VYCOR MEDICAL, INC.

VYCO
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VYCOR MEDICAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

05/12/2020 | 01:13pm

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").






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2. Overview of Business




Vycor is dedicated to providing the medical community with innovative and
superior surgical and therapeutic solutions and operates two distinct business
units within the medical device industry. Vycor Medical designs, develops and
markets medical devices for use in neurosurgery. NovaVision provides
non-invasive rehabilitation therapies for those who have vision disorders
resulting from neurological brain damage such as that caused by a stroke. 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 64 issued or allowed patents and
a further 9 pending. The Company leverages joint resources across the divisions
to operate in a cost-efficient manner.



The Company periodically engages in discussions with potential strategic
partners for or purchasers of each or both of our operating divisions.






Vycor Medical




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 13485:2016 and MDSAP (Medical
Device Single Audit Program) certified, and VBAS has U.S. FDA 510(k) clearance
and CE Marking for Europe (Class III) for brain and spine surgeries, and
regulatory approvals in a number of other international markets. Vycor Medical
has 26 granted and 8 pending patents.






NovaVision




NovaVision provides non-invasive, computer-based rehabilitation therapies
targeted at people who have impaired vision as a result of stroke or other brain
injury, and has 38 granted patents.






Strategy




The Company is continuing to execute on a plan to achieve revenue growth and a
reduction in cash operating losses1. For Vycor Medical this plan includes in
particular: increasing market penetration in the US through broadening of the
distribution network and programs to increase penetration in exiting hospitals;
increasing international growth in territories where we are not represented or
under represented; and continued new product development. The first phase of the
modification of the existing VBAS product range to make it more compatible with
the most common IGS systems was completed in September 2017 and has been well
received by surgeons, resulting in increased hospital penetration and revenues
particularly in the US. The second phase of the development of further IGS
integration is in process and will then be subject to regulatory clearances and
approvals. Upon regulatory approval and product release of this new VBAS the
Company intends to conduct a multi-center study to provide additional clinical
data on the product. We will also be exploring with surgeons and focus groups
additional selected development work targeted at increasing the ease and
applicability of our products to additional common procedures. For NovaVision,
given the company's resources, and the large size and diversity of its end
markets, we believe that the most efficient way to tackle the distribution of
its broad range of patient and professional products is by partnering with
entities that have either direct access to the end users or a desire and
financial wherewithal to leverage the NovaVision therapy platform. Management is
determined to reduce the losses it is incurring in this division, which is why
it has now taken the decision to close the German office and migrate to a
licensing model for NovaVision in Europe. Management is open to a broad range of
alternatives for NovaVision as a whole, which could comprise distribution and
marketing partnerships, licensing, merger or sale.



1 Operating Loss before Depreciation, Amortization and non-cash Stock
Compensation






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COVID-19




In December 2019, an outbreak of a novel strain of coronavirus (COVID-19)
originated in Wuhan, China, and has since spread to a number of other countries,
including the United States. On March 11, 2020, the World Health Organization
characterized COVID-19 as a pandemic. In addition, as of the time of the filing
of this Form 10-Q, several states in the United States remain in states of
emergency, and travel restrictions continue to be applied in several countries
around the world, including the United States. Vycor Medical experienced a
reduction in demand during the three months ended March 31, 2020 in the US and
Europe. Although neurosurgery is not generally an elective procedure, general
hospital dislocation and diversion of resources has impacted our revenues during
the three months ended March 31, 2020 and could continue to do so. While our
operations are principally located in the United States, and our sub-contract
manufacturers are located in the United States, we participate in a global
supply chain, and the existence of a worldwide pandemic, the fear associated
with COVID-19, or any, pandemic, and the reactions of governments around the
world in response to COVID-19, or any, pandemic, to regulate the flow of labor
and products and impede the travel of personnel, may impact our ability to
conduct normal business operations, which could adversely affect our results of
operations and liquidity. Disruptions to our supply chain and business
operations, or to our suppliers' or customers' supply chains and business
operations, could include disruptions from the closure of supplier and
manufacturer facilities, interruptions in the supply of raw materials and
components, personnel absences, or restrictions on the shipment of our or our
suppliers' or customers' products, any of which could have adverse ripple
effects on our manufacturing output and delivery schedule. Although we have
implemented business continuity plans for our offices and personnel to enable
continuity of service remotely, if a critical number of our employees become too
ill to work, or we are not able to access a sufficient quantity of our inventory
for shipment due to enforced office closures, our production ability could be
materially adversely affected in a rapid manner. Similarly, if our customers
experience adverse business consequences due to COVID-19, or any other,
pandemic, demand for our products could also be materially adversely affected in
a rapid manner. Global health concerns, such as COVID-19, could also result in
social, economic, and labor instability in the countries and localities in which
we or our suppliers and customers operate. Any of these uncertainties could have
a material adverse effect on our business, financial condition or results of
operations.



Comparison of the Three Months Ended March 31, 2020 to the Three Months Ended
March 31, 2019






Revenue and Gross Margin:



Three months ended
March 31,
2020 2019 % Change
Revenue:
Vycor Medical $ 307,287 $ 297,106 3 %
NovaVision $ 43,764 $ 53,560 -18 %
$ 351,051 $ 350,666 0 %
Gross Profit
Vycor Medical $ 270,857 $ 266,923 1 %
NovaVision $ 41,299 $ 47,545 -13 %
$ 312,156 $ 314,468 -1 %





Vycor Medical recorded revenue of $307,287 from the sale of its products for the
three months ended March 31, 2020, an increase of $10,181 over the same period
in 2019. Although we do not yet know the extent we could be affected by the
Coronavirus (COVID-19) pandemic, Vycor Medical experienced a decline in revenues
in the US and certain international regions, particularly in March, which was
offset by the shipment of an advance order during the quarter to one
international distributor to ensure protection of its supply chain. Gross margin
of 88% and 90% was recorded for the three months ended March 31, 2020 and 2019,
respectively. Gross margin is affected by the revenue mix and also by
manufacturing validation charges.



NovaVision recorded revenues of $43,764 for the three months ended March 31,
2020
, a decrease of $9,100% over the same period in 2019, mainly as a result of
reduced patient volumes and revenues in Europe. Gross margin was 94%, compared
to 89% for the same period in 2019.






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Selling, General and Administrative Expenses:



Selling, general and administrative expenses decreased by $8,317 to $453,904 for
the three months ended March 31, 2020 from $462,221 for the same period in 2019.
Included within Selling, General and Administrative Expenses are non-cash
charges for stock based compensation as the result of amortizing employee and
non-employee shares, warrants and options which have been issued by the Company
over various periods. The charge for the three months ended March 31, 2020 and
2019 was $133,500. Also included within Selling, General and Administrative
Expenses are Sales Commissions, which decreased by $5,870 from $55,825 to
$49,955 in 2020.



The remaining Selling, General and Administrative expenses decreased by $2,
from $272,896 to $270,449 in 2020.



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
Legal, patent, audit/accounting, regulatory $ 8,909 -
Sales, marketing and travel (3,688 ) -
Board, financial and scientific advisory (6,849 ) -
Payroll (9,563 ) -
Other (travel/regulatory/premises) 8,744 -
Commissions (5,870 ) -
Total change $ (8,317 ) -




Interest Expense:




Interest comprises expense on the Company's debt and insurance policy financing.
Related Party Interest expense for the three months ended March 31, 2020 was
$6,425 compared to $4,759 for 2019. Other Interest expense for the three months
ended March 31, 2020 was $11,967 compared to $11,953 for 2019.






Liquidity




The following table shows cash flow and liquidity data for the periods ended
March 31, 2020 and December 31, 2019:






Cash $ 70,714 $ 72,239 $ (1,525 )
Accounts receivable, inventory and other
current assets $ 471,173 $ 584,193 $ (113,020 )
Total current liabilities $ (2,580,261 ) $ (2,446,406 ) $ (133,855 )
Working capital $ (2,038,374 ) $ (1,789,974 ) $ (248,400 )


Cash provided by financing activities $ 78,853 $ 40,091 $ 38,762



Operating Activities. Cash provided by/(used in) operating activities comprises
net loss adjusted for non-cash items and the effect of changes in working
capital and other activities. The net repayment of normal insurance financing
should also be taken into account when considering cash provided by/(used in)
operating activities.






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The following table shows the principle components of cash provided by/(used in)
operating activities during the three months ended March 31, 2020 and 2019, with
a commentary of changes during the periods and known or anticipated future
changes:






March 31, 2020 March 31, 2019 $ Change
Net loss $ (174,948 ) $ (180,298 ) $ 5,350

Adjustments to reconcile net loss to cash
used in operating activities:
Amortization and depreciation of assets $ 16,237 $ 17,997 $ (1,760 )
Stock based compensation $ 133,500 $ 133,500 $ 0
Other $ 3,304 $ 4,526 $ (1,222 )
$ 153,041 $ 156,023 $ (2,982 )


Net loss adjusted for non-cash items $ (21,907 ) $ (24,275 ) $ 2,368




Changes in working capital
Accounts receivable, accounts payable and
accrued liabilities $ (24,506 ) $ 69,008 $ (93,514 )
Inventory $ 6,314 $ (54,403 ) $ 60,717
Prepaid expenses and net insurance
financing repayments $ 7,712 $ (3,151 ) $ 10,863


Accrued interest (not paid in cash) $ 18,391 $ 16,594 $ 1,797



$ 7,911 $ 28,048 $ (20,137 )

Cash provided by (used in) operating
activities, adjusted for net insurance
repayments $ (13,996 ) $ 3,773 $ (17,769 )





The adjustments to reconcile net loss to cash of $153,041 in the period have no
impact on liquidity. At December 31, 2019 there was an increase in accounts
payable mainly due to expenditure on regulatory and testing for the VBAS
development occurring during the fourth quarter. The net change in accounts
receivable, accounts payable and accrued liabilities was mainly due to the
settlement of these accounts.



Additional inventory of $20,120 was purchased during the three months ended
March 31, 2020 as part of normal production, and the Company anticipates
purchasing additional new inventory of approximately $100,000 during the next
twelve months.



Investing Activities. Cash used in investing activities for the three months
ended March 31, 2020 was $47,365, which reflected expenditure on the second
phase of modifying the VBAS product suite to make it easier to integrate with
IGS. The Company anticipates additional expenditures for this second phase,
including work to obtain regulatory clearances and approvals, of approximately
$80,000.



Financing Activities. During the period ending March 31, 2020 the Company
received funds of $60,000 in respect of loans from Fountainhead.



Liquidity and Plan of Operations, Ability to Continue as a Going Concern



The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred losses since its inception, including a net loss of $174,948 for the
three months ended March 31, 2020 and has not generated sufficient positive cash
flows from operations. As of March 31, 2020 the Company had a working capital
deficiency of $560,861, excluding related party liabilities of $1,477,513. These
conditions, among others, raise substantial doubt regarding our ability to
continue as a going concern. The unaudited consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.






20







As described earlier in this ITEM 2 "Strategy", the Company is continuing to
execute on a plan to achieve revenue growth and a reduction in cash operating
losses2. For Vycor Medical this plan includes in particular: increasing market
penetration in the US through broadening of the distribution network and
programs to increase penetration in exiting hospitals; increasing international
growth in territories where we are not represented or under represented; and
continued new product development. The first phase of the modification of the
existing VBAS product range to make it more compatible with the most common IGS
systems was completed in September 2017 and has been well received by surgeons,
resulting in increased hospital penetration and revenues particularly in the US.
The second phase of the development of further IGS integration is in process and
will then be subject to regulatory clearances and approvals. Upon regulatory
approval and product release of this new VBAS the Company intends to conduct a
multi-center study to provide additional clinical data on the product. We will
also be exploring with surgeons and focus groups additional selected development
work targeted at increasing the ease and applicability of our products to
additional common procedures. For NovaVision, given the company's resources, and
the large size and diversity of its end markets, we believe that the most
efficient way to tackle the distribution of its broad range of patient and
professional products is by partnering with entities that have either direct
access to the end users or a desire and financial wherewithal to leverage the
NovaVision therapy platform. Management is determined to reduce the losses it is
incurring in this division, which is why it has now taken the decision to close
the German office and migrate to a licensing model for NovaVision in Europe.
Management is open to a broad range of alternatives for NovaVision as a whole,
which could comprise distribution and marketing partnerships, licensing, merger
or sale.



However, the Company believes it may not have sufficient cash to meet its
various cash needs through May 31, 2021 unless the Company is able to obtain
additional cash from the issuance of debt or equity securities. Included within
the working capital deficiency above is a term note for $300,000 to EuroAmerican
Investment Corp.
("EuroAmerican"), together with accrued interest of $292,732,
which has a maturity date of June 30, 2020, having been extended on a number of
occasions from its initial due date of June 11, 2011. At this time, it is not
known whether any further extension of the note beyond June 30, 2020 will be
available.. Fountainhead, the Company's largest shareholder, has provided
working capital funding to the Company on an as-needed basis, although there is
no guarantee that this will continue to be the case. The Company may consider
seeking additional equity or debt funding, although there is no assurance that
this would be available on acceptable terms or at all. If adequate funds are not
available, the Company may have to delay or curtail development or
commercialization of products, or cease some of its operations.



Critical Accounting Policies and Estimates



Uses of estimates in the preparation of financial statements



The preparation of unaudited consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the unaudited
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 unaudited
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 stock-based compensation.



A detailed description of our significant accounting policies can be found in
our most recent Annual Report on Form 10-K for the year ended December 31, 2019.

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