The Company has entered into no new consulting or other agreements during the six months ended June 30, 2014, other than amendments to existing agreements outlined below. The following agreements remained in force during the period:
Effective as of January 2, 2014, the Company and Fountainhead amended their Consulting Agreement to extend the term of the Consulting Agreement to January 2, 2015. As of January 2014, the monthly retainer payable to Fountainhead was reduced to $10,000 per month, payable $5,000 in cash and the remainder payable in Company Common Stock at the end of each quarter until the occurrence of specified milestones.
In November 2013, the Company entered into three-month extension amendments to the existing agreements with Del Mar Consulting, Inc. and Alex Partners, LLC under which 33,000 and 27,000 shares of Company Common Stock respectively were issued, valued at $66,000 and $54,000 respectively. These agreements expired at the end of February 2014.
On July 2, 2013, the Company entered into two agreements with GSS one to provide certain financial advisory services to the Company (“Advisory Agreement”) and the other to act as placement agent for the Company (“Placement Agent Agreement”).
Under the terms of the Advisory Agreement, GSS is engaged on a non-exclusive basis to provide financial advisory services to the Company for at least ninety (90) days and thereafter until either party terminates the arrangement. Under the terms of the Advisory Agreement, as amended on March 14, 2014, the Company will issue 45,000 restricted shares of Company Common Stock to the broker-dealer, 15,000 of which are issuable on the date of the execution of the Agreement and 30,000 additional shares to be issued on March 11, 2014. The Agreement also calls for the Company to reimburse certain out-of-pocket expenses.
Under the terms of the Placement Agent Agreement, the Company engaged GSS as its exclusive placement agent until the later of (i) 90 days from the date of execution of the Agreement or (ii) the end of the offering period of any securities financing undertaken by the Company in connection with the Placement Agent Agreement. Normal placement agents fees and expense reimbursement will be payable. Any offering will be undertaken on a “best efforts” basis and the proceeds would be used for working capital and general corporate purposes
In March 2014, the Company entered into a twelve (12) month investor relations advisory agreement, as amended (“Hayden Agreements”) in June 2014, with Hayden IR, LLC. Under the terms of Hayden Agreements, Hayden receives $8,500 in cash per month and 36,000 shares of Common Stock; 18,000 issued in June 2014 and 18,000 to be issued on September 30, 2014.
10. RELATED PARTY TRANSACTIONS
Under the terms of the Offering, there were certain agreements with Related Parties:
(a)
Debt Amendment and Repayment. Fountainhead and Peter Zachariou agreed to extend the maturity of all of the Company’s debt obligations due to them due to as of August 9, 2013 (aggregating $2,247,037) to January 2, 2017, subject to the earlier repayment of such debt upon the occurrence of certain specified conditions. Fountainhead and Peter Zachariou further released all security interests associated with any of the obligations and agreed to forebear declaring any event of default under the obligations for a period of 24 months following the date of the Initial Closing. During January and February 2014, also under the terms of the Offering, debt obligations arising since August 9, 2013 were repaid as follows: Fountainhead - $91,519; Peter Zachariou - $20,000; David Cantor - $15,000.
(b)
Employment of Chief Executive Officer and Employment Agreements. Effective as of January 2, 2014, our board of directors appointed Peter C. Zachariou, our Executive Vice President, to the additional role as the Company’s Chief Executive Officer. Also effective as of the January 2, 2014 the Company entered into separate, but largely identical Employment Agreements with Mr. Zachariou, Adrian Liddell and David Cantor. Mr. Zachariou’s Employment Agreement commences on the Effective Date and terminates six months following the appointment of a successor Chief Executive Officer; Mr. Liddell’s Employment Agreement commences on the Effective Date and terminates upon the appointment of a successor Chief Financial Officer; and Mr. Cantor’s Employment Agreement commences on the Effective Date and terminates upon the appointment of a successor. The aforementioned Employment Agreements provide for annual compensation of $110,000, payment of which is deferred for 12 months from the Effective Date and is subject to the achievement of certain enumerated milestone conditions. Each of these Employment Agreements supersede any prior employment agreements or arrangements between the respective parties.
(c)
Amendment to Consulting Agreement. Effective as of January 2, 2014, the Company and Fountainhead amended their Consulting Agreement to extend the term of the Consulting Agreement to to January 2, 2015. As of January 2014, the monthly retainer payable to Fountainhead was reduced to $10,000 per month, payable $5,000 in cash and the remainder payable in Company Common Stock at the end of each quarter until the occurrence of specified milestones.
(d)
Conversion Agreement. Effective as of January 2, 2014, the Company and Fountainhead entered into a Conversion Agreement whereby Fountainhead agreed to convert all amounts accrued as of the date of the Initial Closing into an investment in that amount in the Offering. Pursuant to the terms of this agreement, Fountainhead converted $1,426,542 of accrued consulting fees into the Units.
During January to June 2014, in accordance with the terms the Consulting Agreement, the Company issued 12,605 shares of Common Stock (valued at $30,000) to Fountainhead.
During June 2014 related party accrued interest due payments were made to: Fountainhead ($202,683); Peter Zachariou, a director of the Company ($69,198); and David Cantor, a director of the Company ($247).
There were no other related party transactions during the six months ended June 30, 2014 other than the payment or accrual of fees under the Fountainhead Consulting agreement described in Note 10 of the financial statements.
11. SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the financial statements were issued:
Share Issuance
During July and August 2014, the Company issued 2,016 shares of Common Stock (valued at $5,000) to Steven Girgenti, in consideration for services provided to the Board of Directors; and 570 and 1,141 shares of Common Stock respectively (valued at $1,563 and $3,125 respectively) to Alvaro Pascual-Leone and Josef Zihl in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
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Debt Extinguishment and conversion to Preferred
On August 5, 2014 Fountainhead, along with certain other related and non-related parties (together, the “Fountainhead Parties”), exchanged all their $2,355,587 of debt into an equivalent amount of preferred equity in the Company. This equity exchange will result in Vycor’s Shareholders’ Equity being increased by $2,355,587, equivalent to the current debt. Under the terms of the exchange, the Fountainhead Parties will receive $2,355,587 of Vycor Series D preferred shares (“Series D”) that will be convertible into Vycor Shares at a price of $2.15. The Series D will carry a dividend of 7% per annum, payable in cash or Series D at the Company’s option, rising to 12% payable in cash after two years. The Company is able to redeem the Series D at par at any time, at its sole option. The Fountainhead Parties will also receive 3-year warrants equivalent to 75% of the Vycor Shares received in the exchange on a converted basis, exercisable at $3.08. After three years, if the Series E has not then been redeemed or converted, the Fountainhead Parties will receive additional warrants equivalent to 50% of the shares then held, exercisable at the then market price.
Also on August 5, 2014, in a transaction not related to the exchange, Fountainhead entered into an agreement with the Company preventing it from selling any Vycor Shares currently held by Fountainhead below $4.50. In return, the Company agreed to extend the life of certain of Fountainhead’s existing warrants expiring in 2015 to the same 3-year term as the warrants being issued under the exchange.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 York on June 17, 2005 as “Vycor Medical LLC”. On August 14, 2007, we converted into a Delaware corporation and changed our name to “Vycor Medical, Inc.”. The Company’s listing went effective on February 2009 and on November 29, 2010 Vycor completed the acquisition of substantially all of the assets of NovaVision, Inc. (“NovaVision”) and on January 4, 2012 Vycor, through its wholly-owned NovaVision subsidiary, completed the acquisition of all the shares of Sight Science Limited (“Sight Science”), a previous competitor to NovaVision.
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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 Medical designs, 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 Medical
Introduction
Vycor Medical designs, develops and markets medical devices for use in neurosurgery. Vycor Medical’s ViewSite 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 Medical is ISO 13485:2003 compliant, and VBAS has U.S. FDA 510(k) clearance and CE Marking for Europe (Class III) for brain and spine surgeries, full regulatory approvals in Australia, Canada, China, Korea and Japan and is seeking or has partial regulatory approvals in Brazil, India, Russia, Taiwan and Vietnam.
Vycor Medical’s Products
VBAS
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.
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VBAS’ clinical advantages are supported by a number of leading peer-reviewed articles (seePeer 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.
Competition
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 Corporation has 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’s sales 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 Medical has 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 Administration is 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.
International Sales
Vycor Medical utilizes select medical device distributors with experience in neurosurgical devices in their countries or regions. Vycor Medical has regulatory approvals for VBAS in Australia, Canada, China, Europe (Class III), Korea and Japan and is seeking or has partial regulatory approvals in Russia, India, Vietnam and Taiwan with distribution agreements in place or being sought.
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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:
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• | “Usage of a Minimally Invasive Tubular Retraction System for Deep-Seated Tumors in Pediatric Patients” inJournal of Neurosurgeryin May 2011: Pediatrics. Co-authors Pablo Recinos, M.D., of the Cleveland Clinic and George Jallo, M.D., of Johns Hopkins University conclude that while access to deep-seated, 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,” by Daniel Prevedello, M.D., Director of the Minimally Invasive Cranial Surgery Program at the Ohio State University. Dr Prevedello reported on a case with a 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” inMinimally Invasive Neurosurgery,February 2011 a Johns Hopkins University paper by lead author A. Quinones Hinojosa. The authors reported a case series of 9 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 authors. |
• | “3D Endoscope-Assisted Transcallosal Approach to the Third Ventricle Using a Minimally Invasive Tubular Retractor System – A Feasibility Study” by Alireza Shoakazemi, Alexander I. Evins, Philip E. Stieg, Antonio Bernardo Published in J Neurol Surg B 2014; 75 - A047. Weill Cornell Medical Center.Conclusion. 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 Model” Alexander I. Evins, Alireza Shoakazemi, Justin C. Burrell, Rahul Kapoor, Philip E. Stieg, Antonio Bernardo Published J Neurol Surg B 2014; 75 - A036. Weill Cornell Medical Center.Conclusion. The application of 3D endoscopic 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 |
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Manufacturing
Vycor Medical uses sub-contract manufacturers to manufacture, package, label and sterilize its products. Lacey Manufacturing Company of Bridgeport, Connecticut manufactures 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 Medical holds sufficient inventory for its foreseeable needs and is in discussions with selected qualified sub-contract manufacturers to replace C&J.
Intellectual Property
Patents
Vycor Medical maintains 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 Medical’s 8 granted patents are in the China (Brain), Hong Kong (Brain), Russia (Brain), Japan (Brain and Spine) and US (Brain (2) and Spine).
Vycor Medical’s 8 pending patents are in: Canada (Brain, Spine), Europe (Brain, Spine), India (Brain, Spine), Hong Kong (Spine), US (Navigation Arm).
Trademarks
VYCOR MEDICAL is a registered trademark andVIEWSITE is a common law trademark.
Vycor Growth Strategy
Vycor Medical’s growth strategy is centered around:
1.Increasing U.S. market penetration through broader hospital coverage and targeted direct physician marketing.
Vycor Medical’s sales 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 Medical leads 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 Medical prioritizes 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 Medical will address is MRI compatibility. Increasingly, intra operative MRI is increasingly being used in neurosurgery, further playing to
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VBAS' competitive edge over the traditional non MRI-compatible metal blade retractor. Vycor Medical intends to commission a brief technical study so that VBAS can be formally certified as MRI compatible. Vycor Medical is 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 Medical utilizes 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), Korea and Japan and is seeking or has partial regulatory approvals in Brazil, India, Russia, Taiwan and Vietnam. Vycor Medical plans 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 Medical has 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 Medical has 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 Medical developed this with a leading neurosurgeon and anticipates the product being available by the end of 2014.
Vycor Medical is 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 billion in the U.S. and over $13 billion globally.
NovaVision has a family of therapies that both restore lost vision and address other neurologically-induced vision issues:
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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.
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•
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 Germany through our wholly-owned subsidiary, NovaVision GmbH and in the UK through 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 FDA 510(k) clearance to be marketed in the U.S; VRT and NeET both have CE Marking for the EU and NeuroEyeCoach™ is registered in the US as a Class I 510(k) exempt device. NovaVision has 32 granted and 7 pending patents worldwide.
NovaVision’s Products
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.
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NeuroEyeCoach™
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 Europe and 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 Europe and 8m in the rest of the world.
Competition
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 Germany. Within compensation, competitors include RevitalVision, PositScience, Rehacom and NVT Systems.
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Clinical Data
VRT
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:
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| • | 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)). |
NeuroEyeCoach
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), Canada (3), Europe (7), Australia (2), China (2), Hong Kong (1), Singapore (1), India (1) and Japan (2).
NovaVision’s 7 pending patents are in Canada (2) and Europe (5).
Trademarks
NovaVision maintains a portfolio of registered trademarks forNOVAVISION, NOVAVISION VRT andVRT VISION RESTORATION THERAPY amongst others, both in the US and internationally.
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NovaVision’s Growth Strategy
Prior to Vycor’s acquisition in late 2010, NovaVision previous management had already invested more than $50 million largely 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 Board and 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 moduleinto 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 Licensing model 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 Vycor Medical and NovaVision.
Government Regulations
We are committed to an integrated total quality management system. We believe that we have completed the necessary procedures and Vycor Medical is certified to the ISO standards expected of medical device manufacturers as follows:
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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, Canada requires that medical device manufacturers marketing their products in Canada must have a quality system certified to ISO 13485:2003. The certification is also required for placement of branded devices into the European Union.
Vycor Medical has the following certification/licensing:
•
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’s products have been classified as Class II products by the FDA and 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 FDA if 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 FDA.
Medical device laws are also in effect in many of the countries outside of the United States in 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 Medical has obtained the CE marking approval to allow for distribution of its VBAS products in Europe as 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.
Employees
We currently have 17 employees.
Website. The Company operates websites atatwww.vycormedical.com, www.vycorvbas.com,www.novavision.com, www.novavisionvrt.com, www.sightscience.com and www.neuroeyecoach.com.
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Comparison of the Three Months Ended June 30, 2014 to the Three Months Ended June 30, 2013
Revenue and Gross Margin:
| | | | | | | |
| | | 2014 | | 2013 | | %
Change |
| Revenue: | | | | | | | | | | | | |
| Vycor Medical | | $ | 203,191 | | | $ | 146,358 | | | | 39 | % |
| NovaVision | | | 95,349 | | | | 88,596 | | | | 8 | % |
| Total Revenue | | $ | 298,540 | | | $ | 234,954 | | | | 27 | % |
| | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | |
| Vycor Medical | | $ | 177,717 | | | $ | 135,152 | | | | 31 | % |
| NovaVision | | | 85,056 | | | | 71,908 | | | | 18 | % |
| Total Gross Profit | | $ | 262,773 | | | $ | 207,060 | | | | 27 | % |
Vycor Medical recorded revenue of $203,191 from the sale of its products for the three months ended June 30, 2014, an increase of $56,833 over 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 $95,349 for the three months ended June 30, 2014, a increase of $6,754 over the same period in 2013, and gross margin of 89%, compared to 88% for the same period in 2013.
Research and Development Expense:
Research and development (“R&D”) expenses were $37,395 for the three months ended June 30, 2014, as compared to $21,285 for 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, 2014 and 2013 were $25,405 and $0, respectively. During the period the Company’s VRT 7.0 program completed the preliminary project stage, following which there was a capitalization of $17,028 of software development costs. Additional costs of $8,377 were 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 $123,878 to $829,989 for the three months endedJune 30, 2014 from $706,111 for 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 endedJune 30, 2014 was $91,073, an increase of $5,134 over $85,939 in 2013. Also included within General and Administrative Expenses are Sales Commissions, which increased by $30,933 to $58,789. The remaining General and Administrative expenses increased by $87,811 from $592,316 to $680,127 of which the Offering costs comprised $137,163 for the three month period ending June 2014.
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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 | | | $ | 5,134 | |
Interest Expense:
Interest comprises expense on the Company’s debt and insurance policy financing. Related Party Interest expense for the three months ended June 30, 2014 increased by $802to $33,613 from $32,811for 2013. Other Interest expense for 2014 decreased by $1,801to $12,327 from $14,128for 2013.
Comparison of the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 2013
Revenue and Gross Margin:
| | | | | | | |
| | | 2014 | | 2013 | | %
Change |
| Revenue: | | | | | | | | | | | | |
| Vycor Medical | | $ | 466,902 | | | $ | 277,024 | | | | 69 | % |
| NovaVision | | | 189,760 | | | | 189,604 | | | | 0 | % |
| Total Revenue | | $ | 656,662 | | | $ | 466,628 | | | | 41 | % |
| | | | | | | | | | | | | |
| Gross Profit | | | | | | | | | | | | |
| Vycor Medical | | $ | 411,125 | | | $ | 251,431 | | | | 64 | % |
| NovaVision | | | 166,813 | | | | 157,285 | | | | 6 | % |
| Total Gross Profit | | $ | 577,938 | | | $ | 408,716 | | | | 41 | % |
Vycor Medical recorded revenue of $466,902 from 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 $189,760 for the six months ended June 30, 2014, an increase of $156 over the same period in 2013, and gross margin of 88%, compared to 83% for the same period in 2013.
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Research and Development Expense:
Research and development (“R&D”) expenses were $52,751 for the six months ended June 30, 2014, as compared to $52,635 for the same period in 2013. Capitalized software development costs for the six months ended June 30, 2014 and 2013 were $55,309 and $0, respectively. During the period the Company’s VRT 7.0 program completed the preliminary project stage, following which there was a capitalization of $25,199 of software development costs. Costs of $29,840 were capitalized for the Company’s NeuroEyeCoach program during the period.
General and Administrative Expenses:
General and administrative expenses increased by $638,471 to $2,028,240 for the six months endedJune 30, 2014 from $1,389,769 for 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 endedJune 30, 2014 was $259,727, an increase of $85,663 over $174,064 in 2013. Also included within General and Administrative Expenses are Sales Commissions, which increased by $49,652 to $105,173. The remaining General and Administrative expenses increased by $503,156 from $1,160,184 to $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 | | | $ | 85,663 | |
| | | | | | | | | |
Interest Expense:
Interest comprises expense on the Company’s debt and insurance policy financing. Related Party Interest expense for the six months ended June 30, 2014 increased by $5,664to $67,442 from $61,778for 2013. Other Interest expense for 2014 decreased by $1,433to $26,621 from $28,054for 2013.
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Liquidity and Capital Resources
Liquidity
The following table shows cash flow and liquidity data for the periods ended June 30, 2014 and December 31, 2013:
| | | | | | | |
| | | June 30,
2014 | | December 31,
2013 | | $
Change |
| Cash | | $ | 2,840,052 | | | $ | 31,303 | | | $ | 2,808,749 | |
| Accounts receivable, inventory and other current assets | | $ | 614,726 | | | $ | 627,649 | | | $ | (12,923 | ) |
| Total current liabilities | | $ | (950,302 | ) | | $ | (5,430,493 | ) | | $ | 4,480,191 | |
| Working capital/(deficit), excluding derivative liability | | $ | 2,541,628 | | | $ | (4,771,541 | ) | | $ | 7,313,169 | |
| Cash provided by financing activities | | $ | 4,715,290 | | | $ | 1,089,071 | | | $ | 3,626,219 | |
In January to April 2014 the Company held five separate closings (the “Closings”) of the sale of $4,070,140 in 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, 2014 we had $2,840,052 cash, 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, 2014 was $1,486,789. Total current debt at June 2014, included in working capital above, was $311,445. Long term debt at June 2014 was $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 Corporation up to $250,000. Cash balances may at times exceed the FDIC insured 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, 2014 and December 31, 2013 patient deposits amounted to $30,144 and $25,467, respectively, and are reserved against in Other Current Liabilities
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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.
Income taxes
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 Medical generates revenue from the sale of its surgical access system to hospitals and other medical professionals. Vycor Medical records revenue when a completed contract for the sale exists, the product is invoiced and shipped to the customer. Vycor Medical does 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.
Inventory
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.
Foreign Currency
The Euro is the local currency of the country in which NovaVision GmbH conducts 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 Limited conducts 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
(a)
Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.
The Company’s management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our CEO and our CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports its files or submits under the Exchange Act is accumulated and communicated to the Company’s
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management, including its CEO and its CFO, as appropriate, to allow timely decisions regarding required disclosure (see (b)).
(b)
Changes in Internal Controls
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
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PART II
ITEM 1. LEGAL PROCEEDINGS
We are subject from time to time to litigation, claims and suits arising in the ordinary course of business. As of August 8, 2014, we were not a party to any material litigation, claim or suit whose outcome could have a material effect on our financial statements.
ITEM 1A. RISK FACTORS.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Offering
On January 2, January 31, February 28, March 31, and April 25, 2014 the Company completed five separate closings (the “Closings” of an offering (the “Offering”) of Units comprising shares of common stock (“Common Stock”) (collectively, the “Shares” and individually, a “Share”) and Series A and Series B Warrants (collectively, the “Warrants”) (collectively, the “Units”) to accredited investors (the “Investors”) in a private placement. The Closings comprised the sale of an aggregate of $5,000,000 in the Units), which were issued pursuant to five separate Securities Purchase Agreements between the Company and the Investors in each of the four Closings. In the aggregate, the Company issued 2,777,808 shares of Common Stock, Series A Warrants to purchase an aggregate of 1,388,919 shares of Common Stock and Series B Warrants to purchase an aggregate of 1,388,919 shares of Common Stock.
Each Unit was priced at $1.80 and comprised of one share of Common Stock, a Series A warrant (the “Series A Warrants”) and a series B warrant (the “Series B Warrants”). The Series A Warrants were detachable and were exercisable over a three-year term and were issued with respect to the purchase of a number of shares of Common Stock equal to 50% of the number of Shares purchased by such investor at an exercise price per share of $2.05. The Series B Warrants were detachable and were exercisable over a three-year term and were issued with respect to the purchase of a number of shares of Common Stock equal to 50% of the number of Shares purchased by such investor at an exercise price per share of $3.08. The Warrants are subject to adjustment for stock splits, stock dividends or recapitalizations.
Also on January 2, 2014, Fountainhead exchanged an aggregate of $1,426,542 of consulting fees owed to it by the Company for the Units issued in the Offering. In the aggregate, the Company issued to Fountainhead 792,523 shares of Common Stock, Series A Warrants to purchase an aggregate of 396,262 shares of Common Stock and Series B Warrants to purchase an aggregate of 396,262 shares of Common Stock.
Based on the subscription terms applicable to the holders of the Company’s previously-issued Series C Convertible Preferred Stock, such holders were given the option of exchanging their investment in such unconverted Series C Convertible Preferred Stock and the related warrants into the securities which are the subject of the Offering, based on the amount of their investment in the Series C Convertible Preferred Stock and the related warrants. On February 24, 2014, the holders of 15.15 shares of Series C Convertible Preferred Stock (representing an aggregate investment of $757,700) exchanged their Series C Convertible Preferred Stock and related warrants for an aggregate of 420,838 shares of Common Stock, Series A Warrants to purchase an aggregate of 210,419 shares of Common Stock and Series B Warrants to purchase an aggregate of 210,419 shares of Common Stock.
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Under the terms of the Placement Agent agreement with Garden State Securities, Inc. (“GSS”) (see Note 10), the Company issued an aggregate of 402,033 Placement Agent Warrants, on almost identical terms to the Series A Warrants.
Other Equity Transactions
During January to June 2014, the Company issued: 4,516 shares of Common Stock (valued at $10,000) to Steven Girgenti, 4,238 shares of Common Stock (valued at $10,000) to Oscar Bronsther and 3,734 shares of Common Stock (valued at $8,750) to Lowell Rush in consideration for services provided to the Board of Directors; and 1,437 shares of Common Stock (valued at $3,125) to Alvaro Pasual-Leone, 2,873 shares of Common Stock (valued at $6,250) to Josef Zihl and 1,324 shares of Common Stock (valued at $3,125) to each of Jason Barton and Jose Romano in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
During January to June 2014, in accordance with the terms the Consulting Agreement, the Company issued 12,605 shares of Common Stock (valued at $30,000) to Fountainhead.
During January 2014, the Company issued 3,000 and 2,000 shares of Common Stock (valued at $5,400 and $3,600) to Del Mar Consulting Group, LLC and Alex Partners respectively under the terms of their advisory amendment agreements.
On March 11, 2014 the Company entered into an Amendment Agreement with GSS. Under the Amendment Agreement, the Company agreed to issue 30,000 shares of Common Stock (valued at $66,000) on the date of the Amendment Agreement in respect of the period January to June 2014, rather than 7,500 shares per month under the original agreement.
During March 2014, in accordance with the terms of an investor relations advisory agreement, the Company issued 2,500 shares of Common Stock (valued at $4,700) to J and M Group, LLC.
During June 2014, in accordance with the terms of an investor relations advisory agreement, the Company issued 18,000 shares of Common Stock (valued at $43,020) to Hayden IR, LLC.
During July and August 2014, the Company issued 2,016 shares of Common Stock (valued at $5,000) to Steven Girgenti, in consideration for services provided to the Board of Directors; and 570 and 1,141 shares of Common Stock respectively (valued at $1,563 and $3,125 respectively) to Alvaro Pascual-Leone and Josef Zihl in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. OTHER INFORMATION
Subsequent events
The Company evaluated subsequent events through the date the financial statements were issued:
Share Issuance
During July and August 2014, the Company issued 2,016 shares of Common Stock (valued at $5,000) to Steven Girgenti, in consideration for services provided to the Board of Directors; and 570 and 1,141 shares of Common Stock respectively (valued at $1,563 and $3,125 respectively) to Alvaro Pascual-Leone and Josef Zihl in respect of their roles as members of the NovaVision, Inc. Scientific Advisory Board.
Debt Extinguishment and conversion to Preferred
On August 5, 2014 Fountainhead, along with certain other related and non-related parties (together, the “Fountainhead Parties”), exchanged all their $2,355,587 of debt into an equivalent amount of preferred equity in the Company. This equity exchange will result in Vycor’s Shareholders’ Equity being increased by $2,355,587, equivalent to the current debt. Under the terms of the exchange, the Fountainhead Parties will receive $2,355,587 of Vycor Series D preferred shares (“Series D”) that will be convertible into Vycor Shares at a price of $2.15. The Series D will carry a dividend of 7% per annum, payable in cash or Series D at the Company’s option, rising to 12% payable in cash after two years. The Company is able to redeem the Series D at par at any time, at its sole option. The Fountainhead Parties will also receive 3-year warrants equivalent to 75% of the Vycor Shares received in the exchange on a converted basis, exercisable at $3.08. After three years, if the Series D has not then been redeemed or converted, the Fountainhead Parties will receive additional warrants equivalent to 50% of the shares then held, exercisable at the then market price.
Also on August 5, 2014, in a transaction not related to the exchange, Fountainhead entered into an agreement with the Company preventing it from selling any Vycor Shares currently held by Fountainhead below $4.50. In return, the Company agreed to extend the life of certain of Fountainhead’s existing warrants expiring in 2015 to the same 3-year term as the warrants being issued under the exchange.
Index to Exhibits
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31.1 | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 12, 2014.
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| VYCOR MEDICAL, INC. |
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| By: | /s/Peter C. Zachariou |
| | Peter C. Zachariou |
| | President and |
| | Director (Principal Executive Officer) |
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| By: | /s/Adrian C. Liddell |
| | Adrian C. Liddell |
| | Chairman of the Board and |
| | Director (Principal Financial Officer) |
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