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Vision-Sciences, Inc. (NASDAQ:VSCI)

F3Q 2014 Earnings Conference Call

February 4, 2014 09:00 a.m. ET

Executives

Howard Zauberman – Interim CEO

Keith Darragh – Vice President, Finance

Lewis C. Pell – Chairman

Analysts

Nat Prentice – Altium Wealth Management

Operator

Good day, ladies and gentlemen and welcome to the Vision-Sciences Third Quarter and Fiscal 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator instructions)

As a reminder, this call maybe recorded. I will now introduce your host for today’s conference, [Amy] you may begin.

Unidentified Corporate Participant

Thank you. Good morning. Thank you for joining Vision-Sciences’ financial results conference call for the third quarter of fiscal 2014. Today’s call will include remarks from Howard Zauberman, President and Chief Executive Officer; and Keith Darragh, VP of Finance, followed by a question-and-answer session period.

A number of forward-looking statements will be made during this presentation. Forward-looking statements are any statements that are not historical facts. These forward-looking statements are based on Vision-Sciences’ current expectations and are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ materially from the statements contained in this presentation. There is no assurance that any future results or events discussed in these statements will be achieved.

Any forward-looking statements represent the company’s views only as of today and should not be relied upon as representing our views as of any subsequent date. For the benefit of those who maybe listening to the replay, this call was held and recorded on February 4, 2014.

With that, I will turn the call over to Howard Zauberman.

Howard Zauberman

Thanks, Amy, and good morning, everyone. I like to begin by saying how pleased I am to be officially part of the dedicated team at Vision-Sciences as we pursue our strategy of growing our position in the endoscopy marketplace.

The third quarter of fiscal 2014 was another positive one for Vision-Sciences. We achieved year-over-year and sequential revenue growth. We continue to see opportunities for sales growth for the balance of this fiscal year, and we will remain focused on carefully controlling our SG&A, improving gross margins, and implementing quality improvement measures, all aimed at narrowing our operating loss.

I will discuss other ways in which the Vision-Sciences story continues to gain strength later on the call. First I'll ask Keith Darragh, our Vice President of Finance to review the financial results. Keith?

Keith Darragh

Thanks, Howard. For the third quarter of fiscal 2014 our net sales were $4.5 million, up 14% as compared with $4 million in the third quarter of fiscal 2013. A 21% increase in Medical segment sales was primarily due to a 48% increase in net sales to the urology market as compared to the prior year quarter. This year-over-year increase was largely driven by continued growth of our EndoSheath technology in the international markets and shipments of our ureteroscopes to Stryker.

Net sales to Stryker were up $279,000 or 30% in the third quarter and $1.6 million or 84% in the first nine months of fiscal 2014. Gross profit was $1.4 million, up 22% as compared with $1.1 million in the third quarter of fiscal 2013.

Gross margin increased 200 basis points to 30.6%, as compared to 28.6% in the third quarter last fiscal year. The year-over-year improvement was attributable to favorable manufacturing absorption as a result of higher production volume of our urology endoscopes and EndoSheath technology in the third quarter of fiscal 2014.

SG&A expenses were essentially unchanged at $2.3 million. As a percentage of net sales, SG&A decreased to 51% for the third quarter of fiscal 2014, as compared to 58% for the same period last fiscal year.

R&D expenses were $552,000 in the third quarter of fiscal 2014, a $205,000 increase over the same period last fiscal year. The increase was primarily attributable to timing of R&D cost related to product development. As a percentage of net sales, R&D increased to 12%, as compared to 9% for the same period last fiscal year.

For the third quarter of fiscal 2014, our operating loss was $1.5 million, a $48,000 or 3% improvement over the same period last fiscal year. Net loss was $1.6 million, or a loss of $0.03 per basic and diluted share for the third quarters of both fiscal years 2014 and 2013.

At December 31, cash and cash equivalents were $1.1 million and working capital was $7.4 million, as compared to cash and cash equivalents of $788,000 and working capital of $7 million at March 31, 2013. We also have $1.5 million of capital available under a revolving convertible promissory note with Lewis Pell, our Chairman.

With that, I will turn the call back to Howard.

Howard Zauberman

Thanks, Keith. This was another quarter of consistent sales growth for Vision-Sciences. We are encouraged by the continuing positive impact of our strategic repositioning of the company.

In the third quarter of fiscal 2014, we had improvement in our gross profit margin and a reduction in our operating loss. The 21% growth in our Medical division was primarily driven by our success in urology, including Stryker’s solid performance and strong international growth of our EndoSheath technology for the urology marketplace.

Our sales force is an integral part of our overall strategy, and we are focused on our customer centric approach to the sales process. We continue to take steps to reinvigorate our sales effort, including ongoing training and development. We remain focused on the core areas, where historically we have had the most successful, ENT and TNE in the office and ambulatory setting and critical care pulmonology in the ICU setting.

We recently began the process to identify and hire a new sales leader for the domestic team and will look to hire additional reps that have commensurate experience. We are pleased with our positive relationship with Stryker and we value them as our strategic partner.

Urology revenues comprised just under 50% of our total revenues this quarter, mainly driven by Stryker’s ongoing success in placing the ureteroscope we developed for them last year. We expect this sales effort will continue to have a positive impact going forward.

We plan to capitalize on the extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology, including three recent research studies announced last quarter, one in cystoscopy and two in the bronchoscopy setting, which demonstrated that our technology has a low risk of pathogen transmission and high patient safety.

We are using these new research data to enhance our promotional and professional educational programs to teach health care professionals the value of our technology platform. This research data, which focuses on the safety, efficacy, and unique portability aspects of the EndoSheath technology, provides clinicians peer-reviewed validation of our products.

We also expect to benefit from increasing awareness of the health risks to patients, when conventional endoscopes are improperly reprocessed. Already this year, the media has focused attention on investigations into three separate incidents of improper endoscope reprocessing. In Canada, two patients acquired hepatitis C after endoscopy procedures, one in May and another in November.

The hospital is investigating a possible breach in sterile technique, and cancelled all routine and elective endoscopy procedures during the week-long investigation. In the May incident, the hospital is testing the now hepatitis C positive patient to determine whether their strain of the virus is the same as the endoscopy patient who was hepatitis C positive prior to the procedure [Indiscernible].

Hello.

Operator

Hello.

Unidentified Corporate Participant

Can you hear us?

Operator

Now we can hear you.

Unidentified Corporate Participant

[Ashley] can you tell us at what point you stopped hearing the speaker lines?

Operator

Right at 8:39:11, as soon as [Mr. Martin] or the speaker was speaking, it just stopped.

Unidentified Corporate Participant

Okay, should we start with the CFO, or should we start from the beginning again.

Keith Darragh

I think the CEO, Howard talking.

Unidentified Corporate Participant

Okay, Howard could you start your remarks again right after Keith’s discussion.

Howard Zauberman

Sure.

Unidentified Corporate Participant

Thank you.

Howard Zauberman

Thanks [Amy]. And we apologize to everyone if there was a problem with the sound system.

This is another quarter of consistent sales growth for Vision-Sciences. We are encouraged by the continuing positive impact of our strategic repositioning of the company.

In the third quarter of 2014, we had an improvement in our gross profit margin and a reduction in our operating loss. The 21% growth in our Medical division was primarily driven by our success in urology, including Stryker’s solid performance and strong international growth of our EndoSheath technology for the urology marketplace.

Our sales force is an integral part of our overall strategy, and we are focused on our customer centric approach to the sales process. We continue to take steps to reinvigorate our sales effort, including ongoing training and development. We remain focused on the core areas, where historically we have had the most success, ENT and TNE in the office and ambulatory setting and critical care pulmonology in the ICU setting.

We recently began the process to identify and hire a new sales leader for the domestic team and will look to hire additional reps that have commensurate experience. We are very pleased with our positive relationship with Stryker and we value them as a strategic partner.

Urology revenues comprised just under 50% of our total revenue this quarter, mainly driven by Stryker’s ongoing success in placing the ureteroscope we developed for them last year. We expect their sales effort will continue to have positive impact going forward.

We plan to capitalize on the extensive and relevant library of published clinical studies on the efficacy and safety of our EndoSheath technology, including three recent research studies announced last quarter, one in cystoscopy and two in bronchoscopy, which demonstrated that our technology has a low risk of pathogen transmission and high patient safety.

We are using this new research data to enhance our promotional and professional educational programs to teach healthcare professionals the value of our technology platform. This research data, which focuses on the safety, efficacy, and unique portability aspects of the EndoSheath technology, provides clinicians peer-reviewed validation of our products.

We also expect to benefit from increasing awareness of the health risks to patients, when conventional endoscopes are improperly reprocessed. Already this year, the media has focused attention on investigations into three separate incidents of improper endoscope reprocessing. In Canada, two patients acquired hepatitis C after endoscopy procedures, one in May and another in November.

The hospital is investigating a possible breach in sterile techniques, and cancelled all routine and elective endoscopy procedures during the week-long investigation. In the May incident, the hospital is testing the now hepatitis C positive patient to determine whether or not their strain of virus is the same as the endoscopy patient, who was hepatitis C positive prior to the procedure immediately preceding.

In Seattle, a break down in training on proper reprocessing of endoscopes used in colonoscopies left instruments dirty and opened the doors to dangerous infections for 106 patients. In Illinois, an outbreak of the nightmare bacteria or superbug, believed to be related to an endoscopic procedure, examining bile and pancreatic ducts made headlines in the Wall Street Journal.

The bacteria, which typically lives in the intestines, and can be spread via fecal matter isn’t typically transmitted by casual contact outside of hospitals. This recent outbreak is of grave concern to the Centre for Disease Control because it has a rare enzyme that breaks down antibiotics. Of the 243 patients, who may have had contact with the bug during an endoscopic procedure were 114 returned for screening and 38 patients tested positive.

In addition to undermining patient confidence, contamination due to improper reprocessing can create stiff potential financial liabilities for hospitals and other healthcare facilities. These cases also expose the facility to risk of costly losses. Moreover, with the implementation of the Affordable Care Act, the current environment focuses on cost containment and effectiveness.

As a result, the financial risks of bringing patients back into the hospital due to hospital-acquired infections are now the burden of the institution itself, whereas previously hospitals were able to deflate those costs by charging third-party payers. The imperative of hospitals to avoid readmission or longer patient stays grows stronger. It becomes even more important outside of a hospital setting, where portability and ease of use are real benefits in addition to sterile procedures.

We believe that the market for our patented EndoSheath technology will continue to grow as medical professionals search for a sterile and reliable product to safeguard patients. Affirmation from clinical sources supports our proposition of always ready, always sterile technology. For the fourth consecutive year, the ECRI Institute listed inadequate reprocessing of endoscopes and surgical instrument as among the top 10 most dangerous technology hazards.

As the attention of the medical community grows, more focused on the most significant current risks facing the healthcare industry, we in turn will continue to work diligently to demonstrate how our EndoSheath technology preempts the hazards of inadequate reprocessing by encasing our flexible endoscopes in a sterile, protective endosheath microbarrier.

Over time we hope the paradigm will shift to an all flexible endoscopic procedures will employ our EndoSheath technology to protect patients against the hazards of inadequate endoscopic reprocessing. Another validation of our technology platform comes from the recent agreement we entered into with 21st Century Oncology as its preferred vendor of choice for endoscopy equipment used for the evaluation and treatment procedures in multiple therapeutic and cancer care areas.

The agreement covers our advanced fiberoptic and video-based endoscopic imaging products, including flexible laryngoscopes, TNE, bronchoscopes and cystoscopes, all of which are utilized in the diagnosing, treatment and management of head and neck, esophageal, lung and bladder cancer among other diseases.

Under this agreement, we had the opportunity to outfit each of 21st Century’s 166 treatment centers in the US and Latin America with our state-of-the-art imaging technology, and the only sterile endoscopic solution in the market. We met with them last week to discuss the roll-out of the plan, and we are pleased, we already have received orders under this agreement.

All of these circumstances contribute to the growing body of data on the clinical efficacy of our EndoSheath technology as a durable microbial barrier that further support the advantages of using our sterile disposable technology over conventional difficult to clean and disinfect endoscopes.

As we look forward, we believe our EndoSheath technology provides a strong platform to drive top line sales growth, improve our operating efficiency and increase our margins. We remained guided by our mission to focus on innovative technologies that improve patient care and reduce cost to the healthcare system.

With that operator, please open the calls for questions.

Lewis C. Pell

Howard it is Lew, can I just add one thing?

Howard Zauberman

Sure.

Lewis C. Pell

Howard, the outbreak of the superbug something important happened there that was noted. The scopes were properly cleaned, whereas the other cases you cited the scopes weren’t properly cleaned. So here is a case of properly cleaned scopes, which still couldn’t kill the superbug because they were at best high level disinfected, not sterile and that is a big problem.

Even if you use the proper maintenance and proper know-how, to clean the scopes as prescribed by CDC or FDA your are still not going to get a sterile instrument. And they commended the hospital for cleaning the scopes properly and they still had this outbreak. That is an important point.

Howard Zauberman

Absolutely correct Lew.

Lewis C. Pell

Okay. Sorry.

Unidentified Corporate Participant

Ashley can you please give instructions for the Q&A.

Question-and-Answer Session

Thank you. (Operator instructions) Our first question comes from [Indiscernible]. Your line is open.

Unidentified Analyst

Well, when do you expect revenue to resume from SpineView is there any timeline?

Howard Zauberman

Good morning Irwin. This is Howard Zauberman. At the moment we don’t have any open orders to fill for them.

Unidentified Analyst

Alright, but do you have any timeline -- they are supposed to be developing a fusion device to go with that.

Keith Darragh

The big problem with SpineView right now as we go minimally invasive surgery is the reimbursement challenge, and it is a challenge. They are doing something very unique and very novel, and it is really next generation. And the standard group of spine surgeons don’t appreciate it but the young kids do. So the -- not only for SpineView, but for Medtronic and for JNJ, and all the spine companies they are having trouble with reimbursement. It will happen, but we are not sure when.

Howard Zauberman

Irwin this is Howard Zauberman. In our -- in our plan going forward we are not projecting any significant revenues from them.

Unidentified Analyst

Well, thank you very much.

Operato

Thank you. Our next question comes from Nat Prentice of Altium Wealth Management. Your line is open.

Nat Prentice - Altium Wealth Management

Howard good morning and Lew as well, I wondered if I could pick up on Lew’s question or Lew’s comment about the superbug, Howard when something like that happens, how do you prioritize your response, I mean there is so many things that you could do, tell me how -- how do you capitalize on an announcement like that or development like that?

Howard Zauberman

Sure. So we -- thanks for the question. We certainly are focused on outbreaks like this, and trying to make sure first that we inform those institutions that there are alternative solutions that Vision-Sciences provides, offering to provide our services and our products so that they have access to our technology.

We certainly make sure that our sales force is well educated and well aware of these incidents so that they can talk to their customers and potential customers about the risks, that these risks can happen at any institution, whether it is an institution or a small practice or a group or ambulatory surgery centre, and that they know that there is a solution that is available provided by Vision-Sciences that is cost effective.

It doesn’t require -- we’re not talking about extensive training of any sort. It is really something that an institution or hospital doctor can incorporate quite quickly. So for us it is a matter of informing our sales force, informing our potential customers and customers of the potential solution that we have offered for them, and giving them access to ways of solving that.

Nat Prentice - Altium Wealth Management

Guys, thank you.

Operator

Thank you. (Operator instructions) I am not showing any other questions in queue. I like to turn the call back over to Mr. Zauberman for any further remarks.

Howard Zauberman

Thank you. After three consistent quarters of growth we are experiencing the positive impact of our repositioning strategy. The ongoing validation of why Vision-Sciences’ technology is critical in today’s healthcare environment further supports the value proposition of our technology.

We are confident that we can address a significant unmet medical need in a cost effective way. Thank you for your ongoing support.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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