WASHINGTON, D. C. 20459
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| ☐ | Transition Report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
COMMISSIONFILE NUMBER: 000-20970
VISION-SCIENCES,
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(845) 365-0600
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8 Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 2. uncertainties. We do not undertake Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 Net sales Cost of sales Gross profit Selling, general, and administrative expenses Research and development expenses Operating loss Interest expense Other, net Loss before provision for income taxes Income tax provision Net loss Net loss per common share - basic and diluted Weighted average shares used in computingnet loss per common share - basic and diluted September 30, March 31, 2014 2014 (unaudited) Current assets: Cash and cash equivalents Accounts receivable, less allowances of $133 and $117, respectively Inventories, net Prepaid expenses and other current assets Total current assets Machinery and equipment Demo equipment Furniture and fixtures Leasehold improvements Property and equipment, at cost Less—accumulated depreciation and amortization Total property and equipment, net Other assets, net Total assets LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable Accrued expenses Accrued compensation Deferred revenue Capital lease obligations Total current liabilities Convertible debt—related party, net of discount Deferred revenue, net of current portion Total liabilities Commitments and Contingencies Stockholders’ deficit: Preferred stock, $0.01 par valueAuthorized—5,000 shares; issued and outstanding - none Common stock, $0.01 par valueAuthorized—100,000 shares;issued and outstanding—47,793 shares and 47,614 shares, respectively Additional paid-in capital Treasury stock at cost, 65 shares and 59 shares of common stock, respectively Accumulated deficit Total stockholders’ deficit Total liabilities and stockholders’ deficit Six Months Ended September 30, 2014 2013 Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization Stock-based compensation expense Provision for bad debt expenses Amortization of debt discount Loss (gain) on disposal of fixed assets Changes in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other current assets Accounts payable Accrued expenses Accrued compensation Deferred revenue Net cash used in operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from disposal of fixed assets Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of convertible debt—related party Proceeds from exercise of stock options Common stock repurchased Payments of capital leases Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental disclosure of cash flow information: Cash paid during the period for: Interest Income taxes Non-cash financing activities: Net transfers of inventory to fixed assets for use as demonstration equipment note 2. The consolidated results of operations for 2015. Based upon our review, we have determined that these policies remain our most critical accounting policies for the three months ended June 30, 2015 and we have made no changes to these policies during fiscal 2016. consolidated entities. The goodwill. There was no change in the goodwill balance as of June 30, 2015. Consolidated Balance Sheet. As of June 30, 2015 and March 31, 2015 we had no remeasurements of such assets to fair value. Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 Medical segment Stryker Percentage of total medical segment net sales Percentage of total net sales 2014 2014 Percentage of total accounts receivable, net September30, 2014 2013 Convertible debt Stock options Warrants Restricted stock Total anti-dilutive securities September30, 2014 March 31, 2014 Raw materials Work in process Finished goods Inventories, net a change in control, all outstanding grants, including those subject to vesting or other performance targets, fully vest immediately. Under related expense was $(29,000) for the three months ended ending June 30, 2015 for the Awards. Convertibledebt –relatedparty Gross Principal Amount Outstanding Unamortized Debt Discount Net Amount Outstanding Replacement Note 2013 Note 2014 Note Date Borrowing Amount Convertible Shares Share Price on Borrowing Date Unamortized Beneficial Conversion Feature October 7, 2013 November 26, 2013 January 21, 2014 March 13, 2014 Three monthsended Six months ended September 30, September 30, 2014 2013 2014 2013 Amortization of convertible debt discount Interest expense Number of Shares Exercise Price Range Weighted Average ExercisePrice Weighted Average Remaining ContractualLife Outstanding at April 1, 2014 Granted Exercised ) Canceled ) Outstanding at September 30, 2014 Vested and expected to vest at September 30, 2014 Exercisable at September 30, 2014 Number of Shares Weighted Average Grant Price Nonvested at April 1, 2014 Granted Vested Forfeited Nonvested at September 30, 2014 Three Months Ended September 30, Six Months Ended September 30, 2014 2013 2014 2013 Risk-free interest rate % % % % Expected life (in years) Expected volatility % % % % Expected dividend yield Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 Cost of sales Selling, general and administrative expenses Research and development expenses Total stock-based compensation expense Six Months Ended Number of Shares Repurchased Cost Weighted Average Purchase Price September 30, 2014 September 30, 2013 Three Months EndedSeptember 30, 2014 Medical Industrial Adjustments* Consolidated Net sales Gross profit Operating loss ) ) ) Interest expense, net Depreciation and amortization Stock-based compensation expense Expenditures for fixed assets As of September 30, 2014 Total assets ) Three Months EndedSeptember 30, 2013 Net sales Gross profit Operating loss ) ) Interest expense, net Depreciation and amortization Stock-based compensation expense ) ) Expenditures for fixed assets As of September 30, 2013 Total assets ) SixMonths EndedSeptember 30, 2014 Medical Industrial Adjustments* Consolidated Net sales Gross profit Operating loss ) ) ) Interest expense, net Depreciation and amortization Stock-based compensation expense Expenditures for fixed assets Six Months EndedSeptember 30, 2013 Net sales Gross profit Operating loss ) ) Interest expense, net Depreciation and amortization Stock-based compensation expense Expenditures for fixed assets As of September 30, * Adjustments 2014 2013 Intercompany eliminations ) ) Investment in subsidiaries ) ) Total adjustments ) ) Convertible debt – related party Gross Principal Amount Outstanding Unamortized Debt Discount Net Amount Outstanding Replacement Note 2013 Note 2014 Note combined basis. Three Months Ended Six Months Ended September 30, September 30, Market/Category 2014 2013 Change 2014 2013 Change Urology ENT TNE Pulmonology Repairs, peripherals, and accessories Total medical sales Total industrial sales Net sales Three Months Ended Six Months Ended September 30, September 30, Market/Category 2014 2013 Change 2014 2013 Change Urology Endoscopes EndoSheath disposables Total urology market ENT Endoscopes TNE Endoscopes EndoSheath disposables Total TNE market Pulmonology Endoscopes EndoSheath disposables Total pulmonology market Repairs, peripherals, and accessories Total medical sales Product Endoscopes EndoSheath disposables Repairs, peripherals, and accessories Total medical sales debt discount totaled $266,000. Three Months Ended Six Months Ended September 30, September 30, Gross Profit 2014 2013 Change 2014 2013 Change Medical As percentage of net sales Industrial As percentage of net sales Gross profit Gross profit margin percentage Three Months Ended Six Months Ended September 30, September 30, Operating Expenses 2014 2013 Change 2014 2013 Change SG&A expenses Medical Industrial Total SG&A expenses R&D expenses Medical Industrial Total R&D expenses Total operating expenses Three Months Ended Six Months Ended September 30, September 30, Other Expense 2014 2013 Change 2014 2013 Change Interest expense Other, net Other expense September 30, 2014 March 31, 2014 Cash and cash equivalents Accounts receivable, net Inventories, net Working capital . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK XBRL VISION-SCIENCES,TABLE OF CONTENTSCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSPartPART I.Financial Information Item 1. Condensed Consolidated Balance Sheets 5 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Balance Sheets5 Condensed Consolidated Statements of Comprehensive Loss Condensed Consolidated Statement of Shareholders’ Equity 9 Condensed Consolidated Statements of Cash Flows 6 Notes to the Condensed Consolidated Financial Statements 7 Item 2. 17 Item 3. 25 Item 4. 25 PART II. OTHER INFORMATION Part II.Other InformationItem 1. Legal Proceedings 24 Item 1.1A.Legal Proceedings26 Item 1A.Risk Factors2626 Item 3. 26 Item 4. 27 Item 5. 27 Item 6. 27 Signatures28SIGNATURES 26 Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 302 Certification by the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 CAUTIONARY NOTE REGARDING This report contains the following trademarks, trade names and service marks of ours: Vision-Sciences®, EndoSheath®, Slide-On®, EndoWipe®, The Vision System®, and Urgent® for our neuromodulation product, Macroplastique® Implants for our urological tissue bulking products, VOX® for our otolaryngology tissue bulking products, PTQ® for our colorectal tissue bulking and Uroplasty® for Uroplasty LLC, one of our subsidiaries. This report also contains trademarks, trade names andservice marks that are owned by other persons or entities.Quarterly Reportquarterly report on Form 10-Q contains forward-looking statements“forward-looking statements” within the meaning of Thethe Private Securities Litigation Reform Act of 1995, whichSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements contained in this report that refer to our estimated or anticipated future results, including estimated synergies, or other non-historical facts are forward-looking statements that reflect our current perspective of existing trends and information as of the date of this report. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “plan,” “could,” “should,” “estimate,” “expect,” “forecast,” “outlook,” “guidance,” “intend,” “may,” “might,” “will,” “possible,” “potential,” “predict,” “project,” or other similar words, phrases or expressions. These forward-looking statements are based on current expectations about future events affecting us and are subject to various risksuncertainties and uncertainties thatfactors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control and could cause our actual results to differ materially from those matters expressed or implied inby our forward-looking statements. Forward-looking statements (including oral representations) are only predictions or statements of current plans and can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. By way of example and without implied limitation, such statements. Examplesrisks, uncertainties and factors that affect our business included:· we plan to obtain additional financing, which may not be available on favorable terms at the time it is needed and which could reduce our operational and strategic flexibility; · we may be unable to successfully integrate Uroplasty’s and Vision’s operations or realize the anticipated cost savings and other potential benefit of the merger in a timely manner, if at all. As a result, the value of our shares may be adversely affected; · we may attempt to acquire new products or technologies, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected benefit or harm our existing business; · we continue to incur losses and may never reach profitability; · the use and acceptance of our products depends heavily upon the availability of third-party reimbursement for the procedures in which its products are used; · we cannot predict how quickly or how broadly the market will accept our products; · that we are subject to changing federal and state regulations that could increase the cost of doing business or impose requirements with which we cannot comply; · the 2010 Healthcare Reform Legislation imposes an excise tax on us that we may be unable to recoup, and requires cost controls that may impact the rate of reimbursement for our products; · changes in regulatory policy, particularly at the FDA, might adversely affect our operations; · if we are not able to attract, retain and motivate our sales force and expand our distribution channels, our sales and revenues will suffer; · the size and resources of our competitors may render it difficult for us to successfully compete in the marketplace; · we are primarily dependent on sales of two product lines and our business would suffer if sales of either of these product lines decline; · we could be subject to fines and penalties, or required to temporarily or permanently cease offering products, if we fail to comply with the extensive regulations applicable to the sale and manufacture of medical products; · our distributors may not obtain regulatory approvals in a timely basis, or at all; · we may not have the resources to successfully market our products, which would adversely affect our business and results of operations; · if we cannot attract and retain our key personnel and management team, we may not be able to manage and operate successfully, and we may not be able to meet our strategic objectives; · if third parties claim that we infringe upon their intellectual property rights, we may incur liabilities and costs and may have to redesign or discontinue selling the affected product; · if we are unable to adequately protect our intellectual property rights, we may not be able to compete effectively; · product liability claims could adversely affect our business and results of operations; · security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer; · the loss or interruption of materials from any of our key suppliers could delay the manufacture of our products, which would limit our ability to generate sales and revenues; · if we are not able to maintain sufficient quality controls, regulatory approvals of our products by the European Union, Canada, the FDA or other relevant authorities could be delayed or denied and our sales and revenues will suffer; · if we are not able to acquire or license other products, our business and future growth prospects could suffer; · our business strategy relies on assumptions about the market for our products, which, if incorrect, would adversely affect our business prospects and profitability; · we derive a significant portion of our sales and revenues from outside of the U.S. and we are subject to the risks of international operations; · failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to, among other things, penalties and legal expenses that could harm our reputation and have a material adverse effect on our business, financial condition and operating results; · our stock is thinly traded and you may find it difficult to sell your investment in our stock at quoted prices; · our stock price may fluctuate and be volatile; · future sales of our common stock in the public market could lower our share price; · our corporate documents and Minnesota law contain provisions that could discourage, delay or prevent a change in control of the company; and · we do not intend to declare dividends on our stock in the foreseeable future. include statements about expectations about future financial results, future productsto make decisions with respect to the Company, our investors 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,”others should carefully consider the foregoing factors 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 potential events and read our actual results may differ significantly from those discussed infilings with the forward-looking statements. Factors that might cause suchSEC, available at www.sec.gov for a difference could include, among others, the availabilitydiscussion of capital resources; the availability and adequacy of third-party reimbursement; government regulation; the availability of raw material components; our dependence on certain distributors and customers; our ability to effect expected sales; competition; technological difficulties; product recalls; general economic conditionsthese 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 note.anany obligation to update ouror revise any forward-looking statements to reflect future events or circumstances,statement, except as may be required by law.I—I. FINANCIAL INFORMATIONItem 1.Financial StatementsVision-Sciences, Inc. and SubsidiariesCondensed Consolidated Statements of Operations(in thousands, except per share amounts) $ 4,110 $ 3,968 $ 7,862 $ 7,620 2,852 2,773 5,455 5,345 1,258 1,195 2,407 2,275 2,358 2,050 4,849 5,100 341 428 877 847 (1,441 ) (1,283 ) (3,319 ) (3,672 ) (106 ) (44 ) (189 ) (85 ) 4 7 (12 ) 3 (1,543 ) (1,320 ) (3,520 ) (3,754 ) - 3 - 3 $ (1,543 ) $ (1,323 ) $ (3,520 ) $ (3,757 ) $ (0.03 ) $ (0.03 ) $ (0.08 ) $ (0.08 ) 46,327 46,144 46,294 46,127 June 30, 2015 March 31, 2015 Assets Current assets: Cash and cash equivalents $ 5,996,245 $ 9,261,903 Accounts receivable, net 6,450,016 7,306,653 Inventories 4,868,685 4,825,984 Other 902,323 749,466 Total current assets 18,217,269 22,144,006 Property, plant, and equipment, net 1,969,809 1,813,343 Goodwill 18,749,888 18,749,888 Other intangible assets, net 13,114,391 13,748,582 Deferred tax assets and other 303,315 296,860 Total assets $ 52,354,672 $ 56,752,679 condensed consolidated financial statementsVision-Sciences, Inc. and SubsidiariesCondensed Consolidated Balance Sheets(in thousands) ASSETS $ 1,395 $ 1,237 2,920 3,818 4,221 4,194 460 455 8,996 9,704 3,447 3,456 1,469 1,311 247 225 372 372 5,535 5,364 4,549 4,302 986 1,062 67 67 $ 10,049 $ 10,833 $ 1,405 $ 1,217 880 918 514 474 310 210 - 22 3,109 2,841 24,480 22,414 128 93 27,717 25,348 - - 478 476 103,000 102,629 (85 ) (78 ) (121,061 ) (117,542 ) (17,668 ) (14,515 ) $ 10,049 $ 10,833 June 30, 2015 March 31, 2015 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable $ 3,875,197 $ 3,967,975 Interest payable 599,954 523,743 Income taxes payable 25,602 25,998 Accrued liabilities: Compensation 2,868,815 3,285,952 Other 1,505,110 2,450,058 Total current liabilities 8,874,678 10,253,726 Convertible debt – related party, net 22,795,464 22,529,497 Accrued pension liability 1,020,389 955,780 Other 228,468 265,766 Total liabilities 32,918,999 34,004,769 Commitments and contingencies - - Shareholders’ equity: Preferred stock, $0.01 par value 5,000,000 Shares authorized; none issued or outstanding - - 260,532 256,763 Additional paid-in capital 75,747,690 75,530,641 Accumulated deficit (55,451,989 ) (51,883,229 ) Accumulated other comprehensive loss (1,120,560 ) (1,156,265 ) Total shareholders’ equity 19,435,673 22,747,910 Total liabilities and shareholders’ equity $ 52,354,672 $ 56,752,679 condensed consolidated financial statementsVision-Sciences, Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows(in thousands) $ (3,520 ) $ (3,757 ) 318 362 349 328 11 7 66 - 9 (5 ) 887 802 (261 ) (712 ) (5 ) (117 ) 188 (112 ) (38 ) 50 40 (96 ) 135 22 (1,821 ) (3,228 ) (17 ) (46 ) - 3 (17 ) (43 ) 2,000 3,000 25 - (7 ) (28 ) (22 ) (34 ) 1,996 2,938 158 (333 ) $ 1,237 $ 788 $ 1,395 $ 455 $ 1 $ 4 $ - $ 3 $ 234 $ 187 2015 2014 Net sales $ 11,150,212 $ 6,384,629 Cost of goods sold 3,652,510 791,311 Gross profit 7,497,702 5,593,318 Operating expenses General and administrative 1,893,272 1,577,368 Research and development 1,062,460 909,444 Selling and marketing 6,651,379 5,272,621 Amortization 634,191 8,326 Transaction costs 468,607 - 10,709,909 7,767,759 Operating loss (3,212,207 ) (2,174,441 ) Other income (expense) Interest income 1,582 3,012 Interest expense (343,555 ) - Foreign currency exchange gain 2,998 911 (338,975 ) 3,923 Loss before income taxes (3,551,182 ) (2,170,518 ) Income tax expense 17,578 19,814 Net loss $ (3,568,760 ) $ (2,190,332 ) Basic and diluted net loss per common share $ (0.14 ) $ (0.14 ) Weighted average common shares outstanding: Basic and diluted 26,053,081 15,749,869 condensed consolidated financial statementsVision-Sciences, Inc. and SubsidiariesNotes 2015 2014 Net loss $ (3,568,760 ) $ (2,190,332 ) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 57,458 (789 ) Unrealized gain (loss) on available-for-sale investments - (743 ) Pension adjustments (21,753 ) (396 ) Total other comprehensive income (loss), net of tax 35,705 (1,928 ) Comprehensive loss $ (3,533,055 ) $ (2,192,260 ) Common Stock Additional Paid-in Accumulated Accumulated Other Comprehensive Total Shareholders' Shares Amount Capital Deficit Loss Equity Balance at March 31, 2015 25,676,212 $ 256,763 $ 75,530,641 $ (51,883,229 ) $ (1,156,265 ) $ 22,747,910 Share-based compensation 379,499 3,795 221,403 - - 225,198 Exercise of stock options, net of shares exchanged (2,630 ) (26 ) (4,354 ) - - (4,380 ) Comprehensive loss - - - (3,568,760 ) 35,705 (3,533,055 ) Balance at June 30, 2015 26,053,081 $ 260,532 $ 75,747,690 $ (55,451,989 ) $ (1,120,560 ) $ 19,435,673 2015 2014 Cash flows from operating activities: Net loss $ (3,568,760 ) $ (2,190,332 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 853,165 72,584 Loss loss on disposal of equipment 216 1,249 Amortization of premium on marketable securities - 343 Share-based compensation expense 225,198 323,304 Amortization of discount on related party debt 265,967 - Long term incentive plan (29,176 ) - Tax expense (benefit) (1,414 ) 2,205 Deferred rent (2,669 ) 22,744 Changes in operating assets and liabilities: Accounts receivable, net 816,135 263,078 Inventories (43,959 ) (92,649 ) Other current assets (50,717 ) (30,323 ) Interest payable 76,211 - Accounts payable (90,040 ) 49,797 Accrued compensation (421,327 ) 94,249 Accrued liabilities, other (1,035,323 ) (65,795 ) Accrued pension liability, net 39,745 44,081 Deferred revenue 72,080 - Net cash used in operating activities (2,894,668 ) (1,505,465 ) Cash flows from investing activities: Proceeds from maturity of available-for-sale investments - 3,050,000 Purchases of property, plant and equipment (395,387 ) (52,739 ) Net cash provided by investing activities (395,387 ) 2,997,261 Cash flows from financing activities: Proceeds from exercise of stock options - 48,600 Net cash provided by financing activities - 48,600 Effect of exchange rate changes on cash and cash equivalents 24,397 (315 ) Net increase (decrease) in cash and cash equivalents (3,265,658 ) 1,540,081 Cash and cash equivalents at beginning of period 9,261,903 8,681,609 Cash and cash equivalents at end of period $ 5,996,245 $ 10,221,690 Cash paid during the period for income taxes $ 17,578 $ 38,700 Cash paid during the period for interest $ 1,400 - (Unaudited, in thousands except number(the “Company,” or “our”, “us” or “we”) designs, develops, manufactures,operate under the name Cogentix Medical, Inc.markets productsthe VSCI shareholders retained approximately 37.5% of the company. Accordingly, while VSCI was the legal acquirer and issued its shares in the Merger, UPI is the acquiring company in the Merger for endoscopy –accounting purposes and the scienceMerger has been accounted for as a reverse acquisition under the acquisition method of using an instrument, known as an endoscope, to provide minimally invasive access to areas not readily visibleaccounting for business combinations. As a result, the financial statements of the Company prior 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 resteffective date of the world. WeMerger are the exclusive supplierhistorical financial statements of ureteroscopes toUPI, whereas the Endoscopy Divisionfinancial statements of Stryker Corporation (“Stryker”). Our largest geographic markets are the U.S.Company after the effective date of the Merger reflect the results of the operations of UPI and Europe.We are incorporatedVSCI on a combined basis. See additional disclosure provided in Delaware, and are the successor to operations begun in 1987. In December 1990, Machida Incorporated (“Machida”) became our wholly-owned subsidiary. We own the registered trademarks Vision Sciences®, EndoSheath®, EndoWipe®, Slide-On® and The Vision System®. Not all products referenced in this report are approved or cleared for sale, distribution, or use.Basis of Presentation and Preparationthe condensed consolidated financial statementsour Condensed Consolidated Financial Statements included herein according to generally accepted accounting principles in the United States of America (“U.S. GAAP”),this Quarterly Report on Form 10-Q, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and include, in the opinion of management, all adjustments (normal and recurring) that we consider necessary for a fair presentation of such information. We have condensed or omitted certainCommission. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted, pursuant to thosesuch rules and regulations. Weregulations, although we believe however, that our disclosures are adequate to make the information presented not misleading.theany interim periods presentedperiod are not necessarily indicative of results to be expected for thea full fiscal year. PleaseThese Condensed Consolidated Financial Statements, presented herein, should be read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and the related notes included in our Annual Reportannual report on Form 10-K for the fiscal year ended March 31, 2015.2014.inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future.inception. We anticipate that we will continue to incur negative cash flows from operations during the remainder of fiscal 2015,2016, driven by continued investment in a direct sales force for the U.S. market, spending for marketing revitalizing aand for research and development, pipeline,integration of UPI and VSCI, and general business operations. As of SeptemberJune 30, 2014,2015, we had cash and cash equivalents totaling approximately $1.4$6.0 million. On June 16, 2014, we issued a convertible promissory noteWe plan to Lewis C. Pell, our Chairman, or the 2014 Note, that allowed us to borrow up to $5.0 million up to June 15, 2019. The 2014 Note was issued in accordance with a letter agreement dated May 29, 2014 with Mr. Pell, or the Prior Letter Agreement, that provided for up to $5.0 million of capital to be made available to us from Mr. Pell, subject to certain conditions and an expiration date of July 1, 2015. The Prior Letter Agreement was then terminated. As of September 30, 2014, we had $2.0 million in principal outstanding under the 2014 Note. On October 24, 2014 anobtain additional $1.0 million was drawn on the 2014 Note. Pursuant to a letter agreement dated October 28, 2014 with Mr. Pell, or the Existing Letter Agreement, Mr. Pell has agreed to provide financial assistance to us in the amount of up to $2.5 million, if necessary to support our operations, for a period ending on the earlier of (i) January 1, 2016 or (ii) our raising debt and/or equity capital in the amount of $2.5 million or more. This financial assistance, if drawn by us, would be in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. We have not utilized the Existing Letter Agreement. We expect that our cash at September 30, 2014, together with $3.0 million remaining to be drawn under the 2014 Note at September 30, 2014, plus the $2.5 million of capital to be made available to us under the Existing Letter Agreement, subject to certain conditions and an expiration date of January 1, 2016, should be sufficient to fund our operations through at least December 31, 2015. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, or if the commitment under the 2014 Note or the Existing Letter Agreement become unavailable, we will need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition.during fiscal 2016. There can be no assurance that any contemplated additional 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.Cash and cash equivalents $ 2,020,000 Accounts receivable 4,249,000 Inventories 4,462,000 Other current assets 369,000 Property, plant and equipment 817,000 Goodwill 18,750,000 Other intangibles 13,660,000 Other non-current assets 97,000 Total assets acquired 44,424,000 Accounts payable and other liabilities 5,209,000 Deferred revenue 176,000 Convertible debt – related party 22,530,000 Other non-current liabilities 40,000 Total liabilities assumed 27,955,000 Total purchase price $ 16,469,000 Amount Developed technology $ 6,200,000 7 Customer relationships 7,270,000 5 Trade names 190,000 10 $ 13,660,000 SummarySignificant Accounting PoliciesOurthe combined entity had the acquisition been completed on April 1, 2013: Supplemental pro forma combined results of operations: Net sales $ 10,137,000 Net loss $ (5,040,439 ) Loss per share – basic and diluted $ (0.20 ) Increase in amortization of intangibles $ 594,000 Interest amortization on related party debt Increase in net loss $ 873,000 statements areresults have been prepared in accordance with the rulesfor illustrative purposes only and regulations of the SEC for interim reporting and U.S. GAAP. These accounting principles require usdo not purport 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.In the opinion of our Company’s management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, our financial position as of September 30, 2014 and the results of operations and cash flows for the three months and six months then ended. The results of operations and cash flows for the period ended September 30, 2014 are not necessarily indicative of the results of operations that actually would have resulted had the acquisition occurred on the April 1, 2013, or cash flows to be expected for any subsequent quarter or the full fiscal year ending March 31, 2015. As of September 30, 2014, there have been no material changes to anyfuture results of the significant accounting policies described in our Report on Form 10-K for the year ended March 31, 2014.accompanyingunaudited pro forma condensed consolidated financial statementsinformation does not reflect any operating efficiencies and cost savings that may be realized from the accountsintegration of the Company. All significant inter-company accountsacquisition.transactionsOther Intangible Assetsbeen eliminatedacquired VSCI for a purchase price of $16.5 million, and as a result, the Company recognized $18.7 million in consolidation. June 30, 2015 March 31, 2015 Accumulated Amortization Developed technology $ 6,200,000 $ 222,000 $ 6,200,000 $ - Patents 5,653,000 5,572,000 5,653,000 5,564,000 Trademarks and trade names 190,000 22,000 190,000 - Customer relationships 7,270,000 383,000 7,270,000 - $ 19,313,000 $ 6,199,000 $ 19,313,000 $ 5,564,000 Accumulated amortization 6,199,000 5,564,000 Net book value of amortizable intangible assets $ 13,114,000 $ 13,749,000 New. Newly Adopted Accounting PronouncementsPronouncementsMay 2014, July 2015, the Financial Accounting Standards Board (FASB) has issued new accountingAccounting Standards Update (ASU) No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” Under the current guidance namely (“ASU”) No. 2014-09, Revenue from Contracts(i.e., ASC 330-10-352 before the ASU), an entity subsequently measures inventory at the lower of cost or market, with Customers, on revenue recognition.market defined as replacement cost, net realizable value (NRV), or NRV less a normal profit margin. An entity uses current replacement cost provided that it is not above NRV (i.e., the ceiling) or below NRV less an “approximately normal profit margin” (i.e., the floor). The new standard provides for a five-step modelguidance requires entities to be appliedmeasure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market (market in this context is defined as one of three different measures). The ASU will not apply to all revenue contracts with customers as well as requires additional financial statement disclosuresinventories that will enable users to understandare measured by using either the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approachlast-in, first-out (LIFO) method or cumulative effect adjustment approach to implement the standard. There is no option for early adoption. For public entities, thisretail inventory method (RIM). The amendments in ASU isNo. 2015-11 are effective for fiscal years and interim periods within those years beginning after December 15, 2016. 2016, including interim periods within those fiscal years. We do not believe the adoption of this update will have a material impact on our financial statements.currently evaluatingnot in a contract with a customer (for example, assets within the impactscope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this update. Under the new guidance, on our condensed consolidated financial statements.In August 2014,an entity should recognize revenue to depict the FASB issued ASU 2014-15, Presentationtransfer of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties Aboutpromised goods or services to customers in an Entity’s Abilityamount that reflects the consideration to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date on which the financial statementsentity expects to be entitled in exchange for those goods or services. The amendments in ASU No. 2014-09 are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. This ASU applies to all entities and is effective for annual reporting periods endingbeginning after December 15, 2016 and2017, including interim periods thereafter, with earlywithin that reporting period. Early application is permitted for annual reporting periods beginning after December 31, 2016. We do not believe the adoption permitted. Weof this update will have a material impact on our financial statements.currently evaluatingbased on the impactframework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework prioritizes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The following three broad levels of inputs may be used to measure fair value under the fair value hierarchy:· Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. · Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. · Level 3: Significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management's estimates of market participant assumptions. new guidancedifferent levels described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.condensed consolidated financial statements.Fair Value Measurementsreflectedreported in our condensed consolidated balance sheetsthe Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, prepaid expenses andinventories, other current assets, accounts payable, accrued expenses, accrued compensation,liabilities and capital lease obligations approximate fair value due to their short-term nature. The carrying value of our convertible debt-related party approximatesapproximate fair value due to its attributes, which include, amongst others, interest and its conversion feature into common stock.In determining the fair value of the convertible debt – related party, we analyzed its attributes (coupon rate, conversion price, and the percentage of market cap the face value of the debt instrument was prior to the announcement of the debt) as compared with public company convertible debt issuances in the healthcare industry. We determined the convertible debt was not issued at a discount as its fair value was equal to its face (carrying) value.Concentration of Credit RiskConcentration of credit risk with respect to accounts receivable relates to certain domestic and international customers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of our customers and, when appropriate, we obtain advance payments for our international sales. As a consequence, we believe that our accounts receivable credit risk exposure is limited. We maintain an allowance for potential credit losses, but historically we have not experienced any significant credit losses related to any individual customer or group of customers in any particular industry or geographic area.The following table summarizes net sales to our significant customer, which accounted for more than 10% of total medical segment net sales and total accounts receivable, net: $ 362 $ 1,201 $ 840 $ 2,346 11 % 35 % 13 % 36 % 9 % 30 % 11 % 31 % As of September 30, As of March 31, 11 % 27 % 2. Basic and Diluted Net Loss per Common ShareBasic 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, warrants, and convertible debt would be anti-dilutive.The following table summarizes equity securities that were excluded from the calculation of fully diluted loss per share as of September 30, 2014 and 2013, respectively: 22,401,050 16,666,666 4,305,110 4,506,775 1,880,620 1,880,620 1,387,752 207,902 29,974,532 23,261,963 Note 3.6. Inventoriesusing(net realizable value). We value at lower of cost or market the first-in, first-out (“FIFO”) methodslow moving and obsolete inventories based upon current and expected future product sales and the expected impact of product transitions or modifications. Historically, the inventory write-offs have generally been within our expectations. Inventories consist of the following: $ 3,151 $ 3,456 578 329 492 409 $ 4,221 $ 4,194 June 30, 2015 March 31, 2015 Raw materials $ 3,377,000 $ 3,156,000 Work-in-process 658,000 527,000 Finished goods 834,000 1,143,000 $ 4,869,000 $ 4,826,000 June 30, 2015 2,638,000 $ 1.64 to $24.40 June 30, 2014 1,604,000 $ 0.77 to $2.63 Raw materials include components purchased from independent suppliers. Most purchased components are available from multiple sources, withexception of certain key components which are supplied to us by key suppliers, with whomCompany had one active plan, the Cogentix Medical 2015 Omnibus Incentive Plan, for share-based compensation grants (“the 2015 Plan”). Under the 2015 Plan, if we have long-term supply arrangements, but no long-term supply agreements.Note4. Supply Agreementsa three-year agreement with Stryker Corporation, or Stryker, that expiresthe 2015 Plan, we reserved 2,500,000 shares of our common stock for share-based grants and 1,502,587 shares remain available for grant on June 30, 2015.Decemberour Condensed Consolidated Statement of Operations based on the fair value at the time of grant of the share-based payment over the requisite service period. We incurred approximately $225,000 and $323,000 in share-based compensation expense for the three months ended June 30, 2015 and 2014, respectively.arehad approximately $1,103,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to stock options that we expect to recognize over a weighted-average period of approximately 1.75 years. We also had $1,443,000 of unrecognized share-based compensation expense, net of estimated forfeitures, related to restricted shares that we expect to recognize over a weighted-average period of approximately 2.16 years.exclusive supplierclosing market price of our stock at the date of the URT-7000 Video Ureteroscope, peripheralsgrant. Options granted under this plan generally expire over a period ranging from five to seven years from date of grant and accessoriesvest at varying rates ranging up to Strykerthree years. 2015 2014 Expected life in years 3.84 3.47 Risk-free interest rate 1.11% 1.0% Expected volatility 63.94% 68.43% Expected dividend yield 0% 0% Weighted-average grant date fair value $0.79 $1.59 Number of shares Weighted average exercise price Weighted average remaining life in years Aggregate intrinsic value Outstanding at March 31, 2015 2,251,085 $ 5.32 5.06 $ - Options granted 617,914 1.64 Options exercised - - Options surrendered (77,325 ) 6.16 Outstanding at June 30, 2015 2,791,674 $ 4.48 5.48 $ - Exercisable at June 30, 2015 1,661,379 $ 5.83 3.96 $ - Number of Shares Weighted average grant date fair value Weighted average remaining life in years Aggregate intrinsic value Shares granted 379,499 1.64 Shares vested (97,223 ) 4.50 Shares forfeited - - Balance at June 30, 2015 600,017 $ 2.68 2.16 $ 972,027 United States.From April 2011 through May 2014, Stryker hadPlan) of the exclusive rights to marketCompany (the “Performance Period”). The stock price targets under the Awards are: $7.57 price per share of common stock, $10.32 price per share of common stock and sell our cystoscopes, the CST- 5000 Video Cystoscope and the CST-4000 Fiber Cystoscope, and the accompanying EndoSheath disposables, peripherals and accessories, (the “Cystocscope Products”). We elected to not renew this exclusivity and to directly sell the Cystoscope Products in the U.S. We made this decision in large part because Stryker’s endoscopy sales force focuses$13.76 price per share of common stock.operating roomdate (a) the average closing price of a share of our common stock equals or exceeds a stock price target for at least 45 consecutive trading days or (b) of the consummation of a change of control of the Company, provided the closing price of a share of our common stock on the last trading day immediately preceding the closing date of the change of control equals or exceeds a stock price target not previously achieved during the Performance Period.hospitals, while most cystoscopy procedures are performed in physicians’ officescash. Expense for the awards is recognized over the derived service period of approximately 2.4 years. We recorded a liability of $123,000 at June 30, 2015 and ambulatory surgical centers.5.9. Convertible Debt – Related PartyConvertible Promissory Notesat Septemberon June 30, 2014: $ 20,000 $ - $ 20,000 3,500 (1,020 ) 2,480 2,000 - 2,000 $ 25,500 $ (1,020 ) $ 24,480 Pursuant to the Prior Letter Agreement,2015: Note Payable A $ 20,000,000 $ (4,021,808 ) $ 15,978,192 Note Payable B 3,500,000 (620,944 ) 2,879,056 Note Payable C 4,990,000 (1,051,784 ) 3,938,216 $ 28,490,000 $ (5,694,536 ) $ 22,795,464 agreed to provide financial assistance to us in the amount of up to $5.0 million, if necessary to support our operations, for a period ending on the earlier of (i) July 1, 2015 or (ii) our raising debt or equity capital in the amount of $5.0 million or more. The Prior Letter Agreement provided that this financial assistance, if drawn by us, would be in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. The Prior Letter Agreement was terminated upon the issuancemember of the 2014 Note.Pursuant to the Prior Letter Agreement, on June 16, 2014, or the 2014 Effective Date, we issued the 2014 Company’s board of directors, and consists of three convertible promissory notes.with Mr. Pell that allowed us to borrow up to $5.0 million up to June 15, 2019. The 2014 NotePayable A accrues annual interest at the rate of 1.91%0.84%. The 2014 Note must be repaid in full on or before the fifth anniversary of the 2014 Effective Date, or the 2014 Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the 2014 Note upon an event of default, as defined in the 2014 Note. The outstanding principal amount of the 2014 Note Payable A is convertible at any time prior to the 2014 Maturity Date, at Mr. Pell’s option, into shares of our common stock at a price of $1.11, the closing bid price of our common stock on the 2014 Effective Date. At September 30, 2014, we had outstanding principal borrowings of $2.0 million under the 2014 Note, which is included in convertible debt – related party on our condensed consolidated balance sheet. Each time we draw on any available credit under the 2014 Note, we determine if a beneficial conversion feature of the convertible debt exists. A beneficial conversion feature will arise if the $1.11 conversion price of the 2014 Note is below the per share fair value of our common stock on the date of a drawdown.On September 25, 2013, or the 2013 Effective Date, we entered into a convertible promissory note, or the 2013 Note, with Mr. Pell that allowed us to borrow up to $3.5 million. The 2013 Note accrues annual interest, at the rate of 1.66%. The 2013 Note must be repaid in full on or before the fifth anniversary of the 2013 Effective Date, or the 2013 Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the 2013 Note upon an event of default, as defined in the 2013 Note. The outstanding principal amount of the 2013 Note is convertible at any time prior to the 2013 Maturity Date, at Mr. Pell’s option, into shares of our common stock at a price of $0.89, the closing bid price of our common stock on the 2013 Effective Date. At September 30, 2014, we had outstanding principal borrowings of $3.5 million, gross of the amount recognized as a beneficial conversion feature, under the 2013 Note, which is included in Convertible debt – related party on our condensed consolidated balance sheet.During each draw upon the 2013 Note, a beneficial conversion feature was recorded as a result of the market price of our common stock increasing after the 2013 Effective Date. The following table summarizes the unamortized beneficial conversion feature amounts recorded as of September 30, 2014: $ 1,000 1,123,595 $ 0.95 $ 55 1,000 1,123,595 1.01 113 1,000 1,123,595 1.39 508 500 561,799 1.54 344 $ 3,500 3,932,584 $ 1,020 The beneficial conversion feature amounts were recorded as a convertible debt discount with a corresponding increase to additional paid-in capital. The amounts are being amortized using the effective interest rate method from the borrowing date to the Maturity Date. At September 30, 2014, we expect to recognize the unamortized convertible debt discount balance of $1.0 million over a period of approximately four years.On September 19, 2012, or the Replacement Note Effective Date, we entered into a convertible promissory note, or the Replacement Note, with Mr. Pell that allowed us to borrow up to $20.0 million. The Replacement Note (i) consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under an Amended and Restated Loan Agreement, dated September 30, 2011, between us and Mr. Pell, or the Original Agreement, and a separate promissory note, dated July 25, 2012, between us and Mr. Pell, and (ii) provided for up to $5.0 million in additional borrowings.The Replacement Note accrues annual interest, payable annually, at the rate of 0.84%. The Replacement Note must be repaid in full on or before the fifth anniversary of the Replacement Note Effective Date, or the Replacement Note Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.The outstanding principal amount of the Replacement Note is convertible at any time prior to the Replacement Note Maturity Date, at Mr. Pell’s option, into shares of our common stock at a conversion price of $1.20$6.00 per share, which was the closing bid price of our common stock on the Replacement Note Effective Date. At September 30, 2014, we had $20.0 million in outstanding principal borrowings under the Replacement Note, which is reflected as convertible debt – related party on our condensed consolidated balance sheet.Pursuant to the Original Agreement, Mr. Pell received warrants to purchase an aggregate of 1,880,620 shares of our common stock at a weighted average exercise price of $1.86 per share. All of the warrants are vested and expire on the later of September 30, 2016 or one year after the termination of the Original Agreement and repayment of all amounts due and payable under the Original Agreement.Amortization of the convertible debt discount and interest expense related to the accrued interest on outstanding borrowings are recorded as interest expense in our condensed consolidated statement of operations. Interest expense for the three months ended September 30, 2014 and 2013, respectively, was comprised of: $ (40 ) $ - $ (66 ) $ - (66 ) (44 ) (123 ) (85 ) $ (106 ) $ (44 ) $ (189 ) $ (85 ) At September 30, 2014, we had an aggregate amount of $376 thousand in accrued interest under the 2014 the 2013 Note and the Replacement Note, which is included in accrued expenses on our condensed consolidated balance sheet.ExistingLetter AgreementPursuant to the Existing Letter Agreement, Mr. Pell has agreed to provide financial assistance to us in the amount of up to $2.5 million, if necessary to support our operations, for a period ending on the earlier of (i) January 1, 2016 or (ii) our raising debt or equity capital in the amount of $2.5 million or more. This financial assistance, if drawn by us, would be in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. We have not utilized the Existing Letter Agreement.Note6.Stock-Based AwardsWe maintain the following stockholder-approved equity incentive plans:●The 2000 Stock Incentive Plan (the “2000 Plan”) 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”) authorized the issuance of up to 5,000,000 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 26, 2012, our stockholders approved an amendment to the 2007 Plan further increasing the number of authorized shares issuable under the plan to 7,000,000 shares of common stock.●The 2003 Director Option Plan (the “2003 Plan”) authorized the issuance of up to 450,000 shares of common stock covering the annual automatic grant, unless waived, 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 of Directors (the “Board”) or its Compensation Committee (the “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 OptionsThe following table summarizes stock options activity for the six months ended September 30, 2014: 4,377,874 $0.85– $4.88 $ 1.78 6.0 830,000 0.90– 1.25 1.06 (25,000 0.97– 0.97 0.97 (877,764 0.95– 4.30 2.40 4,305,110 $0.85– $4.88 $ 1.52 6.4 4,262,557 $0.85– $4.88 $ 1.53 6.4 3,260,194 $0.85– $4.88 $ 1.64 5.5 The weighted average fair value of options granted during the six months ended September 30, 2014 and 2013 was $0.73 and $0.68 per share, respectively.The total intrinsic value (the excess of the market price over the exercise price) was approximately $12 thousand for stock options outstanding, $10 thousand for stock options exercisable, and $12 thousand for stock options vested and expected to vest as of September 30, 2014. The total intrinsic value for stock options exercised during the six months ended September 30, 2014 was approximately $5 thousand. There were no stock options exercised during the six months ended September 30, 2013.We do not expect to realize any tax benefits from future disqualifying dispositions, if any. RestrictedStockWe determine stock-based compensation expense for performance based restricted stock based upon the fair value of our common stock at the date of grant and recognize expense based upon the most probable outcome as to whether the performance targets will be achieved and the stock-based compensation being earned.The following table summarizes restricted stock activity for the six months ended September 30, 2014: 1,325,402 $ 1.06 473,605 1.08 (91,450 ) 1.38 (319,805 ) 1.05 1,387,752 $ 1.05 We grant restricted stock awards to certain executive officers, certain management employees and certain members of our Board. Stock-Based Compensation ExpenseWe 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. 2.0 1.4 2.0 1.2 6.5 5.1 6.6 5.5 78 75 77 80 -- -- -- -- The following table summarizes stock-based compensation recorded in our condensed consolidated statements of operations for the three and six months ended September 30, 2014 and 2013, respectively: $ 22 $ 12 $ 38 $ 42 166 (244 ) 289 265 7 5 22 21 $ 195 $ (227 ) $ 349 $ 328 At September 30, 2014, unrecognized stock-based compensation expense related to stock options was approximately $0.7 million and is expected to be recognized over a weighted average period of approximately 3.2 years, while unrecognized stock-based compensation expense related to nonvested (restricted stock) awards was approximately $0.5 million, which is expected to be recognized over a weighted average period of approximately 3.0 years.Note 7.Treasury StockThe following table summarizes treasury stock activity for the six months ended September 30, 2014 and 2013: 6 $ 7 $ 1.22 26 $ 28 $ 1.11 The shares were purchased from certain management employees to cover income tax withholdings upon the lapse of restrictions on their restricted stock awards.Note 8.Segment InformationWe have two reportable segments, medical and industrial. Each of these operating segments has unique characteristics. Management evaluates the revenue and profitability performance of each of our product lines to make operating and strategic decisions. We have no intersegment revenue.Our medical segment designs, develops, manufactures, and markets our advanced line of endoscopy-based products, including our state-of-the-art flexible endoscopes, and our 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.The following table presents key financial highlights, by reportable segments: $ 3,267 $ 843 $ - $ 4,110 1,023 235 - 1,258 (1,435 (6 - (1,441 (106 ) - - (106 ) 151 1 - 152 186 9 - 195 (8 ) - - (8 ) 10,542 1,865 (2,358 10,049 $ 3,399 $ 569 $ - $ 3,968 981 214 - 1,195 (1,345 62 - (1,283 (44 ) - - (44 ) 170 3 - 173 (221 (6 ) - (227 46 - - 46 11,240 1,333 (1,840 10,733 $ 6,327 $ 1,535 $ - $ 7,862 1,921 486 - 2,407 (3,273 (46 - (3,319 (189 ) - - (189 ) 314 4 - 318 328 21 - 349 17 - - 17 $ 6,428 $ 1,192 $ - $ 7,620 1,774 501 - 2,275 (3,732 60 - (3,672 (85 ) - - (85 ) 355 7 - 362 309 19 - 328 46 - - 46 $ (1,672 $ (1,154 (686 (686 $ (2,358 $ (1,840 Note 9.Subsequent EventsOn October 24, 2014, we drew down another $1.0 million under the 2014 Note. As of November 13, 2014, we had $3.0 million in principal outstanding under the 2014 Note.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsExecutive SummaryBusiness OverviewVision-Sciences, Inc. and its subsidiaries, or the Company, or our, us, or we, designs, develops, manufactures, and markets 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.Medical Business SegmentOur medical segment designs, manufactures, and sells our advanced line of endoscopy-based products, including our flexible fiber and video endoscopes and our EndoSheath technology, for a variety of specialties and markets. Our proprietary reusable flexible endoscope is combined with a single-use, sterile protective EndoSheath disposable that is placed over the patient contact area of the scope. Our “always sterile” EndoSheath technology reduces the risks of cross-contamination associated with the reuse (or “reprocessing”) of conventional endoscopes, which are difficult, costly, and time-consuming to clean and disinfect or sterilize.We target five market spaces for our endoscopes and our EndoSheath technology:Urology – we manufacture, market, and sell our video and fiber cystoscopes, digital processing units, EndoSheath technology, peripherals and accessories to urologists. We also supply our video ureteroscopes to the Endoscopy Division of Stryker Corporation, or Stryker.Pulmonology (Critical Care)– we manufacture, market, and sell our video and fiber bronchoscopes (an endoscope that allows detailed viewing of the lungs), digital processing units, EndoSheath technology, peripherals and accessories to intensivists, pulmonologists, thoracic surgeons, and other airway-related physicians.Surgery– we manufacture, market, and sell our TNE (trans-nasal esophagoscopy) video endoscope, digital processing units, EndoSheath technology, peripherals and accessories to general surgeons, primarily bariatric and gastroesophageal reflux disease (“GERD”) surgeons.Gastroenterology – we manufacture, market, and sell our TNE video endoscope, digital processing units, EndoSheath technology, peripherals and accessories to gastroenterology (“GI”) physicians, ear, nose, and throat (“ENT”) physicians and others with a GI focus as part of their practice.ENT (ear, nose, and throat) – we manufacture, market, and sell our ENT video and fiber endoscopes, digital processing units, peripherals and accessories to ENT physicians and speech pathologists.All of our products, with the exception of our ureteroscopes, are sold directly by our sales force in the United States, and by international distributors in the rest of the world. Our ureteroscopes are sold to Stryker, who then distributes them in the United States.From April 2011 through May 2014, Stryker had the rights to market and sell our cystoscopes, the CST- 5000 Video Cystoscope and the CST-4000 Fiber Cystoscope, and the accompanying EndoSheath technology, peripherals and accessories. We decided to not renew this exclusivity and to directly sell the cystoscopes, their EndoSheaths, peripherals and accessories in the U.S. to maximize our revenue and margins. We made this decision in large part because Stryker’s endoscopy direct sales force focuses on the operating room in hospitals, while most cystoscopy procedures are performed in physicians’ offices and ambulatory surgical centers. We believe that our U.S. sales force will be able to maximize revenue potential by focusing on these call points (physicians’ offices and ambulatory surgical centers). We expect that we will benefit by realizing the full gross profit contribution, which was previously shared with Stryker.Our goal is to become a customer-centric organization with a focus on enhancing stockholder value. We are doing this by:Increasing the competencies and capabilities of our sales force in the U.S. by adding proven medical-surgical device sales professionals and expanding our international distribution network in promising territories;Targeting office-based clinics and ambulatory surgical centers, as well as acute care facilities, that recognize patient safety and the patient experience as a primary value position;Capitalizing on our extensive and relevant library of published clinical studies and peer reviewed papers on the efficacy and safety of our EndoSheath technology; andEnhancing our professional educational programs to allow healthcare professionals to teach other healthcare professionals about our EndoSheath technology.Industrial Business SegmentOur 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.Machida’s quality line of borescopes includes a number of advanced standard features normally found only in custom designed instruments. We were the first to offer a flexible borescope with a grinding attachment, allowing users to “blend” or smooth small cracks in turbine blades of jet engines without disassembling the engine, saving our customers significant expense and delay.Debt Arrangements – Related PartyConvertible Promissory NotesPursuant to a May 29, 2014 letter agreement between us and Mr. Lewis C. Pell, our Chairman, or the Prior Letter Agreement, Mr. Pell agreed to provide financial assistance to us in the amount of up to $5.0 million, if necessary to support our operations, for a period ending on the earlier of (i) July 1, 2015 or (ii) our raising debt or equity capital in the amount of $5.0 million or more. The Prior Letter Agreement provided that this financial assistance, if drawn by us, would be in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. The Prior Letter Agreement was terminated upon the issuance of the 2014 Note (as defined below).On June 16, 2014, or the 2014 Effective Date, we entered into a convertible promissory note, or the 2014 Note, with Mr. Pell, in accordance with the Prior Letter Agreement. The 2014 Note accrues annual interest at the rate of 1.91%. The 2014 Note must be repaid in full on or before the fifth anniversary of the 2014 Effective Date, or the 2014 Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the 2014 Note upon an event of default, as defined in the 2014 Note. The outstanding principal amount of the 2014 Note is convertible at any time prior to the 2014 Maturity Date, at Mr. Pell’s option, into shares of our common stock at a price of $1.11, the closing bid price of our common stock on the 2014 Effective Date. As of September 30, 2014, we had outstanding principal borrowings of $2.0 million under the 2014 Note, which is included in convertible debt – related party on our condensed consolidated balance sheet. On October 24, 2014, we drew down another $1 million under the 2014 Note.On September 25, 2013, or the 2013 Effective Date, we entered into a convertible promissory note, or the 2013 Note, with Mr. Pell that allowed us to borrow up to $3.5 million. The 2013 NotePayable B accrues annual interest at the rate of 1.66%. The 2013 Note must be repaid in full on or before the fifth anniversary of the 2013 Effective Date, or the 2013 Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the 2013 Note upon an event of default, as defined in the 2013 Note. The outstanding principal amount of the 2013 Note Payable B is convertible at any time prior to the 2013 Maturity Date, at Mr. Pell’s option, into shares of our common stock at a price of $0.89, the closing bid price of our common stock on the 2013 Effective Date. At September 30, 2014, we had outstanding principal borrowings of $3.5 million, gross of the amount recognized as a beneficial conversion feature, under the 2013 Note, which is included in convertible debt – related party on our condensed consolidated balance sheet.On September 19, 2012, or the Replacement Note Effective Date, we entered into a convertible promissory note, or the Replacement Note, with Mr. Pell that allowed us to borrow up to $20.0 million. The Replacement Note (i) consolidated and restructured the $15.0 million in aggregate borrowings collectively outstanding under an Amended and Restated Loan Agreement, dated September 30, 2011, between us and Mr. Pell, or the Original Agreement, and a separate promissory note, dated July 25, 2012, between us and Mr. Pell, and (ii) provided for up to $5.0 million in additional borrowings.The Replacement Note accrues annual interest, payable annually, at the rate of 0.84%. The Replacement Note must be repaid in full on or before the fifth anniversary of the Replacement Note Effective Date, or the Replacement Note Maturity Date, but may be prepaid by us at any time without penalty. We will be required to repay all amounts outstanding under the Replacement Note upon an event of default, as defined in the Replacement Note.The outstanding principal amount of the Replacement Note is convertible at any time prior to the Replacement Note Maturity Date, at Mr. Pell’s option, into shares of our common stock at a conversion price of $1.20$4.45 per share, which wasshare.closing bid pricerate of 1.91%. The outstanding principal amount of Note Payable C is convertible into shares of our common stock on the Replacement Note Effective Date. at a conversion price of $5.55 per share.SeptemberJune 30, 2014, we had $20.0 million in outstanding principal borrowings under the Replacement Note, which is reflected as convertible debt – related party on our condensed consolidated balance sheet.At September 30, 2014,2015, we had an aggregate amount of $376 thousand$599,954 in accrued interest under the 2014 Note, the 2013 Note and the Replacement Note,convertible notes payable, which is included in accrued expenses on our condensed consolidated balance sheet.During 2015 2014 Gross service cost $ 36,000 $ 36,000 Interest cost 24,000 37,000 Expected return on assets (19,000 ) (27,000 ) Amortization 7,000 1,000 Net periodic retirement cost $ 48,000 $ 47,000 United Kingdom Consolidated Three months ended June 30, 2014 $ 4,533,000 $ 697,000 $ 1,155,000 $ 6,385,000 (1) No other country accounts for 10% or more of the consolidated net sales. Consolidated June 30, 2015 $ 1,482,000 $ 488,000 $ 1,970,000 March 31, 2015 $ 1,397,000 $ 475,000 $ 1,872,000 (1) Substantially all maintained in The Netherlands draw upongeographic area are net of intercompany sales. No single customer represents 10% or more of our consolidated net sales. Long-lived assets consist of property, plant and equipment.2013 Note,fiscal year ended March 31, 2015.beneficial conversion featurenumber of risks and uncertainties, as we discussed in our special note regarding “Forward-Looking Statements” beginning on page 3 of this report and under “Part I - Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended March 31, 2015 and “Part II - Item 1A. Risk Factors” in this report. These risks could cause our actual results to differ materially from any further performance suggested below.recordedaccounted for as a reverse acquisition due to a number of factors including the relative voting interests in the combined company of the former Vision-Sciences and Uroplasty stockholders following the merger. As a result, Uroplasty and its consolidated subsidiaries represent the accounting acquirer in the merger, and Vision and its consolidated subsidiary represent the legal acquirer in the merger. Accordingly, while Vision was the legal acquirer in the merger, Uroplasty is treated as the acquiring company in the merger for accounting purposes.market pricemerger, our financial statements prior to March 31, 2015 are the historical financial statements of Uroplasty, and our common stock increasingfinancial statements on and after March 31, 2015 reflect the Effective Date. The beneficial conversion feature amounts were recorded asresults of the operations of Uroplasty and Vision-Sciences on a convertible debt discount with a corresponding increase to additional paid-in capital. The amounts are being amortized over a five-year period from the borrowing date to the Maturity Date. At September 30, 2014, the unamortized convertible debt discount balance was $1.0 million and is expected to be recognized over a period of approximately 4.0 years.The following table is a summary of our convertible debt – related party at September 30, 2014: $ 20,000 $ - $ 20,000 3,500 (1,020 ) 2,480 2,000 - 2,000 $ 25,500 $ (1,020 ) $ 24,480 The scheduled maturities of principal amounts of our Convertible debt – related party at September 30, 2014 were $20.0 million due September 19, 2017, $3.5 million due September 25, 2018 and $2.0 million due June 16, 2019.ExistingLetter AgreementPursuant to a letter agreement dated October 28, 2014 with Mr. Pell, or the Existing Letter Agreement, Mr. Pell has agreed to provide financial assistance to us in the amount of up to $2.5 million, if necessary to support our operations, for a period ending on the earlier of (i) January 1, 2016 or (ii) our raising debt or equity capital in the amount of $2.5 million or more. This financial assistance, if drawn by us, would be in the form of an additional loan, share purchase, or financing transaction, on such terms as we and Mr. Pell may determine. We have not utilized the Existing Letter Agreement. and EstimatesThe preparation of condensed consolidated financial statements requires managementin accordance with U.S. generally accepted accounting principles, or GAAP, which require us to make estimates and assumptions in certain circumstances that affect the amounts reported in thereported. In preparing these consolidated financial statements, and accompanying notes. Management evaluates thesewe have made our best estimates and assumptionsjudgments of certain amounts, giving due consideration to materiality.ongoing basis. Estimatesinherent level of uncertainty. Management made no significant changes to our critical accounting policies during the three months ended June 30, 2015. based on historical experience, when available, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which formCogentix, while the basisreported operations for making judgments about the carrying valuesthree months ended June 30, 2014 only include the results of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates underUroplasty. Therefore, starting in the first quarter of fiscal 2016, our reported numbers will be materially different assumptions or conditions.Management believes that, of its significant accounting policies, an understandingthan the reported numbers of the following critical accounting policies is important in obtaining an overall understanding of the condensed consolidated financial statements.Revenue RecognitionWe recognize revenue in accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 605 (Topic 605, Revenue Recognition). ASC 605 requires that five basic criteria must be met before revenue can be recognized:1. persuasive evidence that an arrangement exists;2. delivery has occurred or services were rendered;3. the fee is fixed and determinable;4. collectability is reasonably assured; and5. the fair value of undelivered elements, if any, exists.Determination of criterion (4) above is based on management’s judgment regarding the collectability of invoices for products and services delivered to customers. Should changes in conditions cause management to determine this criterion is not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We recognize revenue when title passes to the customer, generally upon shipment of our products F.O.B. shipping point. Revenue for service repairs of equipment is recognized after service has been completed, and service contract revenue is recognized ratably over the term of the contract.For products sold to Stryker we recognize revenue 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. Stryker is not required to purchase any required minimum amount of products from us.Stock Based CompensationWe 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 servicesame period of the award,prior years.generally four yearsall incremental over the same period in the prior year as the merger occurred on March 31, 2015. Global Macroplastique revenue totaled $1,941,000, a decrease of $138,000 or 4% for employees. We use historical datathe comparable period in the prior fiscal year.estimate expected employee behaviors$3,900,000 for the three months ended June 30, 2015, up from $3,100,000 for the same period last year. Net sales increased as a result of improved sales execution within the U.S, an increase in the number of active customers and higher utilization per customer.option exercisesthe merger with Vision-Sciences and forfeituresthe inclusion of the G&A expenses of Vision-Sciences, offset by cost synergies related to the merger including lower headcount, lower legal and include these expected forfeituresaccounting and lower public company costs.estimateallocation of stock-based compensation expense aspurchase accounting. These intangible assets are amortized over a weighted average life of the grant date. For stock-based awards with performance-based vesting conditions, we are also required to estimate the probability of the vesting conditions being met. 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.Allowance for Doubtful AccountsWe maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is used to report trade receivables at estimated net realizable value. We rely on prior experience to estimate cash that ultimately will be collected from the gross receivables balance at period-end. We maintain a specific allowance for customer accounts that will likely not be collectible due to customer liquidity issues. We also maintain an allowance for estimated future collection losses on existing receivables, determined based on historical trends.InventoriesInventories are stated at the lower of cost or market using the first-in, first-out (“FIFO”) method. If cost exceeds market, inventory is reported at its estimated fair market value based upon our historical experience with inventory becoming obsolete due to age, changes in technology, and other factors. We record a write-down for inventories of components that have become obsolete, slow moving, or are in excess of anticipated demand or net realizable value. We perform a detailed review of inventory each fiscal quarter that considers multiple factors, including demand forecasts, product life cycle status, product development plans, and current sales levels. Inventories consist of raw materials, work in process, and finished goods.Beneficial Conversion FeatureWe account for beneficial conversion features in accordance with the provisions of ASC 470-20 (Subtopic 20 “Debt with Conversions and Other Options” of Topic 470, Debt). A beneficial conversion feature exists if the fair value of the underlying common stock is above the conversion price of the instrument on the commitment date. The difference in the common stock and conversion prices results in a beneficial conversion feature, a nondetachable conversion feature that is in the money at the commitment date. This resulting benefit is recorded as a convertible debt discount, with a corresponding increase to additional paid-in capital, and amortized using the effective interest method over the period from the commitment date (borrowing date) to the maturity date of the convertible debt.Warranty ObligationsIncome (Expense):We provide for the estimated cost of warranties at the time the related revenue is recognized based on the number of units sold, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. Warranty Other expense is recorded in cost of sales in our consolidated statement of operations.Results of Operations (Dollars in thousands, except per share amounts)Net SalesIn the medical segment, we track sales of our endoscopes and EndoSheath technology by market. We also track sales of peripherals and accessories that can be sold to more than one market. Net sales by operating segment and by market/category for the three and six months ended September 30, 2014 and 2013, respectively, were as follows: $ 1,928 $ 1,681 15 % $ 3,701 $ 3,542 4 % 510 403 27 % 761 743 2 % 76 355 -79 % 257 558 -54 % 227 395 -43 % 592 481 23 % 526 565 -7 % 1,016 1,104 -8 % 3,267 3,399 -4 % 6,327 6,428 -2 % 843 569 48 % 1,535 1,192 29 % $ 4,110 $ 3,968 4 % $ 7,862 $ 7,620 3 % Net sales increased $0.1 million, or 4%, to $4.1 millionwas $339,000 for the three months ended SeptemberJune 30, 20142015, compared with $4.0 million during the prior-year period. In our medical segment, increasesto other income of $4,000 in our sales to the urology and ENT markets were offset by decreases in sales to the TNE and pulmonology markets, resulting in a decrease of 4%, or $0.1 million, to $3.3 million, compared with $3.4 million during the prior-year period. Industrial segment sales increased 48% or $0.2 million, to $0.8 million, primarily due to the addition of new customers.Net sales increased $0.2 million, or 3%, to $7.9 million for the six months ended September 30, 2014 compared with $7.6 million during the prior-year period. During the six months ended September 30, 2014, our medical segment’s net sales of $6.3 million decreased by $0.1 million, or 2%, as increased sales to the urology, pulmonology and ENT markets were offset by decreases in sales to the TNE market and a decline in repairs, peripherals and accessories. Our industrial segment’s net sales of $1.5 million increased by $0.3 million or 29%, primarily due to the addition of new customers.The following table summarizes net sales by market/category and by product for our medical operating segment for the three and six months ended September 30, 2014 and 2013, respectively: $ 520 $ 975 -47 % $ 1,262 $ 2,011 -37 % 1,408 706 99 % 2,439 1,531 59 % 1,928 1,681 15 % 3,701 3,542 4 % 510 403 27 % 761 743 2 % 37 302 -88 % 162 455 -64 % 39 53 -26 % 95 103 -8 % 76 355 -79 % 257 558 -54 % 160 358 -55 % 470 388 21 % 67 37 81 % 122 93 31 % 227 395 -43 % 592 481 23 % 526 565 -7 % 1,016 1,104 -8 % $ 3,267 $ 3,399 -4 % $ 6,327 $ 6,428 -2 % $ 1,227 $ 2,038 -40 % $ 2,655 $ 3,597 -26 % 1,514 796 90 % 2,656 1,727 54 % 526 565 -7 % 1,016 1,104 -8 % $ 3,267 $ 3,399 -4 % $ 6,327 $ 6,428 -2 % Net sales to the urology market of $1.9 million and $3.7 million for the three and six months ended September 30, 2014, respectively, increased by $0.2 million, or 15%, and by $0.2 million, or 4%, compared with their prior-year periods. Prior to May 2014, Stryker had the rights to market and sell our cystoscopes, the CST- 5000 Video Cystoscope and the CST-4000 Fiber Cystoscope, and the accompanying EndoSheath technology, peripherals and accessories. During May 2014, we began to market and sell the cystoscopes, their EndoSheaths, peripherals and accessories direct in the U.S. Lower sales of endoscopes have resulted from this changeover. However, this decrease has been more than offset by increased sales of Endosheath disposables.Net sales to the ENT market of $0.5 million and $0.8 million for the three and six months ended September 30, 2014, respectively, increased by $0.1 million, or 27%, and $20 thousand or 2%, respectively, compared with their prior-year periods. In September 2014, we announced the introduction of a new ENT-7000 model that features the smallest diameter insertion tube available at 2.4mm in size.Net sales to the TNE market of $0.1 million and $0.3 million for the three and six months ended September 30, 2014, respectively, decreased by $0.3 million, or 79%, and $0.3 million, or 54%, respectively compared with their prior-year periods. Our salesforce has been focused with the changes in the urology market discussed above, contributing to a decline in sales activity in this market.Net sales to the pulmonology market of $0.2 million for the three months ended SeptemberJune 30, 2014 decreased by $0.2 million, or 43%, compared with the prior-year period. However, sales for the six months ended September 30, 2014 of $0.6 million increased by $0.1 million, or 23%, from the same period one year ago.2014. The increase in other expense was primarily due to the launchrelated party debt assumed in the merger with Vision-Sciences. The related party debt has a weighted average stated interest rate of a new video-based bronchoscope and digital processing unit, the BRS-5100.Net sales1.07% resulting in $75,000 of all repairs, peripherals, and accessories forinterest expense in the quarter. Further, as part of the purchase price accounting related to the merger, the related part debt was discounted to fair value. For the three months ended SeptemberJune 30, 2014 of $0.5 million were within $39 thousand2015, the non-cash amortization of the prior-year period, while sales for the six months ended September 30, 2014 decreased by $0.1 million, or 8%, compared with the prior-year period.Gross Profit (Net Sales Less Cost of Sales)Gross profit by operating segment for the three and six months ended September 30, 2014 and 2013, respectively, was as follows: $ 1,023 $ 981 4 % $ 1,921 $ 1,774 8 % 31.3 % 28.9 % 30.4 % 27.6 % 235 214 10 % 486 501 -3 % 27.9 % 37.6 % 31.7 % 42.0 % $ 1,258 $ 1,195 5 % $ 2,407 $ 2,275 6 % 30.6 % 30.1 % 30.6 % 29.9 % The gross profit margin percentage of 30.6% for the three and six months ended September 30, 2014 increased from 30.1% and 29.9% for the prior-year periods, respectively. The increase was due to an improved margin in the medical products segment, resulting from cost savings efforts as a result of our direct selling of cystoscopes, their EndoSheaths, peripherals and accessories direct in the U.S., somewhat offset by declines in the industrial products segment’s gross margins.Operating Expenses(Selling, General, and Administrative (“SG&A”) and Research and Development (“R&D”)Operating expenses by operating segment for the three andsix months ended September 30, 2014 and 2013, respectively were as follows: $ 2,117 $ 1,898 12 % $ 4,317 $ 4,659 -7 % 241 152 59 % 532 441 21 % 2,358 2,050 15 % 4,849 5,100 -5 % 341 428 -20 % 877 847 4 % - - - - - - 341 428 -20 % 877 847 4 % $ 2,699 $ 2,478 9 % $ 5,726 $ 5,947 -4 % Selling, General, & Administrative (“SG&A”) ExpensesSelling, general and administrative (“SG&A”) expenses were $2.4 million for: During the three months ended SeptemberJune 30, 2015 and 2014, an increasewe recorded income tax expense of $0.3 million, or 15%, compared with the prior-year period. The increase was primarily attributable$17,578 and $19,814, respectively. Income tax expense is attributed to our European subsidiaries and to the prior-year period which includedpayment of minimum taxes in the reversal of stock-basedU.S.resignationmost directly comparable GAAP financial measures.former chief executive officer. SG&A expenses were $4.8 millionbusiness. Analysts and investors frequently ask us for this information. We believe that they use these measures to evaluate the six months ended September 30, 2014,overall operating performance of companies in our industry, including as a decreasemeans of $0.3 million, or 5%, comparedcomparing period-to-period results and as a means of evaluating our results with the prior-year period, primarily attributable to our cost savings measures and that the prior-year period included severance expenses from our former chief executive officer.Research & Development (“R&D”)ExpensesResearchdevelopment (“R&D”) expenses were $0.3 million formerger related costs, during the three months ended SeptemberJune 30, 2015 and 2014 a decreasewas approximately $(1,694,000) and $(1,778,000), respectively. Expense Adjustments Three-Months Ended GAAP Depreciation Amortization Non-GAAP June 30, 2015 Gross profit $ 7,497,000 $ 10,000 $ - $ 52,000 $ - $ 7,559,000 % of net sales 67.2 % 88.5 % Operating expenses General and administrative 2,159,000 (124,000 ) 29,000 (58,000 ) - 2,006,000 Research and development 1,074,000 (17,000 ) - (8,000 ) - 1,049,000 Selling and marketing 6,842,000 (74,000 ) - (101,000 ) - 6,667,000 Amortization 634,000 - - - (634,000 ) - 10,709,000 (215,000 ) 29,000 (167,000 ) (634,000 ) 9,722,000 Operating loss $ (3,212,000 ) $ 225,000 $ (29,000 ) $ 219,000 $ 634,000 $ (2,163,000 ) Merger Related costs 469,000 Operating loss excluding merger related costs $ (1,694,000 ) June 30, 2014 Gross profit $ 5,593,000 $ 13,000 $ - $ 5,000 $ - $ 5,611,000 % of net sales 87.6 % 87.9 % Operating expenses General and administrative 1,577,000 (212,000 ) - (39,000 ) - 1,326,000 Research and development 909,000 (18,000 ) - (1,000 ) - 890,000 Selling and marketing 5,273,000 (80,000 ) - (20,000 ) - 5,173,000 Amortization 8,000 - - - (8,000 ) - 7,767,000 (310,000 ) - (60,000 ) (8,000 ) 7,389,000 Operating loss $ (2,174,000 ) $ 323,000 $ - $ 65,000 $ 8,000 $ (1,778,000 ) the timingCapital Resourcesexpenses. approximately $9,343,000. the six months ended September 30, 2014, R&D expenses increased $30 thousand, or 4%, over the same period last year.Other ExpenseOther (expense) income for the three and six months ended September 30, 2014 and 2013, respectively, were as follows: (106 ) (44 ) 141 % (189 ) (85 ) 122 % 4 7 -43 % (12 ) 3 -500 % $ (102 ) $ (37 ) 176 % $ (201 ) $ (82 ) 145 % Other expense for the three and six months ended September 30, 2014 increased compared with their respective comparison periods due to interest expense resulting from a higher amount outstanding of convertible debt-related party and the amortization of debt discount.Net LossNet loss of $(1.5) million for the three months ended SeptemberJune 30, 2014 increased from $(1.3) million2015, we used $2,895,000 of cash in the prior-year period. However, net lossoperating activities, compared to $1,505,000 of $(3.5) million for the six months ended September 30, 2014 improved from $(3.8) million in the prior-year period as a result of lower SG&A expenses and higher gross profit.Net Lossper Common Share – Basic and DilutedNet loss per basic and common share remained unchanged at $(0.03) per share forcash used during the three months ended SeptemberJune 30, 20142014. We used this cash primarily to fund the operating loss, net of non-cash charges for depreciation, amortization of intangibles, long-term incentive plan and September 30, 2013, and remained unchanged at $(0.08) per share forshare-based compensation of $1,049,000 during the sixthree months ended SeptemberJune 30, 20142015, and September 30, 2013.Liquidity, Capital Resources, and OutlookThe following table summarizes selected financial information as of September 30, 2014 and March 31, 2014: $ 1,395 $ 1,237 $ 2,920 $ 3,818 $ 4,221 $ 4,194 $ 5,887 $ 6,863 Our cash and cash equivalents and availability of $3.0 million on$396,000 during the 2014 Note are our principal sources of liquidity. Cash and cash equivalents at September 30, 2014 were $1.4 million compared with $1.2 million at March 31, 2014. Working capital was $5.9 million at September 30, 2014 compared with $6.9 million at March 31, 2014.For the sixthree months ended SeptemberJune 30, 2014.used $1.8 milliongenerated $3,000,000 of net cash in our operating activities, an improvementfrom the maturity of $1.4 million compared with $3.2 million in the prior-year period.As a resultbetter cash management, for the six months ended September 30, 2014 we issued $2.0 million in convertible debt-related party compared with $3.0 million in the prior-year period. On October 24, 2014, we drew down another $1.0 million under the 2014 Note.OutlookLiquidityinception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future.inception. We anticipate that we will continue to incur negative cash flows from operations during fiscal 2015,2016, driven by continued investment in a direct sales force for the U.S. market, spending for marketing revitalizing aand for research and development, pipeline,integration of UPI and VSCI, and general business operations. As of SeptemberJune 30, 2014,2015, we had cash and cash equivalents totaling approximately $1.4$6.0 million. We expect that our cash at September 30, 2014, together with the $3.0 million of capital availableplan to us under the 2014 Note as of September 30, 2014, plus the $2.5 million of capital to be made available to us under the Existing Letter Agreement, should be sufficient to fund our operations through at least December 31, 2015. On October 24, 2014, we drew down another $1.0 million under the 2014 Note. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, or if the commitments under the 2014 Note or the Existing Letter Agreement become unavailable, we will need to secureobtain additional financingdebt and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition.equity financing during fiscal 2016. There can be no assurance that any contemplated additional 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 ArrangementsAt September 30, 2014, we had no off-balance sheet arrangements that have, or are reasonably likelyhave, a current or future effectachieve significant revenue growth will depend, in large part, on our financial condition, changesability to achieve widespread market acceptance of our products and successfully expand our business in financial condition, revenuesthe U.S. We cannot guarantee that we will successfully achieve such revenue growth. If we fail to meet our projections of profitability and cash flow, or expenses, results of operations, liquidity, capital expenditures, or capital resources.determine to use cash for matters we are not currently projecting, we may need to seek additional financing to meet our cash needs. We cannot assure you that such financing, if needed, will be available to us on acceptable terms, if at all.ItemQuantitative and Qualitative Disclosures About Market Risk as defined in Rule 12b-2 of the Exchange Act, and are not required to provide the information required by this item.Item.Item 4.Disclosure Controls and ProceduresEvaluation ofDisclosure Controls and ProceduresFor the quarterly period ended September 30, 2014, we carried out an evaluation, under.(“CEO”) and our PrincipalChief Financial Officer (“CEO and Principal Accounting Officer (“PFO”CFO”), ofwe evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules(as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our CEO and CFO concluded that, as of the end of the period covered by this report.Our management, including our CEO and our PFO, does not expect that our disclosure controls and procedures will prevent all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met andreport, our disclosure controls and procedures are designedeffective in ensuring that the information required to provide this reasonable assurance. Based uponbe disclosed by us in the evaluation discussed above,reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, in a manner that allows timely decisions regarding required disclosure.PFO concluded that, as of September 30, 2014,ongoing activities after the merger, we are continuing to integrate our disclosurefinancial reporting functions and our controls and procedures were effective at providing such reasonable assurance.Changesprocedures. We have also been augmenting our company-wide controls to reflect the risks inherent in Internal Controls Over Financial ReportingThere have been no changes in our internal controls over financial reporting duringa business combination of the six months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.PART II—OTHER INFORMATIONItemIteminformation discussed in Part I, Item 1A. Risk Factors beginning on page 14 ofspecific risks that could materially adversely affect our Annual Reportbusiness, financial condition or operating results, please see our annual report on Form 10-K for the fiscal year ended March 31, 2014,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 futureWe have incurred substantial operating losses since our inception and there can be no assurance that we will ever achieve or sustain a profitable level of operations in the future. We anticipate negative cash flows from operations during the remainder of fiscal 2015 driven by continued investment in a direct sales force for the U.S. market, spending for marketing, spending for research and development and general business operations. As of September 30, 2014, we had cash and cash equivalents totaling approximately $1.4 million. We expect that our cash at September 30, 2014, together with up to $3.0 million of capital available to us under the 2014 Note at September 30. 2014, plusheading “Part I — Item 1A. Risk Factors.” There has been no material change from the $2.5 million of capital to be made available to us under the Existing Letter Agreement, subject to certain conditions and an expiration date of January 1, 2016 (seeNote 1. Summary of Significant Accounting Policies and Note 5. Convertible Debt – Related Party for additional information), should be sufficient to fund our operations through at least December 31, 2015. On October 24, 2014 we drew down another $1.0 million under the 2014 Note. However, if our performance expectations fall short (including our failure to generate expected levels of sales) or our expenses exceed expectations, or if the commitments under the 2014 Note or the Existing Letter Agreement become unavailable, we will need to secure additional financing and/or reduce our expenses to continue our operations. Our failure to do so would have a material adverse impact on our prospects and financial condition. There can be no assurancerisk factors as disclosed in that any contemplated additional 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.Our officers and directors have the ability to exercise significant control over the CompanyAs of September 30, 2014, our officers and directors owned an aggregate of approximately 37% of our outstanding common stock. Under the Replacement Note, Mr. Pell, at his option, has the right to convert the unpaid principal balance thereof, which was $20.0 million as of September 30, 2014, into 16,666,666 shares of our common stock. Under the 2013 Note, Mr. Pell, at his option, has the right to convert the unpaid principal balance thereof, which was $3.5 million as of September 30, 2014, into 3,932,584 shares of our common stock. Under the 2014 Note, Mr. Pell, at his option, has the right to convert the unpaid principal balance thereof, which was $2.0 million as of September 30, 2014, into 1,801,801 shares of our common stock. The conversion of the Replacement Note, the 2013 Note and the 2014 Note, or the Notes, would increase the aggregate ownership of our officers and directors to approximately 57% of our common stock. As such, upon conversion of the Notes, our directors and officers exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company or forcing management to change its operating strategies, which may be to the benefit of management but not in the interest of the stockholdersItemPeriod April 1, 2015 - April 30, 2015 1,886 $ 1.66 - - May 1, 2015 - May 31, 2015 - - - - June 1, 2015 - June 30, 2015 744 1.68 - - Total 2,630 $ 1.67 - - (a) Represent shares surrendered to cover tax obligation for restricted stock vested. ItemDefaults Upon Senior SecuritiesNoneItemItemItemExhibitsExhibit Method of Filing *2.1 Agreement and Plan of Merger dated as of December 21, 2014 by and among Vision-Sciences, Inc., Visor Merger Sub LLC, and Uroplasty, Inc. Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K as filed with the SEC on December 22, 2014 (File No. 000-20970) 10.1 Letter Agreement dated October 28, 2014 between the Company(a) Amended and Lewis C. Pell.31.1 CertificationsIncorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 000-20970)(b) Certificate of Chief Executive OfficerAmendment to Certificate of Incorporation.Incorporated by reference to Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended March 31, 2001 (File No. 000-20970) (c) Certificate of Amendment to Certificate of Incorporation. Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K as filed with the SEC on December 15, 2010 (File No. 000-20970) (d) Certificate of Amendment to Certificate of Incorporation. Incorporated by reference to Exhibit 99.1 to Current Report on Form 8-K as filed with the SEC on August 1, 2014 (File No. 000-20970) (e) Certificate of Amendment to Amended and Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K as filed with the SEC on March 31, 2015 (File No. 000-20970) (f) Certificate of Amendment to Amended and Restated Certificate of Incorporation. Incorporated by reference to Exhibit 3.2 to Current Report on Form 8-K as filed with the SEC on March 31, 2015 (File No. 000-20970) 3.2 Amended and Restated Bylaws. Incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K as filed with the SEC on July15, 2009 (File No. 000-20970) Description of Non-Employee Director Compensation Filed herewith Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certifications of Principal Financial Officer and Principal Accounting OfficerFiled herewithCertification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications of Chief Executive Officer and Principal Financial Officer and Principal Accounting OfficerFiled herewithCertification by the CEO pursuant to Section 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes OxleySarbanes-Oxley Act of 2002Filed herewith 101.INS** XBRL Instance101.SCH** XBRL Taxonomy Extension Schema101.CAL** Taxonomy Extension Calculation101.DEF** XBRL Taxonomy Extension Definition101.LAB**XBRL Taxonomy Extension Labels101.1PRE**XBRL Taxonomy Extension Presentation * Filed herewith.**101.SCH XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.Taxonomy Extension SchemaFurnished herewith ** 101.CAL XBRL Taxonomy Extension Calculation Furnished herewith ** 101.DEF XBRL Taxonomy Extension Definition Furnished herewith ** 101.LAB XBRL Taxonomy Extension Labels Furnished herewith ** 101.PRE XBRL Taxonomy Extension Presentation Furnished herewith ** Registrant has dulyregistrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VISION-SCIENCES, Date: November 13, 2014August 14, 2015Howard ZaubermanROBERT KILL Howard ZaubermanPresident and Chief Executive Officer Date: November 13, 2014Gary SiegelGary Siegel
BRETT REYNOLDSFinance,PrincipalChief Financial Officer andPrincipalAccounting Officer28