warrants and options which have been issued by the Company over various periods. The charge for the three months ended June 30, 2014was $91,073, an increase of $5,134over $85,939in 2013. Also included within General and Administrative Expenses are Sales Commissions, which increased by $30,933to $58,789. The remaining General and Administrative expenses increased by $87,811from $592,316to $680,127of which the Offering costs comprised $137,163for the three month period ending June 2014. 30 -------------------------------------------------------------------------------- An analysis of the change in cash and non-cash G&A is shown in the table below: Cash G&A Non-Cash G&A Offering costs $ 137,163$ - Investor relations and road show costs 4,841 (44,116 )
Board, financial and scientific advisory (93,995 ) 49,250 Payroll
31,144 - Legal, professional and other consulting 198 - Sales, marketing and travel 4,906 - Other 3,554 - Total change
$ 87,811 $ 5,134Interest Expense: Interest comprises expense on the Company's debt and insurance policy financing. Related Party Interest expense for the three months ended June 30, 2014increased by $802to $33,613from $32,811for 2013. Other Interest expense for 2014 decreased by $1,801to $12,327from $14,128for 2013. Comparison of the Six Months Ended June 30, 2014to the Six Months Ended June 30, 2013Revenue and Gross Margin: % 2014 2013 Change Revenue: Vycor Medical $ 466,902 $ 277,02469 % NovaVision 189,760 189,604 0 % Total Revenue $ 656,662 $ 466,62841 % Gross Profit Vycor Medical $ 411,125 $ 251,43164 % NovaVision 166,813 157,285 6 % Total Gross Profit $ 577,938 $ 408,71641 % Vycor Medicalrecorded revenue of $466,902from the sale of its products for the six months ended June 30, 2014, an increase of $189,878, over the same period in 2013, reflecting increased activity in the US and internationally. Gross margin of 88% was achieved in 2014 compared to 91% in the same period in 2013. Gross margin is mostly a product of sale mix between US sales through distributors, US sales direct and international sales. International sales are all indirect through distributors and end-market prices internationally tend to be lower.
NovaVision recorded revenues of
Research and Development Expense:
Research and development ("R&D") expenses were
$52,751for the six months ended June 30, 2014, as compared to $52,635for the same period in 2013. Capitalized software development costs for the six months ended June 30, 2014and 2013 were $55,309and $0, respectively. During the period the Company's VRT 7.0 program completed the preliminary project stage, following which there was a capitalization of $25,199of software development costs. Costs of $29,840were capitalized for the Company's NeuroEyeCoach program during the period.
General and Administrative Expenses:
General and administrative expenses increased by
$638,471to $2,028,240for the six months ended June 30, 2014from $1,389,769for the same period in 2013. Included within General and Administrative Expenses are non-cash charges for share based compensation as the result of amortizing employee and non-employee shares, warrants and options which have been issued by the Company over various periods. The charge for the six months ended June 30, 2014was $259,727, an increase of $85,663over $174,064in 2013. Also included within General and Administrative Expenses are Sales Commissions, which increased by $49,652to $105,173. The remaining General and Administrative expenses increased by $503,156from $1,160,184to $1,663,340, of which the Offering costs comprised $581,702. An analysis of the change in cash and non-cash G&A is shown in the table below: Cash G&A Non-Cash G&A Offering costs $ 581,702$ - Investor relations and road show costs 20,325 (17,422 )
Board, financial and scientific advisory (240,162 ) 103,085 Legal, professional and other consulting 54,717
- Sales, marketing and travel 15,648 - Payroll 47,404 - Other 23,522 - Total change
$ 503,156 $ 85,663Interest Expense: Interest comprises expense on the Company's debt and insurance policy financing. Related Party Interest expense for the six months ended June 30, 2014increased by $5,664to $67,442from $61,778for 2013. Other Interest expense for 2014 decreased by $1,433to $26,621from $28,054for 2013. 32 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table shows cash flow and liquidity data for the periods ended
June 30, December 31, $ 2014 2013 Change Cash
$ 2,840,052 $ 31,303 $ 2,808,749Accounts receivable, inventory and other current assets $ 614,726 $ 627,649 $ (12,923 )Total current liabilities $ (950,302 ) $ (5,430,493 ) $ 4,480,191Working capital/(deficit), excluding derivative liability $ 2,541,628 $ (4,771,541 ) $ 7,313,169Cash provided by financing activities $ 4,715,290
In January to
April 2014the Company held five separate closings (the "Closings") of the sale of $4,070,140in Units (the "Units") comprising shares of common stock ("Common Stock") and Series A and Series B Warrants (collectively, the "Warrants") to accredited investors (the "Investors") in a continuing offering (the " Offering") which allowed for maximum proceeds of $5,000,000. These Closings raised net proceeds, after expenses, of $4,472,841. As of June 30, 2014we had $2,840,052cash, working capital of $2,541,628(before taking into account the derivative liability of $37,152) and an accumulated deficit of $19,103,451. Total Stockholders' equity at June 30, 2014was $1,486,789. Total current debt at June 2014, included in working capital above, was $311,445. Long term debt at June 2014was $2,355,587.
Uses of estimates in the preparation of financial statements
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimated. To the extent management's estimates prove to be incorrect, financial results for future periods may be adversely affected. Significant estimates and assumptions contained in the accompanying consolidated financial statements include management's estimate of the allowance for uncollectible accounts receivable, amortization of intangible assets, and the fair values of options and warrant included in the determination of debt discounts and share based compensation. Research and Development
The Company expenses all research and development costs as incurred.
Cash and cash equivalents
The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporationup to $250,000. Cash balances may at times exceed the FDICinsured limits. Cash also includes a US investment account in a money market backed by government securities up to 105% of the account balance. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Included within cash are deposits paid by patients, held by the Company until the patient returns the VRT device at the end of therapy. At June 30, 2014and December 31, 2013patient deposits amounted to $30,144and $25,467, respectively, and are reserved against in Other Current Liabilities 33
Property and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.
The Company accounts for income taxes in accordance with the current authoritative guidance. Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when it is more likely than not that such benefit will not be realized.
Patents and Other Intangible Assets
The Company capitalizes legal and related costs associated with the establishment and enhancement of patents for its products once patents have been applied for. Costs associated with the development of the patented item or processes are charged to research and development costs and expensed as incurred. The capitalized costs are amortized over the life of the patent. The Company reviews intangible assets on an annual in accordance with the authoritative guidance. Trademarks have an indefinite life and are also reviewed annually by management for impairment in accordance with the authoritative guidance. Revenue Recognition
Vycor Medicalgenerates revenue from the sale of its surgical access system to hospitals and other medical professionals. Vycor Medicalrecords revenue when a completed contract for the sale exists, the product is invoiced and shipped to the customer. Vycor Medicaldoes provide for product returns or warranty costs. NovaVision generates revenues from various programs, therapy services and other sources such as government grants. Therapy services revenues represent fees from NovaVision's vision restoration therapy software, diagnostic software, medical devices, clinic set up and training fees, and the professional and support services associated with the therapy. NovaVision recognizes revenue for providing the vision restoration therapy as the Company's work effort is expended. NovaVision provides vision restoration therapy directly to patients. The typical vision restoration therapy consists of six modules, performed on average over 6 months in the U.S. and 10 months in Germany. A patient contract comprise set-up fees and monthly therapy fees. Set-up fees are recognized at the outset of the contract and therapy revenue is recognized ratably over the therapy period. Patient therapy is restricted to being completed by a patient within a specified time frame.
Deferred revenue results from patients paying for the therapy in advance of receiving the therapy.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance for potential bad debts if required. We determine whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional 34 -------------------------------------------------------------------------------- information is received. The amounts calculated are analyzed to determine the total amount of the allowance. We may also record a general allowance as necessary. Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon such efforts.
Inventories are stated at average cost, determined by using the weighted average cost method, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose of the product. If the Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company's consolidated statements of operations.
The Euro is the local currency of the country in which
NovaVision GmbHconducts its operations and is considered the functional currency of this entity; the GB Pound is the local currency of the country in which Sight Science Limitedconducts its operations and is considered the functional currency of this entity. All balance sheet amounts are translated to U.S. dollars using the U.S. exchange rate at the balance sheet date except for the equity section which is translated at historical rates. Operating statement amounts are translated using an average exchange rate for the period of operations. Foreign currency translation effects are accumulated as part of the accumulated other comprehensive income (loss) and included in shareholders' (deficit) in the accompanying Consolidated Balance Sheet.
Educational marketing and advertising expenses
The Company may incur costs for the education of customers on the uses and benefits of its products. The Company will include education, marketing and advertising expense as a component of selling, general and administrative costs as such costs are incurred.