RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31,
2018
Revenue and Gross Margin:
Vycor Medical recorded revenue of $1,299,830 from the sale of its products for
the year ended December 31, 2019, a decrease of $11,481 (or 1%) over 2018. The
US continued to experience growth (increase of 28%), primarily as a result of
increased adoption and usage following the introduction of the enhanced VBAS
model in September 2017, however this was offset by two large international
orders representing approximately $196,000 of revenue in the 2018 period which
were not repeated during 2019.
Gross margin of 90% was recorded for the year ended December 31, 2019 compared
to 88% in 2018.
NovaVision recorded revenues of $181,921 for the year ended December 31, 2019, a
decrease of $16,098 from 2018, and gross margin of 90%, compared to 91% for
2018.
Research and Development Expense:
Research and development expenses were $0 in 2019 and 2018.
Selling, General and Administrative Expenses:
Selling, General and Administrative expenses decreased by $183,314 to $2,000,191
in 2019 from $2,183,505 in 2018. 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 and options which have
been issued by the Company over various periods. The charge for 2019 was
$534,940, a decrease of $90,685 from $625,625 in 2018, as a result of the
expensing of options in 2018. Also included within Selling, General and
Administrative Expenses are Sales Commissions, which increased by $3,227 to
$262,460, which was not a significant change from the prior year.
The remaining Selling, General and Administrative expenses decreased by $95,856
from $1,298,647 to $1,202,790. The reduction is primarily the result of
personnel efficiencies and the curtailment of online marketing expenditure for
NovaVision. The Company is in the process of migrating to a new EU Notified Body
for VBAS, with a resultant significant increase in regulatory fees for this
migration during 2019; patent fees were also higher due to the filing of 8 new
patents for VBAS.
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
Regulatory 79,854 -
Legal, patent, audit/accounting, insurance 19,219 -
Sales, marketing and travel (66,739 )
Board and Management - (85,814 )
Payroll (126,862 ) (4,871 )
Other G&A, Premises (1,328 ) -
Commissions 3,227 -
Total change (92,629 ) (90,685 )
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Impairment of Assets:
During the year ended December 31, 2018, and following the applicable guidance,
the Company made a full provision of $307,576 against the NovaVision intangible
assets and capitalized software, of which $256,790 was in respect of Trademarks
and Website and $50,786 was in respect of unamortized software development
costs.
Interest Expense:
Interest comprises expense on the Company's debt and insurance policy financing.
Related Party Interest expense for 2019 increased $9,213 following the issuance
of related party notes during 2018 and 2019 to $20,647 from $11,434 for 2018.
Other Interest expense for 2019 decreased by $764 to $48,036 from $48,800 for
2018.
Liquidity and Capital Resources
Liquidity
The following table shows cash flow and liquidity data for the periods ended
December 31, 2019 and December 31, 2018:
December 31, December 31,
2019 2018 $ Change
Cash $ 72,239 $ 86,481 $ (14,242 )
Accounts receivable, inventory and
other current assets $ 584,193 $ 543,165 $ 41,028
Total current liabilities $ (2,446,406 ) $ (1,812,604 ) $ (633,802 )
Working capital $ (1,789,974 ) $ (1,182,958 ) $ (607,016 )
Cash provided by (used in) financing
activities $ 40,091 $ 200,421 $ (160,330 )
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 principal components of cash used in operating
activities during the year ended December 31, 2019 and 2018, with a commentary
of changes during the periods and known or anticipated changes:
December 31, December 31,
2019 2018 $ Change
Net loss $ (796,202 ) $ (1,379,356 ) $ 583,154
Adjustments to reconcile net loss to
cash used in operating activities:
Amortization and depreciation of assets $ 69,438 $ 177,351 $ (107,913 )
Impairment of assets - 307,576 $ (307,576 )
Share based compensation $ 534,940 $ 625,625 $ (90,685 )
Gain or loss on foreign exchange $ 2,390 $ 1,387 $ 1,003
Other
$ 12,558 $ 6,279 $ 6,279
$ 619,326 $ 1,118,218 $ (498,892 )
Net loss adjusted for non-cash items $ (176,876 ) $ 261,138 ) $ 84,262
Changes in working capital
Accounts receivable, accounts payable
and accrued liabilities $ 152,132 $ (61,685 ) $ 213,817
Inventory $ (19,964 ) $ 4,482 $ (24,446 )
Prepaid expenses and net insurance
financing repayments $ (14,500 ) $ 2,837 $ (17,337 )
Accrued interest (not paid in cash) $ 68,647 $ 59,434 $ 9,213
Other
- $ 3,169 $ (3,169 )
$ 186,315 $ 8,237 $ 178,078
Cash provided by/(used in) operating
activities, adjusted for net insurance
repayments $ 9,439 $ (252,901 ) $ 262,340
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The adjustments to reconcile net loss to cash used of $619,326 in the period
have no impact on Liquidity. The decrease in net loss (as adjusted for non-cash
items) by $84,262 to $176,876 was primarily due to a reduction in cash operating
expenses during the period. The net change in accounts receivable, accounts
payable and accrued liabilities is the result of an increase in accounts
payable; this is mainly due to expenditure on regulatory and testing for the
VBAS development occurring during the fourth quarter.
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 approximately $128,000 was purchased
during 2019. The Company is progressing the second phase of this project and as
a result of this and normal inventory management anticipates purchasing
additional new inventory of approximately $95,000.
Investing Activities. Cash used in investing activities for the year ended
December 31, 2019 was $58,253, 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,
including work to obtain regulatory approvals, of approximately $75,000.
Financing Activities. During the year ended December 31, 2019 the Company
received funds of $37,873 in respect of loans from Fountainhead.
Liquidity and Plan of Operations, Ability to Continue as a Going Concern
The accompanying 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 $796,202 and $1,379,356 for
the years ending December 31, 2019 and 2018 respectively and has not generated
sufficient cash flows from operations. As at December 31, 2019 the Company had a
working capital deficiency of $541,070, excluding related party liabilities of
$1,248,904. As a result these conditions, among others, raise substantial doubt
regarding our ability to continue as a going concern. The 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
As described earlier in this ITEM 1 "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 closer cooperation with complementary product
manufacturers, 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. The Company is in the process of identifying and talking to such
partners. Management is determined to reduce the losses it is incurring in this
division and is open to a broad range of alternatives which could comprise
distribution and marketing partnerships, licensing, merger, sale and/or a
significant restructuring of its activities including closure of part or all of
its operations.
However, the Company believes it may not have sufficient cash to meet its
various cash needs through March 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 $280,765,
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.
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 Annual Report on Form 10-K, several states in the United States have
declared states of emergency, and several countries around the world, including
the United States, have taken steps to restrict travel. 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. Although
neurosurgery is not generally an elective procedure, general hospital
dislocation and diversion of resources could impact our revenues. 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.
2 Operating Loss or Profit before Depreciation, Amortization and non-cash Stock
Compensation
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Off-Balance Sheet Arrangements
As of December 31, 2019, we had no off-balance sheet arrangements.
Seasonality
Our operating results are not affected by seasonality.
Inflation
Our business and operating results are not affected in any material way by
inflation.
Critical Accounting Policies and Estimates
Uses of estimates in the preparation of financial statements
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimated. To the extent management's estimates prove to be incorrect, financial
results for future periods may be adversely affected. Significant estimates and
assumptions contained in the accompanying consolidated financial statements
include management's estimate of the allowance for uncollectible accounts
receivable, amortization of intangible assets, and the fair values of options
and warrant included in the determination of debt discounts and share based
compensation.
Cash and cash equivalents
The Company maintains cash balances at various financial institutions. Accounts
at each institution are insured by the Federal Deposit Insurance Corporation up
to $250,000. Cash balances may at times exceed the FDIC insured limits. Cash
also includes a US investment account in a money market backed by government
securities up to 105% of the account balance. The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents. Included within cash are deposits paid by patients, held by
the Company until the patient returns the VRT device or chinrest at the end of
therapy. At December 31, 2019 and 2018 patient deposits amounted to $46,191 and
$44,605, respectively, and are included in other current liabilities.
Fixed assets
The Company records fixed assets at cost and calculates depreciation using the
straight-line method over the estimated useful life of the assets, which is
estimated to be between three and seven years. Maintenance, repairs and minor
renewals are charged to expense when incurred. Replacements and major renewals
are capitalized.
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Leases
The Company has one leased building in Boca Raton, Florida that is classified as
operating lease right-of use ("ROU") assets and operating lease liabilities in
the Company's consolidated balance sheet as per ASC 842. ROU assets and lease
liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at the commencement date for leases exceeding
12 months. Minimum lease payments include only the fixed lease component of the
agreement. Operating lease expense is recognized on a straight-line basis over
the lease term and is included in cost of Selling, General and Administrative
expenses.
The standard was effective for us beginning January 1, 2019. The Company elected
the available practical expedients on adoption. The adoption had a material
impact on our consolidated balance sheets, but did not have a material impact on
our consolidated statements of comprehensive loss. The most significant impact
was the recognition of ROU assets and lease liabilities for operating leases.
Income taxes
We use the asset and liability method of accounting for income taxes in
accordance with ASC Topic 740, "Income Taxes." Under this method, income tax
expense is recognized for the amount of: (i) taxes payable or refundable for the
current year and (ii) deferred tax consequences of temporary differences
resulting from matters that have been recognized in an entity's financial
statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the results of operations in the period that includes the
enactment date. A valuation allowance is provided to reduce the deferred tax
assets reported if based on the weight of the available positive and negative
evidence, it is more likely than not some portion or all of the deferred tax
assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
Topic 740.10.40 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. We have no
material uncertain tax positions for any of the reporting periods presented.
Patents and Other Intangible Assets
The Company capitalizes legal and related costs associated with the
establishment and enhancement of patents for its products once patents have been
applied for. Costs associated with the development of the patented item or
processes are charged to research and development costs as incurred. The
capitalized costs are amortized over the life of the patent. The Company reviews
intangible assets on an annual in accordance with the authoritative guidance.
Trademarks have an indefinite life and are reviewed annually by management for
impairment in accordance with the authoritative guidance.
During the year ended December 31, 2018, and following the applicable guidance,
the Company made a full provision of $307,576 against the NovaVision intangible
assets and capitalized software, of which $256,790 was in respect of Trademarks
and Website and $50,786 was in respect of unamortized software development
costs.
Software Development Costs
The authoritative accounting guidance requires software development costs to be
capitalized upon completion of the preliminary project stage. Accordingly,
direct internal and external costs associated with the development of the
features and functionality of the Company's software, incurred during the
application development stage, are capitalized and amortized using the
straight-line method over the estimated life of five years. As part of the
impairment review referred to above, software development costs were written
down by $50,786 to $0 during the year ended December 31, 2018.
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Revenue Recognition
On January 1, 2018, the Company adopted the new accounting standard, ASC 606,
Revenue from Contracts with Customers and all the related amendments (new
revenue standard) to all contracts. The adoption of the new accounting standard
had no impact on company's consolidated financial statements.
Vycor Medical generates revenue from the sale of its surgical access system to
hospitals and other medical professionals. Vycor Medical records revenue from
product sales when obligations under the terms of a contract with customers are
satisfied. Generally, this occurs with the transfer of control of the goods to
customers. Vycor Medical does not provide for product returns or warranty costs.
Vycor determines revenue recognition through the following steps:
? Identification of the contract, or contracts, with a customer
? Identification of the performance obligations in the contract
? Determination of the transaction price
? Allocation of the transaction price to the performance obligations in the
contract
? Recognition of revenue when Vycor satisfy a performance obligation
Accounts Receivable and Allowance for Doubtful Accounts Receivable
The Company's accounts receivable are due from the hospitals and distributors in
the case of Vycor Medical, and from patients directly for therapy or physicians
for diagnostic products in the case of NovaVision. Accounts receivable are due
once products have been delivered or at the time the therapy is initiated;
however, for NovaVision therapy patients sometimes credit is extended through
various payment plans based on individual financial conditions, generally not to
exceed the 9 or 10 month therapy period. The outstanding balances are stated net
of an allowance for doubtful accounts.
We have a policy of reserving for uncollectible accounts based on our best
estimate of the amount of probable credit losses in our existing accounts
receivable. We extend credit to our customers based on an evaluation of their
financial condition and other factors. We generally do not require collateral or
other security to support accounts receivable. We perform ongoing credit
evaluations of our customers and maintain an allowance for potential bad debts
if required. We determine whether an allowance for doubtful accounts is required
by evaluating specific accounts where information indicates the customers may
have an inability to meet financial obligations. In these cases, we use
assumptions and judgment, based on the best available facts and circumstances,
to record a specific allowance for those customers against amounts due to reduce
the receivable to the amount expected to be collected. These specific allowances
are re-evaluated and adjusted as additional information is received. The amounts
calculated are analyzed to determine the total amount of the allowance. We may
also record a general allowance as necessary. Direct write-offs are taken in the
period when we have exhausted our efforts to collect overdue and unpaid
receivables or otherwise evaluate other circumstances that indicate that we
should abandon such efforts.
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Inventory
Inventories are stated at the weighted average cost method. Net realizable value
is the estimated selling price, in the ordinary course of business, less
estimated costs to complete and dispose of the product. If the Company
identifies excess, obsolete or unsalable items, its inventories are written down
to their realizable value in the period in which the impairment is first
identified. The provision for inventory for the years ended December 31, 2019
and 2018 was $12,558 and $6,279, respectively. Shipping and handling costs
incurred for inventory purchases and product shipments are recorded in cost of
sales.
Foreign Currency
The Euro is the local currency of the country in which NovaVision GmbH conducts
its operations and is considered the functional currency of this entity; the GB
Pound is the local currency of the country in which Sight Science Limited
conducts its operations and is considered the functional currency of this
entity. All balance sheet amounts are translated to U.S. dollars using the U.S.
exchange rate at the balance sheet date except for the equity section which is
translated at historical rates. Operating statement amounts are translated using
an average exchange rate for the period of operations. Foreign currency
translation effects are accumulated as part of the accumulated other
comprehensive income (loss) and included in stockholders' equity (deficiency) in
the accompanying Consolidated Balance Sheets.
Educational marketing and advertising expenses
The Company may incur costs for the education of customers on the uses and
benefits of its products. The Company will include education, marketing and
advertising expense as a component of selling, general and administrative costs
as such costs are incurred.
Stock Compensation
The Company recognizes the cost of all share-based payments under the relevant
authoritative accounting guidance. Share-based payments include any remuneration
paid by the Company in shares of the Company's common stock or financial
instruments that grant the recipient the right to acquire shares of the
Company's common stock. For share-based payments to employees, which consist
only of awards made under the stock option plan described below, the Company
accounts for the payments in accordance with the provisions of ASC Topic 718,
"Stock Compensation". Share-based payments to consultants, service providers and
other non-employees are accounted for under in accordance with ASC Topic 718,
ASC Topic 505, "Equity Payments to Non-Employees" or other applicable
authoritative guidance.
Contractual Obligations
As a "smaller reporting company" as defined by Item 10 of Regulation S-K, the
Company is not required to provide this information.
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