COGENTIX MEDICAL INC /DE/ - FORM 10-Q

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EX-32 - EXHIBIT 32 - COGENTIX MEDICAL INC /DE/	ex32.htm
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20459

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2011
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

COMMISSION FILE NUMBER 0-20970

VISION-SCIENCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3430173
(State or other jurisdiction of incorporation or organization)	(IRS employer identification number)

40 Ramland Road South, Orangeburg, NY	10962
(Address of principal executive offices)	(Zip code)

(845) 365-0600

(Registrant’s telephone number, including area code)

(Former name, former address, and

former fiscal year if changed since last report)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller

reporting company)

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of January 30, 2012

Common Stock, par value of $0.01	44,672,345
(Title of Class)	(Number of Shares)

VISION-SCIENCES, INC.

TABLE OF CONTENTS

Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Operations	4
		Condensed Consolidated Statement of Stockholders’ Equity	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
	Item 4.	Controls and Procedures	22

Part II.	Other Information
	Item 1.	Legal Proceedings	23
	Item 1A.	Risk Factors	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Submission of Matters to Vote of Security Holders	24
	Item 5.	Other Information	24
	Item 6.	Exhibits	24
	Signatures		25

PART I—FINANCIAL INFORMATION

Item 1: Financial Statements

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

	December 31,			March 31,
	2011			2011
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	3,017		$	9,180
Accounts receivable, net of allowance for doubtful accounts of $57 and $56, respectively		1,555			1,592
Inventories, net		5,306			6,096
Prepaid expenses and other current assets		269			332
Total current assets		10,147			17,200

Machinery and equipment		3,435			3,182
Demonstration equipment		1,036			1,413
Furniture and fixtures		224			224
Leasehold improvements		372			372
Total property and equipment, at cost		5,067			5,191
Less—accumulated depreciation and amortization		2,958			2,970
Total property and equipment, net		2,109			2,221
Other assets, net of accumulated amortization of $94 and $90, respectively		69			73
Deferred debt cost, net of accumulated amortization of $401 and $172, respectively		1,659			272
Total assets	$	13,984		$	19,766

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease obligations	$	99		$	65
Accounts payable		403			921
Accrued expenses		734			782
Accrued compensation		669			706
Advances from customers		1,659			5,693
Total current liabilities		3,564			8,167
Line of credit—related party		8,000			5,000
Capital lease obligations, net of current portion		115			75
Total liabilities		11,679			13,242

Commitments and Contingencies		-			-
Stockholders’ equity:
Preferred stock, $0.01 par value— Authorized—5,000 shares Issued—none		-			-
Common stock, $0.01 par value— Authorized—75,000 shares Issued—44,665 shares and 44,025 shares, respectively		447			440
Additional paid-in capital		98,049			94,339
Treasury stock at cost, 5 shares of common stock and none, respectively		(11	)		-
Accumulated deficit		(96,180	)		(88,255	)
Total stockholders’ equity		2,305			6,524
Total liabilities and stockholders’ equity	$	13,984		$	19,766

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2011			2010			2011			2010

Net sales	$	4,314		$	2,715		$	12,095		$	7,671
Cost of sales		2,957			1,906			8,213			5,532
Gross profit		1,357			809			3,882			2,139

Selling, general, and administrative expenses		2,665			2,599			9,054			7,872
Research and development expenses		730			655			2,161			1,984
Operating loss		(2,038	)		(2,445	)		(7,333	)		(7,717	)

Interest income		2			1			9			4
Interest expense		(131	)		(91	)		(329	)		(235	)
Debt cost expense		(145	)		(37	)		(229	)		(101	)
Other, net		(32	)		-			(43	)		(1	)
Loss before provision for income taxes		(2,344	)		(2,572	)		(7,925	)		(8,050	)
Income tax (benefit) provision		(2	)		4			-			10
Net loss	$	(2,342	)	$	(2,576	)	$	(7,925	)	$	(8,060	)

Net loss per common share - basic and diluted	$	(0.05	)	$	(0.07	)	$	(0.18	)	$	(0.22	)

Weighted average shares used in computing net loss per common share - basic and diluted		44,258			36,955			44,164			36,904

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except per share amounts)

(Unaudited)

	Common Stock						Additional		Treasury Stock								Total
	Number						Paid-in		Number					Accumulated			Stockholders’
	of Shares			Par Value			Capital		of Shares		Cost			Deficit			Equity
Balance at March 31, 2011		44,025		$	440		$	94,339		-	$	-		$	(88,255	)	$	6,524
Exercise of stock options		323			4			395		-		-			-			399
Issuance of restricted stock awards		406			4			-		-		-			-			4
Cancellation of restricted stock awards		(89	)		(1	)		-		-		-			-			(1	)
Issuance of stock warrants		-			-			1,611		-		-			-			1,611
Common stock repurchased		-			-			-		5		(11	)		-			(11	)
Stock-based compensation expense		-			-			1,704		-		-			-			1,704
Net loss		-			-			-		-		-			(7,925	)		(7,925	)
Balance at December 31, 2011		44,665		$	447		$	98,049		5	$	(11	)	$	(96,180	)	$	2,305

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended
	December 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(7,925	)	$	(8,060	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		618			559
Stock-based compensation expense		1,704			1,310
Issuance of restricted stock awards		3			7
Provision for (recovery of) bad debt expenses		1			(152	)
Debt cost expense		229			101
Loss on disposal of fixed assets		39			-
Changes in assets and liabilities:
Accounts receivable		36			(348	)
Inventories		508			(2,372	)
Prepaid expenses and other current assets		63			720
Accounts payable		(518	)		1,036
Accrued expenses		(48	)		(168	)
Accrued compensation		(37	)		(428	)
Advances from customers		(4,034	)		3,669
Net cash used in operating activities		(9,361	)		(4,126	)
Cash flows from investing activities:
Purchase of property and equipment		(127	)		(220	)
Purchase of short-term investments		-			(149	)
Proceeds from short-term investment sales/maturities		-			596
Proceeds from disposal of fixed assets		3			-
Net cash (used in) provided by investing activities		(124	)		227
Cash flows from financing activities:
Advance on line of credit—related party		3,000			2,500
Payments for deferred debt cost		(5	)		-
Payments of capital leases		(61	)		(45	)
Proceeds from exercise of stock options		399			112
Common stock repurchased		(11	)		-
Net cash provided by financing activities		3,322			2,567
Net decrease in cash and cash equivalents		(6,163	)		(1,332	)
Cash and cash equivalents at beginning of period	$	9,180		$	2,540
Cash and cash equivalents at end of period	$	3,017		$	1,208

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	301		$	58
Income taxes	$	4		$	27

Non-cash financing activities:
Issuance of stock warrants with line of credit—related party	$	1,611		$	117
Net transfers of inventory to fixed assets for use as demonstration equipment	$	281		$	551
Capital lease entered into for equipment purchase	$	135		$	88

See accompanying notes to condensed consolidated financial statements.

Vision-Sciences, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited, in thousands except per share amounts)

Note 1. Basis of Presentation

Vision-Sciences, Inc. and its subsidiaries (the “Company” – which may be referred to as “our”, “us” or “we”) have prepared the condensed consolidated financial statements included herein according to generally accepted accounting principles in the United States of America (“U.S. GAAP”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments that we consider necessary for a fair presentation of such information. We have condensed or omitted certain information and footnote disclosures normally included in financial statements pursuant to those rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading.

The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. Please read these condensed consolidated financial statements in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Note 2. The Company and Summary of Significant Accounting Policies

Company Overview

We design, develop, manufacture, and market products for endoscopy – the science of using an instrument, known as an endoscope, to provide minimally invasive access to areas not readily visible to the human eye. Our products are sold throughout the world through direct sales representatives in the United States (“U.S.”) and independent distributors for the rest of the world. With respect to our urology products, we are the exclusive supplier to the Endoscopy Division of Stryker Corporation (“Stryker”). Our largest geographic markets are the U.S. and Europe.

We were incorporated in Delaware, and are the successor to operations originally begun in 1987. Machida Incorporated (“Machida”), our wholly-owned subsidiary, designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries.

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

Liquidity and Capital Resources

We have incurred losses since our inception, and losses are expected to continue through at least fiscal years 2012 and 2013. We have funded the losses principally with cash flow from operations, advances under a $10.0 million revolving loan agreement (the “Agreement”) with our Chairman, Lewis C. Pell (the “Lender”), proceeds from equity financings (most recently the $10.5 million of proceeds we received from a private placement in January 2011), payments from Medtronic related to the sale of certain assets related to our ENT EndoSheath technology business in fiscal 2007, and the sale of other assets. We also received an aggregate of $6.4 million of deposits (the “Prepayments”) from two customers, Stryker and SpineView Inc. (“SpineView”), during fiscal 2011 to support anticipated sales orders, some of which have shipped through the third quarter of fiscal 2012 and the remainder are expected to ship over the course of the next few quarters. We have invested some of our working capital in inventory to fulfill these orders and forecasts provided from Stryker. We believe that at December 31, 2011, our cash on-hand and the remaining $2 million available, subject to certain conditions, under the Agreement will be sufficient to fund our working capital needs, capital expenditures, and future operating losses through December 31, 2012. However, if our performance expectations fall short (including generating expected sales from Stryker and SpineView) or our expenses exceed expectations, we will need to either secure additional financing or reduce expenses or a combination thereof. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

We have recently filed a shelf registration statement for the registration of certain securities of the Company in connection with a possible sale of such securities from time to time. Depending on our public equity float during the time period prior to consummating a financing transaction and the availability of such financing, the registration statement could permit us to raise up to $25 million through the sale of our securities. The timing and terms of a financing, if any, pursuant to this registration statement have not yet been determined. There can be no assurance that any issuance of securities will be available on terms acceptable to us, if at all.

Summary of Significant Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable, based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are any differences (other than nominal differences) between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

• Revenue recognition

• Stock-based compensation expense

• Allowances for doubtful accounts

• Inventory obsolescence reserves

• Other contingencies

The accompanying condensed consolidated financial statements reflect the accounts of the Company. All significant inter-company accounts and transactions have been eliminated in consolidation.

Accounting Standards Updates Adopted

In January 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06 (“ASC Update 2010-06”), an update to ASC 820 (Topic 820, Fair Value Measurement). This update provides amendments to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASC Update 2010-06 became effective for us with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 measurements, which became effective for us with the reporting period beginning April 1, 2011 (our fiscal year 2012). The adoption of the provisions of the update effective April 1, 2011 did not have a material effect on our results of operations, financial position, or liquidity.

Note 3. Fair Value Measurements

The carrying amounts reflected in our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, accrued compensation, and capital lease obligations approximate fair value due to their short-term nature. The fair value of the line of credit is based on its demand value, which is equal to its carrying value.

Note 4. Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method and consist of the following:

	December 31,		March 31,
	2011		2011
Raw materials	$	4,408	$	4,967
Work in process		400		324
Finished goods		498		805
Inventories, net	$	5,306	$	6,096

Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, with the exception of certain key components which are supplied to us by key suppliers, with whom we have long-term supply arrangements, but no long-term supply agreements.

Note 5. Advances from Customers

Exclusive Urology Supply Agreement with Stryker

On September 22, 2010, we signed a three-year agreement (the “Stryker Agreement”) under which we became the exclusive supplier to Stryker of Stryker-branded flexible video and fiber cystoscopes. These cystoscopes employ our patented slide-on EndoSheath technology, which are co-branded Stryker and Vision-Sciences. We will also supply Stryker with flexible ureteroscopes upon launch of this product line, expected to occur during the first half of fiscal 2013. Stryker will initially have the exclusive rights to distribute our cystoscopes, urology EndoSheath technology, and ureteroscopes, in North and Latin America, South America, China and Japan and 12 months post-launch, throughout the rest of the world. Stryker launched these product lines during April 2011 and introduced them at the American Urological Association annual meeting in May 2011.

The purchase price for the products is based on our cost to manufacture plus a margin specified in the Stryker Agreement. We will recognize revenue for products sold to Stryker in a two-step process. The first step is recognition of revenue for our cost to manufacture these products when title passes to Stryker, generally upon shipment of our products F.O.B. shipping point. The second step is recognition of revenue for our specified margin of Stryker’s gross profit after Stryker sells the products to its end customers, based upon reports received from Stryker monthly. Such amounts have not been significant to date. There is no required minimum amount of scopes and EndoSheath products which Stryker is required to purchase from us.

During fiscal 2011, we received a prepayment from Stryker of $5 million, of which we received $2.5 million at signing and the balance in March 2011. The prepayment was recorded as an advance from customer in our condensed consolidated balance sheet. During the three and nine months ended December 31, 2011, we recognized $1.1 million and $3.5 million in revenue, respectively, for delivery of cystocopes and EndoSheath technology. At December 31, 2011, the advance from customer balance pertaining to Stryker was $0.9 million. We will continue to apply the amounts due from Stryker for purchases of scopes and EndoSheath technology to the prior advance by Stryker and recognize the associated revenue in accordance with our revenue recognition policy. Stryker will thereafter pay us for products supplied.

SpineView Development and Supply Agreement

On June 19, 2008, we entered into a Development and Supply Agreement with SpineView, Inc. (the “SpineView Agreement”), pursuant to which we were to develop and supply a CCD-based video surgical endoscope to SpineView for use with SpineView’s products. In September 2010, we received a prepayment of $1.4 million from SpineView for the initial, firm stocking order of 50 SpineView surgical endoscope systems. We recorded this prepayment as an advance from customer in our condensed consolidated balance sheet. During the three and nine months ended December 31, 2011, we recognized $0.2 million and $0.6 million in revenue, respectively, for delivery of SpineView surgical endoscope systems. At December 31, 2011, the advance from customer balance pertaining to SpineView was $0.6 million. We will continue to apply the amounts due from SpineView to the prior advance by SpineView for purchases of scopes and recognize the associated revenue until the balance is exhausted. SpineView will thereafter pay us for products supplied.

Note 6. Line of Credit – Related Party

On September 30, 2011 (the “Effective Date”), we entered into the Agreement with the Lender providing for an additional $5.0 million in available loans (the “New Loan”) to us, in addition to $5.0 million previously borrowed under the Original Agreement (as defined below), for an aggregate loan of up to $10.0 million.

This Agreement amends and restates the original Revolving Loan Agreement between the Lender and us dated November 9, 2009 (the “Original Agreement”) pursuant to which we borrowed $5 million (the “Original Loan Amount”). Under the Agreement, we may draw up to the New Loan Amount until November 9, 2014 or such earlier time as the agreement is terminated in accordance with its terms. The Agreement extends the Original Loan Amount repayment date to be consistent with the New Loan Amount and extends the expiration date of the stock warrants issued under the Original Agreement to be consistent with the terms of the New Warrant (as defined below).

Subject to the terms of the Agreement, we will be required to prepay all amounts outstanding under the Agreement upon a change in control or event of default. In addition, we will be required to repay all of the New Loan and a portion of the Original Loan Amount, if we secure other financing or consummate a sale or license of assets.

Any amounts drawn against the New Loan (an “Advance”) accrue interest at an annual rate of 7.5%. The Lender will receive an availability fee equal to an annual rate of 0.5% on the unused portion of the New Loan calculated based on the difference between the average annual principal amount of the outstanding Advances under the Agreement and the maximum amount of aggregate Advances of $10.0 million.

In connection with the Agreement, the Lender received a warrant to purchase an aggregate of 1,229,105 shares of our common stock at an exercise price of $2.034 per share (the “New Warrant”). The New Warrant vested immediately upon issuance and expires on the later of the fifth anniversary of the Effective Date or one year after the termination of the Agreement (the “Expiration Date”) and repayment of all amounts due and payable under the Agreement. As part of the Original Agreement, the Lender received warrants to purchase up to 272,727 shares of our common stock at an exercise price of $1.375 per share and up to 378,788 shares of our common stock at an exercise price of $1.65 per share.

We have accounted for the fair value of the New Warrant and incremental fair value arising from the extension of the maturity date of the old warrants as an increase to the deferred debt cost. Such deferred debt costs are amortized to expense over the term of the Agreement to its Expiration Date.

We estimated the fair value of all of the stock warrants issued on the date of vesting using a Black-Scholes valuation model that used the weighted average assumptions for the risk-free interest rate, expected life (in years), and expected volatility. The following table summarizes Advances taken and warrant issuances:

		Number of	Fair Value of
	Amount of	Warrant Shares	Warrant Shares
Month	Advance	Vested	on Date Vested
December 2011	$2.0 million	--	--
September 2011	$1.0 million	1,229,105	$1.5 million
December 2010	$0.5 million	37,879	$30 thousand
June 2010	$2.0 million	151,515	$87 thousand
March 2010	$2.5 million	189,394	$106 thousand
November 2009	n/a	272,727	$221 thousand
Total	$8.0 million	1,880,620	$2.0 million

At December 31, 2011, we had $8.0 million in outstanding borrowings under the Loan, which is reflected as line of credit – related party on our condensed consolidated balance sheet. The $10.0 million revolving loan expires in November 2014, at which time we must repay all outstanding borrowings and interest and fees under the Agreement.

Debt cost expense and interest expense related to the stock warrants and availability fee and accrued interest on outstanding borrowings, respectively, for the three and nine months ended December 31, 2011 and 2010 was recorded in our condensed consolidated statement of operations as follows:

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Debt cost expense	$	145	$	37	$	229	$	101
Interest expense		124		88		315		226

At December 31, 2011, we had $0.1 million in accrued interest related to the Agreement, which is included in accrued expenses on our condensed consolidated balance sheet.

Note 7. Stock-Based Awards

Stock Option Plans

We maintain the following equity incentive plans:

The 2000 Stock Incentive Plan (the “2000 Plan”), approved by stockholders in August 2000, authorized the issuance of up to 4,500,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and performance shares.

The 2007 Stock Incentive Plan (the “2007 Plan”), approved by stockholders in August 2007, authorized the issuance of up to 4,000,000 shares of common stock covering several different types of awards, including stock options, restricted shares, stock appreciation rights, and other stock-based awards. On July 12, 2010, our Board and on September 2, 2010, our stockholders approved an amendment to the 2007 Plan to increase the authorized shares issuable under the plan to 5,000,000 shares of common stock. The Board approved an amendment to the 2007 Plan to further increase the number of authorized shares issuable under the plan to 7,000,000 shares of common stock, subject to stockholder approval at our fiscal 2012 annual meeting scheduled to be held in July 2012.

The 2003 Director Option Plan (the “2003 Plan”), approved by stockholders in July 2003 and amended in August 2008, authorized the issuance of up to 450,000 shares of common stock covering the annual automatic grant of 10,000 stock options per outside director per year. The 2003 Plan also provides for granting newly elected or appointed outside directors a one-time grant of 10,000 stock options.

The stock option plans provide that options may be granted at an exercise price of 100% of fair market value of our common stock on the date of grant, may be exercised in full or in installments, at the discretion of our Board or its Compensation Committee, and must be exercised within ten years from date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period based on fair values, generally four years. We use historical data to estimate expected employee behaviors related to option exercises and forfeitures and included these expected forfeitures as a part of the estimate of stock-based compensation expense as of the grant date.

Stock-Based Compensation Expense

We account for stock-based awards issued to employees in accordance with the provisions of ASC 718 (Topic 718, Compensation – Stock Compensation). We recognize stock-based compensation expense on a straight-line uniform basis over the service period of the award, which is generally four years for employees. Stock-based awards issued to consultants are accounted for in accordance with the provisions of ASC 718 and ASC 505-50 (Subtopic 50 “Equity-Based Payments to Non-Employees” of Topic 505, Equity). Options granted to consultants are periodically revalued as the options vest, and are recognized as an expense over the related period of service or the vesting period, whichever is longer. Under the provisions of ASC 718, members of the Board are considered employees for calculation of stock-based compensation expense.

We estimated the fair value of the stock options granted on the date of grant using a Black-Scholes valuation model that used the weighted average assumptions noted in the following table. The risk-free interest rate assumption we use is based upon United States Treasury interest rates appropriate for the expected life of the awards. The expected life (estimated period of time that we expect employees, consultants and directors to hold their stock options) was estimated based on historical rates for two group classifications, (i) employees and consultants and (ii) outside directors. Expected volatility was based on historical volatility of our stock price for a period equal to the stock option’s expected life and calculated on a daily basis. The expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2011			2010			2011			2010
Risk-free interest rate		1.60	%		2.15	%		1.48	%		2.72	%
Expected life (in years)		7.3			7.6			6.3			6.9
Expected volatility		83	%		86	%		86	%		84	%
Expected dividend yield		--			--			--			--

Stock-based compensation expense for the three and nine months ended December 31, 2011 and 2010 was recorded in our condensed consolidated statement of operations as follows:

	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2011		2010		2011		2010
Cost of sales	$	46	$	48	$	126	$	185
Selling, general, and administrative expenses		254		311		1,528		1,058
Research and development expenses		21		19		50		67
Total stock-based compensation expense	$	321	$	378	$	1,704	$	1,310

At December 31, 2011, unrecognized stock-based compensation expense related to stock options was approximately $2.5 million and is expected to be recognized over a weighted average period of approximately 2.9 years.

The following table summarizes stock options activity for the nine months ended December 31, 2011:

					Weighted
				Weighted	Average
		Number	Exercise	Average	Remaining
		of Shares	Price Range	Exercise Price	Contractual Life
Outstanding at March 31, 2011		6,558,701	$0.79 – $5.10	$2.31	5.3
	Granted	1,730,450	$1.84 – $2.78	2.36
	Exercised	(323,551)	$0.85 – $2.05	1.23
	Canceled	(253,875)	$0.85 – $5.10	1.99
Outstanding at December 31, 2011		7,711,725	$0.79 – $4.88	$1.97	5.5
Vested and expected to vest at December 31, 2011		7,280,211	$0.79 – $4.88	$1.92	5.4
Exercisable at December 31, 2011		5,503,150	$0.79 – $4.88	$1.82	4.2

During the three months ended September 30, 2011, in connection with the appointment of Cynthia Ansari as our Chief Executive Officer, we granted her 750,000 options to purchase our common stock at a price of $2.22 per share. These options vest as follows: 25% (187,500) upon her start date (August 11, 2011) and 25% on each of the first, second, and third year anniversaries of her start date. Ms. Ansari will also be granted an additional 750,000 stock options on the first year anniversary of her start date, subject to increase of the securitites authorized under the 2007 Plan, with this grant vesting over four years, with 25% vesting on each of the first, second, third, and fourth anniversaries of the grant.

The weighted average fair value of options granted during the three months ended December 31, 2011 and 2010 was $1.65 and $0.98 per share, respectively. The weighted average fair value of options granted during the nine months ended December 31, 2011 and 2010 was $1.68 and $0.82 per share, respectively.

The total intrinsic value (the excess of the market price over the exercise price) was approximately $2.9 million for stock options outstanding, $2.6 million for stock options exercisable, and $2.8 million for stock options vested and expected to vest as of December 31, 2011. The total intrinsic value for stock options exercised during the three months ended December 31, 2011 and 2010 was approximately $101 thousand and $1 thousand, respectively. The total intrinsic value for stock options exercised during the nine months ended December 31, 2011 and 2010 was approximately $382 thousand and $22 thousand, respectively.

We do not expect to realize any tax benefits from future disqualifying dispositions, if any, because we currently have a full valuation allowance against our deferred tax assets.

Stock Warrants

We had 1,880,620 stock warrants related to our line of credit – related party outstanding with a weighted average exercise price of $1.86 at December 31, 2011. At December 31, 2011, unrecognized debt cost expense related to the stock warrants was approximately $1.7 million, which is expected to be recognized over a weighted average period of approximately 2.9 years.

Restricted Stock

During the nine months ended December 31, 2011, we granted 366,089 shares and 40,000 shares of restricted stock to management and outside directors of our Board, respectively, under our 2007 Plan. At the time of her appointment, Ms. Ansari was granted 118,244 shares of restricted stock, which is included in the number granted to management during the period. The restrictions on 59,122 shares of restricted stock issued to Ms. Ansari lapse in quarterly installments starting on each of June 30, 2012, September 30, 2012, December 31, 2012, and March 30, 2013. The restrictions on the remainder will lapse consistent with the shares of restricted stock granted to the other management employees. Those restrictions lapse after certain Company (net sales and operating loss) and individual milestones are met followed by a four-year graded vesting schedule. Irrespective of achieving the Company milestones, management will receive 25% of their restricted stock award if their individual milestones are met. The restrictions for the restricted stock awards granted to outside directors lapse quarterly over a one-year period.

The following table summarizes restricted stock activity for the nine months ended December 31, 2011:

				Weighted
	Number			Average
	of Shares			Grant Price
Nonvested at March 31, 2011		40,000		$	2.00
Granted		406,089			2.53
Vested		(35,000	)		2.01
Forfeited		(89,483	)		2.68
Nonvested at December 31, 2011		321,606		$	2.48

We determined stock-based compensation expense for performance based restricted stock based upon the fair value of our common stock at the date of grant and recognized expense based upon the most probable outcome as to whether the performance targets will be achieved and the stock-based compensation being earned.

During the nine months ended December 31, 2011, we recognized approximately $0.2 million of stock-based compensation expense related to performance based restricted stock awards. At December 31, 2011, unrecognized stock-based compensation expense related to nonvested awards was approximately $0.6 million, which is expected to be recognized over a weighted average period of approximately 2.7 years.

Note 8. Treasury Stock

We repurchased 4,902 shares of our common stock at its fair value for a cost of $11 thousand during the nine months ended December 31, 2011. The shares were purchased from a management employee to cover income tax withholdings upon the lapse of restrictions on a restricted stock award. Although not required to under our equity incentive plans, we anticipate repurchasing shares in a similar arrangement during the remainder of fiscal 2012.

Note 9. Segment Information

We have two reportable segments, medical and industrial. Each of these operating segments has unique characteristics.

Our medical segment designs, manufactures and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible endoscopes, and our Slide-On EndoSheath technology referred to as a sheath or EndoSheath disposable, for a variety of specialties and markets.

Our industrial segment, through our wholly-owned subsidiary Machida, designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine manufacturing and aircraft engine maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities. Our borescopes are used to inspect aircraft engines, casting parts and ground turbines, among other items.

Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.

The following table presents key financial highlights, by reportable segments:

Three months ended December 31,	Medical			Industrial			Adjustments *			Consolidated
2011
Net sales	$	3,568		$	746		$	-		$	4,314
Gross profit		1,079			278			-			1,357
Operating loss		(2,017	)		(21	)		-			(2,038	)
Interest expense, net		(129	)		-			-			(129	)
Depreciation and amortization		205			11			-			216
Stock-based compensation expense		286			35			-			321
Total assets		14,558			1,502			(2,076	)		13,984
Expenditures for fixed assets		21			-			-			21

2010
Net sales	$	2,068		$	647		$	-		$	2,715
Gross profit		620			189			-			809
Operating loss		(2,404	)		(41	)		-			(2,445	)
Interest expense, net		(90	)		-			-			(90	)
Depreciation and amortization		175			9			-			184
Stock-based compensation expense		357			21			-			378
Total assets		11,299			2,622			(2,284	)		11,637
Expenditures for fixed assets		159			-			-			159

Nine months ended December 31,
2011
Net sales	$	10,057		$	2,038		$	-		$	12,095
Gross profit		3,122			760			-			3,882
Operating loss		(7,117	)		(216	)		-			(7,333	)
Interest expense, net		(320	)		-			-			(320	)
Depreciation and amortization		584			34			-			618
Stock-based compensation expense		1,609			95			-			1,704
Expenditures for fixed assets		127			-			-			127

2010
Net sales	$	5,909		$	1,762		$	-		$	7,671
Gross profit		1,589			550			-			2,139
Operating loss		(7,542	)		(175	)		-			(7,717	)
Interest expense, net		(231	)		-			-			(231	)
Depreciation and amortization		538			21			-			559
Stock-based compensation expense		1,231			79			-			1,310
Expenditures for fixed assets		220			-			-			220

	December 31,
* Adjustments		2011			2010
Intercompany eliminations	$	(1,390	)	$	(1,512	)
Investment in subsidiaries		(686	)		(772	)
Total adjustments	$	(2,076	)	$	(2,284	)

The following table presents the reconciliation to loss before provision for income taxes for the three and nine months ended December 31, 2011 and 2010:

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
Reconciliation to loss before provision for income taxes:	2011			2010			2011			2010
Operating loss	$	(2,038	)	$	(2,445	)	$	(7,333	)	$	(7,717	)
Interest expense, net		(129	)		(90	)		(320	)		(231	)
Debt cost expense		(145	)		(37	)		(229	)		(101	)
Other, net		(32	)		-			(43	)		(1	)
Loss before provision for income taxes	$	(2,344	)	$	(2,572	)	$	(7,925	)	$	(8,050	)

Note 10. Basic and Diluted Net Loss per Common Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding. For all periods presented, the diluted net loss per common share is the same as basic net loss per common share, as the inclusion of other shares of stock issuable pursuant to stock options and warrants would be anti-dilutive. Stock options, warrants, and restricted stock of 9,913,951 shares and 8,078,221 shares as of December 31, 2011 and 2010, respectively, were excluded from the calculation of fully diluted loss per share as their inclusion would have been anti-dilutive due to our net loss per share.

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Such factors include, but are not limited to, further weakening of economic conditions that could adversely affect the level of demand for our products; our ability to satisfactorily distribute our ENT endoscopes without an arrangement with Medtronic; our ability to sell products to Stryker in at least the amounts necessary to retain the remainder of the prepayments received from Stryker; Stryker’s ability to successfully market and sell the products we manufacture for them and to do so at prices that are favorable to us; pricing pressures, including cost-containment measures which could adversely affect the price of, or demand for, our products; availability of parts on acceptable terms; our ability to design new products and the success of such new products; changes in foreign exchange markets; changes in financial markets and changes in the competitive environment. Examples of forward-looking statements include statements about expectations about future financial results, future products and future sales of new and existing products, future expenditures, and capital resources to meet anticipated requirements. Generally, words such as “expect” “believe”, “anticipate”, “may”, “will”, “plan”, “intend”, “estimate”, “could”, and other similar expressions are intended to identify forward-looking statements. The forward-looking statements are based on our future plans, strategies, projections and predictions and involve risks and uncertainties, and our actual results may differ significantly from those discussed in the forward-looking statements. Factors that might cause such a difference could include the availability of capital resources; the availability of third-party reimbursement; government regulation; the availability of raw material components; our ability to satisfactorily distribute our ENT endoscopes without an arrangement with Medtronic; our dependence on certain distributors and customers; our ability to effect expected sales to Stryker (and the expected margin of such sales); competition; technological difficulties; product recalls; general economic conditions and other risks detailed in this Quarterly Report on Form 10-Q and any subsequent periodic filings we make with the Securities and Exchange Commission (“SEC”). While we believe the assumptions underlying such forward-looking statements are reasonable, there can be no assurance that future events or developments will not cause such statements to be inaccurate. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. We do not undertake an obligation to update our forward-looking statements to reflect future events or circumstances.

Registered Trademarks, Trademarks and Service Marks

Vision-Sciences, Inc. owns the registered trademarks Vision Sciences®, Slide-On®, EndoSheath®, EndoWipe® and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.

Executive Summary

We design, develop, manufacture, and market products for endoscopy – the science of using an instrument, known as an endoscope – to provide minimally invasive access to areas not readily visible to the human eye. We operate in two segments, medical and industrial. Our medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our state-of-the-art flexible fiber and video endoscopes and our Slide-On EndoSheath technology, for a variety of specialties and markets. Our industrial segment, through our wholly-owned subsidiary, Machida, Inc. (“Machida”), designs, manufactures, and sells borescopes to a variety of users, primarily in the aircraft engine-manufacturing and aircraft engine-maintenance industries. A borescope is an instrument that uses optical fibers for the visual inspection of narrow cavities.

Medical Segment Areas

Within our medical segment we target five main areas for our fiber and video endoscopes and our EndoSheath technology:

ENT (ear, nose, and throat) – we manufacture ENT endoscopes for use by ENT physicians. We manufacture our TNE (trans-nasal esophagoscopy) endoscopes and also market and sell them to ENT physicians.

Urology – we manufacture, market, and sell our cystoscopes and EndoSheath technology to urologists and other urology-gynecology related physicians. Pursuant to our agreement dated as of September 22, 2010, with the Endoscopy Division of Stryker Corporation (“Stryker”), we supply to Stryker our flexible video and fiber cystoscopes and related EndoSheath products (the “Stryker Agreement”) (See Exclusive Urology Supply Agreement with Stryker below for additional information).

Gastroenterology (“GI”) – we manufacture, market, and sell our TNE scopes and EndoSheath technology to GI physicians, primary care physicians, and others with a GI focus as part of their practice, in addition to bariatric surgeons.

Pulmonology – we manufacture, market, and sell our bronchoscope (an endoscope that allows detailed viewing of the lungs) and EndoSheath technology for bronchoscopy to pulmonologists, oncologists, thoracic surgeons, and other pulmonology-related physicians.

Spine – pursuant to our agreement dated as of June 19, 2008, with SpineView, Inc. (“SpineView”), we supply to SpineView our flexible video surgical endoscope systems for use with SpineView’s products (See SpineView Development and Supply Agreement below for additional information).

We sell our ENT and TNE endoscopes and bronchoscopes through our direct sales force in the U.S. For the rest of the world, we sell our ENT and TNE endoscopes, bronchoscopes, and cystoscopes through international distributors.

Value Proposition and Strategy

We believe our technology delivers significant value to our customers – doctors, clinics and hospitals – through reduced capital, staff and service costs, and increased patient throughput, practice revenue, and profitability. Our EndoSheath technology allows our customers to buy fewer endoscopes to service their patients and enables a higher patient throughput. Our single-use EndoSheath technology provides a sterile barrier between patients and our reusable endoscopes, eliminating the need for time-consuming reprocessing routines necessary with conventional endoscopes. Our endoscopes are therefore typically ready for the next procedure in ten minutes, unlike conventional endoscopes which may take from 45 minutes to up to 24 hours to reprocess. We believe our EndoSheath technology is the solution to the challenges and problems with conventional flexible endoscopes. By offering a technology that provides simpler and quicker endoscope reprocessing and sterility derived from use of a single-use disposable sheath, we have removed the limitations of conventional flexible endoscopy.

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

·	Growing our sales force in the U.S. by adding proven MedSurg device sales professionals;

·	Targeting acute care facilities and office-based clinics that recognize patient safety and the patient experience as a primary value position;

·	Capitalizing on our extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology; and

·	Enhancing our professional educational programs to allow healthcare professionals to teach other healthcare professionals.

New Product Development and Release

During the first quarter of fiscal 2012, we launched a new “small diameter”, 2.4mm 4000 Series fiberscope, the ENT-4500, and in the second quarter of fiscal 2012, the second generation of our 5000 Series video processor, which features upgraded software providing our customers with additional features and superior image quality, was released.

In fiscal 2013, we expect to launch a number of products from our new 7000 Series endoscopy platform, expanding our product portfolio. In the first half, we will release a new, high-performance, streamlined digital processor model, the DPU-7000. The 7000 Series platform offers a full array of expanded features, such as a superior user interface, video and voice recording capabilities, and a number of practice-integrating functions. We also expect to release our first CCD-based flexible ureteroscope, which will be the smallest CCD-based video endoscope in the marketplace today.

While we currently anticipate the development and release of the products as noted above, there can be no assurances that the timelines and related budgeted costs will be attained.

Line of Credit – Related Party

On September 30, 2011 (the “Effective Date”), we entered into an Amended and Restated Revolving Loan Agreement (the “Agreement”) with our Chairman, Lewis C. Pell (the “Lender”) providing for an additional $5.0 million in available loans (the “New Loan”) to us, in addition to $5.0 million previously borrowed under the Original Agreement (as defined below), for an aggregate loan of up to $10.0 million.

In connection with the Agreement, the Lender received a warrant to purchase an aggregate of 1,229,105 shares of our common stock at an exercise price of $2.034 per share (the “New Warrant”). The New Warrant vested immediately upon issuance and expires on the later of the fifth anniversary of the New Warrant or one year after the termination of the Agreement (the “Expiration Date”) and repayment of all amounts due and payable thereunder. As part of the Original Agreement, the Lender received warrants to purchase up to 272,727 shares of our common stock at an exercise price of $1.375 per share and up to 378,788 shares of our common stock at an exercise price of $1.65 per share.

Exclusive Urology Supply Agreement with Stryker

On September 22, 2010, we signed a three-year agreement under which we became the exclusive supplier to Stryker of Stryker-branded flexible video and fiber cystoscopes. These cystoscopes employ our patented slide-on EndoSheath technology, which are co-branded Stryker and Vision-Sciences. We will also supply Stryker with flexible ureteroscopes upon launch of this product line, expected to occur during the first half of fiscal 2013. Stryker will initially have the exclusive rights to distribute products, including cystoscopes, urology EndoSheath technology, and ureteroscopes manufactured by us, in North and Latin America, South America, China and Japan and 12 months post-launch, throughout the rest of the world. Stryker launched these product lines during April 2011 and introduced them at the American Urological Association annual meeting in May 2011.

The purchase price for the products is based on our cost to manufacture plus a margin specified in the Stryker Agreement. We will recognize revenue for products sold to Stryker in a two-step process. The first step is recognition of revenue for our cost to manufacture these products when title passes to Stryker, generally upon shipment of our products F.O.B. shipping point. The second step is recognition of revenue for our specified margin of Stryker’s gross profit after Stryker sells the products to its end customers, based upon reports received from Stryker monthly. Such amounts have not been significant to date. There is no cost of sales associated with revenue under this second step. There is no required minimum amount of scopes and EndoSheath products which Stryker is required to purchase from us.

SpineView Development and Supply Agreement

On June 19, 2008, we entered into a Development and Supply Agreement with SpineView (the “SpineView Agreement”), pursuant to which we were to develop and supply a CCD-based video surgical endoscope to SpineView for use with SpineView’s products. In September 2010, we received a prepayment of $1.4 million from SpineView for the initial, firm stocking order of 50 SpineView surgical endoscope systems. We recorded this prepayment as an advance from customer in our condensed consolidated balance sheet. During the three and nine months ended December 31, 2011, we recognized $0.2 million and $0.6 million in revenue, respectively, for delivery of SpineView surgical endoscope systems. At December 31, 2011, the advance from customer balance pertaining to SpineView was $0.6 million. We will continue to apply the amounts due from SpineView to the prior advance by SpineView for purchases of scopes and recognize the associated revenue until the balance is exhausted. SpineView will thereafter pay us for products supplied.

Results of Operations (in thousands, except percentages)

Net Sales

In the medical segment, we track sales of endoscopes and EndoSheath disposables by market. We also track sales of peripherals and accessories which can be sold to more than one market. Net sales by operating segment and by market/category for the three and nine months ended December 31, 2011 and 2010 were as follows:

	Three Months Ended							Nine Months Ended
	December 31,							December 31,
Market/Category	2011		2010		Change			2011		2010		Change
ENT and TNE	$	840	$	751		12	%	$	2,195	$	1,775		24	%
Urology		1,839		827		122	%		5,251		2,471		113	%
Pulmonology		254		70		263	%		563		541		4	%
Spine		186		-		n/m	*		612		74		727	%
Repairs, peripherals, and accessories		449		420		7	%		1,436		1,048		37	%
Total medical sales		3,568		2,068		73	%		10,057		5,909		70	%
Borescopes		583		442		32	%		1,542		1,223		26	%
Repairs		163		205		-20	%		496		539		-8	%
Total industrial sales		746		647		15	%		2,038		1,762		16	%
Net sales	$	4,314	$	2,715		59	%	$	12,095	$	7,671		58	%

* not meaningful

Net sales increased $1.6 million, or 59%, in the third quarter of fiscal 2012 to $4.3 million compared to $2.7 million in the third quarter of fiscal 2011. During the third quarter of fiscal 2012, our medical segment’s net sales of $3.6 million increased by $1.5 million, or 73%, primarily attributable to higher sales our endoscopes and EndoSheath disposables in the urology market as a result of the Stryker Agreement. Our industrial segment’s net sales of $0.7 million increased by $0.1 million, or 15%, primarily attributable to higher borescope sales. This operating segment’s products are mature, and therefore, we expect future sales to remain relatively flat.

Net sales increased $4.4 million, or 58%, in the first nine months of fiscal 2012 to $12.1 million compared to $7.7 million in the first nine months of fiscal 2011. During the first nine months of fiscal 2012, our medical segment’s net sales of $10.1 million increased by $4.1 million, or 70%, primarily attributable to higher sales of our endoscopes and EndoSheath disposables in the urology market as a result of the Stryker Agreement. Our industrial segment’s net sales of $2.0 million increased by $0.3 million, or 16%, primarily attributable to higher borescope sales.

The following table summarizes net sales by market/category and by product for our medical operating segment for the three and nine months ended December 31, 2011 and 2010:

	Three Months Ended							Nine Months Ended
	December 31,							December 31,
Market/Category	2011		2010		Change			2011		2010		Change
ENT and TNE
Endoscopes	$	819	$	728		13	%	$	2,130	$	1,733		23	%
Slide-On EndoSheaths		21		23		-9	%		65		42		55	%
Total ENT/TNE market		840		751		12	%		2,195		1,775		24	%

Urology
Endoscopes		953		331		188	%		2,975		1,135		162	%
Slide-On EndoSheaths		886		496		79	%		2,276		1,336		70	%
Total urology market		1,839		827		122	%		5,251		2,471		113	%

Pulmonology
Endoscopes		203		37		449	%		462		475		-3	%
Slide-On EndoSheaths		51		33		55	%		101		66		53	%
Total pulmonology market		254		70		263	%		563		541		4	%

Spine
Endoscopes		186		-		n/m	*		612		74		727	%

Repairs, peripherals, and accessories		449		420		7	%		1,436		1,048		37	%
Total medical sales	$	3,568	$	2,068		73	%	$	10,057	$	5,909		70	%

Product
Endoscopes	$	2,161	$	1,096		97	%	$	6,179	$	3,417		81	%
Slide-On EndoSheaths		958		552		74	%		2,442		1,444		69	%
Repairs, peripherals, and accessories		449		420		7	%		1,436		1,048		37	%
Total medical sales	$	3,568	$	2,068		73	%	$	10,057	$	5,909		70	%

* not meaningful

Net sales to the ENT and TNE markets were $0.8 million and $2.2 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.1 million (12%) and $0.4 million (24%) over the same periods in fiscal 2011. Continued expansion in the GI and bariatric surgery markets and growth in our customer base in the ENT market contributed to the year-over-year growth.

Net sales to the urology market were $1.8 million and $5.3 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $1.0 million (122%) and $2.8 million (113%) over the same periods in fiscal 2011. The year-over-year growth was primarily attributable to the expanded U.S. distribution of our flexible video and fiber cystoscopes and related EndoSheath products to Stryker after their launch of these products in April 2011.

Net sales to the pulmonology market were $0.3 million and $0.6 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $184 thousand (263%) and $22 thousand (4%) over the same periods in fiscal 2011. We continue to increase our customer base and realize further penetration in this market space.

Net sales to SpineView were $0.2 million and $0.6 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.2 million and $0.5 million (727%) over the same periods in fiscal 2011. We continue to fulfill the initial stocking order of 50 video surgical endoscope systems to SpineView.

Net sales of repairs, peripherals, and accessories were $0.4 million and $1.4 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $29 thousand (7%) and $388 thousand (37%) over the same periods in fiscal 2011. The increased demand of peripherals and accessories for our urology endoscopes as a result of the Stryker Agreement contributed to the year-over-year growth.

Gross Profit (Net Sales Less Cost of Sales)

Gross profit by operating segment for the three and nine months ended December 31, 2011 and 2010 was as follows:

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
Gross Profit	2011			2010			Change			2011			2010			Change
Medical	$	1,079		$	620			74	%	$	3,122		$	1,589			96	%
As percentage of net sales		30	%		30	%		0	%		31	%		27	%		4	%
Industrial		278			189			47	%		760			550			38	%
As percentage of net sales		37	%		29	%		8	%		37	%		31	%		6	%
Gross profit	$	1,357		$	809			68	%	$	3,882		$	2,139			81	%
Gross margin percentage		31	%		30	%		1	%		32	%		28	%		4	%

Gross profit was $1.4 million and $3.9 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.5 million (68%) and $1.7 million (81%) over the same periods in fiscal 2011. Gross margin percentage was 31% and 32% in the third quarter and first nine months of fiscal 2012, respectively, representing an increase of 1% and 4% over the same periods in fiscal 2011. The year-over-year increases in gross margin are largely driven by a more favorable sales mix towards products with higher gross margins and favorable manufacturing variances as a result of manufacturing efficiencies.

Operating Expenses

Operating expenses by operating segment for the three and nine months ended December 31, 2011 and 2010 were as follows:

	Three Months Ended							Nine Months Ended
	December 31,							December 31,
Operating Expenses	2011		2010		Change			2011		2010		Change
SG&A expenses
Medical	$	2,366	$	2,369		0	%	$	8,078	$	7,147		13	%
Industrial		299		230		30	%		976		725		35	%
Total SG&A expenses		2,665		2,599		3	%		9,054		7,872		15	%
R&D expenses
Medical		730		655		11	%		2,161		1,984		9	%
Industrial		-		-		-			-		-		-
Total R&D expenses		730		655		11	%		2,161		1,984		9	%
Total operating expenses	$	3,395	$	3,254		4	%	$	11,215	$	9,856		14	%

Selling, General, & Administrative (“SG&A”) Expenses

SG&A expenses were $2.7 million and $9.1 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.1 million (3%) and $1.2 million (15%) over the same periods in fiscal 2011. These increases were primarily attributable to higher stock-based compensation expense, higher sales commissions due to the overall growth of our net sales, and increased spending on sales and marketing consulting activities. Prior year SG&A expenses benefited from the recovery of bad debt expense for a delinquent account, which was not repeated in the current fiscal year and also contributed to the year-over-year increase.

Research & Development (“R&D”) Expenses

R&D expenses were $0.7 million and $2.2 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.1 million (11%) and $0.2 million (9%) over the same periods in fiscal 2011. These increases were primarily attributable to higher product development costs associated with our next generation digital processing units. We remain committed to improving the quality of our existing products and enhancing our product offerings with new technologies.

Other (Expense) Income

Other (expense) income for the three and nine months ended December 31, 2011 and 2010 was as follows:

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
Other (Expense) Income	2011			2010			Change			2011			2010			Change
Interest income	$	2		$	1			100	%	$	9		$	4			125	%
Interest expense		(131	)		(91	)		44	%		(329	)		(235	)		40	%
Debt cost expense		(145	)		(37	)		292	%		(229	)		(101	)		127	%
Other, net		(32	)		-			n/m	*		(43	)		(1	)		4200	%
Other expense	$	(306	)	$	(127	)		141	%	$	(592	)	$	(333	)		78	%

* not meaningful

Other expense was $0.3 million and $0.6 million in the third quarter and first nine months of fiscal 2012, respectively, representing increases of $0.2 million (141%) and $0.3 million (78%) over the same periods in fiscal 2011. These increases were primarily attributable to the accrued interest on the outstanding borrowings under the line of credit – related party and the amortization of the deferred debt cost associated with the warrant shares issued in connection with the line of credit – related party.

Net Loss

Net loss for the three and nine months ended December 31, 2011 and 2010 was as follows:

	Three Months Ended									Nine Months Ended
	December 31,									December 31,
Net Loss	2011			2010			Change			2011			2010			Change
Loss before provision for income taxes	$	(2,344	)	$	(2,572	)		-9	%	$	(7,925	)	$	(8,050	)		-2	%
Income tax (benefit) provision		(2	)		4			-150	%		-			10			-100	%
Net loss	$	(2,342	)	$	(2,576	)		-9	%	$	(7,925	)	$	(8,060	)		-2	%

Net loss was $2.3 million and $7.9 million in the third quarter and first nine months of fiscal 2012, respectively, representing decreases of $0.2 million (-9%) and $0.1 million (-2%) over the same periods in fiscal 2011. These decreases were primarily attributable to a higher gross profit, partially offset by higher operating expenses.

Liquidity and Capital Resources

The following table summarizes selected financial information and statistics as of December 31, 2011 and March 31, 2011:

	December 31,		March 31,
	2011		2011
Cash and cash equivalents	$	3,017	$	9,180
Accounts receivable, net	$	1,555	$	1,592
Inventories, net	$	5,306	$	6,096
Working capital	$	6,583	$	9,033

At December 31, 2011, our principal source of liquidity was working capital of approximately $6.6 million, including $3.0 million in cash and cash equivalents. We also have $2 million of available borrowing, subject to certain conditions, under the Agreement. Our cash and cash equivalents decreased $6.2 million during the first nine months of fiscal 2012. The decrease was primarily attributable to cash used to fund our operations and cover the net loss sustained during the period.

In the first nine months of fiscal 2012, we used $9.4 million of net cash in our operating activities compared to $4.1 million in the first nine months of fiscal 2011. The increase in cash used in operations was primarily attributable to the reduction of advances from customers (i.e., sales of products to customers who already prepaid for such products in fiscal 2011), partially offset by lower inventories as we continue to fulfill orders for the remaining customer advances. The first nine months of fiscal 2011 benefited from the receipt of these customer advances, which was not repeated in the current fiscal year.

In the first nine months of fiscal 2012, we used $0.1 million of net cash in our investing activities compared to the $0.2 million provided by such activities in the first nine months of fiscal 2011. The first nine months of fiscal 2011 benefited from the proceeds yielded from sales and maturities of our short-term investments.

In the first nine months of fiscal 2012, we provided $3.3 million of net cash from our financing activities compared to $2.6 million in the first nine months of fiscal 2011. The increase was primarily attributable to a higher Advance taken on the Loan during the first nine months of fiscal 2012.

We have incurred losses since our inception, and losses are expected to continue through at least fiscal years 2012 and 2013. We have funded the losses principally with cash flow from operations, advances under the Agreement, proceeds from equity financings (most recently the $10.5 million of proceeds we received from a private placement in January 2011), payments from Medtronic related to the sale of certain assets related to our ENT EndoSheath technology business in fiscal 2007, and the sale of other assets. We also received an aggregate of $6.4 million of deposits (the “Prepayments”) from two customers, Stryker and SpineView, during fiscal 2011 to support anticipated sales orders, some of which have shipped through the third quarter of fiscal 2012 and the remainder are expected to ship over the course of the next few quarters. We have invested some of our working capital in inventory to fulfill these orders and forecasts provided from Stryker. We believe that at December 31, 2011, our cash on-hand and the remaining $2 million available, subject to certain conditions, under the Agreement will be sufficient to fund our working capital needs, capital expenditures, and future operating losses through December 31, 2012. However, if our performance expectations fall short (including generating expected sales from Stryker and SpineView) or our expenses exceed expectations, we will need to either secure additional financing or reduce expenses or a combination thereof. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, and are not required to provide the information required by this item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We have evaluated, under the supervision and with the participation of our senior management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based upon the foregoing, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2011.

Changes in Internal Controls Over Financial Reporting

There have been no changes in our internal controls over financial reporting during the three and nine months ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There have been no material changes from the information discussed in Part I, Item 1A. Risk Factors, on page 19 of our Annual Report on Form 10-K for the year ended March 31, 2011, except for the information discussed below. You should carefully consider the risks and uncertainties we discussed in our Form 10-K and the risks described below in this quarterly report before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about or that we currently believe are immaterial, or that we have not predicted, may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, operating results, or liquidity could be materially harmed.

We have a history of operating losses and we may not achieve or maintain profitability in the future

We have incurred substantial operating losses since our inception and there can be no assurance that we will achieve a profitable level of operations in the future. We anticipate a negative cash flow during fiscal years 2012 and 2013, because of spending for research and development, increasing our global network of independent sales representatives and distributors, continued investment in a direct sales force for the North American market, general business operations, and capital expenditures. As of December 31, 2011, we had cash and cash equivalents totaling approximately $3.0 million. We expect that our cash at December 31, 2011 and the remaining $2 million available, subject to certain conditions, under the Agreement will be sufficient to fund our operations until December 31, 2012. However, if our performance expectations fall short (including generating expected sales from Stryker and SpineView) or our expenses exceed expectations, we will need to either secure additional financing or reduce expenses or a combination thereof. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurance that any contemplated external financing will be available on terms acceptable to us, if at all. If required, we believe we would be able to reduce our expenses to a sufficient level to continue to operate as a going concern.

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

The following table sets forth information on repurchases by us of our common stock during the three months ended December 31, 2011.

	Total		Average		Total Number of		Maximum Number of
	Number of		Price		Shares Purchased as		Shares that May Yet
	Shares		Paid		Part of Publicly		Be Purchased Under
Fiscal Period	Purchased		Per Share		Announced Programs		the Programs
10/01/11 - 10/31/11		-	$	-		-		-
11/01/11 - 11/30/11		-		-		-		-
12/01/11 - 12/31/11		1,634		2.15		-		-
Total		1,634	$	2.15		-		-

The shares were purchased from a management employee to cover income tax withholdings as result of the lapsing of restrictions on a restricted stock award. Although not required to under our equity incentive plans, we anticipate repurchasing shares in a similar arrangement during the remainder of fiscal 2012.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to Vote of Security Holders

[Removed and Reserved]

Item 5. Other Information

None

Item 6. Exhibits

Exhibits
31.1		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

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

		VISION-SCIENCES, INC.

Date: January 31, 2012		/s/ Cynthia Ansari
		Cynthia Ansari
		Chief Executive Officer (Duly Authorized Officer)

Date: January 31, 2012		/s/ Katherine L. Wolf
		Katherine L. Wolf
		Chief Financial Officer and EVP, Corporate Development
		(Principal Financial Officer and
		Principal Accounting Officer)

COGENTIX MEDICAL INC /DE/ - FORM 10-Q - January 31, 2012

Attached files

COGENTIX MEDICAL INC /DE/ Reports