VYCO Vycor Medical Inc (QB)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

This Interim Report on Form 10-Q contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PLSRA”), Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) regarding Vycor Medical, Inc. (the “Company” or “Vycor,” also referred to as “us”, “we” or “our”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Form 10-Q generally. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Form 10-Q generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future events, or otherwise. We intend that all forward-looking statements be subject to the safe harbor provisions of the PSLRA.

1. Organizational History

The Company was formed as a limited liability company under the laws of the State of New York on June 17, 2005 as “Vycor Medical LLC”. On August 14, 2007, we converted into a Delaware corporation and changed our name to “Vycor Medical, Inc.”. The Company’s listing went effective on February 2009 and on November 29, 2010 Vycor completed the acquisition of substantially all of the assets of NovaVision, Inc. (“NovaVision”) and on January 4, 2012 Vycor, through its wholly-owned NovaVision subsidiary, completed the acquisition of all the shares of Sight Science Limited (“Sight Science”).

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 68 issued or allowed patents and a further 7 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 13485:2003 compliant, 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 Australia, Brazil, Canada, China, Korea, Japan, Russia and Taiwan. Vycor has 23 granted and 6 pending patents worldwide.

NovaVision

NovaVision provides non-invasive, computer-based rehabilitation targeted at a substantial and largely un-addressed market of people who have lost their sight as a result of stroke or other brain injury.

Our Growth Strategy

Vycor Medical

Vycor Medical’s growth strategy includes:

1. Increasing U.S. market penetration through broader hospital coverage and targeted direct physician marketing. Vycor Medical’s sales and marketing strategy is to penetrate a well-defined US target market of 4,500 neurosurgeons. Vycor markets direct to surgeons as well as marketing and distributing through independent distributors, with a focus both on adding new hospitals and expanding to additional surgeons in hospitals where VBAS is already approved, and to expand usage to a broader range of procedures. Vycor is pursuing a policy of continually evaluating and upgrading its distributors as well as adding additional distributors in regions where it has little to no presence.

2. Provision of more Clinical and Scientific Data supporting the products superiority over the current standard-of-care blade retractors and to demonstrate VBAS’ potential for cost savings. Clinical and scientific data (in the form of peer reviewed articles, clinical studies and other reports and case studies) are critical in driving adoption, and in turn revenues, further and faster by demonstrating VBAS’ superiority as a minimally invasive access system that helps VBAS move further up the hospital cost/benefit curve. To date the Company has already had 13 Peer Reviewed studies and 7 other clinical papers published or presented.

3. International Market Growth

Vycor Medical utilizes select medical device distributors with experience in neurosurgical devices in their countries or regions. VBAS has regulatory approvals in Australia, Brazil, Canada, China, Europe (EU – Class III), Korea, Mexico, Japan, Russia and Taiwan. Vycor Medical is actively pursuing new distribution agreements in the countries where it does not have any market presence.

4. New Product Development

Vycor is modifying its existing VBAS product suite to make it easier to integrate with Image Guidance Systems (IGS) by re-engineering its VBAS product range so that the entire range of 12 devices, excluding the VBASmini, will be able to more easily accommodate pointers from the leading IGS system providers. The first phase of this was completed in September 2017 and the final phase will be completed during 2018 and then subject to regulatory approval in the US and internationally. Increasingly, all major neuro centers have image guidance systems, and where this is in place management believes over 90% of surgeries are carried out using IGS; management believes that the existing VBAS rigid structure lends itself well to being incorporated into this increasing trend.

NovaVision

While speech, physical, and occupational therapies are the long-standing treatment standards for stroke and brain injury survivors, vision has been largely unaddressed. Increasingly the healthcare community, partly driven by strong lobbying by stroke associations worldwide, are recognizing that vision is not only a significant issue post stroke or brain injury, but that visual field loss can have a significant impact on the success of other rehabilitation modalities and the patient’s quality of life. VRT is the first and only FDA-cleared clinical-supported vision restoration therapy that can physically enhance the visual field after a stroke or brain injury.

NovaVision is now able to provide a clinically supported, cost-effective and scalable visual therapy solutions offering broad benefits to patients suffering from visual impairments following neurological brain damage; and a highly flexible range of products and licensing options for medical professionals.

NovaVisions’s potential customers often tend to have other medical issues associated with their neurological condition making this a hard target universe. Rehabilitation therapies of this type are a time and effort commitment for patients, who therefore need to be in a condition to carry them out and to be motivated to rehabilitate their vision disorder. The market is also very diverse; stroke patients pass through the rehabilitation system in the first weeks after stroke, and unless they are acute patients are then sent home for recovery. At this point they may see physiotherapists, occupational therapists, eye-care professionals and other physicians, as well as stroke support groups. NovaVision’s challenge has been to continue to drive awareness amongst patients understanding that they are subject to a diverse range of other influencers.

NovaVision, taking the aforementioned issue into consideration, has chosen to target four routes-to-market aimed at patients and professionals, comprising: direct-to-patient; optometrists and other eye-care professionals, rehabilitation centers and clinics; stroke associations and support groups; and other physicians. NovaVision has initially focused on direct-to-patient, with a website lead-driven inbound and outbound marketing strategy targeted at prospective patients and relatives. Given the company’s resources, size and diversity of the professional market, NovaVision believes the best route to market here is by partnering with entities who already have the capability of delivery to the various professional target markets. NovaVision is identifying and is in dialogue with such qualified entities; the range of alternatives could comprise distribution partnerships, merger, sale and/or restructuring of its activities.

Comparison of the Three Months Ended June 30, 2018 to the Three Months Ended June 30, 2017

Vycor Medical recorded revenue of $253,292 from the sale of its products for the three months ended June 30, 2018, an increase of $968 over the same period in 2017.. Gross margin of 83% was recorded for the three months ended June 30, 2018 compared to 86% for the same period in 2017. Gross margin is affected by the revenue mix and also by inventory validation charges as a result of the ongoing inventory build program.

NovaVision recorded revenues of $48,373 for the three months ended June 30, 2018, a decrease of $6,987 over the same period in 2017, and gross margin of 92%, compared to 90% for the same period in 2017.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses increased by $64,132 to $616,997 for the three months ended June 30, 2018 from $552,865 for the same period in 2017. Included within Selling, General and Administrative Expenses are non-cash charges for share based compensation as the result of amortizing employee and non-employee shares, warrants and options which have been issued by the Company over various periods. The charge for the three months ended June 30, 2018 was $220,254, an increase of $83,433 over $136,821 in 2017. Also included within Selling, General and Administrative Expenses are Sales Commissions, which decreased by $11,042 from $48,050 to $37,008 in 2018. The remaining Selling, General and Administrative expenses decreased by $8,259 from $367,987 to $359,728 in 2018.

An analysis of the change in cash and non-cash G&A is shown in the table below:

Interest Expense:

Interest comprises expense on the Company’s debt and insurance policy financing. Related Party Interest expense for the three months ended June 30, 2018 was $646 compared to $0 for 2017. Other Interest income and expense for 2018 increased by $3,389 to $12,198 from $8,809 for 2017.

Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017

Vycor Medical recorded revenue of $531,103 from the sale of its products for the six months ended June 30, 2018, a decrease of $91,107, or 15%, over the same period in 2017. . Following the release of the enhanced VBAS model at the end of September 2017, Vycor took the decision in February 2018, based on surgeon feedback, to accelerate the roll-out of the enhanced model and cease shipment of the previous model. As a result, manufacturing of the enhanced model needed to be accelerated and this caused some delays and lost revenue. Vycor also experienced a decline in sales from two US distributors which it is working on to improve. Gross margin of 87% was recorded for the six months ended June 30, 2018 compared to 88% for the same period in 2017.

NovaVision recorded revenues of $95,663 for the six months ended June 30, 2018, an decrease of $18,210 over the same period in 2016, and gross margin of 91%, compared to 89% for the same period in 2017.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses increased by $21,667 to $1,185,302 for the six months ended June 30, 2018 from $1,163,635 for the same period in 2017. Included within Selling, General and Administrative Expenses are non-cash charges for share based compensation as the result of amortizing employee and non-employee shares, warrants and options which have been issued by the Company over various periods. The charge for the six months ended June 30, 2018 was $358,625 an increase of $78,257 over $280,368 in 2017. Also included within General and Administrative Expenses are Sales Commissions, which decreased by $33,027 to $85,959. The remaining General and Administrative expenses decreased by $23,563 from $764,281 to $740,718.

An analysis of the change in cash and non-cash G&A is shown in the table below:

Interest Expense:

Interest comprises expense on the Company’s debt and insurance policy financing. Related Party Interest expense for the six months ended June 30, 2018 was $646 compared to $679 for 2017. Other Interest expense for 2018 increased by $3,372 to $24,225 from $20,853 for 2017.

Operating Activities . Cash 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 used in operating activities.

The following table shows the principle components of cash used in operating activities during the six months ended June 30, 2018 and 2017, with a commentary of changes during the periods and known or anticipated future changes:

The adjustments to reconcile net loss to cash of $448,693 in the period have no impact on liquidity. The increase in net loss (as adjusted for non-cash items) by $53,896 to $296,527 was primarily a result of reduced revenues. During the first quarter of 2017 a number of material and unusual items impacted the net accounts receivable, accounts payable and accrued liabilities; these were reversed in the first quarter of 2018. In addition, the Company typically renews a large number of annual expense contracts such as insurances and licenses during the first six months, which has an impact on cash usage. The Company is in the process of modifying the VBAS product suite to make it easier to integrate with IGS. The first phase of this project was completed in September 2017 and additional inventory of $18,497 was purchased during the period. The Company anticipates completing the second phase of this project during 2018 and as a result will purchase additional new inventory of approximately $135,000.

Investing Activities. Cash used in investing activities for the six months ended June 30, 2018 was $50,035, which primarily 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 during 2018 of approximately $80,000.

Financing Activities. During and subsequent to the period ending June 30, 2018 the Company received funds of $163,000 in respect of loans from Fountainhead and Peter Zachariou (the Company’s Chief Executive Officer).

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 $745,220 and $673,509 for the six months ended June 30, 2018 and 2017 respectively and has not generated cash flows from operations. As of June 30, 2018 the Company had a working capital deficiency of $374,593, excluding related party liabilities of $663,041. As a result, these conditions, among others, raise substantial doubt regarding our ability to continue as a going concern. The 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.

As described earlier in this ITEM 2 “ Our Growth Strategy ”, the Company is executing on a plan to achieve growth in revenues for both the Vycor Medical and NovaVision divisions as well as reduction in costs, thereby further reducing its cash operating usage. For Vycor Medical this includes in particular: increasing penetration in the US market through targeted marketing and a potential new medical education program; increased international market growth; and new product development centered around the modification of its existing VBAS product range to make it more easy to use with the most common IGS systems, the first phase of which was completed in September 2017. For NovaVision, after a prolonged and now complete period of re-development, the Company is focusing its resources on direct-to-patient marketing through a website lead-driven inbound and outbound marketing strategy. Given the company’s resources, and the size and diversity of the professional market, NovaVision believes the best route to the professional market for its products is by partnering with entities who have already established distribution channels and expertise in the various professional target markets. The Company is identifying and is in dialogue with such qualified entities; the range of alternatives for NovaVision could comprise distribution partnerships, merger, sale and/or restructuring of its activities.

However, the Company believes it may not have sufficient cash to meet its various cash needs through August 31, 2019 unless the Company is able to obtain additional cash from the issuance of debt or equity securities. Fountainhead, the Company’s largest shareholder, is currently providing 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 share-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, 2017.